Corporate Finance

Madras School of Economics

Academic Year 2025-2026
Module 1

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1. Specialized NBFC acting as intermediary
in Insurance settlement at Hospital

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Specialized NBFC acting as Intermediary in Insurance settlement
-The players in the Insurance settlement process :

Patient (Insured), Insurance company, TPA, Hospital.

-The hassle that Patient with medical insurance coverage faces on the day of discharge.

-Gaps that NBFC may try to fill in.

-How it benefits Patient (Insured)? Risks to the patient?

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Specialized NBFC acting as Intermediary in Insurance settlement

-How it benefits Hospital?

-What are the risks that NBFC takes on?

-NBFC have started focusing on highly specialized areas to act as financial intermediary.

-Possible income streams for the NBFC .

-Scalability of the model.

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 2. Students Presentation on
SBI Cards : Business Model and Key metrics

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SBI cards : Intended coverage
-Business model

-Income streams (% contribution from different income streams)

-Source of funding

-Balance sheet Asset components and size. Risk exposure (NPA).

-Applicable Regulation (Banking or NBFC)

-Advantage/ Disadvantage of having SBI cards as a stand alone entity.

(compare how and where the card division of ICICI Bank and HDFC bank are housed).

-Key performance metrics tracked by investment analyst for evaluating SBI cards performance.

-How does the Business model of Credit card differ from that of BNPL. Who are the providers of BNPL?

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3. Sale of Ackzo Nobel India

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Sale of Ackzo Nobel India

Taken from Mint article dated 18th December 2024 (Prior to deal happening)

- Ackzo Nobel India :Listed company.

- Parent company (Akzo Nobel NV, based out of Europe) holds 74.6% stake in Indian
company.

- Current market cap $ 2.1 billion.

- Market share in the paint business in India : 5-6%

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Sale of Ackzo Nobel India
Discussion points

-Who are the investors likely to be interested in buying the promoter stake?
Why will they be interested?

-What are the potential investors looking for?

-How are the investors likely to structure the transaction?

-What is the likely starting point to arrive at the deal valuation?

-What will be the impact on share price of Ackzo Nobel India when the market is made
aware of the intention of the European parent to sell their stake?

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Sale of Ackzo Nobel India
Specifics from Actual deal (announced in June 2025)

JSW Paints acquired 74.76% stake held by the parent in Ackzo Nobel India (this is from Mint article).
However JSW paints website reports the stake acquired from parent as 60.76%. So let’s assume
60.76% is correct.

JSW paints is unlisted company.

The share price agreed is Rs 2762 per share. This is 15% discount to the closing price as on June
26,2025.

Since JSW paints ends up with more than 25% stake in the target company, an open offer gets
triggered (ie a public announcement to acquire atleast 26% of the total shares from the remaining
shareholders needs to be made). The open offer was priced at 3417.8 Rs per share.

JSW paints successfully completed the open offer. Only 0.44% of the overall shareholders took up the
offer.
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Sale of Ackzo Nobel India

What would have happened if JSW paints stake in

Ackzo Nobel India exceeded 75% after the open offer?

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Sale of Ackzo Nobel India

• There is a requirement for Public float (free float).

• Free float (also known as Public float) : refers to shares of a company that can be publicly
traded and are not restricted.
-All listed companies in India to maintain Minimum public float of 25%.
-Newly listed firms get 3 years to adhere to the limit of 25%.
-Stocks with lower free-float : They tend to have higher volatility.
-Stocks with larger free-float : They tend to have lower volatility since there are more
buyers and sellers.

• So if JSW paints stake had exceeded 75% after the open offer, then it would have to bring
down the stake to less than 75% within the time frame allowed by SEBI. This is to meet
the public float requirement of 25%.

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Sale of Ackzo Nobel India
Lets say a promoter/ promoter group ends up holding more than 75% stake in a company.
How can the holding be brought down to meet public float requirement?

-Offer for sale as part of an FPO (Follow on public offer). Promoters offload their stake in the
FPO.
-Raise fresh capital through public issue. If promoters don’t subscribe, promoters stake will
decrease and the public float will increase.
-Promoters sell their stake through stock exchanges (Block deal/ Bulk deal).
-Issue new shares to Institutional investors (QIP : Qualified Institutional placement). With
issue of new shares, promoters stake in the company reduces.
-Sell stake to Strategic investors.
-Go for rights issue with promoters renouncing their entitlement.
-ESOP’s to employees. New shares gets issued once ESOP’s are exercised. This reduces
Promoters stake.
Any other option??

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Sale of Ackzo Nobel India

Acquire another company.

The acquisition should be by way of issuing shares.

When new shares of the acquiring company are issued to existing owners of
the target company, promoters stake (proportion) in acquiring company will
come down.

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Sale of Ackzo Nobel India

Risk of reverse merger on unfavorable terms.

JSW paints is an unlisted company as on date. Potentially JSW paints could be merged with
Ackzo Nobel India ltd and the share exchange ratio may be unfavorable to minority
shareholders of Ackzo Nobel India.

Example of past merger that is perceived to be unfavorable to minority shareholders:

Cairn India merger with Vedanta

Cairn India was cash rich and debt free.
Vedanta had high debt.
Vedanta was a dominant shareholder in Cairn India
The share swap ratio in the merger is perceived to be favorable to shareholders of Vedanta.
Unfavorable to minority shareholders of Cairn India.

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4. Students Presentation on
Fintech companies

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Fintech companies : Intended coverage
a)Major fintech players in India

b)“Payment & Wallet” || “Digital lending platforms” || “Neo Banks”

Difference between respective business models.
Primary source of revenue in each model.
Source of funding.
Significant items on the asset side.
Risk exposure (NPA).

c)Why do fintech companies end up collaborating/buying a stake in NBFC?

d)Why are banks and traditional NBFC’s not able to venture into market space that these fintech
companies are targeting?

e)What is so attractive about fintech companies that it is able to attract lot of PE funds?

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Fintech companies
f)Why do certain Banks (like Federal Bank, HDFC Bank) have NBFC as subsidiary ? What is the regulatory
arbitrage they are trying to encash?

g)Specifics about Paytm:

Business model
Revenue streams
Funding source
Key items on the asset side
Risk exposure (NPA)
Key performance metrics (Business valuation) tracked by investment analyst
IPO : Issue price/ listing price/ Controversy
Controversy regarding ESOP to founder

Exit by prominent foreign investors who had invested in early stage. Loss taken by these investors.
Timing of exit (any announcement/ regulatory change near to that).
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5. Market cap of select companies

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Market cap of select companies
Share Price (Rs)
Avenue Super marts 4,000
(D-mart)
Bata 1,462
Apollo Hospitals 7,320
Nykaa 168
Zomato 273
Swiggy 541
SBI 793
HDFC Bank 1,748
Jio Financial services 307
Sundaram Finance 4,650
Reliance Industries 1,250
TCS 4,097
Data as on 3/1/2025

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Market cap of select companies
Market cap (Rs) Share Price (Rs)
Avenue Super marts 2.61 lac Crores 4,000
(D-mart)
Bata 18,790 Crores 1,462
Discussion Point:
Apollo Hospitals 1.05 lac Crores 7,320 Why do certain
Nykaa 47,850 Crores 168 companies fetch
Zomato 2.47 lac Crores 273 higher valuation?

