Presented By:

Varun Dawar
IMT Ghaziabad
 Working Capital
 One common thread among companies that have outperformed
over last 10 years is superior working capital
management…example Hindustan lever….operating cycle is
negative…..which means they get paid in cash and get credit from
the suppliers…..effectively capex is being funded by negative
working capital…Which other industries you see such
characteristics…?
 Second effect working capital has is on return ratios…given the
reduction in denominator; ratio increases disproportionately….
 Thirdly, high working capital reduces free cash flow leading to
loading of debt….

2
 Working Capital...contd
 Current assets are the assets which can be converted into cash
within an accounting year (or operating cycle) and include cash,
short-term securities, debtors, (accounts receivable or book debts)
bills receivable and stock (inventory).

 Current liabilities (CL) are those claims of outsiders which are

expected to mature for payment within an accounting year and
include creditors (accounts payable), bills payable, and outstanding
expenses.

 NWC can be positive or negative.

Positive NWC = CA > CL
Negative NWC = CA < CL

3
 Operating Cycle Concept
 Operating cycle is the time period between the processing of raw
materials and/or inventory and collect cash from the sale …it
involves

 Acquisition of resources such as raw material, labour, etc.

 Manufacture of the product includes conversion of raw
material into work-in-progress into finished goods.
 Sale of the product either for cash or on credit.

 Length of Operating cycle becomes sum of inventory conversion

period (ICP) and Receivables (debtors) conversion period

ICP (or Days of Inventory Outstanding) – ICP refers to the number

of days inventory sits on the shelf on an average. In an ideal
scenario, we would want this number to be low and inventory flying of
the shelves!!

4
 Operating Cycle Concept
 Receivables (debtors) conversion period (or Days of Sales
Outstanding) – This ratio refers to the number of days to get paid
by your customers. Again lower the number, the better.

 Length of Operating cycle becomes sum of inventory conversion

period (ICP) and Receivables (debtors) conversion period

Operating Cycle = ICP + DCP

5
 Operating Cycle Concept
 Inventory conversion period (or Inventory Days outstanding)=
365/ Inventory turnover ratio

 Inventory turnover Ratio = Cost of Goods Sold/Average Inventory

 Receivable Conversion period or (Days Sales outstanding)= 365/

Receivables turnover ratio

 Receivables Turnover Ratio = Annual Credit Sales /Average

Accounts Receivables

 Operating Cycle = Inventory conversion period + Days Sales

outstanding

6
 Cash Conversion Cycle
Cash Conversion Cycle is the time period from when cash is paid out,
to when cash is received…in other words as to how many days does it
take a company to pay for and generate cash from the sales of its
inventory

Inventory Cash
sold received

Inventory
purchase
d
Inventory period Accounts receivable
period Time
Accounts payable
period Cash paid for
inventory

Operating cycle
(OC)

Cash Conversion Cycle

(CCC) 7
 Cash Conversion Cycle OR Net Operating Cycle
 Payable Conversion Ratio (or Days of Payables Outstanding) = This
refers to the number of days the company takes to pay back its
suppliers.

Payable Conversion Ratio = Credit Purchases (Cost of Goods Sold)/

Average Accounts Payable

Payable Days outstanding = 365/ Payable Conversion Ratio

Cash Conversion Cycle or Net Operating Cycle = Inventory

conversion period + Receivables conversion period - Payables
conversion period

OR

CCC= Operating Cycle – Payable Days outstanding

8
APPLE VS WALMART

Year 2016 Apple Walmart

in USD millions
Revenue 215,639 482,130
COGS 131,376 360984

Debtors 29,299 5,624

Inventory 2,132 44,469
Creditors 37,294 38,487

Debtor Conversion period (DSO) 49.59 4.26

Inventory Conversion period (DIO) 5.92 44.96
Payables Conversion period (DPO) 103.61 38.92

Operating cycle 55.52 49.22

CCC -48.10 10.31
9
CASE STUDY...

