1.

1 INTRODUCTION
Liberalization globalization and privatization are the important issues to the entrepreneur and
corporate threatening the existence of a firm. In such a complex corporate environment, it is the
challenge to the finance manager to survive the firm in long run perspective with the objective of
maximizing the owner's wealth. With a view to achieve this objective finance manager is required
to pay his due attention on investment decision, financing decision and dividend decision.
Assuming that sound investment policy and opportunity are there, it is the intention of this
dissertation to optimize the financing decision and dividend decision in the context of achieving
the stated objective. Financing decision refers to the selection of appropriate financing mix and so
it relates to the capital structure or leverage.
Capital structure refers to proportion of long-term debt capital and equity capital required to
finance investment proposal. There should be an optimum capital structure, which can be attained
by the judicious exercise of financial leverage.
In order to run and manage a company funds are needed. Right from the promotional stage, finance
plays an important role in a companys life. If funds are inadequate and not properly manage the
entire organization suffers, it is therefore necessary that correct estimation of the current and future
need of capital be made to have an optimal capital structure which shall help the organization to
run smoothly.
The capital structure is made up of debt and equity securities and refers to permanent financing of
a firm.
On the other hand a general dictionary meaning of the term Leverage refers to an increase of
accomplishing some purpose. In Financial Management the term leverage is used to describe the
firms ability to use fixed cost assets or funds to increase the returns to its owners.This dissertation
mainly concentrates on the exercise of impact of leverage and capital structure on company
profitability.

THE THEORETICAL ASPECTS OF LEVERAGE ANALYSIS

Leverage:
Leverage is using given resources in such a way that the potential positive or negative outcome is
magnified in finance, this generally refers to borrowing. If the firm's return on assets (ROA) is
higher than the interest on the loan, then its return on equity (ROE) will be higher than if it did not
borrow. On the other hand, if the firm's ROA is lower than the interest rate, then its ROE will be
lower than if it did not borrow.
In other words may be defined, as the employment of an asset or sources of fund has to pay fixed
cost or fixed return.
Types of leverage
There are three type of leverage:
1. Financial Leverage.
2. Operating leverage.
3. Combined or composite leverage.
Financial leverage:
Is primarily concern with the financial activities in which involve rising of funds from the sources
from which a firm has to bear fixed charges. These sources include long-term dept (e.g.: bonds,
debentures, etc) & preferences share etc. Long-term debt carries a contractual fixed rate of interest
& obligatory. As the debt providers have Prior claim on income &assets of a firm over equity
shareholders their rate of interest is generally lower than expected return of the equity shareholders.
Further interest on debt capital is tax-deductible expenses. These two-phenomenon lead to
magnification of rate of return on equity capital & hence E.P.S goes without saying that effects of
changes in E.B.I.T on the earning per share are shown by the financial leverage. Financial leverage
can best be described as the ability of firm to use fixed financial charges in E.B.I.T. on the firm
earning per share.
2

Financial leverage helps to know the responsiveness of E.P.S. to change in the EBIT. It involves
use of funds obtained at fixed cost in the capital structure in such a way that it increase the return
for common shareholders.
It is referred to a state at which a firm has to bear fixed financing cost arising from the use of debt
capital. The firm with high financial leverage will have a relatively high fixed financing cost
compared with low financial leverage. Financial leverage occurs when a company employ the
fixed cost of funds debt or preference share capital with a view to maximizing earning available
to equity shareholder by a way of a higher income of funds. This technique also called Trade on
equity. Financial leverage influence the financial risk as long as the companys earnings are
greater than its fixed cost it will enjoy a favorable financial leverage position and make earning
available to equity shareholders.
Financial leverage can measure with the help of the following formula:-

Financial leverage

EBIT
PBT

Financial leverage will have a favorable impact on earnings per share a return of equity only. When
the firms return on investment exceeds the interest cost of debt. The impact will be unfavorable if
the return on investment is less than interest.

The financial leverage measures the relationship between the E.B.I.T. & E.P.S. And it reflect the
effect of change in E.B.I.T.

On the level of E.P.S. The financial leverage measures the

responsiveness of the E.P.S. to charge in E.B.I.T. If defined as dividend by % change in E.B.I.T.

Degree of Financial Leverage =

% Change in EPS

% Change in EBIT

Operating leverage:
Operating leverage associated with investment activities (Assets acquisition). It occurs anytime
when firm has fixed costs that must be met regardless of volume in operating leverage, when fixed
cost remain constant the percentage change in profit accompanying a change in volume is greater
than the percentage change in volume A firm with high operating leverage will have a relatively
high fixed cost in comparison with a firm with low operating leverage. If a company employs
operating leverage then its operating profit will increase at a faster rate for any given increase in
sale. However I sales fall the firm with high operating leverage will suffer more loss than the firm
with the no or low operating leverage. Therefore operating leverage called 2-edged sword. It can
be ascertained by the help of following formula:

Operating leverage

Contribution
EBIT

Degree of operating leverage:

A high degree of operating leverage shows the greater impact on the operating income of the
company due to variability in its sales, which is also responsible for variability in its operating
profit. It is an important determinant of operation risk.
It can be measured by % change in E.B.I.T. due to percentage change in sale.

Degree of operating leverage =

% Change in EBIT
% Change in sales

Favorable leverage is said to occur when the firm earns more on the assets purchased with the
funds than their opportunity use. It is unfavorable when firm doesnt earn equivalent to the cost of
funds.

Composite leverage or combined leverage or Total Leverage

When financial leverage is combined with operating leverage the effect of change in revenues or
earning per share is magnified Composite / combined leverage refers to extent to which firm has
fixed operating cost as well as financial cost.
The degree of operating and financial leverage can be combined to show the effect of total leverage
on E.P.S associated with given change in sales.
Operating and financial leverage together wide fluctuation in E.P.S for given change in sales if
company employs high level of operating leverage and financial leverage even a small change in
level of sales will have a dramatic effects on earning per share.
It can be calculate by the help of following formula;-

Combined leverage =

Contribution
PBT

Significance:A proper combination of both financial & operating leverage is blessing for firm growth, while
improper combination of both leverage may prove curse for the growth of company. So company
should try to achieve balance of both leverage.

IMPLICATIONS, APPLICATIONS AND UTILITY OF LEVERAGES

INTRODUCTION:Financial leverage is primarily concerned with the financial activities, which involve raising of
funds from the sources for which a firm has to bear a fixed charge. These sources include longterm debt (e.g. bonds, debenture etc.) and preference share capital. Long-term debts capital carries
a contractual fixed rate of interest and its payment is obligatory. As the debt provides have prior
claim on income and assets of a firm over equity shareholders, their rate of interest is generally
lower than the expected return on equity shareholders.
Further interest on debt capital is a tax-deductible expense. These two phenomenons lead to the
magnification of rate of return on equity capital and hence EPS. It goes without saying that the
effects of changes in EBIT on the earnings per share are shown by the financial leverage. Financial
leverage can best be described as the ability of a firm to use fixed financial charges to magnify
the effect of changes in EBIT on the firms earnings per share.
Financial leverage helps to known the responsiveness of the earnings per share (EPS) to the
changes in earnings before interest and taxes (EBIT). It involves the use of funds obtained at a
fixed cost in the hope of increasing the return to common shareholders.
Financial leverage refers to the extent to which a firm has fixed financing cost arising from the use
of debt capital. The firm with financial leverage will have a relatively high fixed financing cost
compared to the firm with a low financial leverage.
Financial leverage will occur when a company employs the fixed cost of funds, debt or preference
share capital with a view to maximizing earnings available to equity shareholders by way of a
higher income than the cost of funds.
These techniques also called trading on equity. Financial leverage influences the financial risk
of a company. If the earnings are insufficient for covering the fixed cost burden then the company
has to face financial risk. As long as the companys earnings are greater than its fixed costs, It will
enjoy a favorable financial leverage position and a make use of the earnings available to equity
shareholders.
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The behaviors of DFL reveals that:1) Each level of EBIT has distinct DFL.
2) DFL is undefined at financial BEP.
3) DFL will be negative when the EBIT level goes below the financial BEP.
4) DFL will be positive for all values of EBIT that are above the financial Break-eve point.
This will however starts to decline as EBIT increases and will reach to a limit of one (1).
By assembling DFL one can understand the impact of a change in EBIT on the EPS of the
company. It helps in assessing the financial risk of the company. It also explain the impact of
market risk on financial risk.
Greater the financial leverage, wider the fluctuation in return on equity and greater is the financial
risk.
IMPLICATIONS
1) High operating leverage combined with high financial leverage will consolidate risky
situation.
2) Normal situation is one should be high and another should be low. If a company has a low
operating leverage, financial leverage can be higher and vice versa.
3) Ideal situation is when both the leverages are low.

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APPLICATION AND UTILITY OF LEVERAGE:

To understand the applications and utility of leverage in financial analysis it is important to
understand the behavior of degree of operating leverage. It is to be noted that:
1) For each level of output there is a distinct DOL.
2) At BEP, DOL is undefined.
3) If quantity is less than BEP, the DOL will be negative.(but there is no such direct
relationship that less quantity leads to decrease in EBIT no such connection to be formed.)
4) If quantity is greater than BEP the DOL will be positive (but there is no such direct
relationship. DOL may start declining after an increasing quantity beyond certain level and
will limit to one (1).)
5) A large DOL indicates that small fluctuation in the level of operation will produce large
fluctuation in the level of operating income.

WHY LEVERAGE IS POSSIBLE?

PROFITABILITY A CATALYST IN THE LEVERAGE:
Profitability is the ability of a company to generate profit. It is an overall measure, which depicts
the efficiency and efficiency and effectiveness at which the company has been operating. It
indicates the overall result of the management's decision. Further, it reflects how best the company
has put to use its scarce resources to generate a higher rate of profitability.
Profitability is also taken as a criterion to measure and assess the relative efficiency of the
management of a company to generate profit. A company, which generates a higher rate of
profitability, is considered to be more efficient than other companies. Profitability is represented
by the return on investment (ROI). It is the overall measure of a company's performance.

11

According to Du-Pont control chart, variability in profitability is explained by taking into

consideration its two components viz profit margin and asset turnover. As per this part, an overall
control is exercised on the various resources of a company and necessary corrective action for
further improvement in profitability is suggested.
Profitability is ascertained from the income statement. The various components of an income
statement and their inter-relationship embrace the profitability status of the firm. This can be
shown from the following table

INCOME STATEMENT:
Total Revenue
-

Variable cost

Fixed Expenses

= EBIT
-

Interest on Debt

= Profit before Tax

-

Tax

= Profit after tax

-

Preference Dividend

= Equity Earnings

EBIT = Total revenue Total cost} Total cost = V +F

Now total revenue = Quantity produced * unit selling price
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Therefore EBIT = Q * S Q * V F = Q (S - V) F
Where:Q = Quantity produced and sold.
S = Unit selling price
V = Variable cost per unit
F = Total fixed cost.

