Analysis of Capital Structure of a Company

Topics: Weighted average cost of capital, Stock, Cost of capital Pages: 8 (2045 words) Published: November 9, 2011
Name of the Company - Patni Computer Systems Ltd.
Name of the Chairman – Narendra K. Patni

Background of the Company
The Patni Computer Systems Ltd. (Patni) was incorporated on 10th February 1978 under the Companies Act 1956. The company converted itself from a private limited company to a public limited company on 18th September 2003. It is now a leading IT consulting services and business solutions provider in India. The majority of the services offered are in the fields of insurance, manufacturing, retail, telecom etc. It has over 12,500 professionals building up a strong team, with 23 sales and marketing offices internationally and many offshore development centres across eight cities in India. The company’s clientele has increased from 199 as of December,31st 2005 to 272 as of December,31st 2009. The company has been certified with ISO 9001:2000 certification and is assessed at SEI-CMMI level 5 and P-CMM level 3. The business processes at Patni are in accordance with Six Sigma and BS 7799. It has alliances with major IT companies such as Microsoft, SAP, Siebel and Oracle. The major revenue generation of about 60% is from manufacturing and BSFI, but now the telecom domain is also gaining momentum and is contributing to the revenue generation. Whereas, geographically US is the major revenue generator contributing about 84.8% to the total revenue. Europe generating revenue of 9.1% and Japan that of 4.3%. And receiving a percentage of 0.7 from Asian countries and 1.1% from the rest of the world. Though the percentage of revenue contribution by US has declined from 88.8% in 2003 to 84.8% in 2005, and the European region’s contribution has been steadily increased to 9.1% in 2005 from 7.2% in 2003.

Capital structure refers to the sources and division of capital for any organization. The combination of debt and equity forms a capital structure. •Share Capital (owned capital)
i.Equity Share Capital
ii.Preference Share Capital
Borrowed Capital (owed capital)
ii.Long Term loan
iii.Short Term Loan
For example, a firm comprising of $20 million dollars in equity and $80 million dollars in debt, is said to be 20% equity-financed and 80% debt-financed. Therefore, in this example, 80% is referred to as firm’s leverage. But in reality the capital structure of a firm may be highly complex and include many sources of funds

Debt-Equity Ratio is the portion of equity and debt that a company is using to finance its assets. It is calculated by total of debts upon total equity.

Factors affecting Capital Structure:-

1. Business Risk
Business risk is the basic risk of the company's operations. It excludes debt. As the business risk increases the optimal debt ratio decreases. Example, if we compare a utility company with a retail apparel company, the utility company will have less risk as there is stability in earnings. Whereas, in retail apparel company there is more risk as the sales of this company is driven by trends in fashion. Thus, a retail apparel company will have a lower optimal debt ratio so that investors can rely on the company’s ability to meet its responsibilities with the capital structure at all times.

2. Company's Tax Exposure
Debt payments are tax deductible. If a company's tax rate is high, then debt is more likely to be used for financing a project as debt payments are tax deductible which protects income to be given as tax.

3. Financial Flexibility
Financial flexibility is the ability of a firm to raise capital at bad times. A company can easily raise capital when the cash inflows are strong and when the sales is growing. Companies should be prudent and raise capital at good times. If the debt level of the company will be low, the more will be its financial...
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