Kajaria Ceramics HSIL

DSO 33 75
DIO 56 230
DPO 52 70
OC 89 305
CCC 36 234

10
 DIVIDEND POLICY
 Does dividend affect market value of the firm…?

 Some firms pay lower dividends on account of future growth

opportunities…. dividend is a by-product of the firm’s capital
budgeting decision

 Another firm may finance capital expenditures largely by

borrowing…. dividend is a by-product of the firm’s financing
decision

 How dividends are paid: Declaration date, Record Date, Ex-

dividend, Payable date

 Declaration Date: This is the date the board of directors declares

the dividend

11
 DIVIDEND POLICY
 Record Date: Date on which ownership of stock or right to receive
a dividend is determined

 Payable Date: Date on which dividend is actually paid to

stockholders of books of record

 Ex-Dividend Date: date before which, if that particular stock is

bought on the exchange, the buyer is entitled to receive the
entitlements. In India, ex-dividend date occurs one business day
before the company's Record Date.

 Cum Dividend: Before the ex dividend date and after the

declaration date, the shares are said to be cum dividend

12
 DIVIDEND POLICY
 Infosys announced dividends of INR 43 (860%) On 15-April 2014.
Record date was fixed on 30 May 2014 and payable date as 16
June 2014.
Infosys
Declaration Date Record Date
15-Apr-14 30-May-14
Cum Dividends Ex-Dividend Date Payable Date
29-May-14 16-Jun-14

 On 29th May 2014, stock fell by the amount of dividend……On 28th May,
stock was trading at 3175….on 29th May it traded at 2921…

13
 DIVIDEND POLICY
 HDFC record date for interim dividends was 31 March 2016. What
would be the date when the stock goes ex-dividend?

Ex date would be 30 March 2016.

14
DIVIDEND POLICY

15
 DIVIDEND POLICY
 Cash Dividends – Dividends paid by a domestic company are tax
exempt in the hands of recipient. However, the company is
required to shell out dividend distribution tax of 15% of the
aggregate dividend declared, distributed or paid. The effective
rate is approximately 20% including surcharge and cess.

 Capital Gains: In case of shares held for more than 1 year, long
term capital gains tax is zero (provided transaction is subject to
STT). Short term capital gains (holding of < 1year) are subject to
15% tax in case of listed equities.

16
 DIVIDEND POLICY

 Stock Split refers to change in par value of a share on account of

change in number of share outstanding….For example very
recently ICICI bank split its share 5-1. Consequently face
vale/par value of ICICI share has come down from INR 10 to INR
2 whereas number of shares would become 5 fold…

 Objective of Stock Split is to enhance liquidity and participation…

17
 DIVIDEND POLICY
 Bonus Issue: Refers to the free issue of shares - paid for by the
company issuing the shares out of capital reserves…Technically it
is capitalization of free reserves…..

 There is no tax implication when bonus shares are awarded. But

when they are sold, they may be taxable, depending on the time
for which they are held…Dividends are taxable in the hands of
companies..

 Terminology:
 1:1 means 1 bonus share for every one share held
 1:10 means 1 bonus share for every 10 shares held
 2:1 means 2 bonus share for every one share held

18
 DIVIDEND POLICY

 Recently, Infosys declared bonus issue of 1:1… ex bonus date was

2 Dec…
 For every one shares of Infosys you own, you will receive one
additional free share i.e. you will own 2 shares of Infosys
after the issue
 The number of shares issued doubled
 The share price became half (Infosys stock fell from INR
4,348 on Dec 1, 2014 to INR 2,127 on Dec 2, 2014 close)
 The Earnings Per Share (EPS) and Dividend Per Share adjust
proportionately
 The issued share capital increases by 100%, this is offset by
the reduction in the reserves.

