Auto Parts Final Sheet

Cost of Capital: Auto Parts

Cost of Capital: Auto PartsBatch-8 (MBA F&B)

11/4/2015

By-Apoorva Sharma (422)Prashant Anchan (450)Adarsh Chhajed (411)

Table of ContentsCost of Capital: Auto parts companies Summary4Source of Data4List of Companies Analysed4Authors and Contribution4Objective5JK Tyres & Industries - Introduction7JK Tyres & industries: Share holding pattern8JK Tyres & industries: Corporate Governance8JK Tyres & industries: Analysis9JK Tyres & industries: Charts & Graphs11Inference:12Balkrishna Industries - Introduction13Balkrishna Industries: Share holding pattern13Balkrishna Industries: Corporate Governance13Balkrishna Industries: Analysis14Balkrishna Industries: Charts & Graphs16Inference-16Amtek Auto - Introduction17Amtek Auto: Share holding pattern18JK Tyres & industries: Analysis18Ametek Auto: Charts & Graphs20Inference:21CEAT limited - Introduction21CEAT industries: Share holding pattern22CEAT Industries: Corporate Governance23CEAT limited : Analysis24Inference:26

Cost of Capital: Auto parts companies SummarySource of DataList of Companies Analysed

www.bseindia.com JK Tyres & Industries

www.moneycontrol.com Balkrishna Industries

www.rediffmoney.com Amtek Auto

www.tradingeconomics.com CEAT Tyres

Apollo Tyres

Authors and Contribution

NameContribution

Apoorva Sharma (422) - 9920590994Data and Analysis of JK Tyres & Industries

Prashant Anchan (450) - 9892364658Data and Analysis of Balkrishna Industries

Adarsh chhajed (411) - 8087768664Data Analysis of Amtek Auto

Synopsis:

After analyzing trends of WACC for various companies, we can say that CAPM reflects the market trends better than the other models as the companys returns are calculated using stock beta and expected market returns, while WACC calculated using the EPR model follows the EPS trend and WACC calculated using the Gordons model and waltar model follows the DPS trend.

Objective

To analyze trends in Weighted Average Cost of Capital of chosen pharmaceutical companies by using different methods for calculating of Cost of Equity.

Appropriateness of Methodology

Cost of Debt:Cost of debt (long term loans secured and unsecured) was calculated using the data available but Cost of Debt (Debentures and Bonds) could not be done since most of the companies have not issued any debentures and Bonds and even if they have issued it was not possible to find the exact data to calculate its cost for the same.Debt financing is done through two ways (i) Loans and (ii) Issue of debentures. When a company borrows it uses financial leverage; so that it can increase its profitability but at the same time it is exposed to financial risk. In general cost of debt is less than cost of equity. The following methodology describes how cost of debt was arrived at i.e. the methodology used and various parameters involved.Methodology and Parameters involved in calculating Cost of Debt (Kt) Identified average total debt (long term loans including both secured and unsecured loans) from companys balance sheets for a period of 5 years.Average total Debt = (Total debt for current year + Total debt for previous year) / 2 Though corporate tax rate applicable to Corporate is around 33% with surcharges and education cress, to provide an exact picture of tax rate effective tax rate is used by considering any tax benefits availed.Effective tax rate (T) = Tax paid / Profit before tax Nominal interest rate on loans is calculated by dividing Total Interest paid upon Average Total Debt.Nominal Interest rate (I) = Interest Paid / Average Total Debt Given the Nominal Interest rate and effective tax rate, Cost of Debt (Kt) is calculated using below formula:Kt = I * (1-T) Cost of Equity:Cost of Equity is calculated using Gordon, Earnings Price Ratio and CAPM models for calculating Cost of Equity. Cost of equity is more challenging to calculate as equity does not pay a set return to its investors. Similar to the cost of debt, the cost of equity is broadly defined as the risk weighted expected return required by the investors. The following methods were used to calculate cost of equity.

