Assignment: Capital Structure

Item no

FY 2006

FY 2007

FY 2008

LTD-Equity

0.04

0

0

TD-Equity

0.155

0.12

0.08

The long term debt to equity ratio for FY 2007 and 2008 have been zero. The company stopped raising funds using debt after FY 2006. The company meets its capital requirements using funds from operations.

While, computing the total debt to equity ratio other than the long term borrowings, I have considered other liabilities whose break up has not been given in the schedule, but as per as my guess it consists of interest bearing liabilities like leases etc, which is clear from the fact that the company pays an interest in spite of having no long term debt. The current liability portion consists of other items like Sundry debtors and unclaimed dividends which do not bear interest as per regular business norms, and hence the surrogate debt items like leases are included in the item other liability which has been included while computing total liability to equity ratio.

The debt to equity ratios and the long term debt to equity ratios of the various companies which compete for market share with Blue Dart Express are as follows:

Total Debt to equity ratio

Year/company

GATI

Blue Dart

Average

2006

0.47

0.155

0.31

2007

1.11

0.12

0.61

2008

0.75

0.08

0.44

LTD to equity ratio

Year/company

GATI

Blue Dart

Average

2006

0.36

0.04

0.20

2007

0.98

0

0.49

2008

0.65

0

0.325

There are other companies like Patel couriers, Elbee services, sky pack service specialists which also operate in the same industry and are small players. The data pertaining to their debt to equity ratio is not available for FY 2006, FY 2007 and FY 2008 and hence the industry has been considered to be comprised of only two major companies'i.e. Blue Dart and GATI.

The Debt-equity ratio and the LTD-equity ratio for Blue Dart is less than the industry average as it is revealed from the above figures. Blue Dart is not leveraged financially as can be seen from the above figures which make it evident that GATI is financed by debt as it can be seen that in FY 2007 it had more debt financing than equity.

Analysis

The industry as such is not financially leveraged as it is

not very capital intensive

sector like say steel or the power sector where companies like NTPC or SAIL would require huge amount of Capital to construct power plant or steel plants.

Further, the industry can be said to be debt averse as they feel that the equity investors would be reluctant to invest in the company as the level of debt goes higher, as the equity investors would feel that they are paying for the interest payments of the company instead of capital gains and gains through dividends.

However GATI has raised debt in the past through debt instruments like debentures and FCCB's which was aimed to fulfill its need for investments in fixed assets.

Blue Dart has got no long term debt on its accounts. It finances itself through purely equity and its cash generated through operations. This is possible partly due to the backing of its promoter DHL and through its premium pricing policy in the market where it owns about 42% market share and is a

monopoly

. It has got a dedicated fleet of aircraft, integrated hubs in airports which are very capital intensive which other players in the market also use for their operations and Blue Dart gets revenues out of that. This helps it finance itself using high margins on consignments which its competitors like GATI cannot. GATI basically focuses on sending consignments through road which has high volumes and low margins.

Using this policy of using only equity and cash out of operations blue dart sends a strong signal to the market about its strong fundamentals and inspires the retail investor to invest more money in the stock of the company to reap higher returns in the future, the retail investor also behaves positively as he does not have to worry about the interest payments that the company has to make. Further, this leads to

higher corporate control

and lesser

agency issues

which lead to the smooth functioning of the company as a whole. Finally, it also leads to lesser

monitoring issues

for the creditors (short term creditors) of the company.

Source: Essay UK - http://ntechno.pro/free-essays/finance/capital-structure.php


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