Swiggy 1.21 lac Crores 541

SBI 7.07 lac Crores 793
HDFC Bank 13.38 lac Crores 1,748
Jio Financial services 1.97 lac Crores 307
Sundaram Finance 51,650 Crores 4,650
Reliance Industries 16.94 lac Crores 1,250
TCS 14.80 lac Crores 4,097
Market Cap = Number of outstanding equity shares*Share Price
Data as on 3/1/2025
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[Link] finance decisions

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Corporate Finance decisions

Corporate finance decisions:

• Investment Decision

• Financing Decision

• Dividend decision

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What is Corporate Finance ?
Type of Decision Overview of the Decision Criteria for making Decision
Investment Businesses would have raised funds from Return from Investments should be
Decision external sources as well as through greater than minimum acceptable
internal accruals (say retained profits). hurdle rate.

Where and how should these funds be

invested?

Example:
JSW paints deciding to acquire a stake in
Ackzo Nobel India.
Indigo airlines deciding to buy new
aircrafts.

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What is Corporate Finance ?
Type of Decision Overview of the Decision Criteria for making Decision
Financing Whether to raise funds through debt or Debt/Equity proportion should be such
Decision equity? that a firms value is maximized.

Say if it is debt, whether to raise funds Debt profile should be such that it
from Banks or by issuing Corporate matches the profile of the assets being
Bonds? funded.

Tenor of the borrowing/Bonds?

What is the proportion of Debt and

Equity to be maintained?

Say whether Indigo airlines should buy an

aircraft or lease an aircraft?

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What is Corporate Finance ?
Type of Decision Overview of the Decision Criteria for making Decision
Dividend Say a company has funds but is not able Funds could be returned to shareholders
Decision to find investments where it can earn in the form of:
hurdle rate. -Dividends and/or
-Share buybacks
Now the company may find it optimal to
return funds to owners of the business. The form in which funds are to be
returned depends on shareholders
Example: preference.
General Electric??
Indian Context?? Whether shareholders prefer Dividend
or Share buyback ?

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 7. Students Presentation on General Electric

Critical analysis of strategies followed by GE from corporate

finance perspective

[Did GE retain excessive cash & overdiversify?

Financial metrics that GE lost focus]

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8. Objectives of Corporate Finance

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Objective of Corporate Finance|

-Maximize market share?

-Profit maximization?

-Maximize Revenue?

-Maximize Share price?

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Objective of Corporate Finance|
Objective What’s wrong with these objective?
Maximize market A firm may attain higher market share by pricing the product near to cost or pricing below
share cost.

Higher market share need not necessarily give the firm more pricing power in future.

If it does not get pricing power, then higher market share will not translate to higher profits
& higher valuation in the future. Hence by focusing on higher market share, the firm will be
worse off.

Note: If higher market share gives the firm more pricing power, then higher market share
will lead to higher profits in future and consequently maximize firms value in the future.

Example :
Organized large scale retailers driving out local stores by offering low price initially.
(Organized retail: Better Economies of scale, Bulk order, Better logistics etc).

Online market players ??

Insurance companies ?? 32
Objective of Corporate Finance|
Objective What’s wrong with these objective?
Profit maximization This may result in firms focusing on short term accounting profit rather than long term value
creation. Hence the firm may be worse off in the long run.

Example: Firm may supply poor quality products in the short run to reduce cost. The
reduction in cost may help firms report higher profits. However the poor quality of products
may damage the reputation of the firm and adversely impact the sales in the long run.
Maximize the Managers may be interested in creating conglomerates. This could be with the intention of
overall revenue increasing Managers power and career.

However this need not necessarily increase firms value.

Maximize equity Very often stock market price do not accurately reflect long term growth potential of a firm.
share price The market may be giving too much importance to short term effects.

If this is how the stock market behaves, then if the firm tries to maximize stock price….then
it will focus on short term decisions rather than focusing on long term wealth creation.
Example: Reducing R&D expenses, Advertisement expenses.
So Maximizing market share , Profit ,overall revenue, equity share price are not the right
objectives. 33
Value of the Business/ Firm value/Enterprise value
Equity & Liabilities Assets

Share capital 400 Fixed Assets 1,000

Reserves & Surplus 600 Investments 200

Long term Debt 250 Trade Receivables 300

Trade Payables 500 Inventories 150

Cash and Bank balances 100

1,750 1,750

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Value of the Business/ Firm value/Enterprise value|

Assume the values given are market values.

Now Enterprise Value of the above firm can be calculated in 2 ways:
Method 1: =Total Assets – Trade payable
=1750-500
=1,250
Method 2: = Share capital + Reserves &Surplus + Long term Debt
=400+600+250
=1,250

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Objective of Corporate Finance|

Value of the Business (firm) = Value of Equity holders stake

+
Value of Preference shareholders stake
+
Value of Debt holders stake

Should the aim be to maximize Value of the business (firm) or

to maximize Value of Equity holders stake?

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Objective of Corporate Finance|
Lets say, a company had :
Outstanding Preference shares of Rs 100 Crores.
Outstanding Corporate Bond of Rs 200 Crores
Value of the Value of Preference Value of stake held Value of Equity
Business (firm) shareholders stake by Corporate Bond holders stake
holders
Initial Scenario 1000 100 200 700
(1000-100-200)
Down Scenario 450 100 200 150
(450-100-200)
Up scenario 1500 100 200 1200
(1500-100-200)
Note:
It has been assumed that both preference shares and Corporate Bonds don’t have any convertible feature.
(option to convert to equity stake.)
Movement in Bond price/preference shares due to change in required return has been ignored.

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Objective of Corporate Finance|

From the previous slide, we can conclude that Maximization of

Value of Business (firm) will eventually lead to maximization of Equity
Shareholders value.

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Objective of Corporate Finance|

What is the potential problem if a firm instead has a narrower focus of

maximizing Equity Shareholders value ?

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Objective of Corporate Finance|

To achieve this firm may take up high risk projects with high proportion of debt
funding.

The probability of project failure will be high.

If the project succeeds, then Debt holders will be paid off the contractual
amount. The abnormal surplus belongs to the equity shareholders.

If the project fails, then there will not be funds to pay off the Debt holders. So
the debt holders end up facing risks that are not commensurate to the return
offered to them (conflict between the interest of providers of debt and equity).

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Private Gain vs Public loss|
Maximizing firm value….this can at times result in compromising
larger interest of the society.

Example:
1)Firm using the cheapest technology for production.
Firm not investing sufficient amount in controlling pollution.
Both these measures may increase the overall firm value ; however there will be adverse impact on
environment and health of the surrounding society.

2)Liquor/ Tobacco companies maximizing firm value:detrimental effect on the larger society.

