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• Introduction
• Importance of investment decision
• Objective of the study
• Methodology
• Limitations


• Introduction
• Pre-Independence
• Post-Independence
• Major Steel Industries in India
• Global Scenario
• Market Scenario
• Production Scenario
• Demand- Availability Projection
• Pricing &Distribution


• Introduction
• Background
• Mission
• Vision
• ISO Policy
• Objectives
• Core values
• Quality Policy
• Environmental policy
• Energy policy
• OSHAS policy

• HR policy
• Customer policy
• IT policy
• VSP Technology : state of the Art
• Major Departments
• Functions of various departments of RINL \ VSP
• Inputs and Basic Infrastructure
• Corporate Strategic Management(CSM)
• Achievements & Awards

Table Representation

A. Steel Industries
B. Major Sources of Raw Materials
C. Major Units
D. Main Products of VSP
E. Parameters of Sintering Machines
F. Production performance
G. Commercial performance
H. Financial performance
I. Man power at a Glance in VSP




• Introduction
• Nature of investment decisions
• Process of Investment decisions
• Importance of Investment decisions
• Types of Investment decisions
• Investment Evaluation criteria
• Cost effective Analysis
• Project planning


• Sources of finance


• Payback period
• Average rate of return
• Net present value
• Internal rate of return
• Profitability index method


• Frame work of capital structure

• Approaches to establishment target capital
• Capital structuring in VSP


• Expansion project capital structure


• Findings
• Suggestions



1.1. Introduction:-
A project is an activity sufficiently self- contained to permit
financial and commercial analysis. In most cases projects
represent expenditure of capital funds by pre- existing entities
which want to expand or improve their operation.
In general a project is an activity in which, we will spend
money in expectation of returns and which logically seems to
lead itself to planning. Financing and implementation as a unit,
is a specific activity with a specific point and a specific ending
point intended to accomplish a specific objective.
To take up a new project, involves a capital investment
decision and it is the top management’s duty to make a
situation and feasibility analysis of that particular project and
means of financing and implementing it financing is a rapidly
expanding field, which focuses not on the credit status of a
company, but on cash flows that will be generated by a specific
Capital budgeting has its origins in the natural resource
and infrastructure sectors. The current demand for
infrastructure and capital investments is being fueled by
deregulation in the power, telecommunications, and
transportation sectors, by the globalization of product markets
and the need for manufacturing scale, and by the privatization
of government –owned entities in developed and developing
The capital budgeting decision procedure basically involves
the evaluation of the desirability of an investment proposal. It is
obvious that the firm most have a systematic procedure for
making capital budgeting decisions. The procedure for making
capital budgeting decisions.
The procedure must be consistent with the objective of
wealth maximization. In view of the significance of capital
budgeting decisions, the procedure must consist of step by step

1.2 Importance of investment decisions:-

Capital investments, representing the growing edge of a

business, are deemed to be very important for three inter-
related reasons.

1. The influence firm growth in the long term consequences capital

investment decisions have considerable impact on what the firm
can do in future.

2. They affect the risk of the firm; it is difficult to reverse capital

investment decisions because the market for used capital
investments is ill organized and /or most of the capital
equipments bought by a firm to meet its specific requirements.

3. Capital investment decisions involve substantial out lays.

Visakhapatnam Steel Plant is a growing concern, capital

budgeting is more or less a continuous process and it is carried out by
different functional areas of management such a production,
marketing, engineering, financial management etc. All the relevant
functional departments play a crucial role in the capital budgeting
decision process.

1.3 Objectives of the study:-

1. To describe the organizational profile of Visakhapatnam Steel

2. To discuss the importance of the management of capital
3. Determination of proposal and investments, inflows and out
4. To evaluate the investment proposal by using capital
budgeting techniques.
5. To summarize and to suggest for the
better investment proposal.

The information for the study is obtained from two sources namely.

1. Primary Sources
2. Secondary Sources

Primary Sources:
It is the information collected directly without any references. It is mainly
through interactions with concerned officers & staff, either individually or
collectively; some of the information has been verified or supplemented with
personal observation. These sources include.

1. Thorough interactions with the various department Managers of VSP.

2. Guidelines given by the Project Guide, Sri P. MALLESWARA RAO,

Asst. Manager (Staff), Budget Section, F & A.

