CASE STUDY -1

UNITED SPIRITS LIMITED AND WHYTE &

MACKAY ACQUISITION DEAL
(APRIL 2007)

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 TABLE OF CONTENT

S.NO TITLE PAGE

NUMBERS

UNITED SPIRITS LIMITED AND WHYTE &

MACKAY ACQUISITION DEAL

1. INTRODUCTION 4-7

2. SITUATIONAL ANALYSIS 8-10

3. ALCOHOL INDUSTRY OF INDIA 11-15

4. PROBLEM IDENTIFICATION 15

5. STRATEGIC ALTERNATIVES 15-16

6. STRATEGIC CHOICE 16

7. THE DEAL 16-17

8. OBJECTIVES BEHIND ACQUISITION 18

9. CONCLUSION 19

10. REFERENCES 19-20

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 1. INTRODUCTION
1.1 UNITED SPIRITS LIMITED (Formerly known as McDOWELL &
COMPANY LIMITED)
India’s largest liquor firm United Spirits Limited has announced that it has acquired 100%
stake of Scottish distiller Whyte & Mackay for £595m or $1.18 billion (Rs.4,800 crore).
While Whyte & Mackay recorded sales of 9 million case and case equivalents in the last 12
months, United Spirits recorded sales of 66 million cases for the year ended on March 31,
2007. With this acquisition, United Spirits will have consolidated sales of 75 million cases
per annum. Whyte & Mackay’s Invergordon Distillery, near Inverness, is one of the largest
Scotch whisky distilleries with a capacity of producing 40 million litres of alcohol per
annum. It also owns four malt whisky distilleries in Scotland and a state of the art bottling
facility in Grange mouth with a capacity of producing 12 million cases per annum. The
acquisition not only gives United Spirits access to premium Scotch brands, but also an
inventory valued at £380 million ($750 million).
The only missing link in united spirits limited portfolio has been Scotch and due to the
shortages and rapidly increasing prices of Scotch whisky, we needed a reliable supply source
to secure our future considering that we use Scotch in our Indian blends.
"The potential for premium Scotch whisky in India is enormous and, with the acquisition of
Whyte & Mackay we now have a strong portfolio of internationally recognized brands that
we will immediately introduce into the Indian market and use our strong distribution muscle
fully to our advantage. "In addition we now have access to international distribution and can
look forward to exporting our brands from India".

1.2 THE UNITED BREWERIES GROUP

Based in Bangalore, it is a conglomerate of different companies with a major focus on the
brewery (beer) and alcoholic beverages industry. The company markets most of its beer
under the Kingfisher brand and has also launched Kingfisher Airlines, an airline service in
India, with international flights operating recently. It is also present in the sporting industry
by the way of buying a team in the Indian Premier League (cricket) from their hometown i.e.
Bangalore by the name of Bangalore Royal Challengers. The group has also made India’s
first team entry into Formula One by being the joint owner team Force One (India’s first-ever
Formula One Team) with the Netherlands based Mol Family. United Breweries is India's
largest producer of beer with a market share of around 48% by volume.

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 The group is a multi-faceted conglomerate with business interests in Beverage Alcohol,
Pharmaceuticals, Media, International Trading, Aviation, Fertilizer, Research &
Development, and Infrastructure Development. After Vittal Mallya's death in 1983, his son
Vijay Mallya assumed the mantle of the group. Vijay Mallya inducted professional
management and consolidating the Group into individual operating divisions. In 1988, UB
Group acquired the global Berger Paints Group with operating companies across four
continents. The paints business was divested for significant value in 1996. After India
adopted economic liberalization in 1991, the UB Group decided to retain interests in only
those businesses that were globally competitive and did not depend upon fiscal tariff
protection. Today, UB Group is the third largest manufacturer of Spirits products in the
world. In 2005, the Group entered aviation sector with the launch of Kingfisher Airlines
Limited. Within a short time the airlines has captured an impressive market share and has
established a niche identity for itself.

19 Millionaire Brands
Whisky Brandy Rum Vodka and Gin

Bagpiper No.1 Celebration Rum White Mischief

No.1 Honey Bee Old Cask Rum Romanov
Special John Ex-Shaw Old Adventurer Rum Blue Riband
Old Tavern
Haywards
Green Label
Gold Riband
Royal Challenge
DSP Black
Signature

Table 1.1 Most Popular Brand Names

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 1.3 FINANCIAL PERFORMANCE OF THE COMPANY

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 1.4 WHYTE & MACKAY LTD.

Whyte and Mackay Ltd is a Scottish company producing alcoholic beverages. It was founded
in 1844 and is based in Glasgow, Scotland. Since May 2007 Whyte and Mackay has been
owned by United Breweries Group, a large Indian conglomerate. Charles Mackay and James
Whyte started a company as whisky merchants and bonded warehousemen in Glasgow in
1882. W&M Special was their first blended whisky and it was successful in the United
Kingdom and other English speaking countries around the world (particularly Australia,
Canada, New Zealand and the United States). After World War II they focused on the home
market and now sell more than 1 million cases a year. The company transcends markets
including Single Malt and Blended Scotch Whiskies, Liqueurs, and Vodkas. Their brands
include Dalmore, Isle of Jura, and Fettercairn Single Malts; Glayva liqueur; and Vladivar
Vodka. Whyte & Mackay is the fourth largest Scotch whisky producer in the world. It is one
of the largest selling scotches in Scotland, and one of the fastest growing scotches in the UK.
The acquisition of Whyte & Mackay signalled the entry of United Spirits into the super
premium spirits market in India in line with its premiumization strategy.

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 2. SITUATIONAL ANALYSIS

2.1 SWOT Analysis

SWOT ANALYSIS
Fig 1. 2

2.1.1 STRENGTHS
 Significant share of the Beer market of about 39% by UBL alone (Source: Company
estimate).
 Contract brewing tie-ups in place.
 National presence with company brands available throughout the country.
 Well known brands like “Kingfisher Lager”, “Kingfisher Strong”, “Kalyani Black
Label Lager”, “UB Premium Ice”, UB Export and “London” range.

2.1.2 WEAKNESS
 Large capacities may lead to a problem of over capacity in winter/rainy seasons.
 Dominant single brand, Kingfisher.
 Over leveraged position leading to short term cash flow problems.

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 2.1.3 OPPORTUNITIES
 Growing beer market.
 Any deregulation in the excise policies with reference to taxation and duty on beer
which could drastically push up the demand for beer.
 Tie-up with S&N to open export opportunities.

2.1.4 THREATS
 The level of taxes is very high which could render beer unaffordable.
 Advertising and marketing restrictions.
 Entry of foreign liquor majors may affect existing market share.

2.2 PORTER’S FIVE FORCES MODEL

Fig 1. 3

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 2.2.1Competitors:
The competitors like Seagrams, Fosters, Johnie Walker offer stiff competition to Kingfisher.
In rivalry competitors try to grab each other’s market share by introducing price wars,
advertising battles and new product introductions. Currently United breweries are the market
leader in beer segment which places it ahead of its competitors. This is because of its
investment in the Research and Development sector in liquor industry which enables it to
introduce new brands rapidly. It has been present in India for many decades which give it an
advantage of strong brand loyalty and also a strong brand image.

2.2.2 Threat of new entrants:

There are many other emerging brands which are coming up in India. As the lifestyle in
urban areas is increasing the per capita liquor consumption is also increasing. These trends
are inviting a lot of new foreign companies who willing to expand in the growing Indian
market. Several foreign brands have made brand associations and are marketing their brands
aggressively through various point-of-sale promotions throughout their distribution networks.

2.2.3 Buyers:
As the liquor consumption in India increases the customers also see their power increasing. In
alcohol industry the brand loyalty is not there. So when more and more brands enter the
market the customer goes for the cheapest brand in the same volume and alcohol limit
bracket.

2.2.4 Substitutes:
In India the primary segments are beer and whiskey. So there is a threat from other
substitutes like Vodka, Wine and Rum. If the competitors decide to make these segments
more popular then there is a threat for the dominant market share of UB group in the liquor
segment.

2.2.5 Suppliers:
The UB group is dependent upon barley producer for their beer production. Any change in
barley prices affects the price of beer.

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 3. ALCOHOL INDUSTRY OF INDIA
Indian Liquor Industry with estimated market value of INR 340 bn is growing at 12-15%
over the last two years. The industry is estimated to have sold 115 mn cases of IMFL last
year. The sector is expected to maintain its CAGR of ~15% while the premium segment
Wine and Vodka is expected to grow at a higher rate. With consolidation and foreign
acquisitions gaining steam the sector is about to witness next phase with realization rising in
line with that of their foreign counterparts.

There are 325 distilleries in India, with an installed capacity of about 3.58 billion litres of
liquor. However, production rate is about 40% of total licensed capacity as total requirement
of liquor stands at 1.3 billion litres.

3.1 MAJOR NATIONAL PLAYERS

United spirits with about 60 % of market share in IMFL is the undisputed leader. Radico
Khaitan who entered the IMFL space some 8 years back has already cornered 12 % market
share and gaining. Other players include Mohan Meakin (9%), Jagatjit (8.5%), etc.

3.2 INTERNATIONAL PLAYERS

The major international players are Pernod Richard, Remy Cointreau, and Diageo (Diageo
has tied up with Radico for entering Indian markets in brown spirits)

3.3 INVESTMENT RATIONALE

Inherent Potential, Deregulation, western cultural influence and high entry barriers has helped
the industry in notching up higher sales growth. Alcohol sale is driven by the high GDP
growth and more people entering the drinking club with newly obtained prosperity or from up
trading from the existing brand.

3.4 INDUSTRY SCENARIO

 Regulated industry - Prices of Intermediate Goods (molasses, alcohol) are

ightly controlled by state governments.

 Industry is Increasing at 12% p.a. for the last 6 years and is expected to grow between
12% to 14% in the next 5 years.

 Total market volume: 159 million cases in Year 2009.

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  Industry is contributing 15 % CAGR Growth per annum.

 Northern & southern Part of India has major 60 % consumption of alcohol.