3)Bank expanding aggressively. When times are good, it propels the overall firm value.
However when there is stress in the overall economy, it blows up quickly and the Bank may have to be
bailed out by the Government using public funds.
The bail out has a cost since Government is forced to invest and Government invariably ends up
overpaying for the stake.

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Private enterprises in India where Govt has stake|
The following could be examples where the stake (stake increase) was not as per original intention :

1)Government owns 49% in Vodafone Idea. Government did not have any equity stake prior to the
crisis.

2)LIC stake in IDBI Bank : 49.24%

Government stake in IDBI Bank : 45.48%

Government did have a stake in IDBI Bank before the crisis. However when larger concerns regarding
NPA & capitalization arose…….. LIC (a public sector unit) was asked to pick significant stake in IDBI
Bank.

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Illustrative list of Corporate Finance activities|
• Mergers and Acquisitions (M&A).

• What are the new Investment opportunities to be taken up?

[Example: Grasim industries venturing into Paint business]

• How to fund the new investment opportunities coming up?

• What is the Capital structure to be maintained?

• Portion of profits to be distributed to shareholders. Whether the amount to

be distributed in the form of Dividend or Share buy-back?

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Illustrative list of Corporate Finance activities|
• Privately held company decides to go Public.
Publicly listed company decides to become Private.

• Working capital management and funding.

-Credit period to be availed from Suppliers.
-Credit period to be offered to Customers.
-Policy with respect to inventory management.
-How to fund the working capital required?
(Note:
Preferable to fund Permanent/ Core working capital through long term source.
Long term source could be internal accruals or long term borrowings or shareholder funds.
If working capital is funded through short term source, then it can be through loan from Bank or by
issuing commercial paper.)

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Illustration|Solution

• Short term borrowing arrangements with Banks.

• Factoring arrangement.

• Negotiate credit period with Suppliers. This will enable the company to
pay at a later date.

• Instead of buying assets, take assets on lease arrangements.

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Illustration|Solution

Factoring arrangement

[Company A sells goods worth Rs 1 crore to Company B.

As per sale terms, Company B is required to pay the money only after 6
months.
To raise finance upfront, Company A sells these outstanding invoices to a
Factoring company. Factoring company will pay Company A the money of
“1 Crore after deducting certain charges”.
On due date, the Factoring company will directly collect the money from
Company B]

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[Link] of Financial statements

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Balance sheet| Overview
As on 31-03-2022 As on 31-03-2021
Non-Current Assets 55,090 54,476
Current Assets 14,647 13,640
Total Assets 69,737 68,116

Equity (Shareholders fund) 48,760 47,434

Non-Current Liabilities 10,033 9,841
Current Liabilities 10,944 10,841
Total Equity and Liabilities 69,737 68,116

Note: Extract from HUL Standalone Balance Sheet||Figures in Crores

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Statement of Profit & Loss| Overview
Year ended Year ended
March 2022 March 2021
Revenue from Operations 51,193 45,996
Other Income 393 513
Total Income 51,586 46,509
Cost of materials sold 25,124 21,677
Employee Benefit Expenses 2,399 2,229
Finance Costs 98 108
Depreciation & Amortization
expenses 1,025 1,012
Other expenses 11,167 10,766
Total Expenses 39,813 35,792
Profit before Exceptional Items &
Tax 11,773 10,717
Exceptional Items (34) (227)
Profit Before Tax 11,739 10,490
Tax Expense (2,921) (2,536)
Profit after Tax 8,818 7,954
Note: Extract from HUL Standalone Profit & Loss||Figures in Crores

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Statement of Cash flows |Overview

Year ended Year ended

March 2022 March 2021 Remarks
Cash flows from Operating Activities (A) 8,964 8,957 +ve indicates “cash
generated”.
Cash flow from Investing Activities (B) (1,732) (1,367)
-ve indicates “cash
Cash flow from Financing Activities (C) (7,984) (9,280) used”.
Net decrease in Cash & Cash Equivalents
(A+B+C) (752) (1,690)
Cash and Cash Equivalents at Beginning of
the year 1,740 3,430
Cash and Cash Equivalents at End of the year 988 1,740
Note: Extract from HUL Standalone Cashflows||Figures in Crores

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 Balance sheet| Book Value per share & Market price by Book value
As on 31-03-2022 As on 31-03-2021
Equity (Shareholders fund) 48,760 47,434
Number of Equity Shares 234.9591 234.9568
Note: Above 2 line items in Crores
Book Value per share
(Stand alone) 207.53 201.88

Book Value per share

(Consolidated) 208.81 202.91

Market Price per Share 2048.85 2431.50

Price/Book Value
Note: Here we use consolidated
Book value per share 9.81 11.98

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 Role of Financial statements in Corporate Finance|
• Assets currently held by the company with appropriate classification.
(Say What are the Fixed assets, Current assets, Intangibles etc?)

• What are the liabilities of the company?

• What is the profitability of the company as per accounting convention?

• What portion of the current profit is attributable to items which are not likely to
repeat in future? (Say Exceptional items)

• Likely future profitability.

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[Link] between 3 companies

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Comparison of 3 listed companies …pg 1
Ref Apollo Hospitals Nykaa NLC India ltd
As on 31-03-2023 (Figures in Crores)
A Non-Current Assets 10,091 1,044 41,493
B Current Assets 4,337 1,906 11,575
C (A+B) Total Assets 14,428 2,950 53,068
D Shareholders Net worth 6,531 1,392 17,626
E Financial liabilities 4,052 351 20,187
Other Non-current 520 9 4,042
F
liabilities
Total Non-current 4,572 360 24,228
G(E+F)
liabilities
H Current liabilities 3,325 1,198 11,214
I (G+H) Total Liabilities 7,896 1,558 35,442
J(D+I) Total Equity and liabilities 14,428 2,950 53,068

Note: Taken from Annual report

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Comparison of 3 listed companies …pg 3

Ref Apollo Hospitals Nykaa NLC India ltd

As on 31-03-2023 (Figures in Crores)
Number of outstanding
K shares (Rs) 14,37,84,657 2,85,24,46,720 1,38,66,36,609

Borrowings included in
P current liabilities(Crores) 896.5 584.764 3807.55

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Comparison of 3 listed companies …pg 4

Ref Apollo Hospitals Nykaa NLC India ltd

As on 31-03-2023 (Figures in Crores)

K Number of outstanding shares (Rs) 14,37,84,657 2,85,24,46,720 1,38,66,36,609

L Market price per share (Rs) 4310.9 124.25 75.98

M(K*L) Market capitalization in Crores 61,984 35,442 10,536

N(D/K) Book value per share (Rs) 454.24 4.88 127.11

O(L/N) Market price/Book value 9.5 25.5 0.6

Borrowings included in current

P liabilities(Crores) 896.5 584.764 3807.55
(P+E)/D Debt-Equity Ratio 0.76 0.67 1.36

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 Shareholder composition
FSN E-
commerce
Apollo Ventures ltd Adani
hospitals (Nykaa) NLC India ltd HDFC Bank Enterprises
As on 5/1/2024
% of Shares Held by All Insider 29.33% 64.18% 82.24% 1.77% 77.25%
% of Shares Held by Institutions 44.82% 21.34% 7.68% 50.15% 12.70%
Number of Institutions Holding
Shares 263 80 28 447 115

% of Float Held by Institutions 63.42% 59.57% 43.23% 51.06% 55.85%

Source :From Yahoo finance

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 Institutional investors stake|

• Higher the stake held by Institutions (especially FII’s), higher is the credibility of the
company. This is because institutions normally invests after due research and the
investee company clears certain minimum threshold regarding corporate
governance/disclosures.