19
 DIVIDEND POLICY
Cash Dividend Bonus Issue Stock Split

Mode Cash Shares Face Value adjustment

Face value reduces, so number of

Effect Reduce Cash on Assets side Increases Number of shares shares increase

Share Price Reduces by amount of Share price drops so as to keep market Share price drops so as to keep market
Market Cap dividend cap same cap same

Tax DDT LTCG/STCG No tax

Infosys recently paid dividend of

Example INR 43 Infosys declared bonus issue of 1:1… ICICI bank split its share 5-1.
Consequently face vale/par value of
Share price became half (Infosys stock ICICI share has come down from INR
Stock price fell on ex-date by INR fell from INR 4,348 on Dec 1, 2014 to 10 to INR 2 whereas number of shares
43 INR 2,127 on Dec 2, 2014 close would become 5 times
20
 DIVIDEND POLICY
 In July 2010, MMTC traded at INR 33,501. The board of
directors approved a 1:1 bonus and 10-for-1 stock split. Calculate
the effect on share price and balance sheet post announcement of
above events.

 Given the effect of bonus and stock split, MMTC share new price
would be 1675

 Number of shares would increase by 20 times; Reserves and

surplus decreased by the amount of bonus shares.

21
 DIVIDEND POLICY
 As per Companies Act, 2013, Section 63 deals with Bonus Shares
requires that company shall issue fully paid Bonus Shares out of
any one of the following source:

 Free Reserves of the Company

 The Securities Premium Account

 The Capital redemption reserve Account

 Further, the Company shall not issue Bonus Shares by capitalizing

reserve created out of revaluation of Assets. Also the Company
shall not issue shares in lieu of Dividend

22
 RIGHT ISSUE
 Right Issue: Represents a right to buy additional shares of a
company by existing shareholders. A company comes out with a
bonus issue when it is sitting on money whereas it comes out with
a rights issue when it needs money…..right issue leads to increase
in equity base

 Theoretical Ex-Right price: Refers to the market price of the

shares after the rights have been exercised

 A company’s shares trades at INR 1000. The company announces 1

for 4 rights issue at 800 per share. What would be the
theoretical Ex-Right price of the company’s shares.

 Theoretical Ex-Right price = [1000x 4 + 1 x 800] /[4+1] = 960

23
 DIVIDEND POLICY AND FIRM VALUE
 Merton Miller and Franco Modigliani (MM) dividend irrelevance
theory: Argues that the firm’s value is determined by its basic
earning power and its business risk rather than its dividend policy

 Using assumptions of perfect capital markets, no transaction cost,

zero taxes and fixed investment policy, MM model states that
value of equity is unaffected by the decision of splitting the
profits between retained earnings (for investment) and dividends
(for payout).

24
DIVIDEND VS BUYBACK
 Share Buyback: Refers to re-acquisition of own stock by the
company. Repurchased shares are called treasury stock.

 Shares may be purchased back by the company on account of

following reasons
 To increase promoters shareholding
 Increase earnings per share
 Support share value by providing liquidity
 To thwart takeover bid
 The buyback of shares cannot exceed twenty-five per cent of the
aggregate paid-up capital and free reserves of the company
 Debt-equity ratio of the Company after the Buyback should be
within the limit of 2:1 (Debt is aggregate of secured and
unsecured debts owed by the firm after buy-back)
25
 DIVIDEND VS BUYBACK
 Proportion of buyback in India as percentage of total rewards is
only 5% compared to 50% in US and 30% in EU.

 Buyback through open market operations is more tax efficient

than dividends as companies have to pay only securities
transaction tax (STT) which is less than 1%. Also the offerer
(investor) of shares would pay a capital gains tax depending on the
holding period. For shares held for more than a year, the
incidence of capital gains tax would be zero.

 Companies in India are liable to pay dividend distribution tax

(DDT) to the tune of 17%.
26
OPEN OFFER VS TENDER OFFER
 An open offer is triggered when an entity acquires more than a
certain percentage of the shares of a listed company. Once
acquiring entities have bought 25% of a company, they will have to
launch an open offer for an additional 26% as per the decision
taken on Thursday.
Parameters Open market Method Tender offer method
Maximum price is fixed; shares can
Price be bought back anywhere upto that Buyback price is fixed
price
Number of shares to be bought back
Shares to be bought back Number of shares to be bought back is fixed
is fixed
Buyback programme can go on for Buyback programme can go on up to a
Duration
up to a year month

STT is paid so LTCG/STCG rules Off-Market Transaction-so normal indexation

Taxation
apply benefits applicable as no STT is paid

27