Fig 1. 4

3. 5 LIQUOR: MARKET

Market Size

o Market : 58 million cases

o Past growth 15 % CAGR per annum
o Brown spirits - particularly whisky, rum & brandy account for over 75 % of this
market
o South and North share 60% of market

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 Industry Structure

o Industry in the organised sector - an industrial license is required to start manufacture

o Major brands (manufacturers) : Signature, Blue Riband (UB Group), Aristocrat
(Jagajit Industries), Smirnoff, Gilbeys Green Label, Malibu, Archer’s Peach
Schnapps(International Distilleries India), Passport (Seagrams), VAT 69, Black &
White, Black Dog (United Distillers India)

3.6 BEER : MARKET

Market Size

 A 70 million cases market

 Market growing at 10-12 % per annum
 South and west zones account for bulk (> 75 %) of this market
 Major beer consuming centres - Maharashtra (Mumbai)

Industry Structure

 Minimum economic size : 5000 kilo litres; 15000 kilo litres for NRI proposals
 Around 40 units in organised sector, mostly regional players
 4 large breweries have 84% of the market
 Major beer brands (manufacturers) - King Fisher, Kalyani Black Label (UB
Group), Golden Eagle (Mohan Meakins), Haywards (Shaw Wallace), London
Pilsner (Associated Breweries and Distilleries)
 Foreign brands - Stroh’s, Fosters
 Licensing required except for small units employing under 50 persons or not using
power
 Cap on additional capacities (frequently circumvented under pretext of
modernisation)

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 Key Drivers for Growth of Liquor Consumption in India

Fig 1. 5

 India is one of the fastest growing economies in the world with GDP Growth of 9 % &
6.8 % over the last 2 years.

 Growth in per capita income to drive income growth at much higher pace than GDP
Growth , which boost demand for lifestyle products such as alcoholic beverages.

 Rural Economy is to be big upsurge in income levels due to various Govt initiatives.

Young Demographics

Fig 1. 6

 More than 60 % of India's population is in the age of 15 -64 years.

 Nearly 485 Million people in the Drinking Age.

 Around 150 Million People are likely to add in next 5 years.

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 Per capita consumption – litres p.a

Fig 1. 7

 India’s Per capita consumption of alcohol is among the lowest in the world.

 A small increase in per capita consumption significantly alters industry growth.

4. PROBLEM IDENTIFICATION
UB Group which is India’s leading alcohol and breweries brand has plethora of products in
its portfolio ranging from beers to vodka to Champaign. But it lacks a major product, i.e.,
Scotch & Whisky which is world famous and has a great demand across Europe and other
countries.

UB group wants to expand its network and increase its world market share in alcohol
industry. For that it had analysed various alternatives for doing so, which are listed below.

5. STRATEGIC ALTERNATIVES
After analysing situational analysis for United Breweries Group (UB Group), we can infer
that UB group has very large stake in Indian Alcohol Industry. In its portfolio of various
liquor products like beer, vodka etc., it lacks only one product and that is scotch & whisky.
Now the strategic objective of UB group is to expand throughout the world with its various
products offering.

In order to enter into European market and grow, UB group has two options i.e., one is
inorganic growth which most of the companies prefer today and organic growth which is a
costly and time consuming process. Major problem lies in organic growth is that it takes time
to establish a brand and grow further, but in this highly competitive environment its better not

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 to give time to your competitor in launching or imitating your idea or concept or product.
Therefore, inorganic growth is one which is highly preferable globally.

Now, UB group has various alternatives in front of him to expand its network, which can be
listed as:

 Establish its own distillery for scotch and whisky.

 Joint venture with various scotch & whisky manufacturers.

 Strategic alliance with any of manufacturer producing such product.

 Acquisition of major scotch and whisky producing player in the market.

6. STRATEGIC CHOICE
First alternative, as mentioned above, takes couple of years for producing such product and
includes huge costs. By that time UB Group’s competitor will enter in, and snatch out the
prospective market share from UB Group.

Joint venture and strategic alliance will somewhat somewhere dilute the brand of UB Group
which is worldwide famous for its beer and vodka.

The only alternative left with company is to acquire someone’s organic growth and grow
inorganically. After scanning the market and proper evaluation of strategic gains, UB Group
chose Whyte & Mackay a leading scotch and whisky producer to acquire.

7. THE DEAL
 UB Group acquired 100% stake in Whyte & Mackay (W&M), a leading distiller of
Scotch & Whisky, for a consideration of GBP 595 million (Rs. 4800 Crore or $ 1.18
billion).
 W&M owns brand like The Delmore, Isle of Jura, Glayva, Fettercairn, Vladivar Vodka,
and W&M Scotch,
 USL Sold treasury stock to part finances the transaction and reduces the debt.
 Acquisition cost will be through non-recourse finance to USL.
 USL tied up a GBP 325 million loan from ICICI bank with a moratorium of two years
and the loan carries on for nine years.
 USL also tied up a GBP 210 million loan from a Citibank with a moratorium of up to 30
months and thereafter for five years.
 W&M expects to have an operating profit of 50 million pounds this year and this is
expected to take care of the interest costs for the acquisition.
 UB had made a bid for the entire business for around $473 million while Whyte &
Mackay had asked for around $600 million.

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  With the consumers in the US increasingly preferring Scotch to other liquor and China
too consuming more Scotch, there was a huge opportunity for the group to source the
brew and market it abroad
 The group also plans to go for a rights’ issue through UB Holdings to raise Rs 425 crore
and raise Rs 600 crore through qualified institutional placement and another Rs 720 crore
through issue of warrants.

Deal Valuation…
• Total Deal Price was £595 million or $ 1.18
billion or Rs. 4800 Crore.

£ 60 million
£ 325 million
by selling
loan from
treasury
ICICI Bank
stock

£ 210 million loan

from Citibank

Deal Valuation

Fig 1. 8

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 Snapshot of Stock Performance during and post acquisitions

Fig 1. 9

8. OBJECTIVES BEHIND ACQUISITION

 The production resource of W&M will provide USL with a perennial source of Scotch
whisky to meet its global requirements in the future. In addition, Invergordon will remain
a key strategic provider of bulk Scotch whisky to industry majors. W&M also owns four
malt whisky distilleries in Scotland and a bottling facility in Grangemouth with a capacity
of 12 million cases annually.
 The missing link in USL’s portfolio has been scotch and due to shortages and rapidly
increasing prices of Scotch whisky, USL needed a reliable source to secure future.
 The acquisition is driven by the potential for the target’s brands in India, a country where
a history of Scotch whisky drinking and rising prosperity levels are driving up demand.
 We now have a strong portfolio of internationally recognized brands that we will
immediately introduce into the Indian market and use our distribution muscle fully to our
advantage. He also referred to the opportunity Whyte & Mackay provides for him to
export UB’s existing brands, leveraging the target’s entrenched distribution network.
 A significant part of the value of Whyte & Mackay lies in its warehoused whisky stocks.

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 M o t ives…
• Diversif ying t he
po r t fo lio ;
• Po t ent ial supply so urce;
• Leveraging W & M ’s
ent renched dist r ibut io n
net w o r k;
• Eco no m ies o f Sco pe;

Objectives behind the Acquisition

Fig 1. 10

9. CONCLUSION

From the above facts and figures represented in share price movements of the company pre
and post acquisition, we can conclude that acquisition of Whyte & Mackay benefitted UB
Group in respect of diversification, economies of scope, expansion, and growth. Presently,
UB Group is working on the brand repositioning of Whyte & Mackay in India, because this is
new brand for home country although it has a great foothold in other countries. Currently, UB
Group sponsored DLF IPL League with Whyte & Mackay logos on display boards, to
promote it and increasing its foothold in Indian alcohol market.

10. REFERENCES
1. www.theubgroup.com

2. www.whyteandmackay.co.uk

3. www.moneycontrol.com

4. www.sebi.gov.in

5. www.financialexpress.com
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 6. www.economictimes.com

7. www.google.com

8. Financial Management; Khan & Jain;

3rd Edition

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 CASE STUDY-2

ANALYSIS OF NON-PERFORMING ASSETS

(NPAs) IN RELATION TO ICICI BANK

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 TABLE OF CONTENT

S.NO TITLE PAGE

NUMBERS

ANALYSIS OF NPAs IN RELATION TO ICICI

BANK

1. INTRODUCTION 23-24

2. NON-PERFORMING ASSETS- MEANING 24-26

3. NPAs IN ICICI BANK 26-27

4. SITUATIONAL ANALYSIS 28-30

5. PROBLEM IDENTIFICATION 30

6. ICICI BANK – NPAs ANALYSIS 31

7. FINDINGS 31-32

8. IMPACT OF RISE IN NPAs ON BANKS 32

PERFORMANCE

9. STRATEGIC ALTERNATIVES- NPA 32-33

MANAGEMENT

10. CONCLUSION 33

11. RECOMMENDATION 33

12. REFERENCES 33

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 1. INTRODUCTION
Banking sector reforms in India has progressed promptly on aspects like interest rate
deregulation, reduction in statutory reserve requirements, prudential norms for interest rates,
asset classification, income recognition and provisioning. But it could not match the pace
with which it was expected to do. The accomplishment of these norms at the execution stages
without restructuring the banking sector as such is creating havoc.

During pre-nationalization period and after independence, the banking sector remained in
private hands. Government of India nationalized the banks to make them as an instrument of
economic and social change and the mandate given to the banks was to expand their networks
in rural areas and to give loans to priority sector such as small scale industries, self-employed
groups, agriculture and schemes involving women.

To a certain extent the banking sector has achieved this mandate. Lead bank scheme enabled
the banking system to expand its network in a planned way and make available banking series
to the large number of population and touch every strata of society by extending credit to
their productive endeavours. This is evident from the fact that population per office of
commercial bank has come down from 66,000 in the 1969 to 11,000 in 2004. Similar, share
of advances of public sector banks to priority sector increased from 14.6% in 1969 to 44% of
the net bank credit. The number of deposit account of the banking system increased from
over 3 crores in 1969 to over 30 crores. Borrowed account increased from 2.50 lakh to over
2.68 crores.

Financial sector reform in India has progressed rapidly on aspects like interest rate
deregulation, reduction in reserve requirements, barriers to entry, prudential norms and risk-
based supervision. In liberalizing economy banking and financial sector get high priority.
Indian banking sector have a serious problem due to non-performing assets. The financial
reform have helped largely to clean NPAs was around Rs. 52,000 crores in the year 2004.
The earning capacity and profitability of the bank are highly affected due to this.

Non-Performing Assets means an asset or account of borrower, which has been classified by
a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the
directions or guidelines relating to asset classification issued by Reserve Bank of India (RBI).
The level of Non-Performing Assets (NPAs) acts as an indicator showing to the banker’s
credit risks and efficient of allocation of resource.

In Indian banking sector the capital coverage for Non-Performing Assets (NPAs) has
increased sharply over the past ten years: the ratio of net worth to net NPAs was 12.8 times as

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 of end-March 2008, against 2.2 times as of end-March 1998. The problem of Non-Performing
Assets (NPAs) is not only affecting the banks but also the whole economy. In fact high level
of Non-Performing Assets (NPAs) in Indian banks is nothing but a reflection of the state of
health of the industry and trade.