• Other points to be discussed:

-Round tripping.
-Number of companies where the FII has invested.
-FII continue to hold on to the investment despite big uptick in price.

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 Role of Stock market|
• Stock market plays a critical role in allocation of Economy’s capital.
• Stock market can discharge this role well only if the Price-discovery process is
efficient. For this to happen, there should be strong interaction between Demand
and Supply.
• Free float (also known as Public float) : refers to shares of a company that can be
publicly traded and are not restricted.
-All listed companies in India to maintain Minimum public float of 25%.
-Newly listed firms get 3 years to adhere to the limit of 25%.
-Stocks with lower free-float : They tend to have higher volatility.
-Stocks with larger free-float : They tend to have lower volatility since there
are more buyers and sellers.
• Free-float requirement is intended to facilitate efficient price-discovery.

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[Link] Problem/Corporate governance

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Features of company|
Features of Companies
✓Company has a legal entity distinct from its members. Hence it has
perpetual succession.
✓Shareholders own the company ; however shareholders do not
manage it.
✓Shareholders vote to elect the Board of Directors.
✓Board of Directors comprises of :
- Executive Directors
- Non-Executive Directors
✓ Board appoints the top management.

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Goal of companies & challenges|

Goal of Companies
✓Maximise Enterprise value (and thereby shareholders wealth).

Challenges
✓Interest of Managers and shareholders do not necessarily align.

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Goal of companies & challenges|
Primary goal of a company is to maximise Enterpirse value and there by
shareholders wealth.
Take the case of a ✓ Maximization of shareholders wealth happens naturally.
small company
where Owners
and Managers are
same.

Large Companies ✓ Here there are large number of shareholders.

✓ Further management team is different from
shareholders.
Interest of Managers and Shareholders do not necessarily
coincide.

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Agency problem and Agency costs|

✓ Managers are agents working on behalf of shareholders. Managers have duty to shareholders.
Still at times Managers may act in their own self interest.
This is called the Agency problem.
Agency problem arises because shareholders are not managing the affairs.
✓ Costs associated with Agency problem is called Agency costs.

✓ 2 types of Agency costs-

(a) Direct Agency costs
Example: Company needs to generate financial statements and Annual reports for shareholders.
The costs associated with this is Direct agency costs.
(b) Indirect Agency costs
Example: Cost of managers making sub-optimal decisions.
Cost of providing ESOP(Employee stock ownership plan) to motivate Managers.

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Agency problem and Agency costs|

✓ Investors may have a large portfolio of shares.

In such cases if Investors are not happy with the management, possibly they may exit the company.
Investors may not find it worthwhile to take efforts to change the management of the company.

✓ Managers career is largely dependent on the ✓ However shareholders may hold a diversified
company. So they make take a more conservative portfolio; hence they will prefer Managers (of
approach to risk. their company) to take risk.

✓ Pecking order of finance:

Managers preference Shareholders preference
Preference 1 : Retained earnings (don’t pay Preference 1 : Debt (Interest on debt is tax
dividends) deductible. Hence cost of debt is low)
Preference 2 : Debt Preference 2 : Retained earnings
Preference 3: Fresh Equity Issue Preference 3: Fresh Equity Issue

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Aligning Managers Interest to shareholders
How can we make Managers to act in best interest of Shareholders?
✓ Possibly by designing a suitable compensation scheme.
For instance, part of the Managers compensation could be in form of
variable pay/ ESOP’s.

Possible drawback of ESOP’s

Managers may take short term measures to boost share price……so that their
ESOP’s turn attractive.

Example : Discuss the possible reason for more buybacks in US.

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 LT acquiring Mindtree|LTIMindtree Ltd

Case facts
• Mindtree Ltd: Listed Indian IT company. Founded by professional entrepreneurs. Promoters stake
was around 14% and they held key executive position and had representation in the Board.

• V.G. Siddhartha, founder of Cafe Coffee day, held around 20% stake in Mindtree Ltd.
Due to financial difficulties, he sold his stake to L&T. Though the acquisition was less than 25%,
through the acquisition L&T acquired control over Mindtree…hence L&T had to make an open offer
to other shareholders of Mindtree.

• The original promoters of Mindtree was against the takeover bid by L&T. Hence it is an example of
hostile take over.

• L&T ended up holding close to 60% after open offer. Hence the original promoters exited executive
position in the company. Subsequently they sold their stakes as well.

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 LT acquiring Mindtree| LTIMindtree Ltd
Discussion points

• Possible reasons why the original promoter of Mindtree was against the takeover bid.

• Agency problem : Managers(Promoters) vs Shareholders

• Did the hostile takeover enhance value to the minority shareholders of Mindtree?

• Is there anything different the original promoters could have done to retain control of the company?

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 Different type of agency problem||
Controlling stake holder vs Minority shareholder
Take the case of a company where the promoter (along with family members) holds a
significant stake and promoter (along with family members) are part of the executive
management.

• The initial agency problem that we discussed was managers not acting in the best interest of the
shareholders…ie their decisions/actions not resulting in increase in firm value. However if the
promoter is also part of executive management, the risk of agency problem will be reduced.

• However there could be a different type of conflict that can arise :

Conflict between the interest of Controlling stakeholder
vs that of the interest of Minority stakeholders.

Examples of areas where there could be disconnect: Related party transactions , Profit distribution,
Remuneration to Promoters who are part of executive management.

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 Objective of Corporate Governance|
Corporate Governance
✓ Corporate Governance: Set of processes and procedures intended to manage
the organizations in best interest of shareholders.

✓ Primary aim of corporate governance:

-Control over managements ability to obtain private benefit.
- Replace inefficient management in a timely manner.

✓ For instance corporate governance will include:

Various committees of the Board reviewing company’s operation periodically.
(Example: Audit committee, Remuneration committee,
Investment committee etc)

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12. Shriram – MUFG deal : What Proxy firms say
Mint article dated 14/1/2026

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Proxy advisory firms ||
• Proxy advisory firms are Independent research firms registered with SEBI and are subject to SEBI regulations.
Proxy advisory firms advise Institutional investors on how to vote on shareholder resolutions.

• Institutional investors could be:

-Insurance companies, Mutual funds, Foreign institutional investors, Pension funds etc.

• Typical agenda items placed for shareholders resolution :

Directors appointment, Related party transactions, Remuneration to Senior management,
Grant of ESOP’s, Mergers & acquisitions, Share buyback, De-listing, Appointment of Auditors etc

• Voting recommendation (vote for/vote against/abstain) is given along with the rationale.

