Valuation of Selected Stock Broking Companies Based on Capital Structure Formation- an Empirical Analysis

SHIV SHAKTI

International Journal of in Multidisciplinary and Academic Research

(SSIJMAR) Vol. 5, No. 2, April 2016 (ISSN 2278 – 5973) VALUATION OF SELECTED STOCK BROKING COMPANIES BASED ON CAPITAL STRUCTURE FORMATION- AN EMPIRICAL ANALYSIS

*Dr.S.Kalaiselvi, Head& Associate Professor of Commerce with CA, Vellalar College for Women(Autonomous),Erode12,TN.

**C.Sangeetha , Assistant Professor of Commerce with CA, Vellalar College for Women (Autonomous), Erode-12,TN.

Impact Factor = 3.133 (Scientific Journal Impact Factor Value for 2012 by Inno Space Scientific Journal Impact Factor)

Global Impact Factor (2013)= 0.326 (By GIF)

Indexing:

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ABSTRACT

Stock-broking is essentially a function of the capital market, which offers the best value proposition for the development of industry. Top 10 stock broking companies in the year 2012 are selected for the study. Data are obtained from capitaline database. Capital structure approaches, DuPont analysis, EBIT-EPS analysis tools are used for seven companies engaged in the business of stock broking are analysed. The study covers a period from 2003 to 2012. The study shows value of companies increased due to more use of debt. Value of Equity shares is negative in some companies due to the fact that the value of debt is higher than value of company. Financial Health and Earnings per share of stock broking companies is satisfactory. The Selected stock broking companies gave equal preference for debt and equity in designing their capital structure.

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VALUATION OF SELECTED STOCK BROKING COMPANIES BASED ON CAPITAL STRUCTURE FORMATION- AN EMPIRICAL ANALYSIS *Dr.S.Kalaiselvi **C.Sangeetha ABSTRACT Stock-broking is essentially a function of the capital market, which offers the best value proposition for the development of industry . Top 10 stock broking companies in the year 2012 are selected for the study. Data are obtained from capitaline database. Capital

structure approaches, DuPont analysis, EBIT-EPS analysis tools are used for seven companies engaged in the business of stock broking are analysed. The study covers a period from 2003 to 2012. The study shows value of companies increased due to more use of debt. Value of Equity shares is negative in some companies due to the fact that the value of debt is higher than value of company. Financial Health and Earnings per share of stock broking companies is satisfactory. The Selected stock broking companies gave equal preference for debt and equity in designing their capital structure. INTRODUCTION Financing the firm’s assets is a very crucial problem in every business and as a general rule there should be a proper mix of debt and equity capital in financing the firm’s assets. Every business enterprise, whether big, medium or small, needs capital to carry on its operations smoothly and to achieve its target. However the actual capital should be neither more or less the amount which is needed and gainfully employed it is called capital structure of a business. Capital structure of business enterprise should be ideal i.e., according to the requirement of the business enterprise. The process of investing in the stock market either individually or through a broker is known as stock broking. This is primarily done by opening a demat account. If done through a broker, broker opens an account helping investor to operate through online stock broking facility and suggests investment ideas and strategies suiting individual requirement based on investor objective of tenure of investment. The selected financial investments and respective companies, schemes, risk taking ability and sum available for investment are considered while forming investment choices. After the amount is invested the broker tracks and monitors the investments changes or reinvests depending on the performance and generates reports for investor.

*Head& Associate Professor of Commerce with CA, Vellalar College for Women (Autonomous), Erode-12,TN 3 www.ssijmar.in

**Assistant Professor of Commerce with CA, Vellalar College for Women (Autonomous), Erode-12,TN

STATEMENT OF THE PROBLEM

The capital structure of a company is to be determined initially at the time the company is floated great caution is required at this stage, since the initial capital structure will have long-term implications. Of course, it is not possible to have an ideal capital structure but the management should set a target capital structure and the initial capital structure should be framed and subsequent changes in the capital structure should be done keeping in view the target capital structure. Thus, the capital structure decision is a continuous one and has to be taken whenever a firm need additional finance.