ICICI Bank is India's second-largest bank with total assets of Rs. 3,793.01 billion (US$ 75
billion) at March 31, 2009 and profit after tax Rs. 37.58 billion for the year ended March 31,
2009. The Bank has a network of 1,480 branches and about 4,721 ATMs in India and
presence in 18 countries. The percentage of net non-performing advances to net advances of
year ending March 31, 2008 and 2009 both Audited is 1.55% and 2.09% respectively.

2. NON-PERFORMING ASSETS (NPAs) - MEANING

Action for enforcement of security interest can be initiated only if the secured asset is
classified as Non-performing asset. Non performing asset means an asset or account of
borrower ,which has been classified by bank or financial institution as sub –standard ,
doubtful or loss asset, in accordance with the direction or guidelines relating to assets
classification issued by RBI. An amount due under any credit facility is treated as “past due”
when it is not been paid within 30 days from the due date. Due to the improvement in the
payment and settlement system, recovery climate, up gradation of technology in the banking
system etc, it was decided to dispense with “past due” concept, with effect from March 31,
2001. Accordingly as from that date, a Non performing asset shell be an advance where:

 Interest and/or installment of principal remain overdue for a period of more than 180
days in respect of a term loan.
 The account remains ‘out of order’ for a period of more than 180 days, in respect of
an overdraft/cash credit (OD/CC).
 The bill remains overdue for a period of more than 180 days in case of bill purchased
or discounted.
 Interest and/or principal remains overdue for two harvest season but for a period not
exceeding two half years in case of an advance granted for agricultural purpose, and
 Any amount to be received remains overdue for a period of more than 180 days in
respect of other accounts.

With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt ‘90 days overdue’ norms for identification of
NPAs, from the year ending March 31, 2004, a non performing assets shell be a loan or an
advance where:

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  Interest and/or installment of principal remain overdue for a period of more than 90
days in respect of a term loan.
 The account remains ‘out of order’ for a period of more than 90 days, in respect of an
overdraft/cash credit (OD/CC).
 The bill remains overdue for a period of more than 90 days in case of bill purchased
or discounted.
 Interest and/or principal remains overdue for two harvest season but for a period not
exceeding two half years in case of an advance granted for agricultural purpose, and
 Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.

2.1 Classification of Non Performing Assets (NPAs):

Standard Assets are the ones in which the bank is receiving interest as well as the principal
amount of the loan regularly from the customer. Here it is also very important that in this case
the arrears of interest and the principal amount of loan do not exceed 90 days at the end of
financial year. If asset fails to be in category of standard asset that is amount due more than
90 days then it is NPA. NPAs are further need to classify in sub categories.

Banks are required to classify non-performing assets further into the following three
categories based on the period for which the asset has remained non-performing and the
reliability of the dues:

Sub Classification of NPA

Fig 2. 1

2.1.1 Sub-Standard Assets:

With effect from 31 March 2004, a sub standard asset would be one, which has remained
NPA for a period of less than or equal to 12 month. The following features are exhibited by
sub standard assets: the current net worth of the borrowers / guarantor or the current market
value of the security charged is not enough to ensure recovery of the dues to the banks in full;

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 and the asset has well-defined credit weaknesses that jeopardize the liquidation of the debt
and are characterized by the distinct possibility that the banks will sustain some loss, if
deficiencies are not corrected.

2.1.2 Doubtful Assets:

A loan classified as doubtful has all the weaknesses inherent in assets that were classified as
sub-standard, with the added characteristic that the weaknesses make collection or liquidation
in full, – on the basis of currently known facts, conditions and values – highly questionable
and improbable. With effect from March 31, 2004, an asset would be classified as doubtful if
it remained in the sub-standard category for 12 months.

2.1.3 Loss Assets:

A loss asset is one which considered uncollectible and of such little value that its continuance
as a bankable asset is not warranted- although there may be some salvage or recovery value.
Also, these assets would have been identified as ‘loss assets’ by the bank or internal or
external auditors or the RBI inspection but the amount would not have been written-off
wholly.

3. NPA in ICICI BANK

3.1 INTRODUCTION

ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is India's largest
private sector bank by market capitalization and second largest overall in terms of assets.
Bank has total assets of Rs. 3,793.01 billion (US$ 75 billion) at March 31, 2009 and profit
after tax Rs. 37.58 billion for the year ended March 31, 2009. The Bank also has a network of
1,449 branches and about 4,721 ATMs in India and presence in 18 countries, as well as some
24 million customers (at the end of July 2007). ICICI Bank offers a wide range of banking
products and financial services to corporate and retail customers through a variety of delivery
channels and specialized subsidiaries and affiliates in the areas of investment banking, life
and non-life insurance, venture capital and asset management. ICICI Bank is also the largest
issuer of credit cars in India. ICICI Bank has got its equity shares listed on the stock
exchanges at Kolkata and Vadodara, Mumbai and the National Stock Exchange of India
Limited, and its ADRs on the New York Stock Exchange (NYSE). The Bank is expanding in
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 overseas markets and has the largest international balance sheet among Indian banks. ICICI
Bank now has wholly-owned subsidiaries, branches and representatives offices in 18
countries, including an offshore unit in Mumbai. This includes wholly owned subsidiaries in
Canada, Russia and the UK (the subsidiary through which the HiSAVE savings brand is
operated), offshore banking units in Bahrain and Singapore, an advisory branch in Dubai,
branches in Belgium, Hong Kong and Sri Lanka, and representative offices in Bangladesh,
China, Malaysia, Indonesia, South Africa, Thailand, the United Arab Emirates and USA.
Overseas, the Bank is targeting the NRI (Non-Resident Indian) population in particular.

3.2 HISTORY

ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial
institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was
reduced to 46% through a public offering of shares in India in fiscal 1998, an equity offering
in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of
Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary market sales by
ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at
the initiative of the World Bank, the Government of India and representatives of Indian
industry. The principal objective was to create a development financial institution for
providing medium-term and long-term project financing to Indian businesses. In the 1990s,
ICICI transformed its business from a development financial institution offering only project
finance to a diversified financial services group offering a wide variety of products and
services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In
1999, ICICI become the first Indian company and the first bank or financial institution from
non-Japan Asia to be listed on the NYSE.

After consideration of various corporate structuring alternatives in the context of the

emerging competitive scenario in the Indian banking industry, and the move towards
universal banking, the managements of ICICI and ICICI Bank formed the view that the
merger of ICICI with ICICI Bank would be the optimal strategic alternative for both entities,
and would create the optimal legal structure for the ICICI group's universal banking strategy.
The merger would enhance value for ICICI shareholders through the merged entity's access to
low-cost deposits, greater opportunities for earning fee-based income and the ability to
participate in the payments system and provide transaction-banking services. The merger
would enhance value for ICICI Bank shareholders through a large capital base and scale of
operations, seamless access to ICICI's strong corporate relationships built up over five

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 decades, entry into new business segments, higher market share in various business segments,
particularly fee-based services, and access to the vast talent pool of ICICI and its subsidiaries.

4. SITUATIONAL ANALYSIS

4.1 SWOT Analysis of ICICI Bank

Fig 2.2

4.1.1 STRENGTHS

 Online Services: ICICI bank provides online services of all it’s banking activities.
 Advanced Infrastructure: Branches of ICICI bank are well equipped with latest technology
to provide he customers with efficient banking services.
 Late Night ATM services: ICICI bank provides late night ATM to services to the customers.

4.1.2 WEAKNESS

 High Bank service charges: ICICI bank charges are high with respect to other counterparts.
 Less Credit Period: ICICI bank provides credit facilities but only upto limited period.
 Decentralized management: Each branch manager is given the authority of taking decisions
in their respective branches. The decisions made by different managers are diverse and any
wrong decision can lead to heavy losses to the bank.

4.1.3 OPPORTUNITIES

 Increased rate of interest on deposits: The bank can provide higher returns on deposits in
comparison of the present situation.

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  Recruit professionals from premier B-schools: Bank & insurance is a special non-aid
course where the students specialize in the functioning and services of the bank & also have
knowledge about various tax policies.
 Corporate Social Responsibility: The bank can associate itself with social causes like
patient relief programmes, funding towards natural calamities.

4.1.4 THREATS

 Competition: ICICI bank is facing tight competition locally as well as internationally.

 Net services: ICICI bank provides all kinds of services online. This could be a possible threat
of cyber attack and hacking of confidential data.

4.2 PORTER’S FIVE FORCES MODEL

Fig 2.3

4.2.1 Rivalry among Competing Firms

Rivalry among competitors is very fierce in Indian Banking Industry. The services banks
offer is more of homogeneous which makes the company to offer the same service at a lower
rate and eat their competitor market’s share. Market Players use all sorts of aggressive selling
strategies and activities from intensive advertisement campaigns to promotional stuff. Even
consumer switch from one bank to another, if there is a wide spread in the interest. Hence the
intensity of rivalry is very high.

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 4.2.2 Potential Entry of New Competitors

Reserve Bank of India has laid out a stagnant rules and regulation for new entrant in Banking
Industry. We expect merger and acquisition in the banking industry in near future. Hence, the
industry is less porn of new competitor.

4.2.3 Potential Development of Substitute Products

Every day there is one or the other new product in financial sector. Banks are not limited to
tradition banking which just offers deposit and lending. In addition, today banks offers loans
for all products, derivatives,ForEx, Insurance, Mutual Fund, Demat account to name a
few.The wide range of choices and needs give a sufficient room for new product development
and product enhancement.

4.2.4 Bargaining Power of Suppliers

Banking industry is governed by Reserve Bank of India. Reserve Bank of India is the
authority to take monetary action which leads to direct impact on circulation of money in the
Economy. The rules and regulation lay down by RBI.

4.2.5 Bargaining Power of Consumers

In today world, Customer is the King. Banks offers different services according to clients
need and requirement. They offer loans at Prime Lending Rate (PLR) to their trust worthy
clients and higher rate to others clients.

5. PROBLEM IDENTIFICATION

Lending is one of the economic activity undertaken by the banking industry. It carries a risk
called credit risk, which arises from the failure of borrower.Non-recovery of loans along with
interest forms a major hurdle in the process of credit cycle. Thus, these loan losses affect the
banks profitability on a large scale.

Non-performing asset has emerged since over a decade as an alarming threat to the banking
industry in our country sending distressing signals on the sustainability and endurability of
the affected bank.