EPS = PAT / N and EPS per equity = PAT DP / N

Now PAT = EBIT I Tax on (EBIT - I)
Therefore EPS for equity = [ (EBIT I )(1 - T) DP] / N
Thus we can see that EBIT is related S, Q.V, and F and EPS is related to EBIT. This relationship
can be used to understand movement in related items with reference movement in certain items.
The relationship between quantity of production sold and earning capacity established operating
leverage. The operating hints that when we change the level of operation it results in the change
in earning capacity.
The relationship between organizations total earning capacity and earning by the individual
investors establish financial leverage. The financial leverage hints that when earning capacity
changes it results in the corresponding change the earning by the individual investor.
The relationship between the two leverage brings out the total leverage. The total leverage hints
that when there is a change in level of operation it results in the corresponding change in the
earnings by the individual investor.

13

Thus this relationship can be shown as:

14

Ref: Lecture Notes on Financial Management by JCS Ravikant S Wawge, DBAR, SSGMCE,
Shegaon
CAPITAL STRUCTURE MEANING AND THEORIES
Capital Structure:Capital Structure of the firm is the combination of different permanent long-term financing like
debt, preference capital etc.
Capital Structure theories:Mainly there are two different views regarding capital structure of the firm. One view states that
capital structure is relevant for any given firm. It emphasis the determination of the optimum
capital structure of a firm at which over all concept of capital for a firm is minimum they are
increasing the total value of the firm.
The second view states that there is no optimal capital structure for any firm. The market value of
the firm is same for any capital structure (any debt/equity ratio) thus capital structure of the firm
is irrelevant.
There are four theories /approaches of expanding the relationship between capital structure and
cost of capital and value of the firm. These are as follows1) NI approach
2) NOI approach
3) MM approach
4) Traditional approach.

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Assumptions:1) The firm employs only two types of capital ie debt and equity. There are also no preference
share.
2) There is no corporate tax. This assumption has been removed later.
3) The firm pays 100 % of its earning as dividend. Thus there is no returned.
4) The firms total assets are given and they do not change, in other words the investment
decisions are assumed constants.
5) The firms total financing remain constant. The firm can change its capital structure either
by redeeming the debentures by issue of share or by raising debt and reduce equity share
capital.
6) The operating earnings (EBIT) is not expanded to grow.
7) The business risk remain constant is independent of capital structure and financing risk.
8) All investors are assumed to have same subjectivity of distribution of future expanded
EBIT of firm.
9) Perpetual life of the firm.
Uses of some symbols in our analysis of capital structure theories.S

Total market value of equity debt.

Total market value of debt.

Total market value of firm.

Interest payment.

NI

Net income available on equity share.

Ko

Overall cost of capital.

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Ke

Equity capitalization rate.

NI Approach:Durand has suggested NI Approach. According to this approach capital structure decision is
relevant to the valuation of the firm. In other words a change in the capital structure causes a
corresponding change in the overall cost of capital as well as the total value of the firm.
According to this approach, a higher debt content in the capital structure (ie high financial
leverage) will result in decline in the overall or WACC this will cause increase in the value of
equity shares of the company, and vice versa.
This approach is based on following assumptions:1) The cost of debt is less than cost of equity capitalization rate.
2) The debt content does not change the risk perception of the investor.
3) There is no corporate tax.

On the basis of NI Approach Total value of the firm as

V=S+B

Where S = Ni/Ke.

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NOI Approach:Durand has also suggested this approach. This approach is just opposite of NI Approach.
According do this approach the market value of firm is not at all affected by capital structure
changes. The market value of the firm ascertained by capitalizing the NOI at overall cost of
capital (Ko) which is considered to be constant. The market value of equity is ascertained by
deducting the market value of debt from market value of firm.
This approach is based on following assumptions1) The overall cost of capital (Ko) remains constant for all degrees of debt equity of leverage.
2) The market capitalization value of the firm as a whole and the spilt between debt and equity
is no relevant.
3) The use of debt having low cost increase in equity capitalization rate (Ke) Thus the
advantage of debt is set off exactly by increase in capitalization rate (Ke).
4) There is no corporate tax.
The following formula can ascertain according to this approach the value of the firm:V = EBIT/Ko
And value of equity (S) = V-B

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M-M Approach
This is Modigliani and Miller approach. According to this approach the value of the firm is
independence of its capital structure however there is basic difference between the two. The NOI
approach is purely definitional and conceptual. It does not provide operational justification for
relevance of capital structure in valuation of the firm. While MM approach support the NOI
approach providing behavioral justification for irrelevance of total valuation and cost of capital of
the firm from its capital structure, in other words MM approach maintaining that the average cost
of capital does not change with the change in the debt weighed equity mix or capital structure of
the firm.
Basic Propositions
Following are the basic propositions of the MM Approach.
The overall cost of capital (Ko) and value of firm (V) are constant for all level of debt equity mix.
The total market value of the firm is given by capitalizing expected net operating income (NOI)
by the rate appropriate for risk classes.
The cost of equity (Ke) is equal to capitalization rate of pure equity steam plus premium of
financial risk. The financial risk increases with more debt content in capital structure, as a result
cost of equity (Ke) increase in manner to offset greatly the use of less expensive source of funds
represented by debt.
The cost of rate of investment purpose is completely independent of the way in which investment
is financed.
Assumptions1) Investors are rational. They evaluate risk and return of each investment proposal rationally
before investing. They are able to maximize their return at minimum cost.
2) Capital market is 100% competitive.
3) The firm pay no any income tax thus loses its tax advantages.
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4) Expected earnings are definite and constant so future earning of firm are known and
definite.
5) Investment decision is known and definite.
Traditional Approach:The traditional approach also known as intermediate approach it is a compromise between two
extreme of NI & NOI approach. According to this approach the value of firm can be increase
initially or using more debt as debt is cheaper source of fund than equity. Thus optimal capital
structure can be reached by debt and equity mix. Beyond the certain level equity increases because
increase in debt (financial leverage) increases the financial risk of equity shareholder. The
advantage of cheaper debt at this point capital structure is offset by increased cost of equity. After
there comes a stage when the increase cost of equity cannot be offset by the advantage of the low
cost debt. Thus overall cost of capital (Ko) according to this certain point remain more or less
constant.
According to above discussion it can conclude that the traditional theory support that the cost of
capital and value of the firm are dependent upon capital structure of firm.

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EARNING PER SHARE IN THE CONTEXT OF OPTIMUM CAPTIAL STRUCTURE &

DIVIDEND POLICY DECISION
Earnings per share is the reward of an investor for making his investment and it is the best measure
of performance of a firm. "The bottom line of income statement is an indicator of performance of
"think tank" or "top level" of the company. Ordinary investors lacking in depth knowledge and
inside information mainly based on EPS to make their investment decision. So it should be the
objective of financial management to maximize the EPS from the viewpoint of both the investor
and investee.
Again the objective of financial management is maximization of value measure in terms of market
price of equity share of a corporate entity. Given the objective of the firm to maximize the value
of equity share, a firm should select a desired combination of financing mix or capital structure to
achieve the goal. Theoretically, optimum capital structure implies that combination of debt and
equity at which overall cost of capital is Minimum and value of the firms is Maximum. The
prevailing view is that the value maximization criterion as a criterion of optimal capital structure
is measured in terms of market price of equity share i.e. the value of the firms is maximized when
the market price of equity share is maximized. So according to this view maximization of market
price of equity share leading to the maximization of value of the firm is a criterion of optimum
capital structure.
In this context an example of a firm may be drawn which is running with optimum debt equity
combination. Now due to the influence of some external factors i.e. sudden political change or
something like this the market price of its equity shares started decreasing and as a result value of
the firm went on decreasing. Due to the downward movement of the value of firm. Its capital
structure will not become optimum further and will need restructuring to become optimum again.
In practice, change in market price of equity share may occur very rapidly and hence it is very
difficult to change the composition of capital structure accordingly.
Capital structure decision is an internal decision of the firm. So increase in market price of equity
share due to the influence of external factors leading to the maximization of the value of the firm
should not be a criterion of optimum capital structure. Rather EPS may be a better substitute, as a
21

criterion of value maximizing EPS should be the main slogan or mul-mantra of a firm in order to
realize the objective of maintaining an appropriate capital structure.
Dividend policy decisions
Dividend decision is the major decision area of financial management. A firm is to decide what
potation of earning would be distributed to the shareholders by way of dividend and what portion
of the same would be retained in the firm for its future growth. Both dividend and retention are
desirable but they are conflicting are desirable but they are conflicting to each other. A finance
manager should be able to formulate a suitable dividend policy, which will satisfy the shareholder
without hampering future progress of the firm. It is common that higher the earnings, higher will
be the amount of dividend and vice-versa.
The forms with a history of taking on good project and the potential for more good projects in the
future acquire much more control over their dividend policy. In particular, these firms can pay
much less in dividend than they have available as cash profits and hold on to the surplus cash
because the shareholder trusts them to reinvest these profits wisely In contrast, shareholders of
firms having history of poor projects wish to have less retention of profits because of the fear that
the profits will be invested in poor projects.
The dividend policy of a firm affects the market price of the share. In general, the stability of
dividend seems to increase the marker price of the share. However the dividend policy may affect
the market price indirectly by affecting the investors expectations of growth and risk associated
with the stream of dividend. The dividend policy of a firm determines the amount of retained
earnings, which can be reinvested by the firm to ultimately result in growth of the firm and
subsequent increase in dividends in later years.

