PROJECT ON

INVESTMENT APPRAISAL

EXIDE INDUSTRIES LTD.

INTRODUCTION

The Battery Industry is poised to grow by more than double within the next five years. Nearly

all the major global automobile manufacturers have set up base in India and are also looking

at India for export of their products. Interestingly, several commercial vehicle manufacturers

have identified India as a manufacturing base for their export market which would also lead

to a higher demand for Indian batteries. This would definitely expand the market base for

automotive batteries manifold. In addition, with the thrust on infrastructure, communication

and power sectors, the consumption of industrial batteries are also expected to rise

substantially. EXIDE continues to maintain its leadership position in India. Exide is a market

leader in the aftermarket branded automotive industry in India. The reasons for Exide’s

continued top and bottom line growth during the year under review is the fact that the

company is not entirely dependent on only the automotive industry. Today approximately 35

per cent of its business and profits come from industrial range of batteries like telecom,

power, traction, inverter, UPS etc. Some of these sub-segments like Inverter, UPS and

Telecom did exceptionally well during the year, helping the company to turn in superior

numbers.

1

EXIDE PERFORMANCE

As there was fall out of the global economic downturn, the auto industry in particular and

other core industries including infrastructure, telecom, power etc. in general showed either a

sharp de-growth or a tapering down of growth. This definitely affected the operations of the

Company but inspite of such difficult circumstances, EXIDE succeeded in increasing its net

turnover by an average of 40% over the last 5 years i.e from 2005-2009 as shown in figure

1.1. For FY2009, the company reported 19.2% jump in Net Sales to Rs 37,609 millions.

However, Exide Industry’s performance was better than the other ancillary companies during

the year, as its Revenue not only depends on the Automobile industry, but it also derives

almost 35% of its Revenues from industrial battery segments like telecom, power, traction,

inverter, UPS, etc. Consistent growth in the Replacement Automotive Battery Segment also

helped post a better performance during the year.

2009 2008 2007 2006 20050

500010000150002000025000300003500040000

Net Sales

Net Sales

(Figure:-1.1)

The operating profit of the company had also a tremendous growth of 204% from year 2005

to year 2009. This shows that the company is generating more income and less expenditure

over these years.

2

DIVIDEND POLICY

2009 2008 2007 2006 20050

5

10

15

20

25

30

Payout (%)

Payout (%)

Figure:-1.2

The company paid a total dividend of Rs.187.5millions in FY 2005 which increased to

Rs.480 crores in FY 2008-09 which shows company growth during the years. As shown in

figure 1.2, we can see that the dividend payout which the company is paying is decreased

over the years from FY 2005 to FY 2008 and then again it increased in the FY 2009. It means

company was paying less dividend in order to make a reserve for itself in future. It gave very

less dividend in the year 2008 because recession had an impact on the total profitability of the

company, but as the inflation rate goes down it can be seen that it paid comparatively more

dividend than the previous year.

Also the earning per share of is company has increased from Rs 3.30 in 2007-2008 to Rs 3.55

in 2008-09. The company declared final dividend of 20% (Rs0.2 per share) in addition to the

40% interim dividend (Rs0.4 per share) announced earlier in the year. With this, total

dividend for FY 2009 was 60% (Rs0.6 per share) resulting in 1.1% yield at the current market

price.

3

DEBT’S TO EQUITY

2009

2008

2007

2006

2005

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7

Debt-Equity Ratio

Debt-Equity Ratio

(Figure:- 1.3)

As shown in figure 1.3, the company is having a decreasing trend in debt-equity ratio of 0.64

times in the FY 2005 to 0.30 times in the FY 2009. This clearly shows that earlier company

used debt as their major source for finance because it was in their expansion period but over

the years it started using equity as their major source of finance. This shows EXIDE’s strong

position in the market.

4

ESTIMATION OF INCOME STATEMENT FOR NEXT FIVE YEAR

ASSUMPTIONS

The average growth rate of sales is taken by calculating the average growth rate

of past 4 years. The average growth rate trend for 4 years is 31%. Expenditure

are also increasing by the same rate as sales are increasing.