Secondary Sources:
This data is from the number of books and records of the company, the
annual reports published by the company and other magazines. The
secondary data is obtained from the following.

a) Collection of required data from annual records, monthly records,

Published book or profile of Visakhapatnam Steel Plant.
b) Other books and Journals and magazines
c) Annual Reports of the company

1.5 Limitations:
Though the project is completed successfully a few limitations
may be there.
a) Since the procedure and polices of the company will not allow to
disclose confidential financial information, the project has to be
completed with the available data given to us.

b) The period of study that is 4 weeks is not enough to conduct

detailed study of the project.

c) The study is carried basing on the information and documents

provided by the organization and based on the interaction with
the various employees of the respective departments.

d) Lack of knowledge. Some of the lack full-fledged knowledge of the

concept and its difficult to collect a specific opinion from them.

e) Time limitation. The duration of the project is short to collect the

required information accurately.




Steel is an alloy of iron usually containing less than 1%

carbon is a versatile material with multitude of useful properties used
most frequently in the automotive and construction industries. Steel
can be cast into bars strips, sheets, nails, spikes, wire, rods or pipes as
needed by the intended user. The consumption of steel is regarded as
the index of industrialization and the economic maturity any country
has attained.

The development of steel industry in India should be viewed in

conjunction with the type and system of government that had been
ruling the country. The production of steel in significant quantity
started after 1990. The growth of steel industry can be conveniently
started by dividing the period in to pre and post independence era. In
the period of pre independence, steel production was 1.5 million tones
per year, which was raised to 9 million tones of target. This is the
result of the bold steps taken by the government to develop this

Growth of Steel Industry:

2.2 Pre-independence:-

1830 - Josiah, Marshall Health constructed the first manufacturing

plant at
Port Move in Madras presidency.
1874 - James Erskin founded the Bengal iron works.
1899 - Jamshedji Tata initiated the scheme for an integrated
steel plant.
1906 - Formation of TISCO.
1911 - Tata iron & steel company started production.
1916 - TISICO was founded.

2.3 Post-independence:-

1951-56 - First Five Year Plan.

 No new steel plant came up .The Hindustan

steel Ltd. was born on 19th January, 1954 with the
decision of setting up three steel plants each with
one million tone input steel per year in at Rourkela,
Bhilai and Durgapur; TISCO stated its expansion

1956.61 - Second Five Year Plan

 A bold decision was taken up to increase the
ingot steel output India to 6 Million tons per year &
production at Rourkela, Bhilai and Durgapur steel
plant started.

1961.66 - Third Five Year Plan

 During the third five year plan the three steel
plants under HSL; TISCO & HSCO were expanded as
show. In January 1964 Bokaro steel plant came into

1966.69 - Recession Period

 The entire expansion program was actively
executed during this period.

1969-74 -Fourth Five Year Plan

 Licenses were given for
setting up of many mini steel
plants and re-rolling mills.
 Govt. Of. India accepted setting up two more
steel plants in south. One each at Visakhapatnam
and Hospet (Karnataka).

 SAIL was formed during this period on 24th

January, 1973. The total installed capacity from 6
integrated plants was 106 Mt.

1979 - Annual Plan

 The erstwhile Soviet Union agreed to help in
setting up the Visakhapatnam steel plant.

1980.85 - Sixth Five Year Plan

 Work on Visakhapatnam steel plant was
started with a big bang and top priority was
accorded to start the plant.

 Scheme for modernization of Bhilai steel

plant, Rourkela, Durgapur, TISCO were initiated.

1985-91 - Seventh Five Year Plan

 Expansion work of Bhilai and Bokaro steel
plants completed.
 Progress on Visakhapatnam steel plant
picked up and rationalized concept has been
introduced to commission the plant with 3.0Mt
liquid steel capacity by 1990.

1991-96 - Eight Five Year plan

 Vishakhapatnam steel plant started its production
modernization of other steel plants is also duly

1997-2002 - Ninth Five Year Plan

 Visakhapatnam steel plant had
foreseen a 7% growth during the
entire plan period.

2002-2007 - Tenth Five Year Plan

 Steel industry registers the growth of 9.9 %
Visakhapatnam steel plant high regime targets
achieved the best of them.

