Reliance Capital: Ankit Chadha, Gaurav Vijay Shah, Mohit Dhand, Sandeep Aggrawal, Tamal Taru
Reliance Capital: Ankit Chadha, Gaurav Vijay Shah, Mohit Dhand, Sandeep Aggrawal, Tamal Taru
Reliance Capital: Ankit Chadha, Gaurav Vijay Shah, Mohit Dhand, Sandeep Aggrawal, Tamal Taru
RELIANCE CAPITAL
Group-2
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Acknowledgement
At the successful completion of our project, we would like to express our sincere gratitude
to all the people without whose support this project would not have been completed.
At the onset, we would like to thank our institute “FORE School Of Management” for giving
us the opportunity to undergo this project.
We would also like to acknowledge the constant help and encouragement of our Corporate
Finance-I faculty Prof. Vineet Gupta, who has given his valuable suggestions, expert
guidance and support.
We would also like to thank all those who have directly or indirectly helped us in the
preparation of this report.
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History of Reliance Capital:
Reliance Capital Limited was incorporated in year 1986 at Ahmedabad in Gujarat as Reliance
Capital & Finance Trust Limited. The name RCL came into effect from January 5, 1995. In
2002, RCL shifted its registered office to Jamnagar in Gujarat before it finally moved to
Mumbai in Maharashtra, in 2006.In 2006, Reliance Capital Ventures Limited merged with
RCL and with this merger the shareholder base of RCL rose from 0.15 million shareholders to
1.3 million.RCL entered the Capital Market with a maiden public issue in 1990 and in
subsequent years further tapped the capital market through rights issue and public issues.
Presently the shares are listed on The Stock Exchange Mumbai and the NSE of India.
Reliance Capital, a constituent of S&P CNX Nifty and MSCI India, is a part of the Reliance Anil
Dhirubhai Ambani Group and is one of India's leading, most valuable and fastest growing
privates sector financial services companies. RCL in the initial years engaged itself in steady
annuity yielding businesses such as leasing, bill discounting, and inter-corporate deposits.
Later, in 1993 diversified its business in the areas of portfolio investment, lending against
securities, custodial services, money market operations, project finance advisory services,
and investment banking. Reliance Capital has a net worth of Rs. 7,669 crore (US$ 1.6 billion)
and total assets of Rs. 25,606 crore (US$ 5 billion) as on September 30, 2009.
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1 Reliance Capital Asset Management Ltd.
Objective of study:
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Methodology:
Cost of equity:
Firms raise equity capital by issuing shares. The shareholders required rate of return
which equates the present value of the expected dividends with the market value of the
shares is the cost of equity.
We have calculated the cost of equity by CAPM based approach which takes into
consideration three parameters:
The formula is
Re = Rf + β ( Rm - Rf)
We have collected the share prices of Reliance Capital ltd and BSE SENSEX from Capitalline
database. By using MS Excel we have calculated the percentage rate of returns on daily
basis for both of them.
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Calculation of Beta (β):
We applied regression for calculating the value of Beta by taking percentage return of
market as the independent variable and the percentage return of security as the dependent
variable.
The Beta (β) was found to be 1.521
Calculation of Market return:
We have calculated the market return by calculating average daily return on SENSEX for a
period of 95 months and then multiplied it with 250. We have taken 250 as average number
of trading days in an year during which stock market is open for trading of shares. It comes
out to be:
=0.074893 * 250
= 18.72314
Cost of Equity:
Particulars Value
Cost of equity 24.6369847
Market return 18.72314
Risk free rate of return 7.372
Beta 1.52099089
Re = 7.732 + 1.521(18.72314–7.732) = 24.64%
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Theoretically, the cost of retained earnings is calculated same as the cost of equity using the
formula
Re = Rf + β ( Rm - Rf)
But the cost of external equity is more than cost of retained earnings due to the presence of
flotation cost. These costs include fees paid to merchant bankers, underwriting commission,
administrative cost, etc.
However, due to the unavailability of data about the floatation cost, cost of retained
earnings is considered to be equal to the cost of equity.
Cost of debt:
The firms raise the capital in the form of debts from debenture holders, banks, financial
institutions, subscribers to commercial paper, etc. and pay them a fixed rate of return.
This interest rate the company pays on all of its debt is called as the cost of debt.
i. Bank loans
The amount of the loan which the company has borrowed has been taken from Schedule ‘C’
of the Consolidated Balance Sheet of the Annual Report 2008 – 2009. The interest paid on
this loan is got from Schedule ‘L’ of the Annual Report 2008 – 2009. It is reported to be:
Bank loan amount = short term + long term loans = Rs.7023.09 crores
Out of the total term loans, Rs. 598 crore is payable within a year as found from the notes to
the account. Other short term sources of finance were commercial papers, unsecured bank
loans and short term loans. This cannot be considered as a part of cost of loan because it is
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of short term nature. So this should be deducted from the total loans. The interest is
calculated for the whole amount of term loans so it should be proportionately reduced.