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 6. ICICI Bank -- Analysis of Non-Performing Assets

Year Net NPA to net customer assets

2000-01 1.40

2001-02 4.70

2002-03 4.90

2003-04 2.87

2004-05 2.03

2005-06 0.71

2006-07 0.98

2007-08 1.49

2008-09 1.96

Table 2.4

Fig 2. 5

7. FINDINGS

The above table is self-explanatory. From FY 2000-01 the NNPAs rise sharply and become 3

times more in next FY which 2001-02 than again it also rise in next year by 0.20%. But over

the period of time, ICICI bank has shown tremendous improvement in terms of Net non-
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 performing assets from FY 2002-03 to FY 2005-06. Net non-performing assets in FY 2002-

03 which is 4.90% goes downward sharply and remain only 0.71% during FY 2005-06 which

is 7 time less than in comparison to the FY 2002-03. But Net non-performing assets from FY

2005-06 starts going in upward direction and become 2% in FY 2008-09 which is almost 3.5

times more in comparison to the FY 2005-06. There will be increase in Net Non-Performing

Assets in the FY 2009-10 due to slow downs and also specifically due to drought conditions

in many parts of the India.

8. IMPACT OF RISE IN NPAs ON BANK PERFORMANCE

 Owners do not receive a market return on there capital .in the worst case, if the banks
fails, owners loose their assets. In modern times this may affect a broad pool of
shareholders.
 Depositors do not receive a market return on saving. In the worst case if the bank
fails, depositors loose their assets or uninsured balance.
 Banks redistribute losses to other borrowers by charging higher interest rates, lower
deposit rates and higher lending rates repress saving and financial market, which
hamper economic growth.
 Non performing loans epitomize bad investment. They misallocate credit from good
projects, which do not receive funding, to failed projects. Bad investment ends up in
misallocation of capital, and by extension, labour and natural resources.
 Non performing asset may spill over the banking system and contract the money
stock, which may lead to economic contraction.

9. STRATEGIC ALTERNATIVES - NPA MANAGEMENT

 Compromise settlement schemes
 Restructuring/Reschedulement
 Lok Adalat
 Corporate debt Restructuring cell
 Debt Recovery Tribunal (DRT)
 Proceedings under the code of Civil Procedure
 Board for Industrial & Financial Reconstruction (BIFR)
 National Company Law Tribunal
 Sale of NPAs to other banks

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  Sale of NPA to ARC/SC under SARFAESI Act 2002
 Liquidation

10. CONCLUSION
India’s largest private bank has big market share in Indian banking sector. With increasing
complexities and competition in the market due to entry of foreign markets ICICI bank is
facing tough challenges to operate. The major problem for every bank and in case of ICICI
bank is rise in NPA level over the period which eats out the bank’s profitability and increases
costs of operation.

11. RECOMMENDATIONS
The following is recommended for reducing NPAs to minimum:

 Strengthening provision norms and loan classification standards based on forward

looking criteria should be introduced.
 Through Securitization banks can reduce their NPAs.
 Strengthening Legal system.
 Speed of Action- the speedy containment of systematic risk and the domestic credit
crunch problem with the injection of large public fund for bank recapitalization are
critical steps towards normalizing the financial system.
 Use the concept of Credit Derivative
 Modification in accounting system
 Maintain required Capital adequacy ratio as per Base II Norms.

12. REFERENCES

 www.marketresearch.com
 www.icici.com
 www.google.com
 www.rbi.com
 www.businessstandard.com
 Banking & Law Practices by S. L Gupta
 Economic Times

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 CASE STUDY - 3

ANALYSIS OF DIVIDEND POLICY WITH

REFERENCE TO
HERO HONDA MOTORS LIMITED

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 TABLE OF CONTENT

S.NO TITLE PAGE

NUMBERS

ANALYSIS OF DIVIDEND POLICY WITH

REFERENCE TO HERO HONDA

1. INTRODUCTION 36

2. DIVIDEND POLICY 36-42

3. BRIEF HISTORY 43

4. SITUATIONAL ANALYSIS 44-48

5. PROBLEM IDENTIFICATION 48

6. DIVIDEND PAYMENT 48-49

7. CONCLUSION 49

8. REFERENCES 50

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 1. INTRODUCTION
Finance is the life-blood of business, without which a firm cannot promote/ maintain and
expand and achieve its predetermined objective. Whether it is big, medium or small it needs
finance. Profit is the primary motivating force for any economic activity, a business
enterprise essentially being an economic organization; it has to maximize the welfare of its
stakeholders.

To this end, the business undertaking has to earn profit from its operations. Profit is the
excess of revenue over expenses on conducting operations. In fact, profits are useful
intermediate beacon towards which a firm's capital should be directed. In this connection
McAlpine rightly remarked that profit cannot be ignored since it is both, a measure of the
success of business and the means of its survival and growth. To quote Broadly, "if an
enterprise fails to make profit, capital invested is eroded and if this situations, prolongs the
enterprise ultimately ceases to exist. A well organized profit planning programme will help
towards maintaining a level of profit, which will ensure the concentration of the business and
fulfillment of other responsibilities. Certainly, profit growth coupled with high level of profit
and the ability to maintain reasonable profit will help towards.

(i) Ensuring that shareholders receive an adequate dividend;

(ii) Preserving the assets worth of the business;
(iii) Generating a sufficient cash flow out of profits to provide capital for expansion; and
(iv) Providing funds for research, and development of new and improved products to
replace the existing products before they decline.

2. DIVIDEND POLICY
Management of earnings means allocation of earnings among dividends and plough of
profits. The term 'Dividend' refers to that portion of company's net earnings that is paid out to
the equity shareholders (not for preference shareholders, since they are entitled to have a
fixed rate of dividend).

Dividend policy of a firm decides the portion of earnings is to be paid as dividends to

ordinary shareholders and the portion that is ploughed back in the firm for investment
purpose. The total net earnings of equity may be paid as dividends (100% dividend payout
ratio), which may consequently result in slower growth and lower market price or a part of
net earnings may be paid as dividends, higher capital gains and higher market price. When a
company uses a part of its net earnings for dividend payments then, the remaining earnings
are retained. Thus, there is an inverse relationship between retained earnings and payment of
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 cash dividend—the larger the cash dividends and lesser the retention, smaller the cash
dividends and larger retentions. Hence, the alternative use of net earnings or net profit
dividends and retained earnings are competitive and conflicting.

Dividend decision affects the value of the firm. The cash available for the payment of
dividends is affected by the firm's investment decision, and financing decision. A decision,
which is related to investment leads to less cash available for payment of dividends. Thus,
there is a relation between investment decision and financing decision. Distribution of net
earnings between dividends and retention would obviously affect owners' wealth. Now the
company is in dilemma which alternative is consistent to maximize shareholders wealth.

The firm has to pay dividends to shareholders if dividends lead to the maximization of
wealth for them, otherwise the company should retain them for financing profitable
investment opportunities.

2.1 FACTORS DETERMINING DIVIDEND POLICY

Before formulating the dividend policy of the company, the Finance Manager is required to
take into consideration various factors which may be classified as below -

(a) External Factors

(b) Internal Factors

2.1.1 EXTERNAL FACTORS

1. Phase of Trade Cycles: The Company’s dividend policy depends upon the phase of trade
cycles through which the company may be moving. During the phase of boom and
prosperity, the company may not like to distribute huge amount of profits by way of
dividends though the earning capacity of the company may permit it to do so. The
company will like to retain more profits which can be used during the depression which is
likely to follow. Further, the company will like to take the benefits of investment
opportunities prevailing during the period of boom. Similarly, during the period of
depression, the company will like to withhold the dividend payments to retain the profits
in the business in order to preserve its liquidity position.

2. Legal Restrictions: If the company wants to pay the dividend in cash, relevant provisions
of Companies Act, 1956 are required to be followed by the company. If the company
wants to issue the bonus shares with the intention to capitalize its reserves, relevant SEBI
guidelines are required to be followed by the company.

3. Tax Policy: Tax policy as a factor affecting the dividend policy of the company needs to
be considered from the point of view of company as well as the shareholders. From
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 company's point of view, dividend can be paid out of profit after tax. As such, tax policy
of the government necessarily affects the dividend policy of the company. From the
shareholder's point of view, dividend received by them is considered to be a taxable
income which increases their individual tax liability.

4. Investment Opportunities: Formulation of dividend policy of the company depends

upon the investment opportunities available to the company, if the investment
opportunities involve a higher rate of return than the cost of capital of the company, the
company will like to retain the profits to be invested in these projects.

5. Restrictions imposed by the lending institutions: In practical circumstances, the

lending banks or financial institutions impose certain restrictions on the company
preventing the payment of dividend entirely or limiting the amount of dividend or
disallowing the payment of dividend if certain conditions are not fulfilled.

2.1.2 INTERNAL FACTORS

1. Attitude of the Management: If the attitude of the management is aggressive, it may

decide to pay more dividend as the management be interested in increasing the recurring
income of the shareholders. Whereas if the attitude of the management is conservative,
the company will like to retain more profits in the business to take care of the
contingencies.

2. Composition of Shareholding: If the company is a private limited company having less

number of shareholders, the company will like to retain more profits and restrict the
payment of dividend in order to reduce the tax liability of the individual shareholders, as
the dividend received by the shareholders is a taxable income in their hands. If the
company is a public limited company, tax brackets of the individual shareholders may not
have a significant impact on the dividend policy of the company.

3. Age of the Company: A young and growing concern will like to retain maximum profits
in the business in order to finance its growth and expansion needs as it may be difficult
for it to raise the funds from the open market whenever the need arises. On the other
hand, an old or established company having reached the saturation point, may follow a
high dividend policy.

4. Nature of Business / Earnings: The nature of business of the company inevitably affects
its dividend policy. A company having stability of earnings may be able to formulate long
term dividend policy and may even follow a high dividend policy if the earnings so
permit. On the other hand, a company having unstable income may like to retain its
profits during boom to ensure that dividend policy is not affected by cyclical variations.
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 5. Growth Rate of Company: The growth rate of the company closely affects its dividend
policies. A rapidly growing company may like to retain majority of its profits in order to
take care of its expansion needs. However, care should be taken by the management to
invest only in those projects which yield more returns than its cost of capital.

6. Liquidity Position: Profitability and Liquidity are separated from each other. In spite of
existence of high profitability or huge reserves, the company may not have sufficient
funds to pay cash dividends. As such, before formulating the dividend policy, due
considerations should be given to the liquidity positions of the company.

7. Customs and Traditions: In some cases, the customs and traditions built by the
company may affect its dividend policy. E.g. If the company is following the stable
dividend policy for 20 years, it may like to maintain the trend in 21st year also, in spite of
adverse profitability or liquidity situations.

