SHIV SHAKTI International Journal of in Multidisciplinary and Academic Research (SSIJMAR) Vol. 5, No. 2, April 2016 (ISSN )

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1 SHIV SHAKTI International Journal of in Multidisciplinary and Academic Research (SSIJMAR) Vol. 5, No. 2, April 2016 (ISSN ) 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 = (Scientific Journal Impact Factor Value for 2012 by Inno Space Scientific Journal Impact Factor) Global Impact Factor (2013)= (By GIF) Indexing: 1

2 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 The study shows value of companies increased due to more use of debt. Value of 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. 2

3 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 The study shows value of companies increased due to more use of debt. Value of 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 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

4 **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. 4

5 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 to For the sake of convenience, the year 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. 5

6 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 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 shares shown in Table 1. Net Operating Income Approach 6

7 Value of company and overall cost of capital of selected stock broking companies is satisfactory. But during the study period market value of 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 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.- Ratio of India Infoline Limited and Religare Securities Limited are low when 7

8 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 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 are high when compared to equity. 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 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 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 8

9 broking companies is satisfactory. The Selected stock broking companies gave equal preference for debt and equity in designing their capital structure. Total value of company (Rs.in crores) Indiabulls Securities Angel Broking Reliance Securities India Infoline TABLE 1: NET INCOME APPROACH TABLES & FIGURES Sharekhan

10 Religare Securities Motilal Oswal Securities TABLE 2: NET OPERATING INCOME APPROACH capitalisation rate(%) Indiabulls Securities Angel broking Reliance Securities India Infoline Sharekhan Religare Securities Motilal Oswal

11 Securities TABLE 3 :TRADITIONAL APPROACH Overall cost of capital(% ) Indiabulls Securities Angel broking Reliance Securities India Infoline Sharekhan Religare Securities _ Motilal Oswal Securities TABLE 4: MODIGLIANI AND MILLER APPROACH (WITH TAX) Overall cost of capital ( %) Indiabulls Securities Angel broking Reliance Securities India Infoline Sharekhan Religare Securities Motilal Oswal Securities

12 TABLE 5 : MODIGLIANI AND MILLER APPROACH (WITHOUT TAX) TABLE6: AVERAGE RATIO OF STOCK BROKING COMPANIES ( ) Overall cost of capital ( %) Indiabulls Securities Limited angel broking limited Reliance Securities Limited India Infoline Limited Sharekhan Limited Religare Securities Limited Motilal Oswal Securities Limited

13 Indiabulls Angel Reliance India Sharekhan Religare Motilal Name of the Ratio Securities Broking Securities Infoline Ltd Securities Oswal Ltd Ltd Ltd Ltd Ltd Securities Ltd Current Ratio Quick Ratio Absolute Liquid Ratio Ratio Proprietory Ratio Interest Coverage Ratios Gross Profit Ratio Net Profit Ratio Return on Shareholders Investment Ratio Operating Profit Ratio Return on Capital Employed TABLE 7:THREE FACTOR ANALYSIS (In %) 13

14 Years Indiabulls Angel Broking Reliance India Infoline Religare Motilal Oswal Sharekhan Ltd Securities Ltd Ltd Securities Ltd Ltd Securities Ltd Securities Ltd Average

15 TABLE 8 : FIVE FACTOR ANALYSIS (In %) Years Indiabulls Angel Broking Reliance India Infoline Religare Motilal Oswal Sharekhan Ltd Securities Ltd Ltd Securities Ltd Ltd Securities Ltd Securities Ltd Average

16 TABLE 9 : EARNINGS PER SHARE (Rs. In Crores) Name of the Companies financin g Indiabulls Securities Ltd Angel Broking Ltd Reliance Securities Ltd India Infoline Ltd Sharekhan Ltd Religare Securities Ltd Motilal Oswal Securities Ltd Name of the Companies Indiabulls Securities Ltd Angel Broking Ltd Reliance Securities Ltd India Infoline Ltd Sharekhan Ltd Religare Securities Ltd Motilal Oswal Securities Ltd

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