1. Gordons Model:Ke = (D0*(1 + g)/P0) + gHere,Ke = Cost of EquityD0 = Dividend per share paid by the company for the current year (Rs.)g = Annual growth rate in dividends and is calculated using geometric mean of growth in dividends in the past years or by multiplying retention ratio with ROEP0 = Current market price of the shares (Rs.)2. Earnings Price Ratio Approach:Ke = E0*(1 + g) / P0Here, Ke = Cost of EquityE0 = EPS for the current year (Rs.) P0 = Current market price of the shares (Rs.)3. CAPM approach:Ri = Rf + i (Rm Rf)Here, Ri = Cost of EquityRf = Risk free rateRm = Market returni = Beta of the return of company with respect to market returnsi = U + LU =Unlevered BetaL =levered BetaL = U /(1+D/E)D=Total DebtE=Total Equity

Weighted average Cost of Capital:The weighted average cost of capital (WACC) of a firm refers to how much on an average it costs a firm to raise money. The importance of the WACC is in its relation to the evaluation of projects.

The firms WACC is the cost of capital for the firms mixture of debt and stock in its capital structure.

WACC = wd(cost of debt) + ws(cost of equity/retained earnings) + wp(cost of preference stock)

Here,wd = weight of debt in the firms capital structurews = weight of share capitalwp = weight of preference share capital

JK Tyres & Industries - Introduction

The company was incorporated as a private limited company in West Bengal in 14th February, 1951. Until 31st March 1970, the company was engaged in the managing agency business. Thereafter, the company decided to undertake manufacturing activities and obtained a letter of intent in February 1972 for the manufacture of automobile tyres and tubes.

The company is the undisputed market leader in Truck/Bus radials in India, with 138 selling locations, 4,000 strong dealer network served by six plants in India and three plants in JK Tornel, Mexico. With state-of-the-art modern production facilities in all 9 plants, total production capacity is almost 20 million tyres p.a.

JK Tyres & industries: Share holding pattern

Holder's NameNo of Shares% Share Holding

Promoters11871765552.34%

General Public2948328713%

Foreign Institutions2736123212.06%

Foreign Ocb174375007.69%

Other Companies168011287.41%

N Banks Mutual Funds92552914.08%

Foreign NRI29856231.32%

Financial Institutions20769420.92%

Central Govt.14276000.63%

Others12460420.55%

Directors211800.01%

JK Tyres & industries: Corporate Governance

NameDesignation

Arun K BajoriaPresident & Director

Arvind Singh MewarDirector

Bakul JainDirector

Bharat Hari SinghaniaCEO

Bharat Hari SinghaniaManaging Director

Kalpataru TripathyDirector

Om Prakash KhaitanDirector

Pawan Kumar RustagiVice President (Legal) & Co. Secretary

Pawan Kumar RustagiSecretary

Raghupati SinghaniaChairman & Managing Director

Sunanda SinghaniaAdditional Director

Swaroop Chand SethiWhole Time Director

Vikrampati SinghaniaDeputy Managing Director

Vimal BhandariDirector

Wolfgang HolzbachDirector

JK Tyres & industries: Analysis

JK Tyres& Industries Ltd.

Calculations for the yearMar '14Mar '13Mar '12Mar '11Mar '10

Expected Cost of Debt:

Average Secured Loans1985.161954.551396.69758.68433.33

Average Unsecured Loans223.01265.62281.35559.35426.85

Average Total Debt2208.17 2220.17 1678.04 1318.03 860.18

Interest248.3206.53170.43175.7164.22

Profit Before Tax195.05150.3112.868.04222.21

Tax60.3744.771.830.3582.21

Cost of debt pre tax11.24%9.30%10.16%13.33%19.09%

Effective tax rate30.95%29.79%14.06%44.61%37.00%

Effective cost of debt post tax7.76%6.53%8.73%7.38%12.03%

Expected Cost of Equity:

