Academic Task Number: CA 2 Course Code: FIN302

Course Title: Financial Management Date Allotment:21-04-24

Date of Submission: April 7, 2024 Maximum Marks:30

Academic Task Type: Online Section: Q2212

PEER RATING CHART:

Name Registration number Rating

Ashutosh 12207913 10
Mayank 12221485 10
The company enables the digital transformation of enterprises globally, including 300
of the Fortune 500 – unlocking opportunities for businesses by enabling borderless
growth, boosting product innovation and customer experience, improving productivity
and efficiency, building agility and managing risk.
With its solutions orientated approach, proven managed service capabilities and cutting-
edge infrastructure, Tata Communications drives the next level of intelligence powered
by cloud, mobility, Internet of Things (IoT), collaboration, security and network
services. Tata Communications carries around 30% of the world’s internet routes and
connects businesses to 80% of the world’s cloud giants and 4 out of 5 mobile
subscribers. The Company’s capabilities are underpinned by its global network, the
world’s largest wholly owned subsea fibre backbone and a Tier-1 IP network with
connectivity to 190+ countries and territories around the world. Tata Communications
Limited is listed on the Bombay Stock Exchange and the National Stock Exchange.

VISION OF THE COMPANY:

"To be a leading diversified corporate entity having market leadership in the
chosen business segments, consistently delivering value to all stakeholders, with
environmental and social responsibility".

EVALUATION OF CAPITAL STRUCTURE:

The capital structure of a company refers to the mix of different types of capital used to finance
the company’s overall operations and growth. Capital in this context includes all financial
resources that are used to fund a company's activities. The capital structure can include:

• Debt: This includes all short- and long-term obligations, such as bank loans, bonds,
debentures, and other borrowings. Debt is often attractive because the interest payments
are tax-deductible, which reduces the company's tax liability. However, excessive debt
increases the company’s risk, as interest and principal repayments are obligations that must
be met regardless of the company's financial performance.
 • Equity: Equity financing involves raising capital through the sale of shares. This can be in
the form of common stock, which often provides shareholders with voting rights and a
claim to a portion of the company’s profits in the form of dividends and capital gains, or
preferred stock, which typically does not offer voting rights but has a higher claim on assets
and earnings than common stock. Equity is not repaid like debt and does not require regular
interest payments. However, issuing new shares can dilute the ownership percentage of
existing shareholders.

• Retained Earnings: These are the profits that a company chooses to reinvest in the business
rather than distributing to shareholders as dividends. Retained earnings can fund new
projects, pay down debt, or pursue acquisitions and are an important indicator of a
company’s ability to generate shareholder value over the long term.

CAPITAL STRUCTURE MIX FOR 5 YEARS (values in Cr.):

SOURCES 2022-23 2021-22 2020-21 2019-20 2018-19

Equity 1356.2 1,319.9 1,307.7 1,319.7 1,300.2

Debt (Total 738.8 625.2 616.9 563.8 582.1

Liabilities)

Retained 874.6 831.8 811.7 823.5 797.5

earnings

Total Liabilities = Total current liabilities + Total non-current liabilities 2022-

23: 628.8+110 =738.8

2021-22: 514.7+110.5 =625.2

2020-21: 522.9+94 =616.9

2019-20: 487.9+75.9 =563.8

2018-19: 522.1+60 =582.1

ANALYZING THE CAPITAL STRUCTURE:

For each year, key ratios give insight into the capital structure, such as:
• Debt to Equity Ratio (D/E): Total Liabilities ÷ Shareholder’s Equity
• Equity Ratio: Shareholder’s Equity ÷ Total Assets
• Debt Ratio: Total Liabilities ÷ Total Assets

These ratios will show that how the company has been financing its operations and growth, through
debt or equity, and how this mix has changed over time.
RATIOS FOR RESPECTIVE YEARS ARE AS FOLLOWS:

NOTE: Respective values of total equity; total liabilities or debt are provided above in
Capital Structure Mix Table.