2007-2012 - Eleventh Five Year Plan

Cost of schemes/project original approved by
Government of India is Rs.9, 569.18 crores

2.4 The major steel and related companies in India:-

1. Bharat Refectories Ltd.
2. Hindustan Steel Works Construction Ltd.
3. Jindal Steel and Power Ltd.
4. Tata Iron Steel Company Metal Scrap Trade Corporation Ltd.
5. Metallurgical and Engineering Consultants India Ltd.
6. National Mineral Development Corporation Ltd.
7. Rashtriya Ispat Nigam Ltd.
8. Sponge Iron India Ltd.
9. Steel Authority India ltd.

The global steel industry has witnessed several
revolutionary changes during the last century. The
changes have been in the realms of both technology & business
strategy. The ultimate object of all these changes is to remain
competitive and open global market.

The Indian steel industry is growing very rigorously with the

major producers like SAIL, RINL, TISCO, JVL and many others. Our steel
industry has amply demonstrated its ability of adopt to the changing
scenario and to survive in the global market that is becoming
increasingly competitive. This has been possible to a large extent due
to the adoption of innovative operating practices and modern
Industrial Development in India has reached a high degree of
self-reliance, and the steel industry occupies a primary place in the
strategy for future development. At present the production of steel
industry country is 34Mt. the public sector steel industry has been
restructured to meet challenges and a separate fund has been
established for modernization and future development of the industry.
It is now being proposed that Indian steel industry should Gear up to
achieve a production level of about 100 Mt by the year2000.

2.5 Global scenarios:-

As per IISI
 In March’ 2005 world Crude steel output was 928Mt when
compared to march 2004 (872Mt), ∙The change in
percentage was 6.5%.

 China remained the world largest crude steel producer in

2005 also (275Mt) followed by Japan (96Mt) and USA
(81Mt). India occupied 8th position (42Mt).

 USA remained the largest importer of semi finished and

finished products in 2002 followed by China and Germany.

 Japan remained the largest exporter of
semi finished and finished steel
products in 2002 followed by Russia and Ukraine.

 Other significant recent developments in the global steel

scenario have been: Under the auspices of the OECD
(Organization for Economic Co-operation & Development)
the negotiations among the major steel producing
countries for a steel subsidy agreement (SSA) held in
2003 with the objective to agree on a complete
negotiating test for the SSA by the Middle of 2004. It also
set subsidies for the steel industry of a ceiling of 0.5% of
the value of production to be used exclusively for
Research & Development

2.6 Market scenarios:-

The year 2004-05 was a remarkable one for the steel industry
with the world crude steel production crossing the one billion mark for
the first time in the history of the steel industry. The world GDP
growth about 4% lends supports to the expectations the steel market
is all set for strong revival after prolonged period of depression .The
Indian economy also become robust with annual growth rates of 7-8 %
this will provide a major boost the steel industry. With the nations
focus on infrastructure development coupled with the growth in the
manufacturing sector, the Indian steel industry all set for north ward
movement. The draft national steel police envisage production of 60
Mt by 2012 and 110Mt by2020, and annual growth rate of 6-7%. All this
should therefore augur well for the Indian steel industry.

2.7 Production scenarios:-

 Steel industry was de-licensed and decontrolled in 1991&1992


 India is the 8th largest producer of steel in the world.

 In 2003-04 finished steel production was
 Pig iron production in 2003-04 was 5.221Mt.
 Sponge iron production was 80.85 Mt during the year 2003-04
 The annual growth rate of crude steel production in 2002-03was 8%
and in 2003-04 was 6%.

The last five year production performance is as under:-

(In Million
2000-01 3.39 5.44 29.27
2001-02 4.08 5.44 30.63
2002-03 5.28 6.44 33.67
2003-04 3.76 8.09 39.12
2004-05 3.18 9.93 41.15
2005-06 4.39 0.00 30.84
2006-07 3.52 0.00 31.40
2007-08 4.95 0.00 29.74
2008-09 4.95 0.00 29.74

40 2000-01
25 2002-03
20 2003-04
15 2004-05
10 2005-06


 Demand-Availability of iron and steel in the
country is projected by ministry of steel
 Gaps in availability are met mostly through imports.
 Interface with consumers by way of Steel Consumer Council exists,
which is conducted on regular basis.
 Interface helps in redressing availability problems, complaints
related to quality.