Equity Dividend (%)50.003524.993035

DPS (Rs.)5.00 3.50 2.50 3.00 3.50

Retention ratio (RR)90.25%89.47%-7.32%67.35%89.70%

ROE (ROE)14.22%1.48%9.14%22.87%43.44%

Growth rate (g) = RR*ROE12.84%1.33%-0.67%15.40%38.96%

Adjusted Share price36.39 101.50 14.40 18.50 40.71

Gordon growth model28.34%4.82%16.58%34.12%50.91%

Adjusted EPS (Rs.)6.56 25.70 2.68 14.93 39.81

EPS growth*-74.47%858.96%-82.05%-62.50%758.90%

Adjusted Share price36.39 101.50 14.40 18.50 40.71

E/P model4.60%242.81%3.34%30.27%839.91%

BETA1.20 0.57 0.83 0.71 0.55

Market Return (Rm)*41.34%6.35%36.08%-24.39%29.92%

Risk free rate (Rf)**8.12%8.42%8.32%8.83%7.22%

CAPM47.92%7.25%31.32%-14.75%19.77%

Expected WACC (book value):Mar '14Mar '13Mar '12Mar '11Mar '10

AVG Share Capital (in Rs. Crs)836.04 741.94 670.58 714.71 693.40

Average Total Debt (in Rs. Crs)2208.17 2220.17 1678.04 1318.03 860.18

Average Total Capital (in Rs. Crs)3044.21 2962.11 2348.62 2032.74 1553.58

Weight of Share Capital0.2746 0.2505 0.2855 0.3516 0.4463

Weight of Debt0.7254 0.7495 0.7145 0.6484 0.5537

WACC (Gordon Growth Model)13.42%6.10%10.97%16.78%29.38%

WACC (EPS Model)6.90%65.71%7.19%15.43%381.53%

WACC (CAPM)18.79%6.71%15.18%-0.40%15.49%

Expected WACC (market value):Mar '14Mar '13Mar '12Mar '11Mar '10



Total (in Rs. Crs)2357.58 2636.92 1737.16 1393.99 1027.33


Weight of Debt0.9366 0.8420 0.9660 0.9455 0.8373


WACC (EPS Model)7.56%43.87%8.54%8.63%146.73%

WACC (CAPM)10.31%6.64%9.50%6.18%13.29%

Actual Returns:Mar '14Mar '13Mar '12Mar '11Mar '10

ROCE (average capital)14.56%12.05%7.80%11.99%24.87%

Net Profit134.68105.541161.32163.47

ROE (average share capital)16.11%14.22%1.48%9.14%22.87%

Growth Rate0.15 0.13 (0.00)0.06 0.21

Volume of shares in lakhs410.59410.59410.59410.59410.59

Book value of share in Rs203.62180.7163.32174.07168.88

Total value of Shares in Lakhs83604.34 74193.61 67057.56 71471.40 69340.44

Total value of Shares in Crores836.04 741.94 670.58 714.71 693.40

Market Value of Shares in Rs36.39 101.50 14.40 18.50 40.71

Total Market Value of Shares in Crores149.41 416.75 59.12 75.96 167.15

JK Tyres & industries: Charts & Graphs

Dividend Policy Method

2014 2013 2012 2011 2010

DPS5.00 3.50 2.50 3.00 3.50

EPS6.56 25.70 2.68 14.93 39.81

Cost of Capital(CAPM)0.10 0.07 0.09 0.06 0.13

Return on Investment0.19 0.16 0.12 0.18 0.32

Retention ratio0.90 0.89 (0.07)0.67 0.90

Calculated Price of share by waltar model77.11 849.65 28.74 599.43 689.50

Actual Price36.39 101.50 14.40 18.50 40.71

Calculated Dividend by waltar model(9.71)(39.38)(7.43)(22.37)(63.92)

Calculated price of share by Gordon model8.78 35.91 (27.70)85.63 26.22

Calculated Earnings by Gordon Model at present market price27.18 72.64 (1.39)3.23 61.82

Inference- 3 types of firms: Growth firms (r > k), Normal firm (r = k) & Declining firm (r < k) Growth firm: Share price increases with decrease in payout ratio. So optimal payout ratio: NilFrom the Waltar model and Gordon Model we can see that company is retaining the capital for capital investment as its maximum ability to pay dividends and earnings based on the share price is high and its paying a part of it on the basis of payout ratio.As its a profit making company it is hopeful that it will keep giving increasing dividends to its shareholders in the coming times.At the same time it can issue bonus shares to the shareholders to retain their faith or go for a stock split so that actual share price will decrease and it will allow them to increase their shareholders numbers.