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1.2 INDUSTRY PROFILE

The demand for edible oils in India has shown a steady growth at a CAGR of 4.43% over the
period from 2001 to 2011. The growth has been driven by improvement in per capita consumption,
which in turn is attributable to rising income levels and living standards. However, the current per
capita consumption levels of India (at 13.3 Kg/year for 2009-10) are lower than global averages
(24 kg/year).1 The Indian edible oils market continues to be underpenetrated and given the positive
macro and demographic fundamentals it has a favorable demand growth outlook over the mediumto-long term.
In terms of volumes, palm oil, soyabean oil and mustard oil are the three largest consumed edible
oils in India, with respective shares of 46%, 16% and 14% in total oil consumption in 2010. Given
the high price consciousness and varied taste preferences of Indian consumers, ICRA expects these
three oils to continue to account for the bulk of edible oil consumption in the country.
There has been a significant gap between demand and supply of edible oil because of limited
availability of oil seeds and shifting of acreage to other crops in the domestic market. This gap has
been met through imports, which account for almost 45-50% of the total oil consumption. In
H1OY2010-11,2 edible oil imports were observed to be the lowest in the last three years in view
of improvement in domestic oilseed production.
Notwithstanding that, ICRA expects the high dependence on imported oils to continue in the
foreseeable future due to anticipated domestic supply constraints and the high cost competitiveness
of imported oils. Refined and crude palm oil (CPO) have accounted for the major portion of edible
oil imports in India (74% in OY2009-10) mainly due to their relatively low prices and ample
availability. ICRA expects the dominance of palm oil in imports to continue in the near-tomedium
term.
Given the high reliance on imports, domestic edible oil prices have largely been linked to
international edible oil prices. After the decline in FY09, international edible oil prices remained
at subdued levels during most part of FY10. The prices of major edible oils rose in H2FY11 on
account of anticipated higher demand for bio-fuels, given the high crude oil prices as well as
expected production shortfalls in palm oil production. Prices have, however, corrected and
23

stabilized in recent months on account of better-than-expected CPO production from

Indonesia/Malaysia during Feb-March 2011; demand rationing due to high prices in developing
countries suffering from high levels of food inflation besides the geopolitical situation in the
Middle, East and North Africa. The improved pricing levels for Oil Year (OY) 2011 as compared
to OY 2010 have provided some comfort to small/medium scale domestic solvent extractors and
enabled relatively better capacity utilization levels. Over the near term, edible oil prices are
expected to remain firm, considering the strong demand for alternative sources of energy like
biofuels in view of the continued rise in crude oil prices.
The Indian edible oil industry is highly fragmented, with the presence of a large number of
participants in the organized and unorganized sectors. This has resulted in severe competition and
inherently thin profitability margins. Further, the profitability of market participants has also been
vulnerable to risks emanating from weak harvests; commodity price volatility and forex
movements.
ICRA notes that while the share of branded oils segment has remained low over the years, it is
poised for growth in view of rising income levels; uptrend in urbanization and increasing quality
consciousness of Indian consumers.
The Government of India has cut down import duties on edible oil since April 2008. The current
duty differential between crude and refined oils stands at 7.5%, which provides protection to
domestic refiners against competition from imported refined oils. Going forward, the industrys
profitability is vulnerable to any reduction in this duty differential.
From a business risk perspective, ICRA considers the flexibility to modify product portfolio as a
key strength in a market characterized by commodity price volatility. Accordingly, players with a
diversified presence and exposure to the three major categories of oil, namely, palm oil, soya bean
oil and mustard oil, would be better positioned for growth as compared to players with single
product concentration. Further, according to ICRA, the large-scale integrated players are better
placed than small and mid-sized manufacturers to withstand the challenges in the business
environment on the strength of benefits related to economies of scale such as marginally lower
cost of production and access to cheaper working capital credit. From the perspective of revenue

24

growth and profitability, market participants with a high share of established branded products are
better placed than participants operating in the commoditized bulk market.
In the recent past, the Indian edible oil industry has witnessed organic and inorganic expansion by
some of its major participants. While ICRA views the increase in scale as a credit positive, the
impact of these capex activities on the capital structure and the ability to scale up revenues and
profitability to the envisaged extent will be some of the variables to be closely observed from a
credit perspective.

BACKGROUND
Edible oils constitute an important component of food expenditure in Indian households.
Historically, India has been a major importer of edible oils with almost 30-40% of its requirements
being imported till 1980s. In 1986, the Government of India established the Technology Mission
on Oilseeds and Pulses (TMOP) in order to enhance the production of oilseeds in the country. The
TMOP launched special initiatives on several critical fronts such as improvement of oilseed
production and processing technology; additional support to oilseed farmers and processors
besides enhanced customs duty on the import of edible oils. Consequently, there was a significant
increase in oilseeds area, production, and yields until the late-1990s. However, in order to fulfill
its obligations towards various international trade agreements and also meet the increasing
demand-supply deficits, India began to reduce import restrictions on edible oils in the late 1990s;
and it was gradually brought under Open General License.
This led to a significant slump in the domestic oil seeds market, as edible oil prices fell sharply in
line with the low international prices prevailing at that time. Subsequently, the duty structure was
modified so as to maintain a duty differential between crude and refined varieties in order to protect
the domestic industry. Nevertheless, due to high import dependence, domestic edible oil prices
remain highly correlated to international edible oil price movement, and this has resulted in
volatility in the key credit metrics of rated edible oil companies. At the same time, ICRA notes
that edible oil companies with benefits of large-scale integrated operations, multi-product offerings

25

and recognizable branded presence in retail markets have fared better as compared to
small/medium-scale domestic oilseed crushers.

KEY TRENDS & CREDIT IMPLICATIONS

Favorable demand outlook for edible oils; underpenetrated market offers significant growth
potential:
The demand for edible oils in India has shown a compounded growth of 4.5% over the last 10
years and is estimated at 16.2 million tonnes for Oil Year (OY) 2010-11. India plays an important
role in the global edible oil market, accounting for approx. 10.2% share of consumption; 7% share
of oilseed production; 5% share of edible oil production and 13.6% share of world edible oil
imports for OY 2009-10. As per USDA estimates, India is the third largest consumer of edible oils
(after China and the EU-27 countries); and will account for 11% of global edible oil demand and
16% of global imports in OY 2010/11F.
Indias annual per capita consumption has shown a steadily increasing trend from 4 kg in the 1970s
to 10.2 kg in the late 1990s to current levels of ~13.5 - 14 kg. However, it still ranks well below
the world average of around 24 kg (per capita figures including consumption of bio-energy),
thereby signifying the high growth potential of the industry. Refer Charts 1 and 2 for trend in
domestic demand and per capita consumption of edible oils in India.
According to ICRA, the medium-to-long term demand outlook for edible oils in India is favorable
(with expected growth in the vicinity of 4-5% p.a.), catalyzed by the growing population and
expected increase in per capita consumption which in turn would be driven by changing lifestyles;
growing urbanization; increasing proportion of middle class population and steadily rising
affluence levels.
Domestic production lags demand growth, thereby leading to heavy reliance on imports
As compared to demand growth for edible oils, the domestic oil and oilseed production has
remained largely stagnant on account of low productivity in under-irrigated areas and shifting of
acreage from oilseeds to other crops. This has resulted in a significant demand-supply gap, which
26

has been met through imports which have been further incentivised by a sharp cut in import duties.
In the period from 2001 to 2008, import duties on crude soyabean oil / palm oil were in a
prohibitively high range of 40%-90%. In order to curtail inflation, GoI revised these protectionist
tariffs downwards to 7.5% for refined palm / soybean oil and 0% for crude palm / soya bean oil in
April 2008, resulting in a surge in volumes of imported oils that currently meet almost 45-50% of
domestic consumption requirements.
Reduction in import volumes witnessed for the first time in the last three years during H1OY201011; nonetheless, high dependence on imported oils is expected to continue Edible oil imports
witnessed a sizeable 21% y-o-y reduction in H1 OY2010-11 (November 2010- April 2011), as can
be observed in Chart 4. This has largely been on account of relatively higher domestic oilseed
availability (~29-30 MT expected for OY2011 as against 24.9 MT for OY2010) and consequently
higher domestic oil production. The high crude palm oil prices (trading almost at par with soya
during December 2010- February 2011), following concerns over production estimates in
Malaysia, also resulted in lower imports, as edible oil players resorted to running down of
inventory levels. The subsequent improvement in estimates of palm oil production has led to some
correction in prices, which coupled with forthcoming festive demand is likely to revive import
volumes in H2OY2011.
Considering the current year domestic edible oil supply of 8.0-8.5 million tons per annum and
factoring a normal growth of 2%-3% (through moderate expansion in cultivated area and yield
improvements) in supply, ICRA expects the significant gap between domestic demand and supply
to persist; and result in continued import dependence for at least 45% of consumption
requirements, notwithstanding the dip in imports seen in H1OY2011.
Apart from price, consumption is also influenced by regional preferences; palm, soya bean and
mustard oil are the three major edible oils. An important characteristic of the Indian edible oil
consumption pattern is the variation in preferences across regions, driven by taste and availability.
For instance, soya bean oil is mainly used in northern and central regions of India due to the local
availability of soya beans. Mustard oil is largely consumed in north-eastern, northern and eastern
regions of India, as its pungency is a desired and inherent part of the local cuisine. Palm oil has
increasingly become the oil of choice in southern India due to the warmer climate (palm oil gets a
27

cloudy appearance in colder climates) and easy availability from South-east Asia. The increased
health awareness also determines the consumption pattern with mustard and soya considered
healthier than palm oil, which has higher levels of saturated fats. Oils like rice bran and olive are
also gaining popularity due to their superior health properties, although their consumption remains
fairly low in absolute terms. Further, price economics also have an important role to play in
determining consumer choice, given that expenditure on edible oil constitutes a significant portion
of the household budget.
In terms of volume, palm, soya bean and mustard/rapeseed oil are the three major edible oils
consumed in India and together account for 75% of the total edible oil demand.
While mustard oil is almost entirely produced within the country, soya bean oil is imported in
significant quantities (about 45%-50%). Palm oil is entirely imported in crude form for refining in
port based refineries while some quantities are also imported in the refined form.
Given the cost economics and taste preferences of consumers, ICRA expects these three varieties
of edible oil to dominate the consumption mix. Accordingly, companies with an exposure to these
oil varieties stand to benefit. Given the inherent volatility in prices, ICRA believes that participants
with a diversified presence across edible oil categories would be better placed than participants
focused on a single variety of oil, due to the flexibility to modify product portfolio in line with
market parity and maintain optimum capacity utilization levels.
High fragmentation and competition put margins of domestic participants under pressure:
The edible oil industry in India is characterized by intense competition and fragmentation, with
the presence of a large number of units attributable to low entry barriers such as low capital and
low technical requirements of the business and a liberal policy regime (SSI reservation for
traditional oilseeds and sales tax incentives by various state governments). While a number of
inefficient units closed down after reduction of high import tariffs on imported edible oils, the
average capacity utilization rates of Indian oilseed processors remain very low (at ~30%-40%),
with many of them operating only for a part of the year, that is, during the local harvest season of
raw materials. As a result of this high competition and fragmentation, margins in the edible oil
business tend to be thin.
28

Further, they are exposed to risks of commodity price volatility and forex movements.
Notwithstanding the above, the market includes some large industry participants like Marico
Limited, Cargill India Private Limited, Adani Wilmar Limited, Ruchi Soya Industries Limited and
KS Oils Limited, which have a diversified product portfolio; multiple manufacturing units and
operate on a pan India basis mainly in the branded segment. ICRA believes that the larger
manufacturers by virtue of their scale enjoy certain advantages like access to cheaper working
capital credit and savings in cost of production, which make them relatively better positioned to
withstand margin pressures and difficult industry conditions.
Strong linkage between domestic and international edible oil prices:
The domestic edible prices are directly linked to the prices of imported palm and soya bean oil due
to heavy reliance on imports and substitutability amongst oil varieties. Given the high volatility in
international edible oil prices, domestic participants are exposed to the risk of unexpected squeeze
on margins due to pricing mismatches between raw materials (which are linked to domestic
factors) and final product prices (affected by global factors). The international prices of edible oils
increased sharply and reached their peaks around June 2008, driven by high crude oil prices that
led to the diversion of edible oilseeds to bio-fuel usages apart from other shortages in supply. In
August 2008, edible oil prices in local and international markets fell by more than 50% (monthon-month) because of a drop in crude oil prices; falling demand on account of global recession
and healthy production figures. The prices remained volatile during FY10 with only a marginal
recovery but remained lower than the peak average of FY09 on an overall basis. In recent months,
edible oil prices have shown significant recovery, following increasing crude oil prices; anticipated
increase in bio-fuel demand; expected production shortages for CPO production in
Malaysia/Indonesia and growing demand. There is also a noticeable trend of reduction in
differential between palm oil and other edible oils, especially soya bean and rapeseed oils. Given
the likelihood of sustained high crude oil prices in the near term, ICRA believes that edible oil
prices would continue to remain firm.