 Price regulation of iron & steel was abolished on 16-01-1992.
 Distribution controls on iron& steel removed except 5 priority
sectors, viz. Defense, Railways, Small Scale Industries
Corporations, Exporters of Engineering Goods and North Eastern
 Allocation to priority sectors is made by Ministry of steel.
 Government has no control over prices of iron & steel.
 Open market prices are generally on rise.
 Price increases of late have taken place mostly in long products than
flat products.



Steel comprises one of the most important resources of the economy.
History shows that, the strongest of civilizations have evolved quickly in the
course of time, because of the proper use of the iron and steel reserves they
had. The huge iron pillars at the entrance of New Delhi suggest that the history
of iron and steel industry in India is well over 2000 years old.

Steel comprises one of the most important inputs to all sectors of the
economy. Steel Industry is both a basic and a core Industry. The economy of
any nation depends on a strong base of Iron and Steel Industry in that nation.
History has shown that the countries having a strong potential for Iron and
Steel Industry have played a prominent role in the advancement in the
civilization in the world. Steel is such a versatile commodity that every object
we see in our day-to-day life had use, such as small items as nails, pins, needles
etc., to surgical instruments, agricultural implements, boilers, ships, railway
materials, automobile parts. The great investments that has gone into the
fundamental research in Iron and Steel Technology has helped both directly
and indirectly many modern fields of today’s science and technology. Steel is
versatile and indispensable item. The versatility of steel can be traced mainly
of three reasons.

1. It is only metallic item, which can be conveniently and economically

produced in tonnage quality.
2. It has got very good strength coupled with malleability.
3. Its properties can be changed over a wide range. Its properties can be
manipulated to any extent by proper heat treatment techniques.

Iron and Steel making as a craft as been known to India for a long time.
However, its production is significant quantities only after 1900.
VSP by successfully installing & operating efficiently Rs. 460 cores
worth of Pollution Control and Environment Control Equipments and
converting the barren landscape by planting more than 3 million plants has
made the Steel Plant, Steel Township and surrounding areas into a heaven of
lush greenery. This has made Steel Township a greener, cleaner and cooler
place, which can boast of 3 to 4° C lesser temperature even in the peak summer
compared to Visakhapatnam City.

VSP exports Quality Pig Iron & Steel products' to Sri Lanka, Myanmar,
Nepal, Middle East, USA, China and South East Asia. RINL-VSP was awarded

"Star Trading House" status during 1997-2000. Having
established a fairly dependable export market, VSP plans
to make a continuous presence in the export market.

The govt. of India has recognized the importance of steel in Indian

industry and established the following steel plants, before it actually set up
VSP/RINL. The details of those are tabulated below.

Durgapur steel
1 plant Britain
2 Bhilai steel plant Erstwhile USSR
3 Bokaro steel plant Erstwhile USSR
Rourkela steel
4 plant Germany

Visakhapatnam steel plant profile:-

To meet the growing domestic needs of steel, Government of India

decided to set up an integrated Steel plant at Visakhapatnam. An agreement
was signed with erstwhile USSR in 1979 for cooperation insetting up 3.4
million tones integrated Steel Plant at Visakhapatnam. The foundation was
laid by the then Prime Minister Mrs. Indira Gandhi on 20th January 1971.

The Project was estimated to cost Rs.3, 897.28 cores based on prices as on
4th Quarter of 1981. However, on completion of Construction of the whole
Plant in 1992, the cost escalated to around 8500 Cr. Unlike other interagated
Steel Plants in India, Visakhapatnam Steel Plant is one of the most modern
Steel Plants in the country. The plant was dedicated to the nation on 1st August
1992 by the then Prime Minister, P.V.Narasimha Rao.

New Technology, large-scale computerization and automation etc., are

incorporated in the Plant. To operate the plant at international levels and
attain such lab our productivity, the organizational manpower has been
rationalized. The plant has a capacity of producing 3.0 MT of liquid steel and
2,656Mt of saleable steel.

Visakhapatnam steel plant technology: state-of-the-art:-

 7m tall Coke Oven Batteries with coke dry quenching.

 Biggest Blast Furnaces in the country.

 Bell less top changing system in Blast Furnace.

 100% slag granulation at the Blast Furnace cast house.

 Suppressed combustion—LD gas recovery system.

 100% continuous casting of liquid steel.

