Financial Leverage

Practices
(PSU vs Privately owned company)
KRTIN JAIN – 18P203
KHUSHI DESAI – 18P200
PRAKASH RANJAN – 18P209
GAURAV RATH – 18P194
NAMAN JAIN – 18P206
JAHANVI BUDUR – 18P197
What is FINANCIAL LEVERAGE?

• Financial leverage is the degree to which a company uses fixed-income securities such as debt
and preferred equity. The more debt financing a company uses, the higher its financial
leverage.
• A high degree of financial leverage means high interest payments, which negatively affect the
company's bottom-line earnings per share.
• Financial risk: the risk to the stockholders that is caused by an increase in debt and preferred
equities in a company's capital structure. As a company increases debt and preferred equities,
interest payments increase, reducing EPS. As a result, risk to stockholder return is increased.
• A company should keep its optimal capital structure in mind when making financing decisions
to ensure any increases in debt and preferred equity increase the value of the company.

INCREASE IN FINANCIAL LEVERAGE INCREASE IN RISK DECREASE IN PROFITS

Degree of financial Leverage = % Change in EPS/ % Change in EBIT

 Shipping corporation of India- PSU
A Brief Introduction :
• SCI was established on 2 October 1961 by the amalgamation of Eastern Shipping Corporation and
Western Shipping Corporation.
• SCI was awarded the prestigious "Navratna" status by Indian Government in 2008
• It has a fleet of 53 Vessels in various segments which involves Tanker shipping, Dry Bulk Shipping and Liners.
• Capt. Anoop Kumar Sharma is the current Chairman and Managing Director of the company
• Company posted a topline of 3600 crores and bottomline of 340 crores in FY2018
• Government of India holds 63% of the company and it is the largest company in India
GREAT EASTERN SHIPPING
COMPANY
A Brief Introduction :
• GE Shipping is the largest private sector shipping company.
• It was founded in 1948 by Vasant J. Sheth
• K.M. Sheth is the current Chairman and Bharat K. Sheth is the Managing Director
• It has a fleet size of 48 vessels in Tanker business and dry bulk shipping
• GESCO had a topline of 3350 crores and posted a loss of 210 crores
• Promoter holding is low at 30%
 Debt Comparision

GESCO
100.00%
• GE Shipping has maintained its D/E ratio as the 80.00% 73.90%
73.96% 75.76%
80.81%
81.27%
markets went through downturn they took the 60.00%
42.52%
opportunity and purchased vessels at lower price. 40.00%
42.50%
44.83%
44.69%
Even though they increased their Dead weight 20.00%
43.10%

tonnage by 50% their D/E ratio remained almost 0.00%

FY14 FY15 FY16 FY17 FY18

same which indicates better utilization of capital LT debt/ Equity LT debt/ capital

• Though they were unable to deleverage SCI

themselves while SCI reduced their D/E ratio by 120.00%

100.00%
105.73%
87.37%

50% but shipping industry is highly capital intensive 80.00% 68.63%

51.98%
60.00% 51.39% 46.63%
and purchasing assets at the right time is very 40.00%
49.33%

important so we can say that SCI focused more 20.00%

0.00%
40.70% 34.20% 33.04%

on deleveraging rather than purchasing vessels. FY14 FY15 FY16 FY17 FY18

LT debt/ Equity LT debt/ capital

Sources of Funds
GESCO

• GESCO has a lot of debentures

issues at different coupon rates
and for different maturity period

• GESCO being a global shipping

player has foreign currency
loans
 Sources of Funds
SCI

• Shipping corporation of India

has focused on taking foreign
bank loans which provides loan
at lower rate of interest and
because of the nature of
shipping industry they have a
natural hedge against currency
fluctuations as well.
• This is a financially sound
decision as it saves a lot of
financial costs for the company
Degree of Financial Leverage

G.E.Shipping Shipping Corp of India

3.50 10
3.00
2.50 5
2.00
1.50 0
1.00
2014 2015 2016 2017 2018
0.50
-5
-
-10
(0.50) 2014 2015 2016 2017 2018
(1.00)
-15
Beta Degree of fin leverage
Beta Degree of fin leverage
Relation between ROE , Cost of Debt & EPS

G.E. Shipping Shipping Corp of India

Relation b/w CoD &RoE Relation b/w CoD & RoE

7% 14
10% 12
6% 12
8% 10
5% 10
8
6% 4% 8
6 3% 6
4%
4 2% 4
2% 2 1% 2
0% 0
0% 0
Cost of debt ROE
Cost of debt ROE
THANK YOU