Inference:There is very little different between Expected WACC calculated using book value and calculated using market value as the Debt to equity is 1% i.e. 0.001:0.9 9and debt taken by the company has been continuously decreasing. Debt to equity ratio was 0.05:0.95 in March 2009 and it reduced to almost 0.01:0.99 in 2014. As a result the WACC calculated is almost equal to cost of equity for the last few years.

WACC using Gordon Growth model has been continuously decreasing(Except the year 2011) due to reduction in growth rate as a result of decrease in ROE as growth rates are calculated by multiplying Retention Ratio with ROE.

WACC calculated using CAPM model is a function of market risk premium and as the market has been increasing since past decade and beta being almost constant for Divis Laboratories, the cost of equity has been increasing during the last few years for the company.

Balkrishna Industries - IntroductionBalkrishna Industries, which is a holding company of Balkrishna Tires, Balkrishna Paper Mills and Balkrishna Synthetic, was incorporated on November 20,1961. It is part of the Siyaram Poddar group, which has a turnover of over USD 250 million, which operates in four business segments: Paper Boards, Tyres, Textile Processing and Wind Power. Paper Boards segment manufactures coated and un-coated paper boards. Tyre segment manufactures a wide range of tyres for diversified and non-traditional applications. Textile processing segment processes textile fabrics. The registered office of the company is located at Boisar, Maharashtra.The company operates mainly in the business segment of tires. It focuses on the production of a range of off-highway tires that includes agricultural, industry, material handling, forestry, lawn and garden, construction and earth moving tires. Over 95% of the tire production is exported under the BKT brand, with the main export markets being countries in Western Europe, North America and Australasia including original equipment manufacturers. In the domestic market, the company supplies to all the major construction equipment manufacturers and has a presence in the replacement market of the road construction sector.Balkrishna Industries: Share holding pattern

