INTRODUCTION

•Capital structure or capital mix is an important measure to control the overall cost of capital and
to improve the earnings of the company. It is most likely referring to the firm’s debt-equity ratio
which provides information to the investors how risky a company is. Various financial sector
reforms like reduction in interest rates were introduced by government which directly or
indirectly influences capital structure of the firms. At present financing capital structure is a
crucial financial decision for every company. At the time of promotion companies must decide
about the composition of capital structure, then at the time when funds must be raised for finance
and investment again this complicated decision acted as a hurdle.

•Capital structure of a firm represents the mix of securities that a firm must sell in order to
finance its assets (generally fixed assets). It is a significant financial decision as it affects the
shareholders risk and return, consequently the market value of shares. A firm has various options
regarding the combination of various sources to finance its investment activities. The firm may
opt for all-equity firm (having no borrowed funds) or equity-preference firm (having no
borrowed funds), any of the numerous possibilities of combination of equity, preference shares
and borrowed funds. Theoretically speaking, a judicious use of debt and equity in capital
structure can maximize the value of the firm.
 Importance of the Study
Many profitable companies fail every year due to mismanaged capital structure. Now a day’s corporations have
full opportunities to restructure their capital structure to get maximum leverage from the debt equity mix by
adding value to the shareholders. The present study attempts to find out the impact of debt equity mix for future
profitability of the company.

Objectives
To compare and analyse the capital structure of Adani Power Ltd and Tata
Power.
To find out different types of financing that these companies used to raise funds.

To find out the liquidity position of the company.

Sensitivity: LNT Construction Internal Use

 Company Profile

 Adani Power is a part of the Adani Group. Currently, it is India’s largest thermal power
company with a power generation capacity of 12,450 MW. Its thermal power plants are
located in Gujarat, Maharashtra, Karnataka, Rajasthan, and Chhattisgarh. Further, it has a
40 MW solar power plant in Gujarat.

 Adani power was the world’s first company to set up a coal-based supercritical thermal
power project. It was set up in Mundra in December 2010. Moreover, this project was
registered under the Clean Development Mechanism (CDM) of the Kyoto protocol.
Similarly, a project in Godda, Jharkhand will export power from India to Bangladesh. The
company has more than 7000 MW capacity power plants in the making. These projects are
planned across Jharkhand, Madhya Pradesh, Gujarat, Rajasthan and Karnataka. Adani
Power accounts for around 6% of the capacity created in India’s multi-decade coal and
lignite-based power generation sector. In addition, it accounts for 16% of all the
investments made by the private sector in India’s power generation sector.

Sensitivity: LNT Construction Internal Use

  Tata Power is present across the entire power value chain. It is India’s
largest integrated power company. This includes conventional &
renewable energy, power services and next-generation customer solutions
including solar rooftops, EV charging stations and home automation.

 Tata Power was the first company to set up India’s first hydroelectric
power stations in 1915. It was known as Tata electric then. It has 13,515
MW of generation capacity together with its subsidiaries & joint entities.
About 34% of which comes from clean energy sources.

 It is among the top private players in each sector of the value chain
including solar rooftop and value-added services. Further, the company
manages a transmission network of 3,532 km and a distribution network
of more than 400 thousand circuit km across India. Tata Power has over a
hundred years of presence in the Indian power sector. It serves over 12
million distribution customers. It is credited with steering the energy
sector on technology, process and platform. Its latest business integrated
solutions, focus on mobility and lifestyle and are poised for multi-fold
growth.

Sensitivity: LNT Construction Internal Use

 About Capital Structure
 Capital structure is the combination of debt and equity used by a company to finance its overall operations
and growth.
 Equity capital arises from ownership shares in a company and claims to its future cash flows and profits.
 Debt comes in the form of bond issues or loans, while equity may come in the form of common stock,
preferred stock, or retained earnings.
 Short-term debt is also considered to be part of the capital structure. Leverage is the amount of debt a
company has in its mix of debt and equity (its capital structure).
 A company with more debt than average for its industry is said to be highly leveraged.
 A company that has no debt is called an unlevered firm; a company that has debt in its capital structure is a
levered firm.

Authorized Capital
 It is the maximum amount of the capital for which shares can be issued by the Company to shareholders.
 The Authorized capital is mentioned in the Memorandum of Association of the Company under the
heading of “Capital Clause”.
 It is even decided prior to incorporation of the Company.
 The Authorized capital can be increased at any time in future by following necessary steps as required by
law.

Sensitivity: LNT Construction Internal Use

 Issued Capital
 Issued capital is a part of authorized capital.
 It represents the total capital issued by a company out of the total authorized capital.
 The issued share capital is offered to the shareholders for subscription.

Paid-up Capital
 It is the amount of money for which shares of the Company were issued to the shareholders and
payment was made by the shareholders.
 At any point of time, paid-up capital will be less than or equal to authorized share capital and the
Company cannot issue shares beyond the authorized share capital of the Company.

Cost of Capital
 Cost of capital represents the return a company needs to achieve in order to justify the cost of a capital
project, such as purchasing new equipment or constructing a new building.
 Cost of capital encompasses the cost of both equity and debt, weighted according to the company's
preferred or existing capital structure. This is known as the weighted average cost of capital (WACC).
 A company's investment decisions for new projects should always generate a return that exceeds the
firm's cost of the capital used to finance the project. Otherwise, the project will not generate a return for
investors.
Sensitivity: LNT Construction Internal Use
 1. What are the different kinds or types of financing that this company has used
to raise funds? Where do they fall in the continuum between debt and equity?