29

Industry remains vulnerable to the risk of narrowing import duty differential:

Beginning 2007-08, there has been a progressive reduction in import duties on crude and refined
edible oils. Most of these policy changes have been made in order to comply with foreign trade
agreements entered by India with other countries and associations such as ASEAN apart from
meeting shortfalls in domestic supplies and curtailing inflation. In the last round of changes in duty
structure (April 2008), the duty on crude palm oil was made nil while that on refined palm oil
was made 7.5% (7.7% including education cess), with the net duty differential being maintained
at 7.5% to protect the domestic industry3. Going forward, the reduction of import duty differential
remains a key regulatory risk for the industry.
Branded oil sales, although currently low in India, are expected to grow due to renewed thrust by
major players given the presence of a large number of unorganized participants in the Indian edible
oil market, the share of branded product sales has remained low with most low-income consumers
opting for cheaper oils sold in loose form. As per industry data, only about 31% of urban
households and about 9% of rural households consume branded edible oils, with the national
average at 16%. Given the low penetration of branded oils; increasing affluence levels and quality
consciousness of the Indian consumers, there is a significant growth potential in the branded
segment. Amongst the major edible oils consumed, palm oil is still largely traded as a commodity
and sold mostly in loose form, with packaged sales accounting only for 15%-20% of total sales.
Sunflower and soya oil, on the other hand, have a high proportion of packaged sales estimated at
around 70% and 55% of total sales. The major participants in the organized sector, namely, Ruchi
Soya, Adani Wilmar Limited (AWL) & Cargill India, have a strong presence in the branded
segment, with branded sales accounting for 38%, 58% and 60% of total edible oil sales of these
companies respectively. Moreover, a few mid-sized, regional edible oil companies such as
Mantora Oil Products Ltd, Modi Naturals and Tara Health Foods Ltd have also been striving to
establish their brands. From a credit perspective, ICRA considers high share of branded sales as a
strength, given the favorable outlook for growth; relatively high margins; stability of offtake and
better pricing power as compared to the bulk market. Nonetheless, since branding activities entail
high upfront outlay while sales volumes may take time to scale up, profitability margins of
companies undertaking large-scale branding efforts are likely to come under pressure during the
interim gestation period.
30

Some trends of consolidation visible in the industry; large-scale integrated players leading the
capacity addition process through expansion as well as acquisition/consolidation. The edible oil
industry in India in the recent past has witnessed both organic as well as inorganic expansion by
some of the major players. AWL has added 1090 TPD of installed capacity for refining and 5050
TPD of installed capacity for seed processing during CY 2010-11 by acquiring five operational
plants and undertaking expansion at three out of its four existing plants. AWL has also additionally
taken over the operations of other Wilmar associates in India (like Acalmar Oils & Foods Limited)
so as to consolidate its pan-India presence. Sanwaria Agro Oils Limited has added 1000.
TPD crushing capacity in 2009 through acquisition of two plants. KS Oils has set up new facilities
at Kota, Ratlam and Guna, totaling 3400-3600 tpd, and acquired a refining unit at Haldia. Further,
some edible oil manufacturers have also undertaken backward integration to strengthen their
overall business model. KS Oils has acquired 1,38,000 acres of palm plantations in Indonesia while
Ruchi Soya has access to 1,75,000 hectares of agricultural land with palm plantations across
different Indian states.
While ICRA considers this consolidation and capacity expansion trend as a favorable development
due to the benefits associated with large scale of operations, on the flip side, the adverse impact of
such activities on the capital structure; profitability and return metrics of the concerned companies,
particularly during the gestation period, presents a downside risk.

31

1.3 COMPANY PROFILE

The success story began with the establishment of the Kaleesuwari Refinery Pvt. Ltd. in 1995.
Since then, the company has made incredible strides in the edible oil market with its flagship brand
"Gold Winner". Driven by the goal to provide quality sunflower oil at competitive prices, Gold
Winner within a short span of time, has become the most preferred brand.
Gold Winner has proved once again that it is aptly named - according to a report published by The
Economic Times Brand Equity on April 21, 2008, Gold Winner is ranked 63rd among India's
hundred biggest Fast Moving Consumer Goods (FMCG) brands by A.C. Nielsen Retail Audit.
This comprehensive retail audit was done based on a variety of parameters including sales, top-ofthe mind recall and trust. Not long ago, an ORG-MARG survey also had rated Gold Winner as
number one in the FMCG (edible oils) category in South India. Gold Winner has become a member
of the US based National Sunflower Association (NSA), whose aim is to promote quality
sunflower products across the globe keeping the health of the people in mind.
Gold Winner finds a place in every discerning home, thanks to the highly sophisticated and
rigorous processes adopted to refine crude sunflower oil. A unique distribution network ensures
that the end consumer always keeps company with health and happiness. Gold Winner is now
available in Sri Lanka and is all set to establish its presence in Singapore.

32

From the day Kaleesuwari was founded, the vision to spread the delight of healthy life was the
pathfinder to the company. This was the driving force behind every new venture they stepped
into.

1994 - The Flagship brand Gold Winner RSF was launched.

2003 - Kaleesuwari entered a new product category and launched Gold Winner
Vanaspathi.

2004 - Gold Winner gets the 63rd rank in India among edible oil category as per the
Brand Equity - ET AC Nielsen Survey.

2005 - Kaleesuwari entered another new product category in the month of September by
launching Sree Gold Dhal.

2007 - Kaleesuwari introduces its Olive Oil brand - Cardia Health Olive Oil.

2008 - Kaleesuwari receives its ISO 2000:9001 certification for the maintenance of
impeccable quality standards.
Kaleesuwari receives the HACCP certificate on Hazard Analysis and Critical Control
Practices.

2009 - The Olive Oil segment is re-launched by the name Cardia with new 700ml &
350ml packaging.
Kaleesuwari creates a new segment of branded lamp oil by the name Dheepam Lamp Oil
in November.
Kaleesuwari receives its ISO 22000 2009 certification.

2010 - Kaleesuwari creates a new health-bound oil blend of Olive & Corn Oil by the
name Cardia Life in October.

33

The Philosophy
Kaleesuwari plans to sustain its competitive advantages of being customer-centric and providing
an extended portfolio of products through the following strategies

Strengthening market position by increasing responsiveness to customer requirements.

Providing cost-effective solutions through augmented productivity, resulting from

innovation and economies of scale.

Manufacturing capacity expansions which include internal expansion and increasing the
number of manufacturing units.

Kaleesuwari's future plans will endeavor to grow and further strengthen its connotation of "Health
and Happiness" as its primary enticement and spur.

The Infrastructure
Kaleesuwari has three manufacturing plants with well-resourced state-of-the-art facilities and
dexterous professionals located near the major cities of Chennai, Coimbatore and Bangalore.
The manufacturing plants use Continuously Automated Technology for processing to maintain
the highest standards of hygiene.
The major share of refinery processing equipment is supplied by the world renowned equipment
supplier, Desmet Ballestra from Belgium. Stringent quality control standards are employed in the
inspection and testing of incoming raw materials, packaging materials, refining via continuous
in-process testing, as well as all finished goods. Kaleesuwaris quality control laboratories house
high-tech testing equipment and follow Good Laboratory Practices to ensure quality and
repeatability of all testing procedures.
Kaleesuwari is the foremost edible oil company in India to put an enterprise-resource-planning
(ERP) system using SAP into practice. It streamlines the operations by systematic monitoring and
analyses of all the business processes.
34

Social Responsibility
The Social Responsibility programs of Kaleesuwari are designed to provide enduring benefits to
its employees, clients, shareholders, partners and individuals of the surrounding within which it
operates.
Kaleesuwari understands its responsibility of being a part of the community. These responsibilities
go further than just producing the products and keeping the customers surrounded by happiness
and good health. Kaleesuwari understands its obligation to lend a helping hand as an employer and
as a part of the community at large.
Through various social and volunteering activities, community involvement and commitment to
the environment, Kaleesuwari endeavors to offer positive impact on people's health and
communities.
As an employer, Kaleesuwari believes in having concrete values, a healthy workplace environment
and management that promote the potentials and talents of every individual.
Employee Engagement
To render its products at exceptional standards, Kaleesuwari completely relies on the drive, skills
and dedication of its employees. Employees of Kaleesuwari are supported by best-in-class HR
policies that place supreme importance to statutory compliance and employee welfare.
Kaleesuwari fosters a culture of continuous individual development and progress to meet the
clients' needs and build on its businesses. The employees have access to an extensive range of
professional development training as well.
Manufacturing plants are managed with the highest prominence offered to safety standards.
Despite being an oil refinery, the factories are well-maintained with a spic-and-span ambience to
work. The in-house wellness centers located within the factorys compound ensures health care
services, if required during the working hours.
With the introduction of Performance-based Management Systems (PMS) in the manufacturing
plants, all employees are treated fairly through standardized procedures that promote consistency
35

all through the organization. Along with the PMS, the company uses fair practices and analytical
procedures to provide growth opportunities for all its employees.
Technological improvement and business education are vital to ensure that the employees have the
knowledge and right skill sets to exceed the clients' expectations in the markets that they operate
in.

Awards & Recognitions

Awards, certifications and recognitions are the best ways to understand Kaleesuwari's persistence
in adding value to its customers from every dimension. Kaleesuwari has raised the bar even when
it comes to making a difference in the life of its customers.
Given below are some of the recognitions received by Kaleesuwari through its brands for
excellence in business development and product quality.

A report published by The Economic Times Brand Equity on April 21, 2004 recognized
Gold Winner to be ranked 63rd among India's top hundred Fast Moving Consumer Goods
(FMCG) brands by A.C. Nielsen Retail Audit.