Balkrishna Industries: Corporate Governance

NameDesignation

Arvind PoddarChairman

Arvind PoddarManaging Director

Vipul ShahCompany Secretary

Vijaylaxmi PoddarExecutive Director

Rajiv PoddarJoint Managing Director

Dharaprasad PoddarChairman Emeritus

Sachin Nath ChaturvediNon Executive & Independent Director

Khurshed DoongajiNon Executive & Independent Director

Laxmidas MerchantNon Executive & Independent Director

Sanjay AsherNon Executive & Independent Director

Ashok SarafNon Executive & Independent Director

Ramesh Kumar PoddarNon Independent & Non Executive Director

Balkrishna Industries: AnalysisParticulars (Rs mn)FY10FY11FY12FY13FY14

Total Debt 42.4 35.7 939.8 1,501.1 1,655.9

Interest cost 25.4 20.6 16.1 18.1 25.3

Average cost of debt - pre tax (%) 60.1 52.7 3.3 1.5 1.6

PBT311.33288.14400.41535.2717.69

Tax102.3890.9125.02142.1157

Tax Rate (%) 32.9 31.5 31.2 26.6 21.9

Post tax cost of Debt (%) 40.32 36.06 2.27 1.09 1.25

Total Shareholders Fund660.77831.771080.091418.961884.8

Debt42.3535.74939.821501.141655.88

Total (Debt + Equity)703.12867.512019.912920.13540.68

Weight of Equity: We 94.0 95.9 53.5 48.6 53.2

Weight of Debt: Wd 6.0 4.1 46.5 51.4 46.8

Particulars%

Average Post tax cost of Debt 16.20

Weight of Debt 31.0

Weight of Equity 69.0

Risk Free rate (%Rf)8.42

Market Return (%Rm)16.879

Market Risk Premium (MRP) = (Rm - Rf)8.46

Beta (x) 0.376

Security Risk Premium (SRP) = *MRP 3.18

Cost of Equity (%) - Rf + SRP 11.60

WACC (%) 13.02

Cost of Equity

CAPMGordonEarnings capitalization method

11.598%92.432%226.591%

Year 2009-10 2010-11 2011-12 2012-13 2013-14

Prop. Dividend per share 13.5313.53 14.50 14.50 19.33

EPS 106.82 18.97 27.54 36.56 50.19

Div. Payout 12.67%71.32%52.65%39.66%38.51%

Plowback 87.334%28.677%47.349%60.339%61.486%

ROE 31.622%23.713%25.497%27.703%29.748%

g 27.617%6.800%12.073%16.716%18.291%

16.299%

No. of Outstanding Shares 26606,80,634

Share Price (1/04/2013 - NSE) 22

Market Value of Equity 589340,76,043

Average Interest Payments 21

Average LT Debts 835

Market Value of Debt2.53%

Balkrishna Industries: Charts & Graphs

Dividend as per Waltar and Gordon Model

Year2013-2014

Actual DPS 19.33

Actual EPS 50.19

Actual Price 22

Cost of Equity(CAPM)(k)11.598%

Return on Investment (r )0.158356587

Plowback (b)0.61

Dividend per share by Waltar Model180.52

Dividend per share by Gordon Model0.41

Inference- 3 types of firms: Growth firms (r > k), Normal firm (r = k) & Declining firm (r < k) Growth firm: Share price increases with decrease in payout ratio. So optimal payout ratio: NilFrom the Waltar model and Gordon Model we can see that company is retaining the capital for capital investment as its maximum ability to pay dividends and earnings based on the share price is high and its paying a part of it on the basis of pay-out ratio.As its a profit making company it is inferred to be able to provide dividends in future to its shareholders.Systematic risk or market risk is the levered beta used in CAPM calculation. In Gordon model we use constant dividend growth model to estimate cost of equity. The future earning of company is decided by past dividends. Also for this company dividends announced is not uniform every year. Hence considering Gordon Model for computing cost ofequity is not appropriate. Also Earnings Price Model considers past earnings of company, hence it may not give accurate projected returns for this company. Hence this model is least preferred.At the same time it can issue bonus shares to the shareholders to retain their faith or go for a stock split so that actual share price will decrease and it will allow them to increase their shareholders numbers.There is very little difference between Expected WACC calculated using book value and calculated using market value as the Debt to equity is 0.7105 and debt taken by the company has been continuously increasing.

WACC using Gordon Growth model has been continuously decreasing(Except the year 2011) due to reduction in growth rate as a result of decrease in ROE as growth rates are calculated by multiplying Retention Ratio with ROE.

Amtek Auto - Introduction

Amtek Auto Limited manufactures and sells automotive components in India and internationally. Its product portfolio includes flywheel ring gears, such as starter ring gears, flex plate assemblies, flywheel assemblies, and con-rod piston sub assemblies; and machining products comprising steering knuckles, ladder frames, engine bearing ladders, exhaust manifolds, aluminium case housings, bridge fork assemblies, hubs, spindles, connecting rods, crankshaft assemblies, housings, gear shifter forks, front axle beam assemblies, pivot arms, flywheel housing and assemblies, wheel hubs, PTO casing, front axle beams, and front and rear axles. The company also provides forging products consisting of connecting rods and caps, crankshafts and camshafts, steering levers, gear shifter forks, sector gears and shafts, front impact beams drive shafts, spindles, hubs and flanges, transmission components, steering parts, pistons, propeller fork shafts, stub-axles, front axle beam, and front and rear axle shafts; casting aluminium products, including clutch cases, transmission cases, timing chain covers, mounting brackets, camshaft covers/carriers, bearing ladders/sumps, structural covers, and differential flanges; and casting iron products, such as cylinder blocks and heads, transmission housings, brake carriers and callipers, trumpet casings, crankshafts, intake and exhaust manifolds, flywheels and flywheel housings, turbo chargers, bell housings, and link shafts. Company offers its products for passenger cars, two or three wheelers, and light and heavy commercial vehicles; and tractors, locomotive components, railways, construction and earth moving vehicles, aerospace, and oil and gas. Amtek Auto Limited was incorporated in 1988 and is based in New Delhi, India.The company is a Public Limited Company. Below is the list of Board of Directors. NameDesignation