Inflation rate has been ignored because it is assumed that there will be

fluctuation in inflation rate in future.

Other income is calculated as per the trend in investment done by the company

during tha last 4 years.

Tax rate for the next five is taken as 30% as per current corporate tax rate.

Depreciation is rate is taken as per the average trend for the last 4 years.

Considering average change in the capital expenditure for future. It is assumed

that company is not going to make any further additions of asset for the next

five year. So the company is following straight line method for depreciation

considering 4% as the rate of depreciation.

Interest rate is taken as per the rate of current year which was on FY 2009. It is

assumed that interest rate remains constant for the next 5 years.

Future estimation for income statement is calculated as per the method followed

in the book “ FINANCIAL MANAGEMENT” – I. M PANDEY.

Note:- All figures are in millions.

5

ESTIMATION OF INCOME STATEMENT

PROJECTED INCOME STATEMENT(Rs. In Mn.)

PARTICULARS 2009 % 2010 % 2011 % 2012 % 2013 % 2014 Net Sales 37609.8 31 49268.8 31 64542.1 31 84550.2 31 110760.8 31 145096.6 EXPENDITURE : Raw Materials 22224.1 31 32268648 31 42271929 31 55376227 31 72542858 31 95031144Power & Fuel Cost 1188.9 31 1557.459 31 2040.271 31 2672.755 31 3501.31 31 4586.716 Employee Cost 1652.1 31 2164.251 31 2835.169 31 3714.071 31 4865.433 31 6373.717Other Mfg Expenses 692.8 31 907.568 31 1188.914 31 1557.477 31 2040.295 31 2672.787 Gross Profit 11851.9 31 15525.99 31 20339.05 31 26644.15 31 34903.84 31 45724.03less:- Operating expenses Selling Expenses 6089.6 31 7977.376 31 10450.36 31 13689.97 31 17933.87 31 23493.37 Miscellaneous Expenses 102.8 31 134.668 31 176.4151 31 231.1038 31 302.7459 31 396.5972 operating profit 5659.5 31 7413.945 31 7468.634 31 9783.91 31 12816.92 31 16790.17add :-other income 67.7 35 91.1242 35 122.6532 31 160.6757 31 210.4851 31 275.7355 EBDIT 5727.2 7505.069 7591.287 9944.586 13027.41 17065.9LESS:- Depriciation 679.4 6 721.7266 6 766.6902 6 814.455 6 865.1955 6 919.0972EBIT 5047.8 6783.343 6824.597 9130.131 12162.21 16146.81LESS:- Interest 516 16 599.9016 16 697.4456 16 810.8503 16 942.6945 16 1095.977EBT 4531.8 6183.441 6127.151 8319.281 11219.52 15050.83less:-TAX (30%) 1559 1855.032 1838.145 2495.784 3365.855 4515.249 PAT 2972.8 4328.409 4289.006 5823.496 7853.662 10535.58

( Table:- 1)

6

COST OF CAPITAL

ASSUMPTION

The growth rate is taken 20% which is the overall growth rate of the company.

The market price which is considered while calculating the cost of equity is

taken as an average of opening and closing price as on 31st march 2009.

(Source:- company annual report, BSE market price column).

Cost of equity is calculated by using Gordon’s Growth Model.

COST OF CAPITAL

COST OF DEBT COST OF EQUITY WACC0

5

10

15

20

25

COST OF CAPITAL (%)

COST OF CAPITAL (%)

( Figure :- 1.4 )

CALCULATION OF COST OF CAPITAL

7

Computation of Growth rate(Rs. In Mn.)

Growth rate Formula

0.19645

9

Roe PAT/Equity0.23775

7 Retention ratio 1- Dividend Payout 0.8263 Equity (Rs.) 12503.5 PAT 2972.8 Dividend Payout 0.1737 Growth rate(%) Roe* Retention ratio 19.64

(Table:- 1.1)

Computation of Cost of Debt(Rs. In Mn)

cost of debt Formula Rs.interest 516total debt 3171.8

kd(%) Interest/Total Debt16.26836

5

( Table :- 1.2)

Computation of Cost of Equity

( Rs. In Mn.)