An ORG-MARG survey had rated Gold Winner as "Number One" in the FMCG (edible
oils) category in South India.

Gold Winner is a well-recognized member of the US based National Sunflower

Association (NSA), whose aim is to promote quality sunflower products across the globe
keeping the health of the people in mind.

Gold Winner crossed another milestone in September 2005 by receiving ISO 9001:2000 &
HACCP Certifications.

The HACCP (Hazard Analysis and Critical Control Point) Certification confirms that the
edible oil processing followed at Kaleesuwari is free from physical, chemical and
biological contamination thereby assuring complete food safety.
36

Manufacturing
Gold Winner's state-of-the-art production unit is situated at Vengaivasal, about 14km from
Chennai, India.
The plant uses the automatic and continuous Belgian technology for processing in order to
maintain the highest standards of quality and hygiene. The Desmet technology used is state of the
art and ensures that the refined oil produced is of international standards.
The storage capacity at the plant is 16000 tones. This large tank space ensures that enough stocks
are available to service the ever-growing demand promptly.
The crude oil is systematically purified in well-defined stages like Neutralization, Bleaching,
Dewaxing and Deodorization. All processes are monitored and controlled automatically by using
PLC based systems. Untouched by hand, the oil produced here matches the exacting requirements
of our customers.
To keep the processes stable and controlled, we have adopted modern plant maintenance practices
including Preventive maintenance. Condition monitoring of critical equipment is resorted to
periodically. In observance to stipulated standards, calibration of instruments and control devices
are done routinely.
Manpower:
A high-level in-plant safety committee ensures that the prescribed safety norms are strictly adhered
to. Personnel safety has the highest priority. Gold Winner has employed well qualified and
experienced personnel to handle all its functions. The workforce, largely local, is inducted to work
only after a rigorous training process that includes on the job training. All welfare measures are in
place to ensure that the productive capacity of our people is maintained at the highest level.
Their caring for the environment:
Gold Winner understands its social responsibilities and the effluent treatment process is built on
the concept of using environment friendly waste disposal practices. The green environs in and
around the factory bear ample testimony to it.
37

Quality Assurance
To ensure the highest level of quality in the finished product, all our incoming raw and other
materials are subjected to stringent tests and checks.
The raw material - crude sunflower oil - is procured from reliable sources in India and abroad and
tested using the modern analytical Gas Chromatograph .The quality at various stages of the
processing is also checked and is further assured by using Good Manufacturing Practices (GMP).
Undesirable components are removed during the processing.
The good properties of the refined sunflower oil are maintained intact by the use of appropriate
packing. This ensures that the freshness we put in at the time of manufacturing is the same
freshness you get when you open your pack .Simply put this is the unique FIFO (Freshness In Freshness Out) benefit that Gold Winner brings to you.
This ensures that every time you buy Gold Winner, you actually carry home health and happiness.
Marketing
Vision: We envision that Gold winner should become the most valued and preferred edible oil
brand in our nation by 2007. Kaleesuwari Refinery Private Limited has dedicated itself to its
mission of building a conveniently available, affordable world class brand that is trusted and
preferred by the consumer for its quality & nutritional value.
Today Gold winner is available in all the southern states of India and Maharastra. Gold winner is
constantly consolidating and expanding its distribution reach with the single minded objective of
coming closer to customer.
In fact Kaleesuwari Refinery Private Limited is implementing an organization wide ERP project
named c2c or closer to customer. Once completed, "This project is expected to track the buying
behavior closely and help us to effectively service our customers requirements". The SAP
implementation would also bring in commensurate reduction in lead time to deliver there by
positively impacting our inventory levels.

38

Gold winner is now an international brand having established its presence in Sri Lanka. Gold
winner would soon be available in Singapore as well. The range of products has been enlarged to
cater to the requirements of our customer comprehensively.
About EFA
The Secret of a winning formula: EFA
Every glistening drop of Gold Winner comes with the promise of ample nutrition and unending
good health. Just a little Gold Winner can add to your meal the innumerable benefits of pure refined
sunflower oil. Thanks to the fact that it contains EFA, Gold Winner keeps the winner in you going
strong at all times.
Why EFA?
With the advent of calorie-conscious and healthy eating habits, low fat diets have become the order
of the day. Leading to a curious dilemma - where does one draw the line between excessive fat
and essential fat? This is where EFA steps in to add the needed sprinkle of health to every recipe.
What is EFA?
EFA (or Essential Fatty Acids) supply the body with vital macronutrients that are not naturally
produced by the human body, and it can be acquired only from external sources through the food
we consume. Sunflower Oil is one such source, which is EFA rich.
Gold Winner, Refined Sunflower Oil rich in EFA ensures that it turns each meal into a culinary
delight.

39

1.4 PRODUCTS PROFILE

Gold Winner Refined Sunflower Oil is the flagship brand of

Kaleesuwari. Gold Winner finds a place in every
discerning home. Thanks to the highly sophisticated and
rigorous processes adopted to refine crude Sunflower Oil. A
unique distribution network ensures that the end-consumer is
enriched by good health and happiness. Gold Winner is now
available in Singapore, Malaysia, Brunei, Kuwait, Dubai, Australia, UK and Sri Lanka. Every drop
of Gold Winner not only glistens with quality and hygiene but also assures gourmet's delight.

Packages Available in:

Pouches: 100ml / 200ml / 500ml /
1litre / 5litre
Pet Bottle: 500ml / 1litre / 2litre
Jar: 5litre / 15litre
Tin: 15kg / 15litre

40

In a tranquil blend of Refined Castor Oil, Sesame Oil,

Coconut oil, Mohua (Illupai) Oil, Rice Bran Oil and Sugandha
Dravyas, Dheepam Lamp Oil brings together a unique
combination of oils that are said to have been used since time
immemorial. The oils in this composition bestow immense
benefits to everyone around. Dheepam is specially designed
and developed with pleasing Sugandha Dravyas and
worshipping with Dheepam in your Pooja Room or in the temples can elevate your mood and
render a feeling of serenity, peace and divine bliss.

Packages Available in: Pet Bottle: 250ml /

500ml / 1litre
Jar: 15litre

41

Cardia Life olive and corn blended refined oil is made from
two healthy & diverse ingredients that combine good health
with great taste. Cardia Life is versatile oil suitable for all
cooking methods and for use in many types of dishes. It
ensures excellent flavor stability and enhances the taste of
food. All these merits turn Cardia Life into an ideal choice.

Packages Available in:

1litre Standup Pouch

Kaleka Filtered Groundnut Oil contains the wholesome

nutrition of groundnuts. It has a unique property to enhance
the flavor of food cooked. The superior quality of the raw
materials and state-of-the-art refining processes ensure that
this oil is of the finest quality.

Packages Available in:

Pouches: 1litre / 2litre
Tin: 15kg

42

Cardia is the premium quality refined edible oil extracted

from hand-picked olives. It is enriched with the highest
proportion of Mono Unsaturated Fatty Acids (MUFA) among
all the edible oils available in the market. Cardia is exclusively
made for those consumers who want to balance the goodness
of Olive Oil with their need for clear refined oil that is devoid
of the characteristic fruity smell and taste of Olive Oil. Cardia
is therefore the healthiest and ideal cooking medium for regular Indian cooking.

Available as: Extra Virgin Olive Oil/ Refined Olive Oil

Packages Available in
Pet Bottle: 500ml / 1litre

43

Pure Plus edible coconut oil, from the house of Kaleesuwari

is made from hand-picked, premium quality copra and
processed through a state of the art technology from U.K.
The pure and natural coconut oil is rich in medium chain fatty
acids that are essential and easily digestible low calorie fats.
Pure Plus with its signature aroma that is fresh and pleasing
is all set to become your preferred choice.

Packages Available in:

Pouches: 1litre
Tin: 15kg

44

Orysa is the premium quality Refined Rice Bran Oil that

protects the consumers hearts with Gamma Oryzonol
protection. Gamma Oryzanol is a natural anti-oxidant that is
known to significantly reduce the absorption and deposition
of LDL and VLDL (bad) serum cholesterol and thereby offer
superior protection to the entire cardio-vascular system. The
prolific presence of the naturally occurring anti-oxidants and
the well balanced ratio of Omega 6 to 3 in Orysa ensure that the oil has superior oxidative stability
and enhanced friability than most other oils. Orysa is rich in Squalene and Trienols that are well
known to have anti-cancer effects.

Packages Available in:

Pouches: 1litre
Tin: 15kg

45

Eldia pure coconut oil, from the house of Kaleesuwari is made

from hand-picked, premium quality copra and processed
through a state of the art technology from U.K.
The pure and natural coconut oil is rich in medium chain fatty
acids (MCFA as triglycerides) that are essentially easily
digestible low calorie fats. Eldia also has anti-microbial, antibacterial and anti-oxidant properties besides being an
excellent carrier for Vitamin A, D, E and K.

Packages available in:

Pouch: 100ml
Pet Bottle:50ml / 100ml / 200ml

46

ELDIA Enriched Hair oil enriched with virgin Pomegranate

seed oil, vitamin E, and Tomato & Blue Lotus extracts comes
with the abundance that nature offers for the nourishment of
hair. All the three natural extracts come with unique antioxidants that help in TOTAL scalp skin renewal, enhance the
beauty of your hair naturally and provide scalp protection
from harmful sunrays. Thus Eldia Enriched comes with natural enrichment to help nourish your
scalp and hair.

Packages available in:

Bottle: 50ml / 100ml / 200ml

47

2.1 OBJECTIVES OF THE STUDY

PRIMARY OBJECTIVE

To study the methods of raising finance and financial leverages used by the company.

SECONDARY OBJECTIVES

To examine the impact of leverage on EPS.

To assess the inter relationship between degree of financial leverage (DFL), earning per
share (EPS) and dividend per share (DPS).

To summarize main finding of the study and offer some suggestion, if any, for improving
EPS by the use of financial leverage.

48

2.2 NEEDS OF THE STUDY

Leverage is an important technique which helps the management to take sound, prudent, financial
and investment decisions. It also helps to evaluate business, financial, total risk of any
organization.
The task of choosing most suitable combination of different techniques in the light of the firms
anticipated securities for financing fund requirements earnings is facilitated by it. In matters
relating to investment also leverage technique is immensely helpful. It acts as a useful guideline
in setting the maximum limits by which the business of the firm should be expanded. For example,
the management is advised to stop expanding business the moment anticipated return on additional
investment falls short of fixed charge of debt.

2.3 SCOPE OF THE STUDY

Capital structure employed by the companies and its effect on the EPS has been studied previously
and also the different financial constraints of both the industries have been compared. Particularly,
it is in the scope of this project to analyze the differences in the effect of leverage on the
profitability of the firms in manufacturing and service industries.