Total Capital employed/Total Assets = (Total debt + Total equity) 2022-

23: 738.8 + 1356.2 = 2095

2021-22: 625.2 + 1,319.9 = 1945.1

2020-21: 616.9 + 1,307.7 = 1924.6
2019-20: 563.8 + 1,319.7 = 1883.5

2018-19: 582.1 + 1,300.2 = 1882.3

RATIOS 2022-23 2021-22 2020-21 2019-20 2018-19

Debt Ratio 0.35 0.32 0.32 0.29 0.30

Equity Ratio 0.64 0.67 0.67 0.70 0.69

Debt-to- 0.54 0.47 0.47 0.42 0.44

Equity Ratio

ANALYSIS OF RATIOS:

FY 2022-23:
• Debt Ratio = 0.35
This implies that 35% of the company’s assets are financed through debt. A debt ratio of 0.35 is
relatively moderate, which suggests that the company is not overly reliant on debt financing, but
it also does not shy away from using leverage as part of its capital structure.

• Equity Ratio = 0.64

This means that 64% of the company's assets are financed by shareholders' equity. A higher equity
ratio is generally seen as a sign of financial stability because it indicates less reliance on debt.
However, this can also indicate that the company may not be taking full advantage of the potential
benefits of financial leverage.

• Debt-to-Equity Ratio = 0.54

The D/E ratio of 0.54 indicates that for every rupee of equity, there is approximately 0.54 rupees
of debt. This level suggests a more balanced approach to financing, with a mix of debt and equity.
It is often viewed favorably by investors and creditors because it shows that the company is not
too aggressive in its borrowing practices, yet it does use debt to potentially enhance its return on
equity.

FY 2021-22:
• Debt Ratio = 0.32
This indicates that 32% of the company's assets are financed through debt. A lower debt ratio can
suggest that the company is using less leverage and has a lower risk of financial distress. It could
also imply that the company is potentially more financially stable and may have more capacity to
take on debt in the future if necessary.

• Equity Ratio = 0.67

With 67% of assets financed by equity, the company has a high proportion of shareholder
financing. This high equity ratio is indicative of a strong equity base, which can be reassuring to
investors and creditors as it suggests a lower likelihood of insolvency.

• Debt-to-Equity Ratio = 0.47

A debt-to-equity ratio of 0.47 means that the company has a balance of debt and equity in its
financing structure, with less than half as much debt as equity. This can be seen as a sign of a
prudent use of leverage. It shows a company that manages its financing mix conservatively, which
can appeal to risk-averse investors.

Brief Analysis:

• Comparative Risk: The ratios from 2021-22 suggest a slightly more conservative capital
structure compared to 2022-23, with a lower reliance on debt.
• Financial Strategy: The company appears to have a strategy that prefers equity financing
over debt, which may indicate a cautious approach to growth and expansion, or simply
reflect the company's operational needs and the cost of capital.
• Investor Appeal: Conservative financial leverage might be more appealing to certain
investors, especially if the industry norm also favors lower debt levels.
FY 2020-21:
• Consistency in Financial Policy: The repetition of these ratios over two consecutive years
(2020-21 and 2021-22) indicates a consistent approach to the company's capital structure,
suggesting stable financial management practices.

• Financial Stability: The low and stable debt ratio over the two years suggests the company
has not significantly increased its debt level, which could mean it is maintaining financial
stability in potentially volatile markets or economic conditions.
 • Strategic Implications: The unchanged equity ratio could also mean that the company is
either reinvesting its earnings back into the business or has not issued new equity, which
could indicate confidence in internal operations and profitability to fund activities.

Overall, the company's consistent capital structure ratios over these years may signal to investors
and creditors that it has a steady financial strategy and risk profile. It's worth noting that while such
stability can be advantageous, it's also important to consider whether the company's conservative
use of debt is optimal given potential investment opportunities and the cost of capital.

FY 2019-20:
• Debt Ratio of 0.29:
This lower debt ratio indicates that the company had a smaller proportion of its assets financed
through debt in 2019-20 compared to the subsequent years. It suggests a conservative approach to
debt usage and implies less financial risk.

• Equity Ratio of 0.70:

A high equity ratio means a significant portion of the company’s assets were financed through
equity. This reflects a strong equity base and can be seen as a sign of financial health and less
vulnerability to market volatility.

• Debt-to-Equity Ratio of 0.42:

This ratio is lower than the following years, showing that there was less debt for each unit of equity.
The company was more reliant on equity financing, which can imply a cautious approach to
leveraging and a lower risk profile for the company's shareholders. • Lower Leverage:
The debt-to-equity ratio suggests that the company was less leveraged during this period. While
this could limit potential returns on equity from financial leverage, it also reduces the risk of
financial distress, especially important during uncertain economic times.