• Investors are not legally bound to abide with the voting recommendation of the Proxy advisory firm.
However, often, the recommendation of Proxy advisory firm have significant influence on the outcome of the
voting.

• Institutional Investors pay fees to Proxy advisory firms.

74
 Shriram – MUFG deal ||

Shriram Finance : Listed company.

Profitable and dominant NBFC.
Ranks 2nd among NBFC in terms of market cap.

Core Business of Shriram Finance :

Commercial vehicle financing
MSME* lending
Gold loans
Two wheelers financing
Passenger vehicles financing

*Micro, Small & Medium Enterprises

75
 Shriram – MUFG deal ||

MUFG (Mitsubishi UFJ Financial Group)

MUFG to invest in Shriram Finance.

MUFG : one of Japan’s largest Banks.

Why MUFG preferred to invest in a NBFC over Bank?

???????????????????

76
 Shriram – MUFG deal ||

Why MUFG preferred to invest in a NBFC over Bank?

• Easier to acquire strategic stake in NBFC rather than Bank.

• In case of Bank, there is cap on promoter ownership and there is greater scrutiny by the
regulator of stake sale. Approval of Regulator may take longer.

• NBFC does most of the business that Banks do

(However NBFC does not hold Banking license…hence it does not have access to cheap
source of funds ..CASA….like Banks do)

77
 Shriram – MUFG deal ||
Three resolutions on which the Shriram Finance is seeking shareholder nod:

1)Issuance of 471 million shares worth Rs 39,618 Crores to MUFG. Post issue, MUFG will end
up holding 20% stake in Shriram Finance.
(Price per share: Rs 840.93………this is the floor price calculated as per SEBI regulation.
Further the issuance is by preferential issue of equity shares………..private placement)

2)Grant of certain controlling rights to MUFG bank.

Controlling rights intended here : Through a Shareholder agreement, MUFG gets the right to
nominate 2 non-independent Directors on to the Board (nominee directors) of Shriram
Finance.

3)One time non-recurring $ 200 million (~ Rs 1800 Crores) payout by MUFG to promoter of
Shriram Capital (Shriram ownership trust). This is for non-compete and non-solicit obligations.

78
Shriram – MUFG deal ||

Whether the deal is good for the Company & the Shareholders?

79
Shriram – MUFG deal ||

Credit rating agencies

Credit rating agencies are positive about the deal. Since after the equity infusion,
the NBFC will be able to borrow cheap.

80
 Shriram – MUFG deal ||

Positives for Shriram Finance

• Strategic global partner with deep pockets.

• Credibility goes up; will be more attractive for investment…especially for FII’s.

• The fund infusion by MUFG could help bring down funding costs (on borrowings) over
time.

81
 Shriram – MUFG deal ||
Concerns of Proxy advisory firms

Concern regarding proposal 1 & proposal 2

After the deal is finalized, MUFG will hold 20% of the capital. Had MUFG acquired more than 25% of the
target company, then it would have triggered an Open offer.

Prior to this transaction, the original promoters held around 25.4%. After MUFG infuses funds, the stake
of promoters will drop to around 20.3%.

Further MUFG is signing a SHA and getting the right to nominate 2 Directors. So effectively MUFG gets
de-facto control ; hence ideally it should have triggered an open offer. However since the stake taken is
less than 25%, it bypasses the need to make open offer.

To summarize, here the primary concern is MUFG gets control but without triggering an open offer.
Hence it is unfair to existing minority share holders.

82
 Shriram – MUFG deal ||
Concerns of Proxy advisory firms

Concern regarding proposal 3

Existing Promoters are paid a one time, non-recurring $200 million pay out. It will be paid to promoter
Shriram Ownership Trust. It is for non-compete and non-solicit obligations. Intended to bar promoters
from launching a rival lending entity.

Why a non-compete premium is required for a promoter group that isn’t actually exiting the company.

83
 Shriram – MUFG deal ||
Stand taken by different Proxy advisory firms
*Stakeholder Empowerment services opposed all 3 proposals.

*Institutional Investor Advisory Services opposed the third proposal.

*InGovern Research services backed all 3 proposals.

* these are Proxy advisory firms

Actual outcome of voting : All 3 proposals approved by shareholders.

% of Shareholders who
approved the proposal
Proposal 1 98.5%
Proposal 2 99.5%
Proposal 3 91.9%

84
Shriram – MUFG deal ||

Time line of Stock Exchange notification

Dec 16, 2025 : Intimation given to Stock exchange on Dec 16, 2025 about the Board
meeting to be held on Dec 19, 2025.
Purpose of the Board meeting : to consider proposal for fund raising by way of rights
issue, preferential allotment, qualified institution placement or any other permissible
mode.

Dec 19, 2025 : Outcome of the Board meeting intimated to Stock exchanges.

85
Shriram – MUFG deal ||

Share price Market cap

10/12/2025 837.25
16/12/2025 848.40
19/12/2025 901.70
22/12/2025 934.85
16/1/2026 997.00 1.87 lac Cr
(Bajaj finserv : 3.2 lac Cr)

86
 Impact of raising fresh funding||Concept

Market capitalization of a company before fund raise : Rs 10,000 Crores.

Fresh equity raised by company from strategic investors : Rs 1,500 Crores.

Market capitalization of the company immediately after the fund raise??

87
13. Financial statement analysis
(Only key Ratios relevant for Corporate finance covered)

89
Financial statements| Framework
Income Statement for the year
ended March 2022 Balance sheet as at 31st March 2022

Revenue Equity & Liabilities Assets

Less Cost of Goods sold Shareholder Equity Fixed Assets

Gross profit Non-Current Liability Other Non-Current Assets

Less Operating Expenses Current Liability Current Assets:

-Inventories
Operating profit -Trade Receivables
Add Non-operating income -Cash & Bank balances
Less Non-operating Expenses Total of Equity and Liabilities Total of Assets
Earnings before interest and tax
(EBIT)
Note:
Finance cost (Interest expense) If a company does not have any non-operating income and
Earnings before tax(EBT) non-operating expenses, then EBIT will be same as Operating profit.
Less Tax
PAT

90
13.1 ROA vs ROCE vs ROE

91
 ROA VS ROCE VS ROE|
Formula used in this section Other Alternate formulas

Return on Assets [EBIT/Total Assets]*100 [Profit after tax/ Average Total Assets]*100
(ROA)
or

[EBIT*(1-t)/Average Total Assets]*100

Return on Capital [EBIT/Capital Employed]*100 [EBIT*(1-t)/Capital Employed]*100

Employed (ROCE)
Return on [[PAT-Preference Dividend]/[Equity
Equity(ROE) shareholder funds]]*100

92
 ROA VS ROCE VS ROE|
No Debt Low level of Debt Intermediate level of Debt Higher level of Debt
ASSETS 4,000 4,000 4,000 4,000

TRADE PAYABLES 200 200 200 200

DEBT - 1,000 2,000 3,000
EQUITY 3,800 2,800 1,800 800

INTEREST RATE ON DEBT 8% 8% 8% 8%

OPERATING PROFIT (EBIT) 400 400 400 400

INTEREST ON DEBT (0) (80) (160) (240)
TAXABLE INCOME (EBT) 400 320 240 160
TAX @ 35% (140) (112) (84) (56)
PAT 260 208 156 104

ROA 10.00% 10.00% 10.00% 10.00%

RETURN ON CAPITAL
EMPLOYED(ROCE) 10.53% 10.53% 10.53% 10.53%
RETURN ON EQUITY (ROE) 6.84% 7.43% 8.67% 13.00%
93
 ROA VS ROCE VS ROE| Inference
If Interest rate on debt lower than ROCE
• Here we have assumed that borrowing rate is lower than ROCE.
Hence ROE increases with increase in Debt level.
• Even if a company borrows, ROE need not necessarily be higher
than ROCE. It depends on the Quantum of debt (& debts impact on
interest outflow and tax outflow).