2.2 TYPES OF DIVIDEND POLICIES

Dividend decision of a firm is taken after taking into consideration, its operating and financial
condition. When there are variations in these conditions the firm may require to adopt the one
that is suitable for the present conditions. What are the different types of dividend policies
available to the financial manager? The types of dividend policies are as ‘follows:

Stable Dividend Policy: The term "stability" refers to the consistency or lack of variability in
the stream of dividend payments. In more precise terms, stable dividend means payment of a
certain minimum amount of dividend regularly. There are three distinct forms of stability,
they are:

(a) Constant Dividend Per Share: A company that follows this policy will pay a fixed
amount per share as dividend. For example Rs. 2 as a dividend on the face value of share of
Rs. 10 each. The level of earnings would not affect this policy or the dividend payments. This
type of dividend policy is more suitable for the company whose earnings are stable over a
number of years. Stability of dividend does not mean stagnation in dividend payout. In fact,
the prime feature of this policy is to study positive change.

(b) Constant Payout Ratio: The ratio of dividend to earnings is known as payout ratio. In
other words, dividend per share is divided by earnings per share to get dividend payout ratio.
It is also known as constant percentage of net earnings. In this policy a fixed percentage of
earnings are paid as dividends each year. Here the ratio is fixed or constant, but dividend per
share varies according to the fluctuations in the earnings.

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 For example, it a company follows a 30 per cent payout ratio it means for every one rupee of
net earnings, Re. 0.30, paid as dividends. Assume if a company earned Rs. 10 last year and
Rs. 15 in the current year. Then the dividend amount for last year is Rs. 3 (10 x 30/100) and
Rs. 4.5 (15 x 30/100) for the current year.

This policy is suitable for a company that is not confident getting stable earnings.

(c) Stable Rupee Dividend Plus Extra Dividend: Under this policy the management fixes
the minimum dividend per share to reduce the possibility of net paying dividend. An extra
dividend is paid in the years of prosperity. This type of policy is more suitable to the
company having minimum earnings and over the minimum, the earnings may fluctuate.

2.3 FACTORS INFLUENCING DIVIDEND POLICY

Maximization of owners' wealth is the objective of the financial manager’s job. Whatever
decision he/she takes, whether it is investment decision, financing decision or dividend
decision, he/she has to maximize value of the firm. There is a positive relation between
dividend policy of a firm and value of the firm that is payment of dividend affects the value
(increases) of the firm.

The determinants of dividend policy will vary from firm to firm. The following are the
various factors that have a bearing on the dividend policy.

1. Nature of Earnings: The nature of business has an important bearing on the dividend
policy. The industrial units that are having stability of earnings may formulate (adopt)
stable or a more consistent dividend policy than other that are having unstable earnings,
because they can predict easily their earnings.

Firms that are involved in necessities suffer less from stable incomes than the firms that
are involved in luxury goods. The industries / firms that are having stable earnings can
adopt stable or high dividend policy, while the other firms that are having instable
earnings should follow a variable or low dividend policy.

2. Age of Company: The age of company has more impact on distribution of profits as
dividends. A newly started and growing company may require much of its earnings for
financing expansion programs or growth requirements and it may follow rigid dividend
policy, where in, most of the earnings are retained while an old company with good track
record and good name in the public can formulate a clear cut and more consistent
dividend policy.

3. Liquidity Position of Company: Generally dividends are paid in the form of cash,
hence, it entails, cash. Although, a firm may have sufficient profits to declare dividends,

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 but it may not have sufficient cash to pay dividends. Thus, availability of cash and sound
financial position of the firm is an important factor in taking dividend decision.

4. Requirements of Institutional Investors: Institutional investors like LICs, GICs and

Mutual funds (UTI), have investment policy, which says that these type of institutes have
to invest only in companies that have a continuous dividend payment record with
stability. These purchase large blocks of shares for relatively, to hold a long period of
time.

Hence, they represent a significant force in the financial markets, and their demand for
company's securities may increase the share price and there by owners' wealth. To attract
institutional investors firms may require to follow stable dividend policy.

5. Legal Rules: Legal rules restrictions are significant as they provide framework within
which dividend policy is formulated. In other words, dividend policy of a firm has to be
evolved within the legal framework and rules and regulations. The legal rules have to do
with capital impairment rule, net profits and insolvency rule.

 Capital Impairment Rule: First these provisions require that, the dividend can be
paid from earnings either from current years earnings or from past years earnings and be
reflected in the earned surplus. If firm pays dividend out of capital that adversely affects
the security of its lenders. The purpose of this rule is to protect creditors (preference
shareholders and auditors of the firm) by providing sufficient equity base because they
have originally relied on that base. Therefore, the financial manager should keep in mind
the legal rules while declaring dividends.

 Net Profits: This rule is essentially a result of the earlier rule. A firm can pay cash
dividends within the limits of current profits plus accumulate balance of retained
earnings. According to Sec. 205 of the companies Act, 1956, dividends shall be declared
or paid only from current profits or past profits after recovery of depreciation'. But
Central Govt. is empowered to all (only in public interest) any company to pay dividends
for any financial year out of profits of the company without providing depreciation.

 Insolvency Rule: A firm is said to be insolvent in two cases. One, in a legal sense, the
recorded value of liabilities exceeding the recorded value of assets, or second, as in a
technical sense, as the firm's inability to pay its creditors as obligations came due. If the
firm is insolvent in either sense, it is prohibited the payment of dividends. The rationale of
this rule is to protect the creditors.

6. Contractual Requirements: Generally lenders may put conditions in a bond indenture or

loan agreement often includes a restriction of the payment of dividend. This is done to
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 protect their interests when the firm is experiencing low liquidity or profitability.

7. Financial Needs of the Company: A firm that has sufficient profitable investment
opportunity should follow low dividend payout ratio.

On the other hand, a firm that has no profitable investment opportunities or few
investment opportunities adopts high dividend payout ratio policy (that low retention)
because owners' can reinvest dividends elsewhere at higher rate of return then the firm
can do, and nominal retention of profit is required to replace the modernize firm's assets.

8. Access to the Capital Market (External Sources): Access to the capital market means
the firms ability to raise funds from the capital market. A company, which has easy access
to the capital market, provides that flexibility in deciding dividend policy. On the other
hand, a firm that has difficulty in accessing capital market to raise required funds, will not
be able to pay more dividends. It has to depend on internal funds, so management should
follow a conservative dividend policy by maintaining a low rate of dividend and plough
back a sizeable portion of profits to face any contingency.

9. Control Objective: Control over the company is also an important factor, which
influences dividend policy. When a firm distributes more earning as dividends in the form
of cash it reduces its cash position. As a result, the firm will have to issue shares to the
public to raise funds required to finance investment opportunities that leads to loss of
control, since, the existing shareholders will have to share control with new owners.

10. Inflation: Inflation is the state of economy in which the prices of products or goods have
been increasing. Inflation is a factor that influences dividend policy indirectly.
Consequently, to replace assets and equipment, firm has to depend upon retained
earnings, this leads to the payment of low dividend, during inflation period.

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 HERO HONDA MOTORS LIMITED

3. BRIEF HISTORY
The Hero Honda story began with a simple vision – the vision of a mobile and an empowered
India, powered by Hero Honda. This vision was driven by Hero Honda's commitment to
customer, quality and excellence, and while doing so, maintain the highest standards of ethics
and societal responsibilities. Hero Honda has been the largest two wheeler company in the
world for eight consecutive years. The company crossed the ten million unit milestone over a
19-year span. In the new millennium, Hero Honda has scaled this to 15 million units in just
five years! In fact, during the year in review, Hero Honda sold more two wheelers than the
second, third and fourth placed two-wheeler company put together. With Hero Honda, the
domestic two wheeler market was able to show positive growth during the year in review.
Without Hero Honda, the domestic market would have actually shrunk.

The company's meteoric growth in the two-wheeler market in India stems from an intrinsic
ability to reach out and come closer to its customers, with every passing year. Hero Honda's
bikes are sold and serviced through a network of over 3500 customer touch points,
comprising a mix of dealers, service centres and stockists located across rural and urban
India. Hero Honda has built two world-class manufacturing facilities at Dharuhera and
Gurgaon in Haryana, and its third and most sophisticated plant at Haridwar has just
completed a full year of operations.

3.1 SEGMENT & BRANDS

PRODUCTS BRANDS

Two-Wheelers CBZ
Achiver CBZ CD Deluxe
Xtreme

CD100SS CD DAWN Glamour Hunk

Karizma Passion Plus Pleasure Splendor

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 Super
Splendor NXG Glamour FI
Splendor

4. SITUATIONAL ANALYSIS

4.2.1 SWOT ANALYSIS OF HERO HONDA MOTORS LIMITED

STRENGTHS

 Ability to understand customer’s needs and wants.

 Recognized and established Brand names.

 Effective advertising capability.

 After sale services.

 Technology

 Low Maintenance cost

 High Resale Value

WEAKNESS

 R & D is not close to the Hero manufacturing plant.

 Hero is vulnerable in the joint venture because Honda Motor Company has so much
power.

 Brand name of Hero has no influence in the Automobile Industry.

OPPORTUNITIES

 Global Expansion

 Become India’s leader in the scooter market

 Financial help easily available.

 Relatively low rate of interest and the discount on prices offered by the dealers &
manufacturers lead to the increasing demand for two-wheelers.

 Large market for the high performance segment which is increasing with the
upliftment of the lifestyle of people.

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 THREATS

 Bajaj Motors is strong Competitor.

 The big giant like Harley-Davidson is going to enter the Indian market very soon.

 FDI announced in Automobiles is 100% .

 Increasing Petrol prices.

 Pollution norms.

 Increase in Aluminium & Steel Prices.