The study is undertaken to give answers to following questions:

1) What is the market value and overall cost of capital of stock broking companies? 2) What is the financial health of these companies? 3) What is the earning per share and return on equity of the sample companies?

OBJECTIVES OF THE COMPANY

The following are the major objectives of the study:

1. To exhibit the profile of the company and its growth during the study period. 2. To compute the market value and overall cost of capital of selected stock broking companies. 3. To analyse the financial health of sample companies. 4. To compute the earning per share and return on equity of sample companies. 5. Based on the findings of the study, to offer suitable suggestions to sample companies for their improvement.

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METHODOLOGY

The methodology followed to carry out the study has been presented below:

Selection of companies

Top 10 stock broking companies in the year 2012 are selected. The companies selected for the present study is confined only to 7 companies due to non availability of data.

1. India bulls securities Limited 2. Angel Broking Limited 3. Reliance Securities Limited 4. India Infoline Limited 5. Sharekhan Limited 6. Religare Securities Limited 7. Motilal Oswal Securities Limited

Study period

The study pertains to a period of financial years from 2002-2003 to 2011-2012. For the sake of convenience, the year 2002-2003 are taken as 2003 and so on in the study.

Source of Data

The study is based on secondary data. Data are obtained from capitaline database available in KSR Institute of Management. Company profiles and additional literature are collected from magazines, news papers, company website and other related websites.

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Analytical Tools

 Capital structure approaches is used to compute the market value and overall cost of capital of the companies.

Important financial ratios are computed in percentage or in times to indentify the financial health of the companies.  DuPont analysis is used to identify the return on equity.

 EBIT-EPS Analysis is computed to identify the earnings per share.

LIMITATIONS OF THE STUDY

 The study covers a decade from 2003 to 2012. It does not consider the changes that have been taken place before and after the study period.  The study is based on financial accounting data it is subject to the inherent limitations of accounting and accounting practices.  Majority of data are secondary and they are historical in nature.  Reliability of the study depends upon the reliability of financial statement.

FINDINGS OF THE STUDY

Capital Structure Theories Net Income Approach Value of company and overall cost of capital of selected stock broking companies is increased during the study period. Except Religare securities Limited the value of company is negative in the year 2005, 2009 and 2012 due to negative value of Equity shares shown in Table 1.

Net Operating Income Approach 6 www.ssijmar.in

Value of company and overall cost of capital of selected stock broking companies is satisfactory. But during the study period market value of Equity shares is negative in Sharekhan Limited due to high value of debt, whereas in other companies it shows good value given

in Table 2.

Traditional Approach Overall cost of capital of selected stock broking companies is satisfactory. But during the study period Sharekhan Limited value shows less, whereas in case of other companies it shows good value pointed in Table 3.

Modigliani and Miller Approach (with tax) Value of company is calculated after deducting the tax. The value of Indiabulls Securities Limited, Angel Broking Limited and Religare Securities Limited is highly satisfied when compared to other broking companies shown in Table 4.

Modigliani and Miller Approach (without tax) Value of company is high when tax is not deducted. Value of selected stock Broking companies is satisfactory. In the Sharekhan Limited value of Equity shares is negative during the study period due to high value of debt in Table 5.

Ratio Analysis The average current ratio of selected stock broking companies was below the standard norm of 2:1 during the study period . Average Quick Ratio of Angel broking limited is satisfactory whereas other Broking companies do not satisfy the standard norm . Average Absolute Liquidity Ratio of Angel Broking Limited and Motilal Oswal securities Limited are satisfactory. Other companies Ratios were below the standard norm 0.5:1.Debt-Equity Ratio of India Infoline Limited and Religare Securities Limited are low when 7 www.ssijmar.in

compared other broking companies during the study period due to lesser dependence on outsider’s funds. Average Proprietory ratio of Angel Broking Limited, Sharekhan Limited and Religare Securities Limited is below the standard norm it

indicates that the proportion of shareholders fund in the total assets employed in the business is low .Interest Coverage ratio, Gross Profit ratio and Net Profit ratio of the stock Broking companies is satisfactory .Average return on shareholder’s investment shows that

profitability and Efficiency of the selected stock broking companies is satisfactory .Operating Profit ratio of India Infoline is low when compared other companies due to less operational efficiency of the company .Return on Capital Employed indicates that investment by owners and Creditors have been efficiently used by India Infoline Limited and Motilal Oswal Securities Limited are shown in Table 6.