2.4 LIMITATIONS OF THE STUDY

The study is limited to four year only. Generally twenty years data is ideal to form trend
analysis.

This is based on secondary data collected from the annual report of the company. It was
not possible to collect the primary data from the company's office.

49

2.5 REVIEW OF LITERATURE

A few empirical studies have been performed to analyze the relationship between leverage and
corporate performance. The major difference between them is based on the definition of corporate
performance.
There is a first strand of papers using basic accounting measures of performance. Majumdar and
Chhibber [1999] test the relationship between leverage and corporate performance on a sample of
Indian companies. Adopting an accounting measure of profitability, return on net worth, to
evaluate performance, they observe a significant negative link between leverage and corporate
performance.
Kinsman and Newman [1999] use various measures of performance on this issue on a sample of
US firms, based on accounting or ownership information (firm value, cash-flow, liquidity,
earnings, institutional ownership and managerial ownership). They perform regressions of
leverage on this set of performance measures. Their conclusion is the existence of robust
relationships between leverage and some of the measures of performance such as a negative link
with firm value and cash-flow. However this work is criticized with the use of much contested
performance measures such as liquidity, but also with their joint inclusion in regressions, mixing
their influence.
In this field, we can also mention a couple of empirical works that focus on the determinants of
leverage and test the profitability variable. It has to be underlined however that profitability cannot
be strictly considered as a performance variable to explain the leverage, as profitability is the
source of internal financing. As a result, there is a negative impact of profitability on leverage, as
a higher profitability means a lesser need for external financing such as financial debt. Here the
conclusion is clearly a negative relationship between profitability and leverage (Rajan and
Zingales [1995], Johnson [1997], Michaelas et al. [1999]).
There is however a second strand of works on the relationship between leverage and corporate
performance that develop more sophisticated measures of performance.

50

Pushner [1995] aims to analyze the relationship between leverage and corporate performance in
concordance with the influence of equity ownership in Japan. Corporate performance is here
measured by total factor productivity: a production frontier is estimated, in which performance is
equal to the residual of OLS estimate. He concludes to a negative relationship between leverage
and corporate performance. Two studies test the role of financial pressure on corporate
performance, which is a closely related issue. Both analyze data on the United Kingdom and
measure again corporate performance as total factor productivity.
Nickell et al. [1997] observe a positive link between financial pressure and productivity growth.
Nickell and Nicolitsas [1999] conclude to a weak positive effect of financial pressure on
productivity. To conclude this brief survey about former empirical literature, it appears that there
is no consensus on the relationship between leverage and corporate performance. We observe
furthermore two key elements for the understanding of the link leverage-performance. The first
element is the fact that all studies test this link only in one country, which can explain the different
results as the institutional framework may play a role on the relationship between leverage and
corporate performance. This is the reason why we analyze in our study this relationship on several
countries. The second element concerns the used measures of performance, either accounting
measures of total factor productivity indicators. In the following work, we adopt frontier efficiency
scores to evaluate performance.
Efficiency scores own a couple of advantages in comparison of other measures of performance.
Comparing to raw measures of performance, efficiency scores allow the inclusion of several
outputs and inputs and provide consequently synthetic measures of performance. In comparison to
all other measures of performance (raw measures or productivity measures), efficiency scores have
the advantage to offer relative scores that take directly into account the comparison with the best
companies.

51

Managers with substantial free cash flow might overinvest to increase personal compensation and
benefits (Jensen, 1986; Stulz, 1990; Hillier, 2010); when a company is financed with equity,
management is not required to pay dividend. In not doing so the management can waste free cash
flow for personal benefits and neglect the dividend payments to shareholders. Debt serves as a
protection mechanism against overinvestment, because free cash flow that can be used for personal
benefits of the managers should be paid to bondholders in the form of interest. Unlike dividends
the interest payments are mandatory and not paying them leads to default and eventually
bankruptcy. Second, managers might underinvest when they fear that investments might not
generate enough cash to pay the interest and principal of debt that is required to fund investments.
Increasing debt leads to underinvestment as the possibility of default rises which results in
management keeping the level of debt as low as possible (Myers & Meckling, 1974; Myers &
Majluf 1976; Hillier, 2010). According to Fiegenbaum & Thomas (1988) managers might
overinvest when they assess their return on a project too low regarding a target return (ROI) ratio
and want to increase the return by increasing investment in more risky projects. On the other hand
managers might assess the risk of a project too high and the investment return too low, leading to
underinvestment to decrease the project risk. But due to time constraints and narrowing the scope
of the research the influence of return on investment decisions will not be part of this research.
Theory implies that managerial shareholdings influences the overinvestment and underinvestment
problems. Managerial shareholdings reduces overinvestment because they align the interest of
managers and shareholders; increasing the value of the company instead of growth. But when the
power of management increases because of increasing levels of share ownership, managerial
shareholdings can also create a new agency problem. Managers might expropriate the rights of
minority shareholders (Morck et al., 2005; Pawlina & Renneboog, 2005). Underinvestment is
expected to be more persistent with increasing insider ownership. Investment in (high-risk)
projects can negatively affect managerial wealth due to a decline in share price which is combined
with the risk of default when a project does not yield sufficient cash flow to pay the interest
(Pawlina & Renneboog, 2005; Pindado & La Torre, 2009). Empirical results of Goergen &
Renneboog (2001) imply that outsider shareholders (e.g. institutions or governments) can decrease
the extent of agency problems. Through effective monitoring of the company and its managers,
outsiders can influence and control 2 investment decisions of the management. It has to be noticed

52

that overinvestment and underinvestment might not necessarily be influenced by solely debt, but
also by the risk-attitude of management.
Recent studies have investigated the relationship between leverage and investment, and the
presence of agency problems: Lang et al. (1996) in the US, Goergen & Renneboog (2001), and
Richardson (2006) in the UK, De Gryse & De Jong (2006), and De Jong & Van Dijk (2007) in
The Netherlands, Aivazian et al. (2005) in Canada, Odit & Chittoo (2008) in Mauritius, Pindado
& De la Torre (2009) in Spain, and finally Zhang (2009) in China. These studies have led to
different result and conclusions regarding the existence and magnitude of agency problems. This
might indicate that the presence and extent of overinvestment and underinvestment differs per
country. No such study has been performed for companies in Denmark. Because most studies are
performed in market-oriented settings characterized by an active external market for corporate
control (US, UK, and Canada) and aforementioned studies have found that investment is
influenced by corporate governance, results found in prior research might not be generalizable to
companies in Denmark. Danish companies are characterized by a network-oriented corporate
governance structure where only a few listed companies are widely held and companies are most
often controlled by family-founders and institutions (Weiner & Pape, 1999; Enriques & Volpin,
2007). Denmark has an international economy in which 22% of the turnover in 2006 was made by
international companies (Foreign Investor Survey, Statistics Denmark 2008). This implies that the
value-destroying overinvestment and underinvestment might affect the wealth of international
companies as well because the cost of overinvestment and underinvestment affects those
companies.

53

3.1 RESEARCH DESIGN:

The objectives for which study has been undertaken are:
1) To study the methods of raising finance and financial leverages used by the company.
2) To examine the impact of leverage on EPS.
4) To assess the inter relationship between degree of financial leverage (DFL), earning per share
(EPS) and dividend per share (DPS).
5) To summarize main finding of the study and offer some suggestion, if any, for improving EPS
by the use of financial leverage.
Hypothesis:
In order to realize the above objective following hypotheses have formulated.
1) The company uses debt as a cheaper source of finance than equity.
2) DFL and EPS are positively correlated in such a manner that increases in financial leverage
leads to increase in EPS.

54

3.2 METHODS OF DATA COLLECTION:

This project is totally based on the Secondary Data, So all the data of Kaleesuwari Refinery Pvt.
Ltd. have been collected from 1) The annual report of the company.
2) From the Web site of company.
3) From the study Books material.
The data collected from this source have been used and complied with due care as per requirement
of the study.
Period of study:
The present study covers a period of five year from 2010-2014.
Techniques of analysis:
For analyzing the degree of association between DFL, EPS and DPS. The study has been made by
converting the collected data into relative measure such as ratios, percentage rather than absolute
one.
Limitation of study:
1) The study is limited to four years only. Generally twenty years data is ideal to form trend
analysis.
2) This is based on secondary data collected from the annual report of the company. It was not
possible to collect the primary data from the company's office.

55

3.3 TOOLS USED FOR RESEARCH

1. Current Ratio:
A liquidity ratio that measures a company's ability to pay short-term obligations. Also known as
"liquidity ratio", "cash asset ratio" and "cash ratio".
The Current Ratio formula is:

The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities
(debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current
ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the
company would be unable to pay off its obligations if they came due at that point. While this shows
the company is not in good financial health, it does not necessarily mean that it will go bankrupt as there are many ways to access financing - but it is definitely not a good sign.
The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to
turn its product into cash. Companies that have trouble getting paid on their receivables or have
long inventory turnover can run into liquidity problems because they are unable to alleviate their
obligations. Because business operations differ in each industry, it is always more useful to
compare companies within the same industry.
This ratio is similar to the acid-test ratio except that the acid-test ratio does not include inventory
and prepaid as assets that can be liquidated. The components of current ratio (current assets and
current liabilities) can be used to derive working capital (difference between current assets and
current liabilities). Working capital is frequently used to derive the working capital ratio, which is
working capital as a ratio of sales.

56

2. Acid Test Ratio:

A stringent indicator that determines whether a firm has enough short-term assets to cover its
immediate liabilities without selling inventory. The acid-test ratio is far more strenuous than the
working capital ratio, primarily because the working capital ratio allows for the inclusion of
inventory assets.
The Acid Test Ratio formula is:

Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at
with extreme caution. Furthermore, if the acid-test ratio is much lower than the working capital
ratio, it means current assets are highly dependent on inventory. Retail stores are examples of this
type of business.
The term comes from the way gold miners would test whether their findings were real gold
nuggets. Unlike other metals, gold does not corrode in acid; if the nugget didn't dissolve when
submerged in acid, it was said to have passed the acid test. If a company's financial statements
pass the figurative acid test, this indicates its financial integrity.

57

3. Fixed Assets Turnover Ratio:

A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio measures a company's
ability to generate net sales from fixed-asset investments - specifically property, plant and
equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the
company has been more effective in using the investment in fixed assets to generate revenues.

The fixed-asset turnover ratio is calculated as:

This ratio is often used as a measure in manufacturing industries, where major purchases are
made for PP&E to help increase output. When companies make these large purchases, prudent
investors watch this ratio in following years to see how effective the investment in the fixed
assets was.
4. Gross Profit Ratio:
Gross profit ratio (GP ratio) is a profitability ratio that shows the relationship between gross profit
and total net sales revenue. It is a popular tool to evaluate the operational performance of the
business. The ratio is computed by dividing the gross profit figure by net sales.