4.2.2 BCG MATRIX FOR HERO HONDA MOTORS LIMITED

Sl Market Market Relative Market Quadrant

No. share of share of market growth in which
SBU Hero largest share rate the SBU
Honda competitor lies
(SBU)

1 Motorcycles 53.8% 27.5% 1.95 19.89 % STAR

( Bajaj )

2 Scooters 12.8 % 55 % 0.23 12.36 % Question

Mark
(Honda)

Table 3.1 Data for BCG Matrix

Fig 3.2 BCG Matrix

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  Cash cows are units with high market share in a slow-growing industry. These
units typically generate cash in excess of the amount of cash needed to maintain
the business. They are regarded as staid and boring, in a "mature" market, and
every corporation would be thrilled to own as many as possible. They are to be
"milked" continuously with as little investment as possible, since such investment
would be wasted in an industry with low growth.
 Dogs, or more charitably called pets, are units with low market share in a mature,
slow-growing industry. These units typically "break even", generating barely
enough cash to maintain the business's market share. Though owning a break-even
unit provides the social benefit of providing jobs and possible synergies that assist
other business units, from an accounting point of view such a unit is worthless, not
generating cash for the company. They depress a profitable company's return on
assets ratio, used by many investors to judge how well a company is being
managed. Dogs, it is thought, should be sold off.
 Question marks (also known as problem child) are growing rapidly and thus
consume large amounts of cash, but because they have low market shares they do
not generate much cash. The result is a large net cash consumption. A question
mark has the potential to gain market share and become a star, and eventually a
cash cow when the market growth slows. If the question mark does not succeed in
becoming the market leader, then after perhaps years of cash consumption it will
degenerate into a dog when the market growth declines. Question marks must be
analyzed carefully in order to determine whether they are worth the investment
required to grow market share.
 Stars are units with a high market share in a fast-growing industry. The hope is
that stars become the next cash cows. Sustaining the business unit's market
leadership may require extra cash, but this is worthwhile if that's what it takes for
the unit to remain a leader. When growth slows, stars become cash cows if they
have been able to maintain their category leadership, or they move from brief
stardom to dogdom.

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 4.2.3 PORTER’S FIVE FORCES MODEL

Fig 3.3

1. Threat of Mobility. It's true that the average person can't come along and start
manufacturing automobiles. Historically, it was thought that the American automobile
industry and the Big Three were safe. But this did not hold true when Honda Motor Co.
opened its first plant in Ohio. The emergence of foreign competitors with the capital, required
technologies and management skills began to undermine the market share of North American
companies.
2. Power of Suppliers. The automobile supply business is quite fragmented (there are
many firms). Many suppliers rely on one or two automakers to buy a majority of their
products. If an automaker decided to switch suppliers, it could be devastating to the previous
supplier's business. As a result, suppliers are extremely susceptible to the demands and
requirements of the automobile manufacturer and hold very little power.
3. Power of Buyers. Historically, the bargaining power of automakers went
unchallenged. The American consumer, however, became disenchanted with many of the
products being offered by certain automakers and began looking for alternatives, namely
foreign cars. On the other hand, while consumers are very price sensitive, they don't have
much buying power as they never purchase huge volumes of cars.
4. Availability of Substitutes. Be careful and thorough when analyzing this factor: we are
not just talking about the threat of someone buying a different car. You need to also look at
the likelihood of people taking the bus, train or airplane to their destination. The higher the
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 cost of operating a vehicle, the more likely people will seek alternative transportation options.
The price of gasoline has a large effect on consumers' decisions to buy vehicles. Trucks and
sport utility vehicles have higher profit margins, but they also guzzle gas compared to smaller
sedans and light trucks. When determining the availability of substitutes you should also
consider time, money, personal preference and convenience in the auto travel industry. Then
decide if one car maker poses a big threat as a substitute.
5. Industry Rivalry. Highly competitive industries generally earn low returns because
the cost of competition is high. The auto industry is considered to be an oligopoly, which
helps to minimize the effects of price-based competition. The automakers understand that
price-based competition does not necessarily lead to increases in the size of the marketplace;
historically they have tried to avoid price-based competition, but more recently the
competition has intensified - rebates, preferred financing and long-term warranties have
helped to lure in customers, but they also put pressure on the profit margins for vehicle sales.

5. PROBLEM IDENTIFICATION
Dividend Policy, which is one of the crucial decision/policy for every organization, tells an
organization about how much funds have to be paid to shareholders as dividends and how
much to be retained.

Payment and retaining of dividends depends on the various future projects, future
expectations of growth etc. Dividend policy directly affects the share prices of company and
investors are very sensitive to such information. Therefore to formulate a balanced and
effective dividend policy, is very important activity of every organization in order to provide
benefits to its shareholders as well as to achieve its growth objectives.

6. DIVIDEND PAYMENT

The company has been continuously paying dividends to its shareholders for the last 18 years
and is among one of the very few Indian automobile companies with such an amazing track
record of dividend payout. Given this long history, there is very little chance that the
company might stop paying dividends to its shareholders in the future.

At the current price level, the dividend yield for Hero Honda is hovering around 3%.
Assuming the company continues to grow its dividend per share at more than 20% per
annum, the investor would be able to fetch 10% returns annually on his investment from
dividends alone from the 6th year onwards. This is quite an achievable goal, as the company
has managed to grow its dividend per share at a CAGR of 24% between FY91 and FY08.
Furthermore, the company has low capex requirements. It also has a policy of not keeping
more cash than required. In fact it distributes the surplus cash to the shareholders.

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 Fig 3.4 Dividend Payments over the years (Source: CMIE)

7. CONCLUSION
Despite a low current dividend yield, the growth rate will turn Hero Honda into a dividend
play for the long term investor. However, the investor should bear in mind that the above
desired results can be achieved only if one stays invested in the company from a long term
perspective. Moreover, it is vital that management policies and the environment in which the
company operates remain unchanged.

Dividend decision is very important for any organization because it directly reflects the
companies profitability and the soundness thereon, because if a company pays a higher
dividend then it is assumed that the company is having good profits whereas if a company
pays a lower dividend then the shareholders become suspicious about the profitability of the
company and they throng the market to sell the shares.

If more number of shareholders go in the market to sell the shares of a company, then as the
rule of demand and supply of shares the market value of the share goes down. It means that
lower DPS results in lower MPS and as a result less number of people goes for the shares of
that company. Hence, dividend policy must be framed in such a manner that it is neither too
low to dissatisfy the shareholders nor too high to put company in a financial burden. Further
the dividend should also be stable and the policy must be known to the shareholders so that
an investor can rely on the company.

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 8. REFERENCES

 www.marketresearch.com
 www.herohonda.com
 www.google.com
 www.moneycontrol.com
 www.businessstandard.com
 www.livemint.com
 Economic Times
 Financial Express

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 CASE STUDY - 4

LEVERAGED BUYOUT DEAL OF

TATA TEA & TETLEY

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 TABLE OF CONTENTS

S.NO TITLE PAGE

NUMBERS

LEVERAGED BUYOUT DEAL OF TATA TEA &

TETLEY

1. INTRODUCTION 53

2. TEA INDUSTRY OF INDIA 53-56

3. ABOUT TATA TEA 56-58

4. ABOUT TETLEY 58-59

5. PROBLEM STATEMENT 59-60

6. SITUATIONAL ANALYSIS 60-63

7. STRATEGIC DECISION 63-65

8. BENEFITS OF TATA TEA’S TETLEY 65

ACQUISITION

9. CONCLUSION 65

10. REFERENCES 66

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 1. INTRODUCTION
The Leveraged Buyout Deal of Tata & Tetley provides insights into the concept of Leveraged
Buyout (LBO) and its use as a financial tool in acquisitions, with specific reference to Tata
Tea’s takeover of global tea major Tetley.

“We were very clear that the burden on Tata tea should be such that the company would be
able to absorb it. And it would not materially affect Tata Tea’s bottomline.”

- N. A. Soonavala, Vice-Chairman, Tata Tea

“It was important to make the right decision on the comprehensiveness of the transaction.
The model has been driven by existing and future earnings potential of the Tetley group and
the resultant post-acquisition cash flows to immediately justify the business and financial
model.”

- Rana Kapoor, MD, Rabo India Finance Ltd., Commenting on the deal.

In the summer of 2000, the Indian corporate fraternity was witness to a path breaking
achievement, never heard of or seen before in the history of corporate India.

Tata Tea acquired the UK heavyweight brand Tetley for a staggering 271 million pounds.
This deal which happened to be the largest cross border acquisition by any Indian company
marked the culmination of Tata Tea’s strategy of pushing for aggressive growth and
worldwide expansion. This acquisition made Tata Tea the second biggest tea company in the
world.

Ratan Tata, Chairman, Tata group said, “It is a great signal for global industry by Indian
Industry. It is a momentous occasion as an Indian company has been able to acquire a brand
and an overseas company.” Apart from the size of the deal, what made it particularly special
was the fact that it was the first ever Leveraged buy-out (LBO) by any Indian company. This
method of financing had never been successfully attempted before by any Indian company.
Tetley’s price tag of 271 million pounds (US $ 450 M) was more than four times the worth of
Tata tea which stood at US $114 M.

2. TEA INDUSTRY OF INDIA

The tea industry in India is about 172 years old. It occupies an important place and plays a
very useful part in the national economy.

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 Tea plantations in India are mainly located in rural hills and backward areas of North-eastern
and Southern States. Major tea growing areas of the country are concentrated in Assam, West
Bengal, Tamil Nadu and Kerala. The other areas where tea is grown to a small extent are
Karnataka, Tripura, Himachal Pradesh, Uttaranchal, Arunachal Pradesh, Manipur, Sikkim,
Nagaland, Meghalaya, Mizoram, and Bihar.

Unlike most other tea producing and exporting countries, India has dual manufacturing base.
India produces both CTC and Orthodox teas in addition to green tea. The weightage lies with
the former due to domestic consumers’ preference. Orthodox tea production is balanced
basically with the export demand. Production of green tea in India is small. The competitors
to India in tea export are Sri Lanka, Kenya, China, Indonesia and Vietnam.

Tea is an agro-based commodity and is subjected to vagaries of nature. Despite adverse agro
climatic condition experienced in tea growing areas in many years, Indian Tea Plantation
Industry is able to maintain substantial growth in relation to volume of Indian tea production
during the last one decade. There has been a dramatic tilt in tea disposal in favour of
domestic market since fifties. While at the time of Independence only 79 M.Kgs or about
31% of total production of 255 M.Kgs of tea was retained for internal consumption, in 2008
as much as 802 M.Kgs or about 82% of total production of 981 M.Kgs of tea went for
domestic consumption. Such a massive increase in domestic consumption has been due to
increase in population, greater urbanisation, increase in income and standard of living etc.

Indian tea export has been an important foreign exchange earner for the country. There was
an inherent growth in export earnings from tea over the years. Till 70s’, UK was the major
buyer of Indian tea Since 80s’ USSR became the largest buyer of Indian tea due to existence
of the trade agreement between India and erstwhile USSR. USSR happened to be the major
buyer of Indian tea accounting for more than 50% of the total Indian export till 1991.