We have also included working capital loans in the bank loans. Working Capital Loans have
reduced from 1378.24 crore in 2007-08 to 1010.29 crore in 2008-09. This can be concluded
from the fact that some part of the loan has been repaid during the year. Still company is
using Working Capital Loan for a period more than 1 year. Company might be using roll over
facility of bank. Therefore, we are taking this amount as a long term source of capital
1855.56
= 5.60%
ii. Debentures:
Cost of debenture is calculated on long term debentures. In the year 2007-08 NCD were
884.32 which rose to 1181.90 in 2008-09. Long term debentures issued by the company are
repaid in year 2008-09, whereas new debentures issued are of short tenure i.e. 360 days
which we found out from information memorandum submitted by RCL with SEBI. So we are
taking proportion of debentures in capital structure to be zero. Hence, the cost of
debentures is also zero.
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So, our total cost of debt comes out to be 5.60 %
Company is having a authorized preference capital of Rs 100 crores. But there are no
preference shares issued by the company till now, so when we are calculating our cost of
capital we will consider the cost of preference capital to be zero.
Particulars (In %)
Cost of equity (Ke) 24.63
Cost of retained earnings 24.63
Cost of preference capital (Kp) 0
Cost of debt (Kd) 5.60
Particulars Weight
Equity Capital 0.0264
Retained Earnings 0.7742
Preference Capital 0.00
Debt 0.1993
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Weighted Average Cost of Capital (WACC):
Company finances its project by raising capital from different sources based on factors like
cost of capital, ease of raising capital, market condition, etc. Capital structure have different
components i.e. Debentures, equity shares, preference shares and loans. The component
costs are multiplied by the weights of the various sources of capital to obtain the weighted
average cost of capital. The composite or overall cost of capital is the weighted average of
the costs if various sources of funds, weights being the proportions of each source of funds
in the capital structure. WACC is calculated as:
Particulars Value
Equity Capital 0.65
Retained Earnings 19.069
Preference Capital 0.00
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Debt 1.12
WACC 20.84
So, the Weighted Average Cost of Capital for Reliance Capital Limited comes out to be
20.84 % as on 31 March 2009.
Flotation cost was not known which we required in the calculation of cost of
retained earnings
Limitation of CAPM lies in the assumptions taken.
Coupon rates as well as terms of loans were not available.
No information about working capital loans
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Interest was given for all the loans together.
Findings
Major part of the capital structure is retained earnings. This shows that company is
using its own funds to finance its projects and do not rely much on outside debt. This
also reduces the chance of bankruptcy. This can also be due to ability of company to
generate returns upto expectations of shareholders.
RCL has less equity as compared to debt. Company has included debt to get the tax
benefit on interest paid which reduces the cost to company. Company might be
using debt to increase the return to shareholders.
Preference stock was not there in their capital structure. Debentures issued by the
company were short term as interest rates were high, company may not want to
carry the burden for a long period.
Loans have smallest cost whereas cost of equity as well as retained earnings was the
largest. From this we can conclude that cost of retained earnings is not zero and cost
of debt is smallest. This does not implies that company should include high debt in
its capital structure. Cost of debt increases with increase in proportion of debt in the
capital structure as credit rating of company falls due increase in financial risk of the
company
Bibliography
1. http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/FHB100909_Full.pdf , November
28,2009
2. http://www.madaan.com/taxrates.htm, December 02,2009
3. http://www.bseindia.com, November 27, 2009
4. http://www.moneycontrol.com, November 27, 2009
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5. http://www.money.rediff.com, November 27, 2009
6. http://www.reliancecapital.co.in/idf_areports.html , December 03, 2009
7. http://www.reliancecapital.co.in/idf_qresults.html , December 03, 2009
8. http://bseindia.com/downloads/ipo/200931814558Information%20Memorandum%20RCL
%20NCD%20Listing2009.pdf ,November 30, 2009
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2009
Appendix
1. Calculation Of Beta
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SUMMARY OUTPUT
Regression Statistics
Multiple R 0.7091645
R Square 0.5029143
Adjusted R Squar 0.5026398
Standard Error 2.5658485
Observations 1813
ANOVA
df SS MS F Significance F
Regression 1 12062.6622 12062.66 1832.235 3.5E-277
Residual 1811 11922.8603 6.583578
Total 1812 23985.5225
YIELDS (IN %)
Securities 2004-05 2005-06 2006-07 2007-08 2008-09 Average
8.07% 2017 6.4 7.22 7.8 7.93 7.29 7.328
5.69% 2018 6.39 7.29 7.95 7.99 7.54 7.432
6.25% 201 6.46 7.23 7.91 8.03 7.15 7.356
average 7.372
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