FY 2018-19:

• Debt Ratio of 0.30:

This ratio suggests that 30% of the company’s assets were financed by debt. A debt ratio of 0.30 is
considered moderate, implying a balanced use of debt financing that doesn't excessively burden
the company’s capital structure.

• Equity Ratio of 0.69:

With 69% of the company’s assets being financed by equity, this high equity ratio shows a
substantial equity base. This can be a positive signal to investors, indicating that the company may
have a lower risk of insolvency and potentially more stable funding.
 • Debt-to-Equity Ratio of 0.44:
This D/E ratio is slightly higher than in 2019-20 but still under 0.5, which indicates that the
company has a balanced approach towards its capital structure, with a slightly higher use of debt
compared to the following year.

• Moderate Leverage:
The company's capital structure in 2018-19 shows a moderate level of leverage. This can suggest
that while the company is willing to use debt to finance its growth, it remains cautious not to
overleverage, maintaining a healthy balance between debt and equity.

TREND ANALYSIS OF CAPITAL STRUCTURE:

• Debt Ratio: The debt ratio has increased slightly over the five-year period, from 0.30 in
2018-19 to 0.35 in 2022-23. This suggests the company has been financing a larger
proportion of its assets through debt over time. Despite this increase, the debt ratio remains
relatively moderate, indicating a cautious approach to debt.
• Equity Ratio: The equity ratio has decreased from 0.70 in 2019-20 to 0.64 in 2022-23. This
indicates a reduced proportion of financing through equity. The equity ratio remains high,
suggesting the company still relies heavily on equity for financing its assets.

• Debt-to-Equity Ratio: There's an upward trend from 0.42 in 2019-20 to 0.54 in 2022-23.
The increasing debt-to-equity ratio implies that the company has been taking on more debt
relative to its equity. However, the ratio is still less than one, indicating that equity
financing prevails over debt financing

Brief Analysis:
 • Moderate Leverage Increase: The company appears to be gradually increasing its leverage,
which might suggest confidence in its ability to service debt through operational earnings
or an effort to capitalize on potential growth opportunities through additional borrowing.

• Maintaining Financial Stability: Despite the increased leverage, the ratios indicate that the
company maintains a stable financial structure with a strong equity base, which is
beneficial for risk management.

• Potential Strategic Shifts: The slow increase in debt could reflect a strategic shift towards
a more aggressive growth plan or could be due to the need for capital investments,
acquisitions, or other business activities.

Overall, the company's capital structure indicates a moderate but increasing use of debt while
maintaining a significant amount of equity funding. This balance allows the company to potentially
enhance returns on equity while not significantly elevating financial risk. It's important for the
company to continuously monitor and manage this balance to ensure long-term financial health
and strategic alignment with business goals.

• Equity:
There has been a gradual increase in equity from 2018-19 to 2022-23, with a slight fluctuation in
2019-20.
This growth in equity could indicate that the company is retaining earnings, issuing new shares, or
experiencing an increase in share price, reflecting potentially positive market sentiment or internal
growth.

• Debt (Total Liabilities):

Debt levels show a general upward trend with a significant increase in 2022-23.
This suggests that the company might be utilizing more debt financing for its operations or growth
investments, which could indicate an expansion strategy or the capitalization of lower interest
rates. • Retained Earnings:
Retained earnings have consistently increased over the five-year period, which is a sign of the
company's profitability and its decision to reinvest profits back into the company rather than
paying them out as dividends.
The consistent increase in retained earnings is typically a good sign, indicating that the company
has a sustained ability to generate earnings over time.

Brief Analysis:
• Strengthening Equity Base: The increase in equity, especially when accompanied by
increasing retained earnings, suggests a robust financial foundation and a potential for
funding future growth internally.

• Increased Leverage: The noticeable jump in debt in the latest year could imply a strategic
shift or the pursuit of new investments, suggesting confidence in future earnings potential
to cover the additional financial obligations.

• Positive Profit Reinvestment: The growth in retained earnings indicates that the company
has been profitable and is likely reinvesting those profits to support business growth and
enhance shareholder value.