However, with the disintegration of USSR and abolition of Central Buying Mechanism,
Indian tea exports suffered a set back from 1992-93. However, Indian Tea exports to
Russia/CIS countries recovered from the setback since 1993 under Rupee Debt Repayment
Route facilities as also due to long term agreement on tea entered into between Russia and
India. Depressed scenario again started since 2001 due to change in consumption pattern, i.e.
switch over from CTC to Orthodox as per consumer preference and thus India has lost the
Russian market. Another reason for decline in export of Indian tea to Russia is offering of
teas at lower prices by China, South Asian countries like Indonesia and Vietnam.
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 The major competitive countries in tea in the world are Sri Lanka, Kenya, China and
Indonesia. China is the major producer of green tea while Sri Lanka and Indonesia are
producing mainly orthodox varieties of tea. Kenya is basically a CTC tea producing country.
While India is facing competition from Sri Lanka and Indonesia with regard to export of
orthodox teas and from China with regard to green tea export, it is facing competition from
Kenya and from other African countries in exporting CTC teas.

Because of absence of large domestic base and due to comparatively small range of
exportable items, Sri Lanka and Kenya have an edge over India to offload their teas in any
international markets. This is one of the reasons of higher volume of export by Sri Lanka and
Kenya compared to India. Another important point is that, U.K has substantial interest in tea
cultivation in Kenya. Most of the sterling companies, after Indianisation due to
implementation of FERA Act started tea cultivation in Kenya. So, it makes business sense for
U.K. to buy tea from Kenya and Kenya became the largest supplier of tea to U.K.

Tea is an essential item of domestic consumption and is the major beverage in India. Tea is
also considered as the cheapest beverage amongst the beverages available in India. Tea
Industry provides gainful direct employment to more than a million workers mainly drawn
from the backward and socially weaker section of the society. It is also a substantial foreign
exchange earner and provides sizeable amount of revenue to the State and Central Exchequer.
The total turnover of the Indian tea industry is in the vicinity of Rs.9000 Crs. Presently,
Indian tea industry is having (as on 18.12.2009)
• 1692 registered Tea Manufacturers,
• 2200 registered Tea Exporters,
• 5848 number of registered tea buyers,
• 9 tea Auction centres.

2.1 SPECIAL FEATURES OF INDIAN TEA INDUSTRY

 Production dependent on agro-climatic conditions.

 Same plant and same agro-practices give variations in quality in different regions.
 Product life is for limited period.
 Labor intensive.
 High input cost
 No priority for scientific cost management.

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  Huge proportion of old tea and low productivity.
 Low investment in development programme.

3. ABOUT TATA TEA

Set up in 1964 as a joint venture with UK-based James Finlay and Company to develop
value-added tea, the Tata Tea Group of Companies, which includes Tata Tea and the UK-
based Tetley Group, today represent the world's second largest global branded tea operation
with product and brand presence in 40 countries. Among India's first multinational
companies, the operations of Tata Tea and its subsidiaries focus on branded product offerings
in tea but with a significant presence in plantation activity in India and Sri Lanka.

The consolidated worldwide branded tea business of the Tata Tea Group contributes to
around 86 per cent of its consolidated turnover with the remaining 14 per cent coming from
Bulk Tea, Coffee, and Investment Income. The Company is headquartered in Kolkata and
owns 27 tea estates in the states of Assam and West Bengal in eastern India, and Kerala in
the south.

3.1 PRODUCTS & BRANDS

The company has five major brands in the Indian market - Tata Tea, Tetley, Kanan Devan,
Chakra Gold and Gemini -- catering to all major consumer segments for tea. The Tata Tea
brand leads market share in terms of value and volume in India and the Tata Tea brand is
accorded "Super Brand" recognition in the country. Tata Tea's distribution network in the
country with 38 C&F agents and 2500 stockists caters to over 1.7 million retail outlets (ORG
MargRetail Audit) in India.

The company has a 100% export-oriented unit (KOSHER & HACCP certified)
manufacturing Instant Tea in Munnar, Kerala, which is the largest such facility outside the
United States. The unit's product is made from a unique process, developed in-house, of
extraction from tea leaves, giving it a distinctive liquoring and taste profile. Instant Tea is
used for light density 100% Teas, Iced Tea Mixes and in the preparation of Ready-to- drink
(RTD) beverages.

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 With an area of approx 15,900 hectares under tea cultivation, Tata Tea produces around 30
million kg of Black Tea annually.

3.2 HISTORICAL MILESTONES

Pre 1963 James Finlay

1964 Tata Finlay established to develop value added Tea

1976 Tata Finlay takes over tea production and marketing operations of James Finlay

1983 James Finlay sell their shareholdings to Tatas heralding the "Dawn of a new

Era" - Tata Tea is born

1987 A wholly owned subsidiary, Tata Tea Inc, set up in the U.S.A.

1991 Acquisition of 52.5% shareholding in Consolidated Coffee Ltd (Tata Coffee

Ltd.)

1992 Joint Venture in Sri Lanka, Estate Management Services (P) Ltd. formed.

1993 Joint Venture alliance with Allied Lyons plc - Tata Tetley established.

1995-96 65% share Lankan JVC acquires 51% shareholding in Watawala Plantations

Ltd.

1996 Sri Lankan JVC acquires 51% shareholding in Watawala Plantations Ltd.

2000 Tata Tea acquires The Tetley Group Ltd., UK.

Over the years, the company expanded its operations and also acquired tea plantations. In
1976, the company acquired sterling Tea companies from James Finlay & Company for Rs
115 million, using Rs. 19.8 million of equity and Rs. 95.2 million of unsecured loans at 5%
per annum interest. In 1982, Tata Industries Ltd. Bought out the entire stake of James Finlay
& Company in the joint venture, Tata Finaly Ltd. In 1983 the company was renamed Tata
Tea Limited. In the mid 1980s, to offset the erratic fluctuations in commodity prices, Tata
Tea felt it necessary to enter the branded tea market. In May 1984, the company
revolutionized the value-added tea market in India by launching Kanan Dean tea in polypack.

In 1984, the company set up a research & development center at Munnar, Kerala. In 1986, it
launched Tata Tea Dust in Maharashtra. In 1988, the Tata Tea Leaf was launched in Madhya
Pradesh.

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 In 1989, Tata Tea bought a 52% stake in Karnataka-based Consolidated coffee limited-the
largest coffee plantation in Asia, in order to expand its coffee business. In 1991, Tata Tea
formed a joint venture with Tetley International, UK, to market its branded tea abroad. In
1992, Tata Tea took a 9.5% stake in asian Coffee-the Hyderabad based 100% export oriented
unit known for its instant coffee, through an open offer. This offer was the first of its kind in
Indian corporate history. Later, in 1994, Tata Tea increased its stake in Asian Coffee to
64.5% throught another open offer. This helped it to consolidate its position in the coffee
industry. In 1995, Tata Tea unveiled a massive physical upgradation program at a cost of Rs.
1.6 billion. The upgradation program, spread over four years, was meant to improve its
production facilities. In the same year, the company, along with a Sri Lankan partner, bid
successfully for a group of 20 tea estates in the famous Watawala plantations in Sri Lanka.

In 1996, Tata Tea felt the need to develop into a truly national brand. It identified an
opportunity to enter the leaf tea segment in the South. Between 1996 and 1998, the company
launched Tata Tea Premium in Karnataka, Andhra Pradesh, Kerala and Goa.

To meet the demands of the American market, Tata Tea Inc. – a wholly owned subsidiary of
Tata Tea Limited – was set up in Florida to package and market instant tea in the US. The tea
was produced in Tata Tea’s factory in Munnar and then processed in Florida. The company
also launched Snapple, a ready-to-drink iced tea, in the US. In 2000, it was one of the largest
selling ready-to-drink teas in the US.

In order to tap the Japanese tea and coffee market, Tata Tea entered into a joint venture with
Hitachi of Japan – Tata Hitachi Sales Limited. Tata Tea had been serving as an agent for
Nippon Yusen Kaisha (NYK), one of the largest shipping companies in the world.

4. ABOUT TETLEY

In 1837, two brothers, Joseph and Edward Tetley started to sell tea and became such a
success that they set up as tea merchants. In 1856, in partnership with Joseph Ackland, they
set up "Joseph Tetley & Company, Wholesale Tea Dealers".

Tea was rationed during World War II, it was not until 1953, just after rationing finished, that
Tetley launched the tea bag to the UK and it was an immediate success.

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 The rest, as they say, is history. The tea bag had captured the public’s imagination and desire
for convenience. Within 10 years it revolutionised how Britons drank their tea and the old
fashioned tea pot had given way to making tea in a cup using a tea bag.

Since the 60s, Tetley has continued to develop people’s love of tea drinking by introducing
innovative and exciting ideas in many different countries. In 1989 we launched the round tea
bag, latching on to the fashion to drink tea in a mug, rather than a cup. Next came the
Drawstring ‘No drip, no mess’ tea bag.

1974 Tetley Tea Company was bought by J Lyons who merged it with the Lyons tea business
to form Lyons Tetley. 1978 Allied Breweries acquired J Lyons’ Businesses then as Allied
Domecq sold them in the 1990s. The Tetley Group was created in July 1995, when a group
of investors bought what was then the world-wide beverage business from Allied Domecq.
On 10th March 2000, The Tetley Group was sold to Tata Tea Limited, one of the world’s
largest integrated tea businesses.

Every day, our focus is on developing new, exciting and different ways of making tea.
Recently in the UK, Canada and Australia, we’ve launched new blends of green teas and fruit
and herbal infusions, some delicious new ready to drink iced teas and spicy chai latte teas
(just add a shot of steamed milk and away you go..). And there’s a lot more on the way!
Nearly 1,000 people world wide work for Tetley, at its headquarters in Greenford, UK and in
Australia, Canada, Poland, Russia, the USA, Pakistan, Bangladesh, India and South Africa.
Tetley also includes Good Earth Teas, one of the USA’s most exciting specialty tea brands
and JEMČA, the market leading tea company in the Czech Republic selling a range of black,
green and fruit and herbal teas. We also own one third of Joekels Tea Packers, the third
largest player in the South African tea market
Tetley is part of Tata Tea, India’s No 2 tea brand and itself part of the Tata Group, one of
India’s biggest business corporations. Between us, Tata Tea and Tetley have tea for sale in
60% of the world’s tea market.
We’re proud of our achievements and success. We’re just as proud of our commitment to
operate as a responsible business. Click on this link to find out more about what we’re doing
to manage our environmental, ethical and social impacts.

5. PROBLEM STATEMENT

In 1999, Tata Tea Company faced several new challenges:

 Upcoming Deregulation
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  Changing consumer tastes
 Ban on Tea imports scheduled to be lifted in 2001.
 Possibility of future stiff competition from Nestle, Sara Lee Corporation and
Associated British Foods.