DuPont Analysis Average return on Equity of selected stock broking companies is low. In Religare securities limited it is very low due to less Profit Margin, Asset Turnover and Financial Leverage shown in Table 17.

EBIT-EPS Analysis Earnings per share of selected stock broking companies under debt financing are high when compared to equity financing. Companies use more debt to increase Earnings per share shown in Table 18.

CONCLUSION Indian stock market has become one of the most dynamic and efficient market today. Investors now seek stock market as preferred place to make investment. Stock market is often taken as a primary indicator of a country’s economic well-being as it enables the efficient allocation of capital. Stock market is a important place where the companies can raise extra capital by issuing the shares. Capital structure Approach, Financial Health, Return on Equity and Earnings per share of seven companies engaged in the business of stock broking are analysed. The study shows value of companies increased due to more use of debt. Value of Equity shares is negative in some companies due to the fact that the value of debt is higher than value of company. Financial Health and Earnings per share of stock

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broking companies is satisfactory. The Selected stock broking companies gave equal preference for debt and equity in designing their capital structure.

TABLES & FIGURES

TABLE 1: NET INCOME APPROACH

Total value of company 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (Rs .in crores) Indiabulls 15751.42 1.09 10.12 665.31 1399.87 2007.48 13833.02 7567.78 8200.09 18780.78 Securities Angel 11723.44 497.08 632.52 1024.69 1227.64 1861.41 2215.73 2196.69 3969.56 8193.67 Broking Reliance 16345.42 2201.61 2118.51 1699.40 2301.80 4422.45 13347.04 16922.32 13357.30 19143.23 Securities India 913.35 -11.78 43.75 82.09 345.25 522.79 925.74 536.51 1395.10 1920.30 Infoline 2893.04 Sharekhan 202.37 267.05 166.44 236.10 1384.09 2267.00 2627.02 2580.18 3931.70

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Religare -2174.79 0.04 0.43 -0.37 39.37 75.02 170.01 -40.15 303.73 224.74 Securities Motilal Oswal 70.56 336.63 330.35 1170.88 1061.27 1569.38 86.71 684.87 473.84 192.64 Securities

TABLE 2: NET OPERATING INCOME APPROACH

Equity capitalisation 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 rate(%) Indiabulls Securities - 1.30 -71.70 -230.41 36.24 18.47 -8.24 13.53 25.45 9.65 16.68

Angel broking 13.73 12.38 12.24 34.16 338.25 -53.67 -68.73 64.96 10.44 20.10 Reliance Securities 7.57 7.79 9.55 23.88 9.57 7.42 11.30 11.55 -1.29 20.25 -34.86 India Infoline 23.94 15.65 24.02 20.76 21.67 29.26 32.17 31.06 19.39

Sharekhan - 0.17 -2.83 -25.51 -6.97 -3.92 -2.94 -1.94 -2.66 -8.63 -10.01

Religare Securities 11.76 23.08 -57.14 229.02 19.17 60.36 -22.49 47.83 -11.42 30.88 Motilal Oswal 14.07 9.48 23.36 23.87 21.48 21.23 16.61 24.02 29.94 7.18 10 www.ssijmar.in

Securities

TABLE 3 :TRADITIONAL APPROACH

Overall cost of 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 capital(% )

Indiabulls Securities 3.67 8.79 7.22 12.39 14.71 6.86 15.82 11.33 8.17 15.71 Angel broking 13.62 13.39 10.35 10.98 11.03 9.64 9.68 8.36 8.98 11.80 Reliance Securities 16.17 14.44 14.96 25.89 17.58 11.84 13.67 12.75 7.49 16.43 India Infoline 28.35 15.59 23.24 12.15 17.21 24.89 28.45 17.72 13.73 12.33 Sharekhan 0.27 2.06 7.86 5.01 2.71 5.10 5.02 6.77 9.19 4.65 Religare Securities _ 11.63 -8.11 11.35 19.02 16.29 -27.52 29.72 11.45 37.31 Motilal Oswal 15.39 9.93 16.38 15.97 21.85 26.03 14.73 17.46 23.49 9.66 Securities