Arvind DhamChairman & Director

B LuganiIndependent Director

B VenugopalNominee Director

D S MalikCEO

D S MalikManaging Director

Gautam MalhotraNon Executive Director

John Ernest FlinthamSenior Managing Driector

Madhu VijDirector

Raj Narain BhardwajIndependent Director

Rajeev Kumar ThakurIndependent Director

Rajeev Raj KumarCo. Secretary & Compl. Officer

Rajeev Raj KumarSecretary

Sanjay ChhabraIndependent Director

Sanjiv BhasinIndependent Director

Vinod UppalVice President - Finance

Amtek Auto: Share holding pattern

Holder's NameNo of Shares% Share Holding

Promoters10791265048.98%

Foreign Institutions8175797837.11%

Other Companies121623505.52%

Financial Institutions90082564.09%

General Public72976423.31%

Banks Mutual Funds11075660.5%

Others7966990.36%

Foreign NRI2732870.12%

Foreign Ocb15000%

JK Tyres & industries: Analysis

Amtek Auto(in Rs. Crs.)

Calculations for the yearSept '14Sept '13Jun '12Jun '11Jun '10Mar '09

Expected Cost of Debt:

Average Secured Loans6,287.395,864.771,535.001,141.76888.08

Average Unsecured Loans82.15167.411964.862126.131827.81

Average Total Debt6369.54 6032.18 3499.86 3267.89 2715.89

Interest429.11275.32185.51335.17124.53

Profit Before Tax472.03571.71409.83132.16199.83

Tax148.67120.99118.2851.2157.64

Cost of debt pre tax6.74%4.56%5.30%10.26%4.59%

Effective tax rate (Tax Shield)31.50%21.16%28.86%38.75%28.84%Avg

Effective cost of debt post tax4.62%3.60%3.77%6.28%3.26%4.31%

Expected Cost of Equity:

Equity Dividend (%)2525255050

DPS (Rs.)0.50 0.50 0.50 1.00 1.00

Retention ratio (RR)96.07%97.34%95.98%68.63%83.56%

ROE (ROE)6.30%9.39%6.65%1.92%3.93%

Growth rate (g) = RR*ROE6.05%9.14%6.38%1.32%3.28%

Adjusted Share price(31 march)159.10 63.85 132.25 150.90 194.00 Avg

Gordon growth model6.38%10.00%6.78%1.99%3.81%5.79%

Adjusted EPS (Rs.)14.6820.6213.223.517.0910.80

EPS growth-28.81%55.98%276.64%-50.49%-34.35%

Adjusted Share price159.10 63.85 132.25 150.90 194.00 Avg

E/P model6.57%50.37%37.65%1.15%2.40%19.63%

BETA1.06 0.62 0.27 0.71 0.84

Market Return (Rm)43.74%6.35%36.08%-24.39%29.92%

Risk free rate (Rf)8.96%8.74%8.99%8.42%7.75%Avg

CAPM45.69%7.27%16.28%-14.74%26.42%16.18%

Expected WACC (book value):Mar '14Mar '13Mar '12Mar '11Mar '10Mar '09



Average Total Capital (in Rs. Crs)11503.2 10830.1 7883.3 7533.6 6360.6


Weight of Debt0.55 0.56 0.44 0.43 0.43


WACC (E/P Model)5.49%24.32%22.61%3.38%2.77%

WACC (CAPM)22.95%5.22%10.72%-5.62%16.53%

Expected WACC (market value):Sept '14Sept '13Jun '12Jun '11Jun '10Mar '09



Total (in Rs. Crs)9874.80 7428.09 6416.61 6786.49 6628.87


Weight of Debt0.6450 0.8121 0.5454 0.4815 0.4097


WACC (E/P Model)5.31%12.39%19.17%3.62%2.75%

WACC (CAPM)19.19%4.29%9.46%-4.62%16.93%

Actual Returns:Sept '14Sept '13Jun '12Jun '11Jun '10

ROCE (average capital)7.83%7.82%7.55%6.20%5.10%

Net Profit323.36 450.72 291.56 81.82 143.06

ROE (average share capital)6.30%9.39%6.65%1.92%3.93%

Growth Rate0.06 0.09 0.06 0.01 0.03

Volume of shares in lakhs2,203.182,186.242,205.482,331.742,017.00

Book value of share in Rs233.01219.46198.75182.94180.7

Total value of Shares in Lakhs513362.97 479792.23 438339.15 426568.52 364471.90

Total value of Shares in Crores5133.63 4797.92 4383.39 4265.69 3644.72

Market Value of Shares in Rs159.10 63.85 132.25 150.90 194.00

Total Market Value of Shares in Crores3505.26 1395.91 2916.75 3518.60 3912.98

Ametek Auto: Charts & Graphs

Dividend Policy Sept '14Sept '13Jun '12Jun '11

DPS0.50 0.50 0.50 1.00

EPS14.68 20.62 13.22 3.51

Cost of Capital(CAPM)0.19 0.04 0.09 (0.05)