Now, the possible solution available with the Tata Tea Company is:

 To enhance its position in the current brand, or

 To acquire a well known brand.

TATA choose to acquire Tetley. The major challenge was financing as Tetley was valued at
$450 million while value of Tata Tea was only $114 million.

6. SITUATIONAL ANALYSIS

6.1 PORTER’S FIVE FORCES MODEL FOR INDIAN TEA INDUSTRY

Fig 4.1

 Industry Rivalry (High):

o There are approximately 700 tea companies in India hence there is intense
rivalry amongst them.
o Market is dominated by a large number of unorganized players.
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 o Industry growth is slow.
o There are low switching costs.
 Bargaining Power of Buyers (High):
o There are large numbers of buyers purchasing the product.
o The bargaining power of buyers is extremely high as the buyers have many
options available.
o Not much product differentiation in terms of taste.
o Buyers purchase a large proportion of the industry’s total output.
 Bargaining power of suppliers (Low):
o There are large number of products of tea in India
o There are substitutes like coffee available.
o Supplier’s product creates low switching costs.
 Threat of substitutes (Moderate):
o Substitutes - Coffee, cold drinks, juice, traditional payables like kahwa.
o Existing consumers are loyal.
o Substitute’s price may be lower. As there are so many players in the industry a
price war is unavoidable.
 Threat of new entrants (High):
o Large untapped rural market for branded tea segment in rural India and Indian
tea in global markets.
o Encouraging government policies like food and beverages act and other
subsidies.

6.2 SWOT ANALYSIS OF TATA TEA

Fig 4.2

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 STRENGTHS

 Market Leader: With a value share of 22.6% in November 2009, Tata Tea enjoys the
market leader position after overtaking HUL which has a value of 21.3%.
 Resources & Capabilities: Tata Tea own approximately 51 tea estates in the states of
Assam, West Bengal and Kerala in India. Having plantations in varied agro-climatic
zones enables Tata Tea to cultivate distinct tea leaves.
 Brand Name: Tata Tea brand is ranked the second most trusted beverage brand by
brand equity. The company’s best selling brand is Agni which caters to the mass
segment and other brands include Tata Tea Gold, Chakra, Gemini and Kanan Devan.
 Experience: Tata Tea has been one of the oldest companies in India and has the
advantage of skill and experience on their side.

WEAKNESS

 No Product differentiation: Due to lack of product differentiation, customer loyalty

is of major concern for the company.
 Distribution Network: The distribution network of Tata Tea comprises of 1.25 lakhs
distributors which are lower than that of the HUL, which on the contrary have the
strongest dealer network in the country.

OPPORTUNITIES

 New Product Development: The Company can integrate into fruit and herbal teas.
This segment has not yet been tapped by any of the tea companies and this will give
Tata Tea the first mover’s advantage.
 Rural market: There is a large untapped rural market which needs to be exploited.
Although Tata Tea made its presence in the rural market but still this sector is
dominated by unorganized players.
 Export Potential: Tata Tea is present in 40 countries around the world. There are lot
more opportunities which can be exploited by increasing their production capacity and
meeting international standards.
 Merger & Acquisitions: There are more than 1000 tea companies in India. Tata tea
can increase its market share and penetration by acquiring these small companies and
also forming mergers with other big MNCs.

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 THREATS

 Low Barriers: Entry barriers kept very low by policy makers which makes Indian tea
market extremely fragmented and unorganized. There are many regional players who
hold small chunks of markets.
 Competition: After adoption of Liberalization, privatization and globalization policy,
potential threat of competition has increased for the domestic players.

7. STRATEGIC DECISION

7.1 ACQUISITION PROCESS

The Tata-Tetley deal was unusual, in that it had no precedence in India. Traditionally, Indian
market had preferred cash deals, be it the Rs. 10.08 billion takeover of Indal by Hindalco or
the Rs. 4.99 billion acquisition of Indiaworld by Satyam.

What set the deal apart was the LBO (Leveraged Buy-out) mechanism which financed the
acquisition. In an LBO, the acquiring company could float a Special Purpose Vehicle (SPV)
which is a 100% subsidiary of the acquirer with a minimum equity capital.

The SPV leverage this equity to gear up significantly higher debt to buyout the target
company. This debt is paid off by the SPV through the target company’s own cash flows. The
target company’s assets were pledged with the lending institution and once the debt was
redeemed, the acquiring company had the option to merge with the SPV. Thus the liability of
the acquiring company was limited to its equity holding in the SPV. Thus, in an LBO the
takeover is financed by the target’s company future internal accruals. This reduced the burden
on the acquiring company’s balance sheet and made the entire takeover a low risk affair.

In the case of Tata Tea, its reserves at the time of the deal were just around Rs. 4 billion,
precluding the possibility of making such a gigantic acquisition on its own. Neither could it
afford the debt burden associated with large borrowings. So, it opted for a leveraged buyout.

7.2 STRUCTURE OF THE DEAL

The purchase of Tetley was funded by a combination of equity, subscribed by Tata Tea,
junior loan stock subscribed by institutional investors (including the vendor institutions

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 Mezzanine finance, arranged by Intermediate Capital Group Plc.) and senior debt facilities
arranged and underwritten by Rabobank International.

Tata Tea created a SPV Christened Tata Tea Britain to acquire all the properties of Tetley.
The SPV was capitalized at 70mn pounds, of which Tata Tea contributed 60mn pounds, this
included 45mn pounds raised through a GDR issue. The US subsidiary of the company, Tata
Tea Inc. had contributed the balance 10mn pounds.The equity investment was made into Tata
Tea Great Britain, a special purpose vehicle created for the Tetley acquisition. Tata Tea raised
$75-m (pounds 45-m) through an issue of global depository receipts (GDRs) to help meet its
contribution to the equity.

Of the debt component, pound 20-m was brought in through sub-ordinate vendor loan notes
and the balance through debt offerings arranged by Rabobank International which acted as
the advisor as well as the sole lead arranger for the transaction. The senior debt facilities
consisted of four tranches that comprised an amortising term loan (pound110-m), a term loan
(pound 25-m) and a revolving credit facility (pound 20-m). Tata Tea is one of the largest tea
companies in the world and the second largest seller of packet tea in India. It has 54 estates
spread across 57,000 hectares in the four states of Assam, West Bengal, Tamil Nadu and
Kerala and produces over 57m kg of tea every year. Tetley is one of the leading tea
companies in the world and is also the inventor of the tea bag. It is the leading brand of tea
bags in the UK, by value and volume and is also among the top 20 grocery brands in the UK.

Tetley blends, packs, markets and distributes tea products, principally in the UK and the US.
It is presently the second largest tea bag concern in the world, producing approximately 20bn
tea bags per annum. A year after Tata Tea acquired the Tetley group, merging the two entities
is increasingly beginning to make strategic sense to the Tata top management, reports George
Cherian in Mumbai.

Debt Repayment Structure

A B C D
Amount 110mn GBP 25mn GBP 10mn GBP 20mn GBP
Loan Type Long-term debt Long-term debt Long-term debt Revolving debt
Purpose Funding Funding Capital Working Capital
Acquisition Acquisition Expenditure & Corporate
Expenses.
Year of 2007 2007 2008 2007
Maturity
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 Payback Semi-Annual Two Two Cessation of
Method Installments installments in installments in credit
2007-08 2007-08

Table 4.3

8. BENEFITS OF TATA TEA’S TETLEY ACQUISITION

 Tetley is the most easily recalled tea brand in the world, a blue-blood British Tea
Company, known for its innovation, whether in packaging or managing the brand.
 Tetley is able to buy teas worldwide, blend and package them, which is a very special
skill that Tetley possesses. It sources teas from all over Argentina, Turkey, India, Sri
Lanka, Africa, etc. Its expertise in this area is unrivalled and is an important asset that
Tata tea has inherited.
 Tetley is extremely good innovation in packaging. They are the first company in the
world to introduce tea bags. They have an extremely fine track record for innovative
packaging; they created, among others, the round tea bags and the drawstring tea
bags.
 And finally, they have extremely good logistics management skills, which tata tea has
acquired.

Therefore, what it means to the Indian consumer is that Tata Tea will be able to leverage
all this in the Indian market place.

9. CONCLUSION

The takeover of Tetley was very widely reported by newspapers all over the world. The
British media carried the news very prominently. It changed their perception of India; they
realised Indian companies have the daring and courage to acquire an international company
bigger than themselves -- Tetley is three times the size of Tata Tea. It was received with some
degree of consternation but with a great deal of respect.

All the above strengths inherited with Tetley, proves to be highly beneficial for Tata Tea in
increasing its market share in the tea industry and thereby taking over of its competitors.
After this acquisition Tata Tea’s market leader position strengthened with increased profits at
high economies of scale.

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 10. REFERENCES

 www.tatatea.com
 www.tata.co.in
 www.seeburger.com
 www.planmanconsulting.com
 www.thehindubusinessline.com
 www.economictimes.com
 www.india-today.com
 www.google.com
 www.businessballs.com
 www.humanresources.about.com
 www.geert-hofstede.com

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 APPENDIX

FIG./TABLE TITLE PAGE

NO. NUMBERS

1.1 MOST POPULAR BRAND NAMES 5

1.2 SWOT ANALYSIS – CASE 1 8

1.3 PORTER’S FIVE FORCES MODEL – CASE 1 9

1.4 LIQUOR INDUSTRY SEGMENTATION 12

1.5 KEY DRIVER’S FOR GROWTH OF LIQUOR CONSUMPTION 14

IN INDIA

1.6 YOUNG DEMOGRAPHICS 14

1.7 PER CAPITA CONSUMPTION-LITRES P.A 15

1.8 DEAL VALUATION 17

1.9 STOCK PERFORMANCE DURING & POST ACQUISITION 18

1.10 OBJECTIVES BEHIND THE ACQUISITION 19

2.1 SUB CLASSIFICATION OF NPAs 25

2.2 SWOT ANALYSIS- CASE 2 28

2.3 PORTER’S FIVE FORCES MODEL- CASE 3 29

2.4 NPA ANALYSIS 31

2.5 NET NPA TO NET CUSTOMER ASSETS 31

3.1 DATA FOR BCG MATRIX 45

3.2 BCG MATRIX – CASE 3 45

3.3 PORTER’S FIVE FORCES MODEL- CASE 3 47

3.4 DIVIDEND PAYMENT OVER THE YEARS 49

4.1 PORTER’S FIVE FORCES MODEL- CASE 4 60

4.2 SWOT ANALYSIS- CASE 4 61

4.3 DEBT REPAYMENT STRUCTURE 64

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