TABLE 4: MODIGLIANI AND MILLER APPROACH (WITH TAX)

Overall cost of 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 capital ( %) Indiabulls Securities - 1.19 -34.70 -39.01 483.30 13.22 -7.57 22.80 492.22 12.83 20.99 Angel broking 27.71 22.56 34.21 -86.28 27.54 -31.82 -40.70 -91.61 13.54 23.31 Reliance Securities 17.87 5.14 17.41 33.12 12.15 8.20 14.49 24.16 -1.23 28.28 India Infoline 27.79 21.46 34.10 25.71 23.11 33.23 35.22 31.11 11.91 -42.84 Sharekhan - 0.17 -2.78 -22.32 -6.62 -3.82 -2.52 -1.83 -2.33 -6.89 -8.20 Religare Securities 11.76 10.71 -61.54 -218.81 21.63 147.28 -26.46 28.13 14.65 36.60 Motilal Oswal 16.40 10.77 30.16 25.89 26.62 28.06 15.07 30.93 53.60 6.02 Securities

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TABLE 5 : MODIGLIANI AND MILLER APPROACH (WITHOUT TAX)

TABLE6: AVERAGE RATIO OF STOCK BROKING COMPANIES (2003-2012)

Overall cost of 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 capital ( %) Indiabulls Securities -1.30 -71.70 -230.41 36.24 18.47 -8.24 13.53 25.45 9.65 16.68 Limited angel broking limited 13.73 12.38 12.24 34.16 338.25 -53.67 -68.73 64.96 10.44 20.10 Reliance Securities 7.57 7.79 9.55 23.88 9.57 7.42 11.30 11.55 -1.29 20.25 Limited India Infoline Limited 23.94 15.65 24.02 20.76 21.67 29.26 32.17 31.06 19.39 -34.86 Sharekhan Limited -0.17 -2.83 -25.51 -6.97 -3.92 -2.94 -1.94 -2.66 -8.63 -10.01 Religare Securities 11.76 23.08 -57.14 229.02 19.17 60.36 -22.49 47.83 -11.42 30.88 Limited Motilal Oswal 14.07 9.48 23.36 23.87 21.48 21.23 16.61 24.02 29.94 7.18 Securities Limited

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Indiabulls Angel Reliance India Sharekhan Religare Motilal

Securities Broking Securities Infoline Ltd Securities Oswal Name of the Ratio Ltd Ltd Ltd Ltd Ltd Securities Ltd Current Ratio 0.87 1.12 0.76 0.71 0.32 0.49 0.81 Quick Ratio 0.87 1.12 0.76 0.71 0.32 0.49 0.81 Absolute Liquid Ratio 0.45 0.53 0.41 0.28 0.17 0.32 0.50

Debt Equity Ratio 1.07 1.12 0.96 0.23 1.10 0.22 0.99 Proprietory Ratio 0.82 0.60 0.83 0.83 0.59 0.61 0.79 Interest Coverage 2.94 2.94 4.55 9.01 7.62 1.12 7.42 Ratios Gross Profit Ratio 26.00 26.14 25.66 24.02 24.08 25.84 25.78 Net Profit Ratio 22.23 19.57 18.83 19.23 19.41 19.28 20.97 Return on Shareholders’ 22.75 16.96 16.48 16.67 24.35 19.51 35.46 Investment Ratio Operating Profit Ratio 76.40 46.67 84.25 20.41 60.19 61.93 42.14 Return on Capital 3.67 4.96 4.38 12.98 1.07 5.80 20.38 Employed

TABLE 7:THREE FACTOR ANALYSIS (In %) 13 www.ssijmar.in

Indiabulls Angel Broking Reliance India Infoline Religare Motilal Oswal Years Sharekhan Ltd Securities Ltd Ltd Securities Ltd Ltd Securities Ltd Securities Ltd 2003 3.79 6.59 1.87 0.05 1.71 0.10 1.48 2004 0.14 7.38 1.65 0.35 3.72 0.11 3.83