Cost of Equity Formula DPS 0.2Market Price (Rs.) 38.65Growth Rate(%) 20

ke(%) 20.72 ( Table:- 1.4)

Gordon growth rate model

Cost of equity = DPS( 1+ growth) + growth / Price of the share - growth

8

Computation of capital ( Weighted Average Cost of Cpital)

(Rs. In Mn.)Wacc kd(%) 16.26tax rate(%) 30Ke(%) 20.72Debt (Rs.) 3171.8debt+equity (total liability) 15675.3Equity (Rs.) 12503.5 WACC=KeWe + KdWd(1 –t)(%) 18.64

( Table :- 1.4)

As shown in table 1.1, the overall growth rate for the company is 20%.Total debt for the

company in the FY 2009 was 3171.8 millions and the interest paid for the debt during the

year was Rs.516 millions .As shown in table- 1.2,the total cost of debt calculated for the

company is 16.26%. Similarly the company paid the dividend of Rs. 0.20 per share to its

share holder. Considering the market value of share on 31st march 2009, the cost of equity for

the company is 20.72% which is relatively higher than growth rate which is 20%. As shown

in above table-1.3 the gap between cost of equity and growth rate is relatively very small.

This shows that comapny’s greater opportunity to invest in future projects. It also shows

company’s quick recovery of returns from the investment in an adequate shorter period.

The cost of capital of capital is calculated using weighted average cost of capital which is

shown in Table:-1.4 and as per shown in Figure:-1.3. It shows the minimum required rate

of return on funds which is committed to the project, which is the discount rate for cash

flows.

CASH FLOW ESTIMATIONS

9

ASSUMPTIONS AND CALCULATION

Initial Investment is taken as 20% of gross block which is the base year i.e FY

2009 (Source:- Schedule 5 fixed asset schedule from annual report of company).

Depreciation rate is taken at 6% which average rate for last 4 years.

Interest is taken 16% which is interest rate for FY 2009.

The change in working capital is calculated by taking change in current year

working capital from last year. By calculating the percentage change of net-

working capital for sales by using Net working capital/Sales of base year which

is FY 2009. That percentage change is then calculated with the change in sales

for the next five year. Same procedure is carried out for the change in capital

expenditure for future estimation of five years.

( In Mn.)PARTICULARS YEAR 0 YEAR1 YEAR2 YEAR3 YEAR4 YEAR5 2009 2010 2011 2012 2013 2014Investment 2513.4 Profit After Tax 4328.4

4289.006 5823.49

7853.662

10535.58

INTEREST 599.901

6697.445

6810.850

3942.694

51095.97

7DEPRECIATION

721.7266

766.6902 814.455

865.1955

919.0972

NET WC Change 487.7 881.71 1152.31 1505.96 1968.13 2572.16Change in capex 168 544.24 714.59 938.26 1231.93 1617.53 NET CASH FLOW 4224.07 3886.24 5004.57 6461.49 8360.96 Total Investment 3169.1

( Table:- 1.5)

METHODS OF INVESTMENT APPRAISAL

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NET PRESENT VALUE COMPUTATION

Net present value of an investment is the difference between present value of cash inflows

and cash outflows. The present values of cash flows are obtained at a discount rate equivalent

to the cost of capital.

NPV= [ C 1(1+k)

+ C 2(1+k )2 + C3

(1+k)3 +…⋯⋯+ Cn(1+k )n ]−Co

( Rs. In Mn.) YEAR 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5PARTICULARS 2009 2010 2011 2012 2013 2014TOTAL INVESTMENT 3169.1

NET CASH FLOW 4224.07

83886.24

25004.57

56461.49

28360.96

4Discount Rate 18.64 1.1864 3.474 4.122 4.8905 5.8021

Present value 3560.41

61118.66

51214.11

31321.23

31441.02

4TOTAL CASH INFLOW

8655.452

Initial Investment 3169.1

NPV5486.35

2

( Table:- 1.6)

In the above Table:-1.6, we can see the amount of NPV is positive i.e NPV>0 which is Rs.