 ‘Tempcore’ and ‘Stelmor’ cooling process in LMMM & WRM.

 Extensive waste heat recovery systems.

 Comprehensive pollution control measure.

Major sources of raw materials

Raw Materials Source

Iron Ore Lumps & Fines Bacheli, Chattisgarh/Gua,
BF Lime Stone Jaggayyapeta, AP
SMS Lime Stone UAE
BF Dolomite Madharam, AP
SMS Dolomite Madharam, AP
Manganese Ore Chipurupalli, AP
Boiler Coal Talcher, Orissa
Coking Coal Australia
Medium Coking Coal (MCC) Gidi/Swang/Rajarappa/Kargali

Water supply:-

Operational water requirement of 36 Mgd is being met from the Yeleru

Water Supply Scheme.

Power supply:-
Operational Power requirement of 180 to 200 MW is being met
through captive Power Plant. The capacity of the power plant is 286.5 MW.
Visakhapatnam Steel Plant is exporting 60MW power to Andhra Pradesh State
Electricity Board.

Major Units:-
Major Units
rtme Capacity Units (3.0 MT Stage)
nt (‘000 T)
Coke Ovens 2,261 4 Batteries of 67 Ovens & 7 Meters. Height
2 Sinter Machines of 312 Sq. Meters. grate area
Sinter Plant 5,256
Blast Furnace 3,400 2 Furnaces of 3200 Cu. Meters. volume each
Steel Melt Shop 3,000 3 LD Converters each of 133 Cu. Meters.
Volume and Six 4 strand bloom casters
LMMM 710 4 Strand finishing Mill
4 Strand high speed continuous mill with no
WRM 850
twist finishing blocks

Main Products of VSP:-

Main Products of VSP

Steel Products By-Products

Blooms Nut Coke Granulated Slag
Billets Coke Dust Lime Fines
Channels, Angles Coal Tar Ammonium Sulphate
Beams Anthracene Oil
Squares HPNaphthalene
Flats Benzene
Rounds Toluene
Re-bars Zylene
Wire Rods Wash Oil


To be a continuously growing world class company

We shall
 Harness our growth potential and sustain profitable growth.

 Deliver high quality and cost competitive products and be the first

choice of customers.

 Create an inspiring work environment to unleash the creative energy of


 Achieve excellence in enterprise management.

 Be a respected corporate citizen, ensure clean and green environment

and develop vibrant communities around us.


To attain 16 Mt liquid steel capacity through technological up-

gradation, operational efficiency and expansion; augmentation of assured
supply of raw materials; to produce steel at international Standards of Cost &
Quality; and to meet the aspirations of stakeholders.


● Expand plant capacity to 6.3 million ton by 2011-12 with the Mission
to expand further in subsequent phases as per the corporate plan.

• Revamping existing Blast Furnaces to make them energy efficient to

contemporary levels and in the process increase their capacity by 1
Mt, thus total hot metal capacity to 7.5 Mt

● Be amongst top five lowest cost steel producers in world by 2009-10.

● Achieve higher levels of customer satisfaction.

● Vibrant work culture in the organization.

● Be proactive in conserving environment, maintaining high levels of

and addressing social concerns.

Core values:-

 Commitment.

 Customer Satisfaction.

 Continuous Improvement.

 Concern for Environment.

 Creativity & Innovatio

Quality Policy:-

Visakhapatnam Steel Plant Employees are committed to meet the needs

and expectations of our customers and other interested parties. To
accomplish this, they will
 Supply quality goods and services to customers delight.

 Achieve quality of the products by following systematic approach

through planning, documented procedure and timely review of quality


 Continuously improve the quality of all materials, processes and


 Maintain an enabling environment, which encourages teamwork and

active involvement of all employees with their involvement.

Environment Policy:-

Visakhapatnam Steel Plant carrying out its operations without harming to

the environment. To accomplish this, they will
 Document, implement, maintain and continuously

review the environmental management system.

 Comply with all the relevant environmental legislations, regulations

and other requirements.

 Ensure continual improvement in the environmental performance and

prevention of pollution by minimizing the emissions and discharges.

 Maintain a high level of environmental consciousness amongst


Energy Policy:-

Visakhapatnam Steel Plant is committed to optimally utilize various forms

of energy in a cost-effective manner to effect conservation of energy resources.
To accomplish this, they will:
 Monitor closely and control the consumption of various forms of

energy through an effective Energy Management System.