2005 1.84 10.00 2.14 0.69 9.38 0.12 6.30

2006 6.32 10.69 2.88 1.04 7.91 0.09 17.64 2007 9.15 10.88 3.46 5.66 15.77 0.23 24.71 2008 24.84 13.41 7.78 11.17 4.58 0.37 12.15 2009 33.64 15.49 11.59 9.92 4.93 2.88 7.79 2010 21.08 23.69 9.22 12.00 5.59 0.81 7.25 2011 30.00 35.94 7.40 13.61 5.71 0.81 6.91 2012 45.66 51.66 12.49 10.90 2.45 5.55 3.52 Average 17.65 18.57 6.05 6.54 6.18 1.12 9.16

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TABLE 8 : FIVE FACTOR ANALYSIS (In %)

Indiabulls Angel Broking Reliance India Infoline Religare Motilal Oswal Years Sharekhan Ltd Securities Ltd Ltd Securities Ltd Ltd Securities Ltd Securities Ltd 2003 3.76 6.49 1.80 - 1.66 - 1.48

2004 0.14 7.34 1.63 - 3.66 0.11 3.81 2005 1.84 9.78 2.10 0.68 9.31 0.11 6.21 2006 6.23 10.56 2.88 1.02 7.65 0.09 17.29 2007 9.07 10.67 3.44 5.63 15.48 0.22 24.19 2008 24.34 13.29 7.75 11.05 4.51 0.36 12.08 2009 32.97 15.07 11.43 9.80 4.71 2.83 7.19 2010 20.51 23.48 9.02 12.00 5.49 0.79 7.14 2011 29.56 35.13 6.76 13.23 5.40 0.79 6.84 2012 44.85 50.17 12.46 10.61 2.40 5.50 3.34 Average 17.33 18.20 5.93 6.40 6.03 1.08 8.96

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TABLE 9 : EARNINGS PER SHARE (Rs. In Crores)

2003 2004 2005 2006 2007 Name of the Equity Debt Equity Debt Equity Debt Equity Debt Equity Debt Companies financing financing financing financing financing financing financing financing financin financing g Indiabulls Securities Ltd 0.02 -0.02 0.04 0.10 1.48 1.60 4.28 5.16 5.01 5.62 Angel Broking Ltd 3.00 3.16 3.90 4.50 5.08 5.12 5.20 4.92 4.82 5.16

Reliance Securities Ltd 2.03 2.51 1.82 2.06 1.57 2.42 1.97 2.43 2.59 3.22

India Infoline Ltd -0.11 1.06 0.19 55.33 0.43 8.60 0.76 1.09 1.51 1.98

Sharekhan Ltd 0.19 1.21 1.86 2.01 4.02 4.21 2.47 2.64 7.67 7.75 Religare Securities Ltd _ _ -0.05 0.05 0.02 0.21 0.07 0.19 0.18 3.24 Motilal Oswal 0.54 0.98 0.48 1.06 0.72 5.10 10.12 12.42 11.05 11.78 Securities Ltd

2008 2009 2010 2011 2012 Name of the Companies Equity Debt Equity Debt Equity Debt Equity Debt Equity Debt financing financing financing financing financing financing financing financing financing financing Indiabulls Securities Ltd 3.89 4.62 5.25 5.92 12.32 11.42 14.71 14.92 12.30 12.85

Angel Broking 4.79 Ltd 5.61 5.11 6.21 7.71 8.65 18.47 17.46 32.15 34.51

Reliance Securities Ltd 6.03 6.86 8.55 8.91 6.09 6.99 5.24 6.72 10.37 11.65

India Infoline 3.27 Ltd 3.81 2.45 6.32 3.77 4.35 3.50 4.19 1.54 2.08

Sharekhan Ltd 2.25 3.42 2.99 3.12 3.21 6.92 4.52 5.86 1.62 2.72

Religare Securities Ltd 0.29 1.38 0.12 0.97 0.55 1.36 0.15 0.91 4.73 6.29 Motilal Oswal Securities Ltd 5.91 7.42 0.19 1.15 2.29 3.46 2.02 3.12 0.31 1.47

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