Return on Investment0.11 0.10 0.10 0.09

Retention ratio0.96 0.97 0.96 0.69

Calculated Price of share by waltar model43.76 1154.07 150.97 80.58

Actual Price159.10 63.85 132.25 150.90

Calculated Dividend by waltar model(50.49)(33.08)(21.85)0.13

Calculated price of share by Gordon model(6.47)9.34 142.43 10.41

Calculated Earnings by Gordon Model at present market price(361.10)140.89 12.28 50.87

Inference:Estimating Risk and Return:Daily closing price of the stock and BSE indx (S&P BSE AUTO) the past 5 years from (04/01/10 to 31/12/14 ) were taken from BSE India website. The same was used for calculation of average annual return, average annual risk and stocks beta (). (detail excel sheet attached)

Amtek Auto ReturnsMarket ReturnAmtek Auto RiskMarket Risk

0.58%18.24%44.97%19.81%

We observe from the above table that the returns offered by Amtek stock is significantly lower than the returns offered by Market and similarly Risk offered by Amtek stock is significantly Higher than the returns offered by Market. The stock is not behaving as per the basic principle that the amount of risk taken should be directly proportional to the end return. Hence if the risk appetite of the investor is high, Amtek Auto is not offering fair chance to earn equivalent high returns.

Estimating Cost of Capital:Data required in calculation of cost of capital is taken from the last 4 year annual reports of the firm, downloaded from the companys website. Data includes Shareholders Equity, Debt, Interest expense, Tax paid, Dividend paid and EPS.Average Cost of Equity arrived by various methods isCost of Equity (Avg of 5 yrs)

CAPMGordonP/E multiple

16.18%5.79%19.63 %

CAPM is considered superior to Gordon and P/E method because it uses the risk-return relationship to arrive at the cost of equity. It brings together systematic risk and return for the stock, and hence is widely used and accepted for financial investment decisions. Gordons model uses constant dividend growth to estimate the cost of equity. This model is backward looking as future growth is calculated based on past dividends. Also, in practical scenarios, as dividend growth various every year for a firm, the model is not accurate in arriving at the cost of capital. P/E multiple is considered to be least accurate method among the 3. The perceived growth in the EPS of next year might vary with each individual investor. Hence it is rarely used for investing decisions. Therefore, I have used Capital Asset Pricing Model (CAPM) method for calculation of WACC.Average Wt of Debt = 55.64%Average Wt of Equity = 45.36%Weighted Average Cost of Capital, WACC = 9.96%

CEAT limited - IntroductionCEAT, the flagship company of RPG Enterprises, was established in 1958. Its predecessor Cavi Electrici e Affini Torino SpA was established in Italy in 1924. Today, CEAT is one of Indias tyre manufacturers and has presence in global markets, and has a capacity of over 95,000+ Tyres per day. CEAT offers tyres to all segments and manufactures radials for: Heavy-duty Trucks and Buses, Light Commercial Vehicles, Earthmovers, Forklifts, Tractors, Trailers, Cars, Motorcycles and Scooters as well as Auto-rickshaws. The company is headquartered at Annie Besant Road, Worli in Mumbai. It has manufacturing plants inMumbai,Nashikand Halol nearBaroda. CEAT owns: 6 Manufacturing plants 10 outsourcing units for tyres, tubes and flaps 3 dedicated 2-3-wheeler plants controlled by CEAT

Products of CEAT:CEAT manufactures a wide range of tyres for various customer radials for Indian vehicles and caters to various user segments includingI. Heavy-duty Trucks and BusesII. Light Commercial VehiclesIII. EarthmoversIV. ForkliftsV. TractorsVI. TrailersVII. CarsVIII. SUVsIX. Motorcycles and ScootersX. Auto-rickshaws

