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Applied Corporate Finance Project for

M/s. Titan Company Ltd.

I. Introduction

Financial statement analysis is the process of reviewing and evaluating a company's financial statements

such as the balance sheet or profit and loss statement, thereby gaining an understanding of the financial

health of the company and enabling more effective decision making. Financial statements record

financial data; however, this information must be evaluated through financial statement analysis to

become more useful to investors, shareholders, managers and other interested parties.

Financial statement analysis is a method or process involving specific techniques for evaluating risks,

performance, financial health, and future prospects of an organization. It is used by a variety of

stakeholders, such as credit and equity investors, the government, the public, and decision-makers

within the organization. These stakeholders have different interests and apply a variety of different

techniques to meet their needs.

The present study is primarily intended to unearth the Corporate Finance applications with

“Titan Company ltd.”

II. Objectives

The study is conducted with the following specific objectives:

To understand overall Corporate Governance of the Company

To measure Risk free rate, Equity Risk premium, Market returns, Beta, Cost of equity and Cost

of Capital of the company

To calculating Fundamental beta

To identifying optimal capital structure of the company

To understand the dividend policy of the company and to provide findings and recommendations

to the companies for effective corporate decision making.

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III. Company Overview

The Company was incorporated on 26th July, at Chennai. The manufacture analog electronic watches

with a choice of Over150designs.The Company was promoted jointly by Questar Investments, Ltd., a

Tata Company with its associates Tata Sons, Ltd., and Tata Press, Ltd., and Tamil Nadu Industrial

Development Corporation, Ltd. (TIDCO). The main objective of the company is to manufacture analog

electronic watches with a choice of over 150 designs.

The Company Limited is engaged in offering watches, jewelry and others. The Company's segments

include Watches, Jewellery, Eyewear and Others. The Company offers plain and studded gold jewelry

brands, such as Tanishq, GoldPlus, Zoya, Mia, which are retailed through Tanishq, GoldPlus, Zoya &

Mia stores. The Company offers watches and accessories, such as bags, sunglasses in brands, including

Titan, Sonata, Fastrack and sub brands, such as Raga and Edge among others. The Company's watches

and accessories are retailed through World of Titan, Helios and Fastrack stores. The Company offers

frames, contact lenses, and Sunglasses in brands, such as Eye+. The Company's eyewear brands are

retailed through Titan Eye Plus stores. It also offers precision engineering component and sub-

assemblies (PECSA) and machine building and automation (MBA) solutions. The Company's

subsidiaries include Titan Time Products Limited, Favre Leuba AG and Titan Engineering and

Automation Limited.

IV. Vision, Mission and Objective of the Company

VISION

We create elevating experiences for the people we touch and significantly impact the world we work in.

MISSION

We will do this through a pioneering spirit and a caring, value-driven culture that fosters innovation,

drives performance and ensures the highest global standards in everything we do.

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V. Corporate Governance

a). CEO

The CEO is Mr. Bhaskar Bhat .He is the managing director of Titan company.

b). Board of Directors

Directors Independent Director

Mr N .N Tata, Director

Mr Harish Bhat, Director

Mr T K Arun, Director

Mr T K Balaji, Independent Director

Ms Vinita Bali, Independent Director

Mrs Hema Ravichandar, Independent Director

Prof. Das Narayandas, Independent Director

Mrs Ireena Vittal, Independent Director

Mr Ashwani Puri, Independent Director

c). Relationship with Financial Market and Society

Total customer orientation: Customers take precedence over all else, always.

Employee appreciation: We value and respect Titanians and endeavour to fulfil their needs and

aspirations.

Performance culture and teamwork: At Titan Company, high performance is a way of life

and is nurtured by teamwork.

Creativity and Innovation: Driven by innovation and creativity, we focus on smarter

approaches and newer technologies.

Passion for excellence: In all our pursuits, we ceaselessly strive for excellence.

Corporate Citizenship: We ensure that a part of our resources is invested in environment and

community betterment

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VI. Stockholder Analysis

S.No Details

1 Listings NSE,BSE

2 Type of Shares Equity Share

3 Share Holding of Promoter and Promoter

Group 471,007,920

4 Share Price Rs 316.25

5 Share Holding of Promoter and Promoter

Group %

53.05%

Category No. of Shares Percentage

Promoters 471,007,920 53.05

Foreign Institutions 195,205,979 21.99

General Public 168,122,017 18.94

NBFC and Mutual Funds 22,298,883 2.51

VII. Risk and Return Analysis

Risk free

rate (Rf)

for India

Rf= 10 Year Zero Bond yield – Default Country

Spread

Rf = 7.4 % - 2.44 %

5% Approx.

Equity

Risk

Premium

(Historical

Returns

Method)

ERP = Base premium for mature market + Country

Risk Premium

Country Risk Premium

= Country Default Spread x

* The Current US Market risk premium is 4.8%

Country Risk Premium for

India = 2.44% x 1.5

= 3.6%

ERP = 4.8%* + 3.6% = 8.4%

8.4% (8% Approx)

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Market

Returns

(Rm)

Rm = ERP + Rf

Rm = 8.4 % + 5 %

Rm = 13.4%

Beta

Covariance (Asset and Market) / Variance of the

Market

(or)

SLOPE / LINEST in Excel

ß = 0.63

Cost of

Equity

Re = Rf + ß (Rm – Rf)

Re=10.10%

Cost of

Debt

(Opening Interest + Closing Interest) / (Opening ST

& LT Loans + Closing ST & LT Loans)

Rd=58%

We

Market Capitalization on Equity / (M.Cap. Equity +

Debt (LT & ST))

We =99%

Wd

Debt / (M.Cap. Equity + Debt (LT & ST))

Wd=1%

Cost of

Capital

(WACC)