58

5. Net Profit Ratio:

Net profit ratio (NP ratio) is a popular profitability ratio that shows relationship between net profit
after tax and net sales. It is computed by dividing the net profit (after tax) by net sales.

For the purpose of this ratio, net profit is equal to gross profit minus operating expenses and income
tax. All non-operating revenues and expenses are not taken into account because the purpose of
this ratio is to evaluate the profitability of the business from its primary operations. Examples of
non-operating revenues include interest on investments and income from sale of fixed assets.
Examples of non-operating expenses include interest on loan and loss on sale of assets.
The relationship between net profit and net sales may also be expressed in percentage form.
6. Debt Ratio:
Debt Ratio is a financial ratio that indicates the percentage of a company's assets that are provided
via debt. It is the ratio of total debt (the sum of current liabilities and long-term liabilities) and total
assets (the sum of current assets, fixed assets, and other assets such as 'goodwill')

Total liabilities divided by total assets or the debt/asset ratio shows the proportion of a company's
assets which are financed through debt. If the ratio is less than 1, most of the company's assets are
financed through equity. If the ratio is greater than 1, most of the company's assets are financed
through debt. Companies with high debt/asset ratios are said to be highly leveraged. The higher
the ratio, the greater risk will be associated with the firm's operation. In addition, high debt to
assets ratio may indicate low borrowing capacity of a firm, which in turn will lower the firm's
financial flexibility. Like all financial ratios, a company's debt ratio should be compared with their
industry average or other competing firms.

59

7. Debt to Equity Ratio:

The debt-equity ratio is another leverage ratio that compares a company's total liabilities to its
total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and
obligors have committed to the company versus what the shareholders have committed.

To a large degree, the debt-equity ratio provides another vantage point on a company's leverage
position, in this case, comparing total liabilities to shareholders' equity, as opposed to total assets
in the debt ratio. Similar to the debt ratio, a lower the percentage means that a company is using
less

leverage

and

has

stronger

equity

position.

8. Debt to Tangible Net Worth Ratio:

A measure of the physical worth of a company, which does not include any value derived from
intangible assets such as copyrights, patents and intellectual property to the total debt of the
company.
Debt to Tangible Net worth Ratio =

60

Total liabilities

(Stockholders equity Intangible assets)

9. Net Worth Ratio:

The net worth ratio states the return that shareholders could receive on their investment in a
company, if all of the profit earned were to be passed through directly to them. Thus, the ratio is
developed from the perspective of the shareholder, not the company, and is used to analyze
investor returns.
The ratio is useful as a measure of how well a company is utilizing the shareholder investment to
create returns for them, and can be used for comparison purposes with competitors in the same
industry.
To calculate the return on net worth, first compile the net profit generated by the company. The
profit figure used should have all financing costs and taxes deducted from it, so that it accurately
reflects the profit available to shareholders. This is the numerator in the formula. Next, add together
the capital contributions made by shareholders, as well as all retained earnings; this is the
denominator in the formula. The final formula is:
Net aftertax profits

Shareholder capital + Retained earnings

10. Total Capitalization Ratio:

An indicator that measures the total amount of debt in a companys capital structure. The totaldebt-to-capitalization ratio is a gauge of a companys financial leverage, and is calculated as:

Leverage can be a double-edged sword for a company. While a high total-debt-to-capitalization

ratio can increase shareholders return on equity because of the tax deductibility of interest
payments, a higher proportion of debt reduces a companys financial flexibility and increases the
risk of insolvency. A lower debt-to-capitalization ratio may be preferable for most companies in
order to keep the debt burden within easily manageable levels.

61

The acceptable level of total debt for a company depends on the industry in which it operates.
While companies in capital-intensive sectors like utilities, pipelines, and telecommunications are
typically highly leveraged, their cash flows have a greater degree of predictability than companies
in

other

sectors

that

are

exposed

to

the

economys

cyclical

fluctuations.

11. Long Term Asset Vs Long Term Debt:

A measurement representing the percentage of a corporation's assets that are financed with loans
and financial obligations lasting more than one year. The ratio provides a general measure of the
financial position of a company, including its ability to meet financial requirements for outstanding
loans. A year-over-year decrease in this metric would suggest the company is progressively
becoming less dependent on debt to grow their business. The calculation for the long term debt to
total assets ratio is:
Long Term Assets vs. Long Term Debts =

Long Term Assets

Long Term Debt

12. Rate of Interest:

This ratio shows the interrelation between the Long term debts in the company and the total interest
paid towards such debt.
It can be calculated by,
Interest

Rate of Interest = Long Term Debt

62

13. Rate of Return on Investment:

Rate of return on investment calculated to find out the ratio of earnings that are after in the relation
of total capital employed in the firm.
It can be calculated with following formula,
RRI =

Earnings After Tax

Total Capital Employed

14. Operating Leverage:

Operating leverage is a measure of how revenue growth translates into growth in operating income.
It is a measure of leverage, and of how risky, or volatile, a company's operating income is.
Operating Leverage =

Contribution
EBIT

15. Degree of Operating Leverage:

A type of leverage ratio summarizing the effect a particular amount of operating leverage has on
a company's earnings before interest and taxes (EBIT). Operating leverage involves using a large
proportion of fixed costs to variable costs in the operations of the firm. The higher the degree of
operating leverage, the more volatile the EBIT figure will be relative to a given change in sales,
all other things remaining the same. The formula is as follows:

63

16. Financial Leverage:

Financial leverage helps to know the responsiveness of E.P.S. to change in the EBIT. It involves
use of funds obtained at fixed cost in the capital structure in such a way that it increase the return
for common shareholders.
Financial Leverage =

EBIT
EBT

17. Degree of Financial Leverage:

A ratio that measures the sensitivity of a companys earnings per share (EPS) to fluctuations in its
operating income, as a result of changes in its capital structure. Degree of Financial Leverage
(DFL) measures the percentage change in EPS for a unit change in earnings before interest and
taxes (EBIT), and can be mathematically represented as follows:

18. Combined Leverage:

When financial leverage is combined with operating leverage the effect of change in revenues or
earning per share is magnified Composite / combined leverage refers to extent to which firm has
fixed operating cost as well as financial cost.
Combined Leverage = Operating Leverage x Financial Leverage

64

1. Current Ratio:
Current

Current

Liabilities

Ratio

3,187,717,716

3,450,845,468

0.092

2012

4,802,920,094

5,400,491,218

0.889

2013

49,740,028,006

5,188,893,488

0.96

2014

6,267,827,954

6,128,450,608

1.023

Year

Current Assets

2011

4.1Table of Current Ratio

4.1 Chart showing of Current Ratio

1.2

0.8

0.6

0.4

0.2

2011

2012

2013

65

2014

Interpretation:
In the year 2011, Current ratio is at the lowest level and after that the current ratio has been showing
an increasing trend throughout the years. It means the company is in a good position. And they
should maintain this trend.
Comparing the year of 2011 to 2014, the current ratio is increasing due to increase in the amount
of every current assets and current liabilities. Every element inside the current assets and liabilities
are increasing to huge amount when compared to 2011.

66

2. Acid Test Ratio:

Acid Test

Year

Quick Assets

Current Liabilities

2011

2,234,272,187

3,450,848,645

0.6474

2012

2,745,984,669

5,400,491,218

0.508

2013

2,083,290,183

5,188,893,488

0.4014

2014

3,376,761,457

6,128,450,608

0.551

Ratio

5.2 Table of Acid Test Ratio

5.2 Chart showing of Acid Test Ratio

0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

2011

2012

2013

67

2014

Interpretation:
Acid test ratio showing a fluctuating trend where the ratio was high in the year of 2011 and then
started to fall gradually till the year 2013 and again its increased in the year of 2014. The amount
of Prepaid expenses which is need to be reduce from the current assets increased gradually each
year.
And the amount of inventory amount shows an increase trend. But the changes in current assets
cause this fluctuating trend in Acid Test Ratio.

68

3. Fixed Assets Turnover Ratio:

Fixed Assets
Year

Net Sales

Fixed Assets

Turnover
Ratio

2011

10,329,063,817

2,061,556,399

5.01

2012

14,010,997,683

2,585,348,288

5.42

2013

19,361,538,559

1,627,826,334

11.89

2014

23,788,667,630

2,802,628,203

8.49

5.3 Table of Fixed Assets Turnover Ratio

5.3 Chart showing of Fixed Assets Turnover Ratio

14
12
10
8
6
4
2
0

2011

2012

2013

69

2014

Interpretation:
The Fixed assets turnover ratio shows an increasing trend from the year of 2011 to 2013. And falls
during the year of 2014.
This fall occurs due to the high change in the fixed assets during the year of 2014 and the increase
in sales amount too.

70

4. Gross Profit Ratio:

Gross Profit

Year

Gross Profit

Net Sales

2011

10,337,071,787

10,329,063,817

100.1%

2012

14,070,863,046

14,010,997,683

100.4%

2013

19,038,621,898

19,361,538,559

98.33%

2014

23,788,428,494

23,788,667,630

99.99%

Ratio

5.4 Table of Gross Profit Ratio

5.4 Chart showing of Gross Profit Ratio

110%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%

2011

2012

2013

2014

Interpretation:
Gross profit of the Kaleesuwari stays in well maintained manner where there is no huge fall or
huge increase but it fluctuates to a certain minimal level.
71

5. Net Profit Ratio:

Net Profit

Year

Net Profit

Net Sales

2011

322,180,628

10,329,063,817

3.11%

2012

178,990,094

14,010,997,683

1.28%

2013

265,927,769

19,361,538,559

1.37%

2014

324,819,684

23,788,667,630

1.41%

Ratio

5.5 Table of Net Profit Ratio

5.5 Chart showing of Net Profit Ratio

3.5
3
2.5
2
1.5
1
0.5
0

2011

2012

2013

2014

Interpretation: Net profit after the year of 2011, shows a decrease amount and then it increases for
the year of 2013. And continues with an increasing trend. The main reason for the fall from the
year 2011 to 2012 is increasing amount of Net Sales doesnt meet up the expected Net Profit on
that year.
72

6. Debt Ratio

Year

Total Liabilities

Total Assets

Debt Ratio

2011

4,110,246,088

5,293,154,560

0.78

2012

6,206,670,661

7,568,569,226

0.82

2013

6,484,762,129

8,112,588,463

0.84

2014

9,367,586,074

9,367,586,074

0.79

5.6 Table of Debt Ratio

5.6 Chart showing of Debt Ratio

0.85
0.84
0.83
0.82
0.81
0.8
0.79
0.78
0.77
0.76
0.75

2011

2012

2013

73

2014

Interpretation:
During the period of 2011-2013 the Debt ratio shows an increasing trend. Though the amount
between Total Liabilities and Total Assets increases every year, the difference between them was
high between them in the period of 2013 and low during the year of 2011. This causes to the
difference between the Debt Ratios.