CEAT industries: Share holding pattern

(ii) Public shareholding

CEAT Industries: Corporate Governance

NameDesignation

Chairman

Arvind PoddarManaging Director

Vipul ShahCompany Secretary

Vijaylaxmi PoddarExecutive Director

Rajiv PoddarJoint Managing Director

Dharaprasad PoddarChairman Emeritus

Sachin Nath ChaturvediNon Executive & Independent Director

Khurshed DoongajiNon Executive & Independent Director

Laxmidas MerchantNon Executive & Independent Director

Sanjay AsherNon Executive & Independent Director

Ashok SarafNon Executive & Independent Director

Ramesh Kumar PoddarNon Independent & Non Executive Director

CEAT limited : Analysis

Particulars (Rs mn)FY10FY11FY12FY13FY14

Total Debt 42.4 35.7 939.8 1,501.1 1,655.9

Interest cost 25.4 20.6 16.1 18.1 25.3

Average cost of debt - pre tax (%) 60.1 52.7 3.3 1.5 1.6

PBT311.33288.14400.41535.2717.69

Tax102.3890.9125.02142.1157

Tax Rate (%) 32.9 31.5 31.2 26.6 21.9

Post tax cost of Debt (%) 40.32 36.06 2.27 1.09 1.25

Total Shareholders Fund660.77831.771080.091418.961884.8

Debt42.3535.74939.821501.141655.88

Total (Debt + Equity)703.12867.512019.912920.13540.68

Weight of Equity: We 94.0 95.9 53.5 48.6 53.2

Weight of Debt: Wd 6.0 4.1 46.5 51.4 46.8

Particulars%

Average Post tax cost of Debt 16.20

Weight of Debt 31.0

Weight of Equity 69.0

Risk Free rate (%Rf)8.42

Market Return (%Rm)16.879

Market Risk Premium (MRP) = (Rm - Rf)8.46

Beta (x) 0.376

Security Risk Premium (SRP) = *MRP 3.18

Cost of Equity (%) - Rf + SRP 11.60

WACC (%) 13.02

Cost of Equity

CAPMGordonEarnings capitalization method

11.598%92.432%226.591%

Year 2009-10 2010-11 2011-12 2012-13 2013-14

Prop. Dividend per share 13.5313.53 14.50 14.50 19.33

EPS 106.82 18.97 27.54 36.56 50.19

Div. Payout 12.67%71.32%52.65%39.66%38.51%

Plowback 87.334%28.677%47.349%60.339%61.486%

ROE 31.622%23.713%25.497%27.703%29.748%

g 27.617%6.800%12.073%16.716%18.291%

10 %

No. of Outstanding Shares 4,290,668

Share Price (01/04/2015 - BSE) 830.6

Market Value of Equity 3,563,828,841

Dividend as per Waltar and Gordon Model

Year2013-2014

Actual DPS 10

Actual EPS70.58

Cost of Equity(CAPM)(k)10.60%

Return on Investment (r )0.287

Plowback (b)0.858

Dividend per share by Gordon Model9.41

Inference:

3 types of firms: Growth firms (r > k), Normal firm (r = k) & Declining firm (r < k) Growth firm: Share price increases with decrease in payout ratio. From Gordon Model we can see that company is retaining the capital for capital investment as its maximum ability to pay dividends and earnings based on the share price is high and its paying a part of it on the basis of pay-out ratio.As its a profit making company it is inferred to be able to provide dividends in future to its shareholders.Systematic risk or market risk is the levered beta used in CAPM calculation. In Gordon model we use constant dividend growth model to estimate cost of equity. The future earning of company is decided by past dividends. Also for this company dividends announced is not uniform every year. Hence considering Gordon Model for computing cost ofequity is not appropriate. Also Earnings Price Model considers past earnings of company, hence it may not give accurate projected returns for this company. Hence this model is least preferred.At the same time it can issue bonus shares to the shareholders to retain their faith or go for a stock split so that actual share price will decrease and it will allow them to increase their shareholders numbers.

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