We*Re + Wd*Rd(1-Taxrate)

Assume Tax Rate is 30%

WACC=10.28%

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Calculating Fundamental Beta

Historical Beta

Beta of the Company B=0.63

Debt/Equity Ratio D/E=0.03

Similar Type of Companies under the same Sector Beta D/E Tax rate – 30%

PC Jewellary 0.93 1.04

Gitanjli 1.17 1.72

Unlevered Beta Computation for PC Jewellry and Gitanjli

Formula BL/(1+D/E(1-t)

PC Jewellary Beta

0.53819

Gitanjli Beta

0.53085

Average (Unlevered Beta)

0.53452

Levered Beta for Glenmark

Formula BUL x (1+D/E(1-t)

Levered Beta 0.54575

VIII. Capital Structure

Equity Share capital Value (Book Value) 349000

Debt (Long term + Short term & Others) 93504

D/E Ratio 0.27

Debt to Capital Ratio 0.211

Market Cap Value as on ……. 29687.57

Debt (Long term + Short term & Others) 93504

D/E Ratio 3.15

Debt to Capital Ratio 0.76

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Cost of Capital Vs. Cost of Debt

Cost of Capital (CoC)=7.25 %

Cost of Debt (CoD)= 9%

Here CoC is less than of CoD i.e. (CoC < CoD)

Tax benefits

Cost Reduction

Profit Retention

Financial Leverage

Tax Savings

Optimal Capital Structure

a) Cost of Capital Approach

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b) Operating Income Approach

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c) Adjusted Present Value Approach

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d) Sector Approach

IX. Dividend Policy

(a). Dividend Summary

For the year ending March 2016, Titan Company has declared an equity dividend of 220.00%

amounting to Rs 2.2 per share. At the current share price of Rs 310.15 this results in a dividend yield of

0.71%.

The company has a good dividend track report and has consistently declared dividends for the last 5

years.

* As per the Profit & Loss account

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(b). Assessment of Dividend Policy

2014 2015 2016

Long Term Debt - - -

Current liabilities 351405 269363 276602

Current Assets (Less cash) 434053 463362 503635

Net Profits

81626 68939

Depreciation and Amortization

8957 9956

Capital Expenditure

20934 25516

Change in Debt

- -

Change in Current Assets

29309 40273

Change in Current Liabilities

(82042) 7239

Free Cash Flow to Equity

(41702) 20345

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Dividend Paid (including taxes)

21691 47575

Equity Value

308387 349000

Return on Equity

26.5% 19.8%

Cost of Equity 10.0% 10.0% 10.0%

Dividend Payout Ratio

26.6% 69.0%

(c). Assessment of Dividend Policy with Peers

Particular Titan company PC jewellary(peer1) Gitanjli(peer 2)

2014-15 2015-16 2014-15 2015-16 2014-15 2015-16

Net Profits

81626 68939 378.43 399.66 8958 13513

Dividend Paid (including

taxes) 21691 47575 68.97 31.43 616 -

Payout Ratios 26.6% 69% 18.2% 7.9% 6.88% 0%

The net profit of Titian company decreasing from 2015-2016 but payout ratio is increasing. This not

good for the company. Why because the out flow is more than inflow. They are paying more divined to

attract the shareholders. The peers company payout ratio are decreasing year to year it means they are

not investing others project.so this create some benefit to titan company.

X. Major Findings

Share Holding of Promoters 53.05%

Fundamental Beta of Titan Company Ltd. is 0.63 which is less than 1 (<1).This indicates

Company is less volatile than the market.

Here Cost of debt (9%) is greater than the cost of Capital (7.25%). This indicates a bad sign

because If the cod of a firm increases , the levered beta of a firm increases and thereby increases the coe

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of a firm this will affect the creditness of a firm ,which means credit rating of a firm decreases ,So in here

I recommend that decrease the value of debt.

In Cost of Capital Approach, we realize that the cost of capital first goes down as we increase

the debt, and then after reaching Optimal level, starts rising again as cost of equity and debt both

begin rising with higher debt levels. The Optimal Debt Equity Ratio is 0.27.

In Operating Income Approach, we realize that the highest firm value is at debt equity

of 0.27. The Income drop results in the firm value dropping, even though cost of capital is

lower elsewhere.

In Adjusted Present Value Approach, the optimal Debt Capital ratio is 0.4. This means

Debt Equity ratio is 0.66.

In Sector Approach, looking at peers such as PC Jellwery and Gitanjli, we see that average Debt

Equity ratio should be about 6561% for Titan company . which is very high .

In Dividend Policy, return on Equity is greater than the cost of Equity (RoE > CoE). So

the company is creating value on retained money. It means the company is creating value

by investing that money in good projects.

In Dividend Policy, Free cash flow to Equity got decrease from 2015 to 2016. This Free

Cash Flow to Equity means how much cash we can pay to the shareholders. It implies that

Company is reinvesting in good projects to expand its market.

Here Titan company Ltd has high payout ratios compared to the Peer Companies pc jewellery

and Gitanjli . The Dividend Pay-out ratios of Titan Company Ltd. is showing increasing trend

every year from 2014-2016. This indicates that company can afford to pay such high dividends.

XI. Recommendations

The cost of debt is greater than of cost of equity .i recommend the company to decrease their

debt.

The company beta is 0.63 the company has the good risk facing capacity.

The company need to concentrate their net profit.

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XII. Conclusion

In the present study, I understood overall Corporate governance and Dividend Policy of Titan company

Ltd. It is concluded that the company can increase their Debt Equity ratio from 0.4 to 0.66.

XIII. References

1. http://www.godrejcp.com/

2. http://www.itcportal.com/

3. http://marico.com/

4. http://www.moneycontrol.com/

5. http://www.investopedia.com/

6. http://www.google.com/