74

7. Debt to Equity Ratio:

Year

Total Liabilities

Share Capital

Debt to Equity

2011

5,293,154,560

97,000,000

54.57

2012

7,568,569,226

97,000,000

78.02

2013

8,112,588,463

97,000,000

83.63

2014

9,367,586,074

97,000,000

96.57

5.7 Table of Debt to Equity Ratio

5.7 Chart showing of Debt to Equity

120
100
80
60
40
20
0

2011

2012

2013

75

2014

Interpretation:
Debt to equity shows as gradual increasing trend which shows the trend is stable. But the firm
should have a minimum of 50% margin of safety in meeting the long term financial
commitments. The higher the number, the higher the riskier for the company. So according to the
performance of Kaleesuwari, the Debt to Equity shows an increasing trend.
Thought the amount of Share Capital remains the same, the total liabilities shows an increasing
trend which leads to the increase trend in the Debt to Equity Ratio. This trend is not good for the
company. And it should be controlled.

76

8. Debt to Tangible Net worth:

Equity-Intangible

Year

Total Liabilities

DTN

2011

5,293,154,560

96,200,000

55.02

2012

7,568,569,226

96,200,000

78.67

2013

8,112,588,463

96,200,000

84.33

2014

9,367,586,074

96,200,000

97.38

Assets

5.8 Table of Tangible Net Worth

5.8 Chart showing of Debt to Tangible Networth

120

100

80

60

40

20

2011

2012

2013

2014

Interpretation:
This ratio shows an increasing trend throughout all years. Because of the gradual increase in the
amount of Total Liabilities.

77

9. Net worth Ratio:

Year

NPAT

Shareholders Capital

NW

2011

322,180,628

97,000,000

3.32

2012

2,469,000

97,000,000

0.025

2013

3,146,000

97,000,000

0.032

2014

324,819,684

97,000,000

3.349

5.9 Table of Net worth Ratio

5.9 Chart showing of Net Worth Ratio

4
3.5
3
2.5
2
1.5
1
0.5
0

2011

2012

2013

2014

Interpretation:
Net profit after tax in between year of 2012 and 2013 shows and huge difference comparing to
the year of 2011 and 2014 together. The company is developed from the year of 2013 and made
a remarkable growth in the year of 2014.

78

10. Total Capitalization Ratio :

Long Term Debt +
Year

Long Term Debt

Share Holders

Total Capitalization Ratio

Equity
2011

360,804,610

457,804,610

0.79

2012

439,689,973

536,689,973

0.82

2013

880,743,705

977,743,705

0.90

2014

870,759,271

967,759,271

0.89

5.10 Table of Total Capitalization Ratio

5.10 Chart showing of Net Worth Ratio

1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

2011

2012

2013

79

2014

Interpretation:
This ratio doesnt show huge different but it has small fluctuating trend as a whole. Where from
the year of 2011 to 2013 it has an increasing trend due to the increasing amount in Long term
debt and Shareholders Equity throughout the years.
During the year of 2014 the amount of Long term debt and Shareholders Equity shows a little
fall that reduce the amount of Total Capitalization Ratio.

80

11. Long Term Asset Vs Long Term Debt:

Long Term Asset
Year

Long Term Assets

Long Term Debt

Vs Long Term
Debt

2011

2,061,556,399

360,804,610

5.71

2012

2,583,348,228

439,689,973

5.88

2013

2,934,251,537

880,743,705

3.33

2014

2,802,628,203

870,759,271

3.22

5.11 Table of Long Term Asset Vs Long Term Debt Ratio

5.11 Chart showinf of Long Term Asset Vs Long

Term Debt Ratio
7
6
5
4
3
2
1
0

2011

2012

2013

2014

Interpretation:
After the year of 2012, the ratio shows a decrease trend due to the fall in both Long term assets
and Long term debts.
81

12. Rate of Interest:

Year

Interest

Long Term Debt

Rate of Interest

2011

2,268,000

424,864,985

0.53

2012

1,806,000

503,750,348

0.36

2013

1,111,000

944,804,080

0.12

2014

1,058,000

934,819,646

0.11

5.12 Table of Rate of Interest Ratio

5.12 Chart showing of Rate of Interest Ratio

1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

2011

2012

2013

2014

Interpretation:
Rate of Interest shows a decreasing trend. Though the Long term debt amount is increasing
each year, the interest that has been spend is decreasing all years. This is a well maintained
aspect of the company and this should be continued for coming years.

82

13. Rate of Return on Investment:

Total Capital

Rate of Return on

Employed

Investment

322,180,628

1,798,428,628

17.9

2012

178,990,094

1,987,777,104

2013

265,927,769

2,719,386,055

9.8

2014

324,819,684

2,942,065,549

11.04

Year

Earnings After Tax

2011

5.13 Table of Rate of Return on Investment Ratio

5.13 Chart showing of Rate of Return on

Investment Ratio
25%

20%

15%

10%

5%

0%

2011

2012

2013

2014

Interpretation:
Rate of return on investment will reflects the performance of the company in a simple manner. The
earnings after the year of 2011 falls. And from the year of 2012 it started to increase. Though the
total capital employed shows an increase amount in all years, due the fluctuation in EAT the rate
of return on investment fluctuates.
83

14. Operating Leverage:

Year

Contribution

EBIT

Operating Leverage

2011

8,921,627,368

503,098,042

17.73

2012

12,496,893,650

248,860,989

50.22

2013

17,733,144,923

360,146,377

49.24

2014

22,005,312,746

407,721,433

59.97

5.14 Table of Operating Leverage

5.14 Chart showing of Operating Leverage

100
90
80
70
60
50
40
30
20
10
0

2011

2012

2013

2014

Interpretation:
Operating Leverage shows a fluctuating trend. Due to the fluctuation amount in EBIT and
contribution increases every year.

84

15. Degree of Operating Leverage:

Degree of Operating

Year

% Change in EBIT

% Change in Sales

2011

17.38%

11.8%

1.47

2012

50.53%

34.65%

1.46

2013

44.72%

38.19%

1.17

2014

13.21%

22.87%

0.58

Leverage

5.15 Table of Degree of Operating Leverage

5.15 Chart showing of Degree of Operating

Leverage
2.0

1.5

1.0

0.5

0.0

2011

2012

2013

2014

Interpretation:
DOL shows a decreasing trend for all four years. In 2014, it shows the huge less amount because
of the difference between EBIT and Sales is high on that year.
85

16. Financial Leverage:

Year

EBIT

EBT

Financial Leverage

2011

503,098,042

500,830,042

1.004

2012

248,860,989

247,034,984

1.007

2013

360,146,377

359,035,377

1.003

2014

407,721,433

406,663,433

1.002

5.16 Table of Financial Leverage

5.16 Chart showing of Financial Leverage

1.5

1.0

0.5

0.0

2011

2012

2013

2014

Interpretation:
Financial leverage is constant. The interest doesnt impact the earnings too much. And it stays
the same for the company.

86

17. Degree of Financial Leverage:

% Change in

Degree of Financial

EBIT

Leverage

15%

17.38%

0.86

2012

60%

50.53%

1.19

2013

48%

44.72%

1.07

2014

22%

13.21%

1.67

Year

% Change in EPS

2011

5.17 Table of Degree of Financial Leverage

5.17 Chart showing of Degree of Financial

Leverage
2.0

1.5

1.0

0.5

0.0

2011

2012

2013

2014

Interpretation:
This shows a fluctuate trend. The fluctuating trend occurs because of the difference between
%Change in EPS and %Change in EBIT differs. When the difference is small the ratio is low and
when its high, the ratio in number shows a high amount.
87

18. Combined Leverage:

Year

Operating Leverage

Financial Leverage

Combined Leverage

2011

17.73

1.004

17.81

2012

50.22

1.007

50.57

2013

49.24

1.003

49.39

2014

53.97

1.002

54.08

5.18 Table of Combined Leverage

5.18 Chart showing of Combined Leverage

60
55
50
45
40
35
30
25
20
15
10
5
0

2011

2012

2013

2014

Interpretation:
The leverage combine together shows increasing trend except the year of 2013, which falls to a
minimum level.

88

19. EBIT, EBT and EAT

Long
Year

Total Cap

Term

Employed

Debts

Equity

Reserve

Share

and

Capital

Surplus

Net
Worth

EBIT

Interest

EBT

Divid
end

EAT

2011

1.75

1.43

0.06

0.26

1.18

0.38

0.24

0.14

0.14

2012

21.12

1.34

2.27

17.51

2.43

0.36

0.30

0.06

0.06

2013

22.17

2.12

2.27

17.79

2.50

0.50

0.30

0.20

0.20

2014

51.58

20.18

22.42

8.57

14.21

4.11

1.10

3.01

0.54

2.47

5.19 Table of EBIT, EBT and EAT

20. DFL, EPS, ROI, Cost of Debt, Cost of Equity and Cost of Return

Years

DFL

EPS
(Rs)

ROI

Cost of

Cost of

Rate of

debt

Equity

Return

(%)

(%)

(%)

2011

2.71

2.33

16.78

16.78

--

11.86

2012

2.64

22.39

22.39

--

2.47

2013

2.5

8.81

14.15

14.15

--

2014

1.36

12.23

5.45

5.45

3.80

17.38

5.20 Table of DFL, EPS, ROI, Cost of Debt, Cost of Equity and Cost of Return

89

21. EARNINGS AFTER TAX:s

5.19 Chart showing of EAT

Value (Rs.Crore)

35
30
25
20
15
10
5
0
2010-2011

2011-2012

2012-2013

2013-2014

Years

Above graph shows that in the year 2010-2011 and 2013-2014 the earnings after tax (EAT) is very
high as compare to the years 2011-2012 and 2012-2013. And the very less amount of EAT
recorded in the year of 2011-2012.

90

22. EARNINGS BEFORE TAX:

5.20 Chart showing of EBT

Value (Rs Crore)

60

50.08

50
35.9

40
30

40.66

24.7

20
10
0
2010-2011

2011-2012

2012-2013

2013-2014

Years

Above graph shows that in the year 2010-2011 is high and the following year 2011-2012 it shows
the lowest EBT. Again its shows an increasing trend in the following years of 2012-2013 and
2013-2014.

91

23. EARNINGS BEFORE INTEREST AND TAX:

5.21 Chart shwoing of EBIT

Value (Rs Crore)

60

50.3

50
36.01

40

40.77

24.88

30
20
10
0
2010-2011

2011-2012

2012-2013

2013-2014

Years

Above graph shows that in the year 2010-2011 is high and the following year 2011-2012 it shows
the lowest EBIT. Again its shows an increasing trend in the following years of 2012-2013 and
2013-2014.

92