Influence of capital structure
on the performance of the
company- Tata Motors
17BM60125 VISHRUT SHAH
17BM60135 SHIVANGI MAHESHWARI
Objectives of study
• To study the capital structure of
the firm during the study period
Research Design
• Period of Study:
• The study period for the research is 10 years starting from 2004 to 2013.
• Source of Data:
• Secondary data is used for the study. The financial statements of Tata Motors
Limited for the 10 years are taken.
• Tools of Analysis:
• To assess the significance of ‘Capital Structure’ of Tata Motors Limited Ltd
during the study period of 2003-2004 to 2012-2013- WACC, Ratios
• Capital structure is the combination of the capital raised by the company. This combination or mix
influences the overall cost of capital.
• Mix of equity and debt.
• The proportion of this equity and debt to the total capital is decided by the company according to the
financial position and ability to raise such capital.
• The modern theory of capital structure was established by Modigliani and Miller (1958)
• All theories can be divided into two groups – either they predict the existence of the optimal debt-equity
ratio for each firm (so-called static trade-off models) or they declare that there is no well-defined target
capital structure (pecking-order hypothesis).
Factors which influences Capital
Structure:
• Business Risk
• Company's Tax Exposure
• Financial Flexibility
• Management Style
• Growth Rate
• Market Conditions
• Tata Motors Limited has used only two sources of finance to
finance its assets and working capital.
YEAR NET WORTH(Cr)
• Tata Motors Limited is authorized to issue a paid up capital of
679.32Cr. 2003-04 3593.6
2004-05 4111.39
• The net worth of the company is also increasing over the years.
2005-06 5537.07
• This shows the company is getting benefitted through the
increase in equity share capital. 2006-07 6869.75
2007-08 7839.5
• The net worth of the company is calculated as
2008-09 12394.27
• NET WORTH= Equity share Capital+ Reserves & Surpluses- (Debit
2009-10 14803.78
balance of P/L Account + Miscellaneous expenditure not written
off, if any) 2010-11 20013.3
2011-12 19367.66
2012-13 19134.84
• Debt Capital of Tata Motors Limited
Sources of debt
YEAR DEBT CAPITAL(Cr)
2003-04 1259.77
• Working capital borrowings
from banks. 2004-05 2495.42
• Term loan from 2005-06 2936.84
banks/Financial Institutions 2006-07 4009.14
• Foreign Loans 2007-08 6280.52
• Public deposits (also includes 2008-09 13165.56
loans from retired employees) 2009-10 16625.91
2010-11 15898.75
2011-12 11011.63
2012-13 14268.69
Financials
Equity in Debt in Total Net
Year Interest PAT
crores crores Assets Worth
2003-04 353 1259.77 225.96 810.34 4853.37 3593.6
2004-05 361.79 2495.42 234.3 1236.95 6606.81 4111.39
2005-06 382.87 2936.84 350.24 1528.88 8473.91 5537.07
2006-07 385.41 4009.14 455.75 1913.46 10878.89 6869.75
2007-08 385.54 6280.52 471.56 2028.92 14120.02 7839.5
2008-09 514.05 13165.56 704.92 1001.26 25559.69 12394.27
2009-10 570.6 16625.91 1276.25 2240.08 31429.69 14803.78
2010-11 634.65 15898.75 1383.79 1811.82 35912.05 20013.3
2011-12 634.75 11011.63 1218.62 1242.23 30379.29 19367.66
2012-13 638.07 14268.69 1387.76 301.81 33403.53 19134.84
WACC
Equity in Debt in Cost of
Year Cost of debt WACC
crores crores Equity
2003-04 353 1259.77 17.93 22.54 18.94
2004-05 361.79 2495.42 9.38 30.08 12
2005-06 382.87 2936.84 11.92 22.61 13.73
2006-07 385.41 4009.14 11.36 27.85 12.81
2007-08 385.54 6280.52 7.5 25.88 8.57
2008-09 514.05 13165.56 5.35 8.07 5.45
2009-10 570.6 16625.91 7.67 15.13 7.92
2010-11 634.65 15898.75 8.7 9.05 8.71
2011-12 634.75 11011.63 11.06 6.41 10.8
2012-13 638.07 14268.69 9.72 1.57 9.3
WACC = (D/(D+E))Rd + (E/(D+E))Re
Tax Benefit and
PAT
• The tax benefit is the reduction in
income taxes that results from
taking an deduction from taxable
income.
• As we can see because of the
increase in debt, interest
component is increasing year on
year, due to which Tax deduction
is also increased.
• Tax benefit = Interest * (1-Tc)
ICR Ratio 9
• ICR = EBIT / Interest 7
• Decrease in ICR over the 6
years 5
• ICR > 1.5 is considered as 4
minimum required as per
3
Industry standard
2
0
2003-042004-052005-062006-072007-082008-092009-102010-112011-122012-13
ICR Ratio Minimum
Trading on Equity
• Trading on equity refers to the PAT Total Assets
technique in which low cost of 810.34 4853.37
debt is used enhance earnings 1236.95 6606.81
for the shareholders.
1528.88 8473.91
• ROI = PAT/Total Assets
1913.46 10878.89
• In most of the cases, ROI is
2028.92 14120.02
less than cost of debt. So, this
does not support trading on 1001.26 25559.69
equity as equity owners are 2240.08 31429.69
not benefited out of this. 1811.82 35912.05
1242.23 30379.29
301.81 33403.53
Debt Equity Ratio
• The debt component is
very high as compared to
value of equity
• Industry Standard is 0.33
• Debt equity ratio for Tata
Motor is most of the time
greater than 0.1 than
industry average, which is
not desirable
References
• Brealey,R., &Myers S.(2000) Principles of Corporate Finance, India:
McGraw-Hill.
• Bradley,M., G.Jarrell, & Kim E.(1984), On the Existence of an Optimal
Capital Structure: Theory and Evidence, Journal of Finance, 39, 857-878.
• Evidence from International Data, Journal of Finance,1421-1460
• A Study on Capital Structure of Tata Motors Limited: Procedia Economics
and Finance 11 ( 2014 ) 445 – 458
Thank You