Low level of Intermediate Higher level of

No Debt Debt level of Debt Debt
Nr for ROE 260 208 156 104
Dr for ROE 3,800 2,800 1,800 800
ROE % 6.84% 7.43% 8.67% 13.00%

95
 ROA VS ROCE VS ROE|
No Debt Low level of Debt Intermediate level of Debt Higher level of Debt
ASSETS 4,000 4,000 4,000 4,000

TRADE PAYABLES 200 200 200 200

DEBT - 1,000 2,000 3,000
EQUITY 3,800 2,800 1,800 800

INTEREST RATE ON DEBT 11% 11% 11% 11%

OPERATING PROFIT (EBIT) 400 400 400 400

INTEREST ON DEBT 0 -110 -220 -330
TAXABLE INCOME (EBT) 400 290 180 70
TAX @ 35% -140 -101.5 -63 -24.5
PAT 260 188.5 117 45.5

ROA 10.00% 10.00% 10.00% 10.00%

RETURN ON CAPITAL
EMPLOYED(ROCE) 10.53% 10.53% 10.53% 10.53%
RETURN ON EQUITY (ROE) 6.842% 6.732% 6.500% 5.688%
94
ROA VS ROCE VS ROE| Inference
If Interest rate on debt higher than ROCE
• Here we have assumed that borrowing rate is higher than ROCE.
Hence ROE decreases with increase in Debt level.

• Further here ROE cannot be higher than ROCE (since through

excess borrowing, you are bringing down return to shareholders).

96
13.2 Operating & Financial Leverage

97
 Operating Leverage|
Base Up Scenario Down Scenario
SALE PRICE PER UNIT 1 1 1
UNITS SOLD 2000 2200 1800

SALES(A) 2000 2200 1800

OPERATING EXPENSES (B) 1600 1700 1500
OPERATING PROFIT (C)
400 500 300
OPERATING PROFIT %
[C/A] 20.00% 22.73% 16.67%

What is contributing to increase in operating profit % ?

98
 Operating Leverage|
Base Up Scenario Down Scenario
SALE PRICE PER UNIT 1 1 1
VARIABLE EXPENSES PER UNIT 0.5 0.5 0.5
UNITS SOLD 2000 2200 1800

SALES(A) 2000 2200 1800

VARIABLE OPERATING
EXPENSES (B) 1000 1100 900
FIXED OPERATING EXPENSE(C) 600 600 600
OPERATING PROFIT (D)
[A-B-C] 400 500 300
OPERATING PROFIT %
[D/A] 20.00% 22.73% 16.67%

99
What type of cost structure will Mature companies with
stable cashflows prefer?

100
What type of cost structure will Start up companies prefer?

101
 Operating Leverage|

Ways to reduce fixed element in the cost structure :

-Outsource non-core activities.

-Use temporary/ contractual staff.

-Take assets on lease with an option to cancel the lease (rather than
outright purchase).

102
 Operating Leverage|

Nr = [Change in EBIT]/[EBIT]

Dr = [Change in Sales]/[Sales]

Degree of Operating Leverage = Nr/Dr

103
 Operating Leverage using base scenario of 2000 units|
Base Calculated with reference to Calculated with reference to
Base scenario of 2000 units Base Scenario of 2000 units
UNITS SOLD 2000 2200 1800
SALES(A) 2000 2200 1800
OPERATING PROFIT[A-B-C] 400 500 300
Increase in Sales +10% -10%
Increase in Operating profit +25% -25%
Degree of operating leverage 2.5 2.5
@ 2000 units

Application of Operating leverage

Increase in Sale of 10% * Operating leverage of 2.5 = Increase in operating profit of 25%

104
Operating Leverage|
Application of Operating leverage

Companies don’t disclose the break up between Fixed cost and Variable cost in financial
statements. These are internal information. So it is not possible to directly project
Operating profit for different scale of operations.

However by using formula in the previous slide, we can arrive at Operating leverage.

Thereafter, operating profit can be projected for different scale of operations (It will be
appropriate only if the extrapolation is within a reasonable range. Since if the volumes
are expanding rapidly……Fixed cost takes the form of Step fixed cost….ie certain additional
fixed costs will have to be incurred)

105
 Operating Leverage|

To do

Calculate operating leverage with Base sale of 1800 units.

106
 Operating Leverage using base scenario of 1800 units |
Base Up Scenario Down Scenario
SALE PRICE PER UNIT 1 1 1
VARIABLE EXPENSES PER UNIT 0.5 0.5 0.5
UNITS SOLD 1800 2000 1600

SALES(A) 1800 2000 1600

VARIABLE OPERATING
EXPENSES (B) 900 1000 800
FIXED OPERATING EXPENSE(C) 600 600 600
OPERATING PROFIT (D)
[A-B-C] 300 400 200
OPERATING PROFIT %
[D/A] 16.67% 20.00% 12.50%

107
 Operating Leverage using base scenario of 1800 units|
Base Calculated with reference to Calculated with reference to
Base scenario of 1800 units Base Scenario of 1800 units
UNITS SOLD 1800 2000 1600
SALES(A) 1800 2000 1600
OPERATING PROFIT[A-B-C] 300 400 200
Increase in Sales +11.1% -11.1%
Increase in Operating profit +33.3% -33.3%
Degree of operating leverage
@ 1800 units 3

Learning : Operating leverage varies at different volume of sales.

At 2000 units, operating leverage was 2.5

At 1800 units, operating leverage is 3.0

108
Operating Leverage|

It depends on the industry/ business that you are in and likely stability of the
revenue.

Higher the operating leverage, higher the operating risk. Why?

Because of fixed operating costs.

So if sales drop, operating profit will drop by a greater extent.
[If sales increase, then operating profit will also increase by a
greater extent]

110
 Operating Leverage|

Other Impact on Operating Profit

In the Preceding example, it was presumed that sales price per unit is
constant for all scenarios.
However in reality, company may have to reduce sales price per unit to
achieve higher quantity of sales.

Thus operating profit is influenced by:

- Fixed operating expenses and/or
- Sale price per unit.

111
 Breakeven sales|

Break even point

= Fixed cost/contribution per unit
= 600/0.5
= 1200 units.