Overall, the company's financial structure shows signs of growth and stability, with a solid
foundation in equity and retained earnings. The increase in debt may warrant monitoring to ensure
that it aligns with sustainable growth strategies and does not lead to over-leverage.

TREND ANALYSIS OF EPS (Earnings per Share):

The Earnings Per Share (EPS) is a key indicator of a company's profitability from the perspective
of an individual common shareholder. It is calculated by dividing the company's profit available
to common shareholders by the weighted average number of common shares outstanding during a
specific period.

The formula for EPS =Net Income/PAT−Preferred Dividends ÷ Number of Shares

YEARS EPS ROE
 2022-23 9 11.34%
2021-22 7.2 9.30%
2020-21 6.8 8.90%
2019-18 10.4 13.42%
2018-19 16.5 14.49%

EPS
16.5

10.4
9
7.2 6.8

2022-23 2021-22 2020-21 2019-18 2018-19

The provided EPS data over five years shows the following trend:

2018-19: An EPS of 16.5, which is the highest in the given period. This suggests that the
company had a strong profitability relative to its number of shares outstanding during this
year.

• 2019-20: The EPS decreased significantly to 10.4. This is a substantial drop from the
previous year and could be due to various factors such as increased number of shares
outstanding, decreased net income, or a combination of both.

• 2020-21: A slight decrease in EPS to 6.8. The downward trend continued, which might
indicate ongoing challenges in maintaining profitability, market competition, operational
costs, or other financial pressures.
• 2021-22: An EPS of 7.2, which shows a small improvement from the previous year. This
could suggest a partial recovery in profitability or effective cost management strategies
coming into play.

• 2022-23: The EPS jumped to 9. This increase is notable and suggests a significant
improvement in the company's profitability. This could be a result of increased net income,
a decrease in the number of shares outstanding, or both.
Analysis of the Trend:
• Volatility: The EPS has been quite volatile over the five-year span, indicating that the
company may have experienced varying levels of profitability and operational efficiency.

• Recovery Indication: The latest increase in EPS suggests that the company is potentially
on a recovery path or has taken effective measures to improve profitability.
• Consideration of External Factors: It's important to consider external factors such as
economic conditions, changes in industry dynamics, and company-specific events, which
can significantly impact EPS.

• Need for Further Investigation: To understand the reasons behind these fluctuations, one
would need to delve deeper into the company's financials, market conditions, and
operational changes during these periods.

ANALYSIS OF FINANCIAL LEVERAGE & ITS IMPACT ON EPS FOR THE RESPECTIVE
YEARS:

Financial leverage is the concept of using borrowed capital as a funding source. Leverage is often
used when businesses invest in themselves for expansions, acquisitions, or other growth methods.
Measures of financial leverage are used to assess the extent to which a company uses debt to
finance its activities. These measures are critical because they can significantly impact a company's
profitability and risk profile. Here are the main ratios and measures used to evaluate financial
leverage:

• Debt-to-Equity Ratio (D/E) = Total Debt ÷ Total Equity

This ratio compares the company’s total liabilities to its shareholder equity. A higher ratio means
the company is more leveraged and suggests a higher risk level.
 Debt-to-Equity Ratio
0.6
0.54
0.5 0.47 0.47
0.44
0.42
0.4

0.3

0.2

0.1

0
2022-23 2021-22 2020-21 2019-20 2018-19

There's an upward trend from 0.42 in 2019-20 to 0.54 in 2022-23. The increasing debt-to-equity
ratio implies that the company has been taking on more debt relative to its equity. However, the
ratio is still less than one, indicating that equity financing prevails over debt financing.
• Debt Ratio = Total Debt ÷ Total Assets
It measures the proportion of a company's assets that are financed by debt. A higher debt ratio
indicates that the company is more leveraged and thus might have higher financial risk.

Debt Ratio
0.4
0.35
0.35 0.32 0.32
0.29 0.3
0.3

0.25

0.2

0.15

0.1

0.05

0
2022-23 2021-22 2020-21 2019-20 2018-19

The debt ratio has increased slightly over the five-year period, from 0.30 in 2018-19 to 0.35 in
2022-23. This suggests the company has been financing a larger proportion of its assets through
debt over time. Despite this increase, the debt ratio remains relatively moderate, indicating a
cautious approach to debt.
 • Interest Coverage Ratio = Earnings Before Interest and Taxes (EBIT) ÷ Interest
Expenses

This ratio indicates how easily a company can pay interest on its outstanding debt with its
operating earnings. A lower ratio suggests that the company has more debt burden relative to its
earnings.