5487 millions. The positive net present value of an investment represents the maximum

amount company would be ready to pay for purchasing the opportunity of making the

investment. The net present value Rs. 5487 millions can be interpreted to represent the

amount the company could raise at the rate of return which is 18.64%, in addition to the

initial outlay of 31619.1 millions to distribute to its shareholders and by the end 5 years.

11

PAYBACK PERIOD

The number of years required to recover the initial outlay of the investment is payback

Payback = Initial outlaycash inflow

(Rs. In Mn.)

2010 2011 2012 2013 2014

NET CASH FLOW 4224.0783886.24

25004.57

56461.49

28360.96

4INITIAL OUTLAY 2513.4

PAYBACK PERIOD7MONTHS 14DAYS

INITIAL OUTLAY/CASH FLOW*12

( Table:- 1.6)

As per the payback rule, the project is accepted because the project is giving early recovery

of its investments, thus it gives an insight in to the liquidity of the project. The funds so

released can be useful for the company to put it in to other use or to invest in other projects.

ACCOUNTING RATE OF RETURN (ARR)

Accounting rate of return is the rate arrived at by expressing the average annual net profit

(after tax) as given in the income statement as a percentage of the total investment or average

investment.

ARR = Average Profit AfterTax

Initialoutlay

(Rs. In Mn.)

2010 2011 2012 2013 2014

PARTICULAR SUMAVERAGE

PAT 4328.44289.00

65823.4

97853.66

210535.5

8 32830.1

46566.02

8INITIAL OUTLAY 2513.4 AVERAGE RATE OF RETURN

2.612409

ARR 261% (Table:-1.7)

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The investment decision will be to select the project since it is generating higher

rate of return for the company in the future.

INTERNAL RATE OF RETURN ( IRR)

The internal rate of return of a investment is defined as the rate of discount at

which the present value of cash inflows and present value of cash outflows are

equal. It can be restated as the rate of discount, at which the present value of

cash flows associated with a project equal zero.

IRR=r1+[ N1

N1+N 2

× (r2−r1¿ ]Where,

r1 – smaller rate of interest

r2 - higher rate of interest

N1 – NPV at smaller rate

N2 – NPV at higher rate

( Rs. In Mn.) YEAR 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 PARTICULARS 2009 2010 2011 2012 2013 2014

INITIAL OUTLAY 2513.4 SUM

NPV-INITIAL OUTLAY

NET CASH FLOW 4224.078 3886.242 5004.575 6461.492 8360.964 NPV@ 400% 1408.026 431.8046 185.3546 79.77151 34.40726 2139.364 -374.036NPV@ 350% 1689.631 621.7987 320.2928 165.4142 85.61627 2882.753 369.3533

IRR@2513.4374.842

5 ( Table:-1.8)

As shown in the above Table:-1.8, the trial and error method is used to find out IRR, here

two discount rate are taken one at 400% and one at 350%,. At 400% the company is having

negative net present value which is Rs.-374,and at 350% it has positive NPV which is

Rs.369. As the discount rates increases, the negative NPV diminishes and become zero at

13

350%, but reaching a maximum it started reaching a maximum it decreases and at 400% it

becomes zero.

From this it is clear that the investment combines the feature of both lending and borrowing.

CONCLUSION

After the analysis of EXIDE LTD. I find that the company is now at its growing stages. The

capital structure of the company could change if the company is planning to invest into its

growth.

After the analysis of the investment appraisal and the future estimation for the company I feel

that the company should invest in to the project as all the method used are satisfying the

conditions.

Looking at the company’s current situation I can say that company is having a bright future,

this I can say by the company’s overall growth rate, earning per share that the company is

making and the returns that the company is giving to its shareholder.

14

BIBLIOGRAPHY

Financial Management, Ninth Edition – I.M Pandey

www.moneycontrol.com

The financial data was sourced from Capitaline, a financial database in the college. www.bseindia.com www. investopedia.com

www.exideindustries.com

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