>>>Equity
Authorized
Period Issued Capital Paid-up Capital
Capital
2022 4500 3856.94 3856.94
2021 4500 3856.94 3856.94
2020 4500 3856.94 3856.94
2019 4500 3856.94 3856.94
2018 4500 3856.94 3856.94

Authorized
Period Issued Capital Paid-up Capital
Capital
2022 10565 325.23 319.53
2021 550 325.23 319.53
2020 270 270.64 270.48
2019 350 276.17 270.48
2018 350 276.17 270.48
Sensitivity: LNT Construction Internal Use
 >>> Others
Adani Power
 Description 2017 2018 2019 2020 2021
Secured Borrowings( Term loans,Trade Credits) 29847.25 27695.63 31643.8 30980.87 31043.24
Unsecured Borrowings(Loans from related
parties) 4712.6 8714.64 12922.54 8976.13 6828.08
Non-Current Borrowings (A) 34,559.85 36,410.27 44,566.34 39,957.00 37871.32
           
Current Maturities (B) 3,714.62 3,495.90 2,830.61 2770.95 3,683.99
           
Total Debt (A+B) 38,274.47 39,906.17 47,396.95 42,727.95 41,555.31
Tata Power
Description 2017 2018 2019 2020 2021
Secured Borrowings( Term loans, Debentures) 12397.71 20084.57 21083.53 16765.83 19360.48
Unsecured Borrowings(Term Loans, Debentures) 9958.6 11054.66 11611.61 13279.02 13369.22
Non-Current Borrowings (A) 22356.31 31139.23 32695.14 30044.85 32729.70
           
Current Maturities (B) 7,405.65 3,491.43 3,836.43 2074.37 5,008.71
           
Total Debt (A+B) 29,761.96 34,630.66 36,531.57 32,119.22 37,738.41
Sensitivity: LNT Construction Internal Use
 Debt Equity Ratio
Adani Power vs TATA Power
Adani Power Year
  2017 2018 2019 2020 2021
Debt 38,274.47 39,906.00 47,396.95 42,727.95 41,555.31

Total Equity 889.33 7,712.29 6,480.45 13,112.59 18,703.44

Debt Equity
43.03 5.17 7.31 3.26 2.22
Ratio

TATA Power  Year

  2017 2018 2019 2020 2021
Debt 29761.96 34630.66 36531.57 32119.22 37738.41

Total Equity 18394.34 20472.17 21898.06 25,249.56 26,028.46

Debt Equity
1.62 1.69 1.67 1.27 1.45
Ratio
Sensitivity: LNT Construction Internal Use
 Debt-Equity Ratio

50
45 43.03
40
35
30
25
20
15
10 7.31
5.17
5 1.69 3.26 2.22 1.45
1.62 1.67 1.27
0
2017 2018 2019 2020 2021
Adani Power Tata Power

Sensitivity: LNT Construction Internal Use

 Interpretation
 Debt Equity ratio is used to measure how much debt the company uses against its total equity.

 A firm’s capital structure is typically expressed as a debt-to-equity or debt-to-capital ratio.

 Here, both Adani Power and Tata Power have used leverage to fund their business.

 Tata Power has a lower debt-equity ratio of 1.45 as compared with Adani Power in FY2021-22.

 From the graph Tata Power has maintained a good debt equity ratio when compared with Adani
Power.

Sensitivity: LNT Construction Internal Use

 2. Based upon the cost of capital approach, what is the optimal debt ratio for
your firm?
Debt Ratio:

Adani Power  Year

  2017 2018 2019 2020 2021
Debt 38,274.47 39,906.00 47,396.95 42,727.95 41,555.31

Total Assets 69523.28 67,984.60 75,025.00 78,805.91 81,981.02

Debt Ratio 0.55 0.59 0.63 0.54 0.51

TATA Power  Year

  2017 2018 2019 2020 2021
Debt 29761.96 34630.66 36531.57 32119.22 37738.41
Total Assets 81904.64 84162.93 89748.15 98838.86 112884.59

Debt Ratio 0.36 0.41 0.41 0.32 0.33

Sensitivity: LNT Construction Internal Use

 Debt Ratio
0.7
0.63
0.6 0.59
0.55 0.54
0.51
0.5
0.41 0.41
0.4 0.36
0.32 0.33
0.3

0.2

0.1

0
2017 2018 2019 2020 2021
Adani Power Tata Power

Sensitivity: LNT Construction Internal Use

 Interpretation
 A debt ratio measures the amount of leverage used by a company in terms of total debt to total
assets.

 A company's debt ratio can be calculated by dividing total debt by total assets.

 A debt ratio of greater than 1.0 or 100% means a company has more debt than assets while a debt
ratio of less than 100% indicates that a company has more assets than debt.

 Here, both Adani Power and Tata Power has more assets than debt because all the debt ratios are
below 1.0 or 100%.

Sensitivity: LNT Construction Internal Use

 3. Bringing in reasonable constraints into the decision process, what would
your recommended debt ratio be for this firm?

 As per the Debt Ratios of 0.5 and below are considered excellent, while ratios above 2.0 are
viewed more unfavorably.

 Utilities often carry high debt levels as their infrastructure requirements make large, periodic
capital expenditures necessary.

 Adani power has a debt ratio of more than 0.5 which is not a good sign for the company’s capital
structure where 0.5 being the ideal debt equity ratio.

 A higher debt to equity ratio indicates that more creditor financing (bank loans) is used than
investor financing (shareholders).

 Higher use of debt increases the fixed financial charges (Interest on Debt) of a firm. As a result,
increased used of debt increases the financial risk of a firm.

Sensitivity: LNT Construction Internal Use

 THANK YOU

Sensitivity: LNT Construction Internal Use