(VALUES IN CRORES)
YEARS EBIT INTEREST INTEREST
COVERAGE RATIO
2022-23 211.3 9.8 21.6

2021-22 170.1 5.8 29.3

2020-21 156.6 5.3 29.5

2019-20 232.4 8 29

2018-19 280.1 5.6 50

60 INTEREST COVERAGE RATIO

50
50

40
29.3 29.5 29
30
21.6
20

10

0
2022-23 2021-22 2020-21 2019-20 2018-19

The decreasing trend in the ICR from 50 to 21.6 over the five years could reflect a strategic
decision to increase leverage, potentially for growth investments or acquisitions. Despite the
decreasing trend, the company maintains a robust ICR, which signals financial health and
suggests that the company has not over-leveraged itself. The consistent ability to cover interest
expenses comfortably provides confidence in the company's financial management and risk
mitigation strategies.

• The Degree of Financial Leverage (DFL):

It is a financial ratio that measures the sensitivity of a company's Earnings Per Share (EPS) to
fluctuations in its operating income, known as Earnings Before Interest and Taxes (EBIT). The
DFL provides an indication of how a company's EPS could change as a result of changes in
EBIT, holding all else constant. A higher DFL suggests that small changes in EBIT will result in
larger changes in EPS, which is indicative of higher financial risk due to the presence of fixed
financial costs (like interest expenses on debt).

Formulas for DFL:

• Formula 1: DFL=EBIT ÷ EBIT −Interest Expenses
• Formula 2: DFL = % change in EPS ÷ % change in EBIT
The formula helps to understand the proportion of earnings that are committed to interest expenses
and how this affects the company’s earnings available to shareholders.
Interpretation of DFL:
• A DFL greater than 1 suggests that the company has financial leverage and that EPS is
more sensitive to changes in EBIT.
• A DFL of 1 indicates that the company has no debt or that its operating income is unaffected
by financial leverage.
• A DFL less than 1 is unusual and could indicate negative interest expenses (which could
happen if a company has significant interest income).

DFL Using Formula number 1(Values in CR.):

YEARS EBIT INTEREST EBT DFL=EBIT/EBT

2022-23 211.3 9.8 201.5 1.04

2021-22 170.1 5.8 164.3 1.03

2020-21 156.6 5.3 151.3 1.03

2019-20 232.4 8 224.4 1.03

2018-19 280.1 5.6 274.5 1.02

DFL Using Formula 2:

YEARS % change in EPS %change in EBIT DFL= %
change in EPS
÷ % change in
EBIT

2022-23 9-7.2 / 7.2 = 25% 211.3-170.1 / 170.1 = 24% 1.04

2021-22 7.2-6.8 / 6.8 = 5.8% 170.1-156.6 / 156.6 = 8.62% 0.67

2020-21 6.8-10.4 / 10.4 = -34.6% 156.6-232.4 / 232.4 = -32.6% 1.06

2019-20 10.4-16.5 / 16.5 = -36.9% 232.4-280.1 / 280.1 = -17% 2.17

2018-19 16.5-16.2 / 16.2 = 1.85% 280.1-261.1 / 261.1 = 7.27% 0.25

Analysis of Financial Leverage Impact on EPS:

• Over the five-year period, the DFL fluctuates, suggesting that the impact of financial
leverage on EPS varies significantly from year to year. This could be due to varying levels
of debt taken on by the company, changes in interest rates, or shifts in operational income.

• The years with a DFL greater than 1 (2019-20 and 2020-21) suggest periods where
financial leverage had an amplifying effect on the volatility of EPS in response to changes
in EBIT. Specifically, 2019-20 shows the most significant amplification, which may
indicate a high level of financial leverage and potential risk to EPS stability.

• The years with a DFL less than 1 (2021-22 and 2018-19) suggest that financial leverage
did not exaggerate the impact of operational performance changes on EPS. In 2018-19, the
DFL is notably low, indicating that the change in EPS might have been muted compared
to the change in EBIT because of other factors or potentially a reduction in debt levels.