113
 Financial Leverage| Alternate formula

Degree of Financial Leverage = Nr/Dr

Nr = [Change in EBT]/[EBT]

Dr = [Change in EBIT]/[EBIT]

Financial Leverage

-Financial leverage indicates use of debt.

-Use of debt can make profit available to shareholders more volatile.
[If a company is doing well, then it can improve ROE]

114
 Financial Leverage|

Degree of Financial Leverage = Nr/Dr

Nr = Earnings before Interest & Tax (EBIT)

Dr = Earnings before tax (EBT)

Note : Results of using both the formulas will be the same.

116
Financial Leverage|Different capital structure
No Debt Low Debt Higher Debt
ASSETS 4,000 4,000 4,000
DEBT - 1,000 2,000
EQUITY 4,000 3,000 2,000
INTEREST RATE ON DEBT 8% 8% 8%

Sales of 2000 No Debt Low Debt Higher Debt

SALES 2000 2000 2000
OPERATING PROFIT(EBIT)
400 400 400
INTEREST ON DEBT 0 80 160
TAXABLE INCOME (EBT) 400 320 240
TAX @ 35% 140 112 84
PAT 260 208 156
Calculate ROE, ROCE and Degree of financial leverage for aforesaid 3 scenarios.

117
Financial Leverage|Assessing profitability @2000
Sales of 2000 No Debt Low Debt Higher Debt
SALES 2000 2000 2000
OPERATING PROFIT(EBIT)
400 400 400
INTEREST ON DEBT 0 80 160
TAXABLE INCOME (EBT) 400 320 240
TAX @ 35% 140 112 84
PAT 260 208 156
RETURN ON CAPITAL
EMPLOYED(ROCE)
[EBIT/(Debt+Equity)] =10.00% 10.00% 10.00%
RETURN ON EQUITY (ROE)
[PAT/Equity] 6.50% 6.93% 7.80%
DEGREE OF FINANCIAL
LEVERAGE
(EBIT/EBT) 1.00 1.25 1.67

118
Financial Leverage|Assessing profitability @2200
Sales of 2000 No Debt Low Debt Higher Debt
SALES 2000 2000 2000
OPERATING PROFIT(EBIT) 400 400 400
INTEREST ON DEBT 0 80 160
TAXABLE INCOME (EBT) 400 320 240
TAX @ 35% 140 112 84
PAT 260 208 156
Operating leverage (calculated
earlier) 2.5
Financial leverage 1.00 1.25 1.67

Infer the result for sale of 2200 units through operating leverage and financial leverage

119
Financial Leverage|Assessing profitability @2200
Sales of 2000 No Debt Low Debt Higher Debt
SALES 2000 2000 2000
OPERATING PROFIT(EBIT) 400 400 400
INTEREST ON DEBT 0 80 160
TAXABLE INCOME (EBT) 400 320 240
TAX @ 35% 140 112 84
PAT 260 208 156
Operating leverage (calculated
earlier) 2.5
Financial leverage 1.00 1.25 1.67

Sales of 2200 No Debt Low Debt Higher Debt

SALES 2200 2200 2200
OPERATING PROFIT 500 500 500
INTEREST ON DEBT 0 80 160
TAXABLE INCOME (EBT) 500 420 340
TAX @ 35% 175 147 119
PAT 325 273 221
Infer the result for sale of 2200 units through operating leverage and financial leverage

120
Combined leverage|
Table 1 No Debt Low Debt Higher Debt
Operating profit @ sale of 2000 400 400 400
Operating profit @ sale of 2200 500 500 500
Increase in operating profit 25% 25% 25%
Cross check:
Increase in operating profit = Increase in sales of 10%* operating leverage of 2.5

Table 2 No Debt Low Debt Higher Debt

Taxable income @sale of 2000 400 320 240
Taxable income @ sale of 2200 500 420 340
Increase in taxable income when sale is
2200 25% 31.25% 41.67%
Financial leverage calculated earlier 1.00 1.25 1.67
Note: Taxable income and EBT are same.
Cross check:
Increase in Taxable income = Increase in Operating profit(in table 1)* Financial leverage

121
Combined(Total) leverage|
Combined leverage = Degree of operating leverage * Degree of financial leverage

Table 3 No Debt Low Debt Higher Debt

Increase in sales 10% 10% 10%
Increase in taxable income 25% 31.25% 41.67%
Operating leverage calculated earlier 2.5 2.5 2.5
Financial leverage calculated earlier 1.00 1.25 1.6667
Combined leverage 2.5 3.125 4.16667
Cross check:

Increase in Taxable income = Increase in sales * Combined leverage

122
13.3 Certain other ratios

123
Different category of Ratios|

• Liquidity Ratios (Short term solvency)

• Financial leverage ratios (Long term solvency)

• Activity or Productivity or Asset Utilization ratios

• Profitability ratios

124
13.3.1 Liquidity Ratios|

Liquidity Ratios
Current Ratio
Quick Ratio
Net Working Capital
Changes in Net Working capital

125
13.3.1 Liquidity Ratios|
Ratio Formula Indicates
Current Ratio [Current Assets]/[Current Liabilities] Short term solvency
Quick Ratio [Quick Assets]/[Current Liabilities] Short term solvency

Where
Quick Assets = Current Assets – Inventories – Prepaid expenses

Net Working Capital Current Assets

minus
Current Liabilities

Current Assets is often referred to as Working capital.

Changes in Net working capital for Current Year This is likely to be positive for a
Net Working capital minus company that is fast growing.
Net working capital for Last Year

126
13.3.2 Financial leverage Ratio|
Ratio Formula Indicates
Debt-Equity Ratio Debt/ Shareholders Equity Measures the extent to which company has used Debt
financing (rather than Equity).

Evaluates long term solvency position.

Is taking on Debt good ?

• In case of a company that is low risk and earns healthy profit……financial leverage is good.
• However if a company is loss making…then use of debt magnifies the loss since company is bound to make interest
payment.

Debt comprises of :
• Short term debt (Bank loans, commercial paper)
• Long term debt (Bonds, Bank loans)
Note: In case of Debt, there is a promise to pay interest and re-pay principal component. This makes Debt risky.

Note:
Accounts Payable , Accrued Liabilities etc are not Debt. View this as liabilities arising in the normal operations.

127
13.3.3 Activity Ratios|

Activity Ratios
• Activity ratios also called as Productivity or Asset utilization ratios.
• Indicates how effectively the firms assets are utilised to generate Revenue.
Remarks
• Analyse Receivables, Inventory and Fixed Assets separately.

Different types of Activity Ratios

Asset turnover ratio
-Fixed Assets turnover ratio
-Total assets turnover ratio
-Capital turnover ratio
Working capital turnover ratio
-Inventory turnover ratio
-Receivables turnover ratio
-Trade Payables Turnover ratio

128
13.3.3 Activity Ratios|

Discussion on Trade payable ratios

Trade Payables Turnover ratio : Net Credit purchase / Average Accounts payable

Companies Trade payable turnover ratio has substantially increased.

What does this indicate?

129
13.3.3 Activity Ratios|
Discussion on Trade payable ratios
How can we reach better conclusion?

-Don’t view Trade payable ratio in isolation.

-Check the cash generated from operations in Cash flow statement & Inventory turnover
ratio. These 2 should give further indications.

131
 13.3.4 Profitability Ratios|
[Link] Profitability ratios related to Sales
Gross profit margin
[Gross Profit/ Sales]*100
Formulae
Where Gross Profit = [Sales – Cost of goods sold]

Net profit margin

Formulae [Profit after tax/ Sales]*100
Operating profit margin
[Operating profit/ Sales]*100

Alternatively it is [EBIT/Sales]*100
Formulae Note:
a)Operating profit = Sales – Cost of goods sold – operating expenses.
b)EBIT = Operating profit +Nonoperating income -Nonoperating expenses
c)To arrive at operating profit and EBIT, we have not reduced interest and tax.
EBITDA margin
Formulae [EBITDA/ Sales]*100

132
13.3.4 Profitability Ratios|

4.2.1 Return
[Link] Profitability
on Totalratios
Assetsrelated
(ROA) to overall Investment made
• ROA [Profit after tax/ Average Total Assets]*100
Formulae
• ROCE or
• ROE [EBIT*(1-t)/Average Total Assets]*100

Already covered.

133
13.3.4 Profitability Ratios|

[Link] Profitability ratios to assess performance from Owners view point

EPS
DPS
Dividend Payout ratio
Retention Ratio
PE ratio
PEG ratio

134
13.3.4 Profitability Ratios|
[Link] Profitability ratios to assess performance from Owners view point
Earnings per share (EPS)
Formulae =(PAT – Preference Dividend)/ Number of outstanding Equity shares
Dividend per share (DPS)
Formulae = Aggregate Dividend paid to Equity Shareholders/Number of outstanding Equity shares

Dividend pay-out ratio

Formulae = Dividend per share/ Earning per share
This indicates what proportion of Earnings has been distributed as Dividends. Possible to assess
Remarks
if company can sustain dividend payment.
Remarks Retention Ratio = 1- [Dividend pay-out ratio]

Dividend yield
= Dividend per share/Market price per share
Formulae
Note: We are calculating this for Equity shares.
Remarks In case company does not pay dividend…..then Dividend yield will be 0.

135
13.3.4 Profitability Ratios|
[Link] Profitability ratios related to market

Price to Earnings Ratio (P/E ratio)

a)P/E ratio = Market price per share/ Earnings per share
Formulae
b)Earnings per share (EPS) = (PAT – Preference Dividend)/ Number of outstanding Equity shares

a)P/E ratio of 25 : This means that investors are willing to pay 25 for 1 Rupee of Earnings.

b)P/E ratio increases when market price per share increases or Earnings per share declines.

c)Possible justification for high PE ratio : substantial growth potential in company’s future
earnings.
Remarks
d)High P/E ratio ; possibly this indicates markets have high confidence in company’s future
performance.

e) 2 types of P/E ratio –

- Trailing P/E ratio (here we use latest available EPS)
- Forward P/E ratio (here we use forecast EPS)
136
13.3.4 Profitability Ratios|
Price to Earnings Ratio (P/E ratio)
f) Another way of interpreting P/E ratio :

Say P/E ratio of 25.......

Assume current EPS continues………
Now it takes 25 years for the investor to recoup the price paid per share only through profits.

g) Low P/E stocks:

Remarks Normally these are considered as value stocks. Here the payback period is lower.

h)High P/E stocks:

These are called Growth stocks. Here investors are relying more heavily on future growth in
EPS.

i) P/E ratio cannot be used when EPS is negative or very low.

137
13.3.4 Profitability Ratios|
PEG Ratio (Price/Earnings to growth ratio)

Company A Company B
Market price 100 100
EPSt 10 5
P/E Ratio 10 20

138
13.3.4 Profitability Ratios|
PEG Ratio (Price/Earnings to growth ratio)

Company A Company B
Market price 100 100
EPSt 10 5
P/E Ratio 10 20
EPSt-1 9.1 2.5
Growth rate in EPS ~10% ~100%

139
13.3.4 Profitability Ratios|
PEG Ratio (Price/Earnings to growth ratio)

Company A Company B
Market price 100 100
EPSt 10 5
P/E Ratio [Nr] 10 20
EPSt-1 9.1 2.5
Growth rate in EPS [Dr] ~10% ~100%
Let’s assume historical earnings growth rate will continue in future.
PEG Ratio [Nr/Dr] 10/10 = 1 20/100 = 0.2

140
13.3.4 Profitability Ratios|
PEG Ratio (Price/Earnings to growth ratio)
PEG ratio = Nr/Dr

Nr = P/E Ratio

Dr =Growth rate of earnings for a specified period.

• PEG ratio enhances the utility of PE ratios.

• Lower PEG ratio; this indicates stock is undervalued (PEG of less than 1 indicates stock is
undervalued).
• Concerns : What is the future growth estimate to use?
Whether the past will be a reliable estimate of the future?
Whether to use future growth estimate for a short time frame or
long time frame?
Growth estimate could vary depending upon the sources.

141
13.3.4 Profitability Ratios|
PE Ratio for tech companies

TCS Infosys Tata Elxsi

FY 2015 23.3 20.3 38.3
FY 2016 22.9 20.8 40.8
FY 2017 18.4 16.9 26.8
FY 2018 21.4 15.4 29
FY 2019 24.8 21.2 20.7
FY 2020 21.1 15.5 16
FY 2021 37.6 31.6 50
FY 2022 36.3 36.2 109.1
FY 2023 28.8 23.9 52
FY 2024 31.3 25.2 60.8
Comments please ?

142
13.3.4 Profitability Ratios|

Comments:

As per an article in January 2025, most of the large cap IT stocks are trading
at PEG ratio of 3 to 4.

143
Other Ratios |
Book value per share
Formulae Shareholder Equity / Number of outstanding Equity shares
Shareholder Equity =
Remarks Paid up Equity share capital+ Share Premium account+ Retained Earnings+ Accumulated other
comprehensive income – Treasury stock

Market value/Book value

Formulae Market price per share/ Book value per share

144
[Link] advertisement of Jyoti CNC Automation ltd

[Manufacturers of Computer numerically controlled machines]

145
Critically analyse and discuss the risk factors mentioned in IPO
advertisement

146
• IPO closing date - January 11,2024
• Overall issue subscribed : 40 times.
(employee category oversubscribed by 13 times)
• Closing market price on January 17,2024 : Rs 428.

• Additional points to be learned:

-Difference between IPO/FPO
-Difference between Offer for sale and Fresh issue of shares.
-Assess Debt-Equity ratio post public issue of shares.
-Overall cost of capital; the weights to be used are market
weights.

147
Are we likely to miss out the big picture by focusing on the
risks listed in IPO advertisement?

148
Extract from FY 2025 annual report

Note: Companies to give reasons where ever the deviation is more than 25% compared to previous year.

149
 15. Students Presentation on
Indigo (+ Southwest Airlines, RyanAir)

150
Thank you

151