 Adopt appropriate energy conservation technologies.

 Maximize the use of cheaper and easily available forms of energy.

OSHAS Policy:-
Visakhapatnam Steel Plant is committed to occupational health and
safety of employees and contract workers. To accomplish this, the will,
 Document, implement, maintain and periodically review the

occupational health and safety management system including the


 Comply with the relevant occupational health and safety legislations,

regulations and other requirements.

 Ensure continual improvement in the environment performance and

prevention of pollution by minimizing the emissions and discharges.

 Maintain a high level of environmental consciousness amongst


 Review the environmental objectives and targets on a continuous basis.

Human Resource Policy:-

Visakhapatnam Steel Plant is committed to create an organizational

culture, which nurtures employee’s potential for the prosperity of the
organization. To accomplish this, they will,
 Identify development needs of the employees on a regular basis,

provide the necessary training and continually evaluate and monitor

the effectiveness of the training so that the quality of the training also

gets updated.

 Provide inputs to the employees for developing their attitude towards

work and for matching their competencies with organizational


 Create an environment of learning and knowledge sharing by providing

the means and facilities and also access to the relevant information and


 Facilitate the employees for continuous development of their

knowledge base, skills, efficiency, innovativeness, self-expression and

behavior so that they contribute positively with commitment for the

growth and prosperity of the organization while maintaining a high

level of motivation and satisfaction.

 Prepare employees through appropriate development programs for

taking up higher responsibilities in the organization.

Customer Policy:-

 VSP will endeavor to adopt a customer-focused approach

At all times with transparency.
 VSP will strive to meet more than the customer needs
and expectations pertaining to products, quality, and
Value for money and satisfaction.
 VSP greatly values its relationship with customers and
would make efforts at strengthening these relations for
Mutual benefit.

I.T. Policy:-

 RINL/VSP is committed to leverage Information Technology as

the vital enabler in improving the customer-satisfaction,
organizational efficiency, productivity, decision-making,
transparency and cost-effectiveness, and thus adding value to
the business of steel making. Towards this, RINL shall:
 Follow best practices in process Automation & Business
Processes through IT by in-house efforts / outsourcing and
collaborative efforts with other organization / expert groups /
institutions of higher learning, etc., thus ensuring the quality of
product and services at least cost.
 Install, maintain and upgrade suitable cost-effective IT
hardware, software and other IT infrastructure and ensure high
levels of data and information security

Major Departments:-
Raw Material Handling Plant:
VSP annually requires quality raw materials viz. Iron Ore fluxes
(Lime stone, Dolomite); coking and non coking coals etc. to the tune of
12-13 Million Tones for producing 3 Million Tones of Liquid Steel. To
handle such a large volume of incoming raw materials received from
different sources and to ensure timely supply of consistent quality of
feed materials to different VSP consumers, Raw Material Handling
Plant serves a vital function. This unit is provided with elaborate
unloading, blending, stacking & reclaiming facilities viz. Wagon
Tipplers, Ground & Track Hoppers, Stock yards Crushing plants,
Vibrating screens, Single/ twin boom stickers, wheel on boom and
Blender reclaimers. In VSP peripheral unloading has been adopted for
the first time in the country.

The Raw Material Handling Plant (RMHP) Department procures the

different raw materials from various sources. The following are the important
raw material handled by the RMHP Department.
Coke Oven Department:-
The main function of this department is to convert the coal in to coke,
which is received from RMHP Department.
Coke is a hard porous mass obtained by functional distillation of coal in
absence of air at a temperature above 125oC for a period of 16-18 hours. It is
used as a fuel and reducing agent for reduction of iron ore in blast furnace.
The following are the parameters of Coke Ovens:

Number of batteries 4
Number of ovens in batteries 67
Coal handling capacity of 31.6 tones
Dimensions of oven 16m length x 7m height

Besides coke production, a number of coal chemicals are being extracted in

coal chemical plants. The coal chemicals are tar, benzyl and ammonia based
products. The coal is not consumed directly because coke helps in reducing
the pollution.

Sinter Plant Department:-
Sinter is a hard and porous lump obtained by agglomeration of lines of
iron ore, coke, limestone and metallurgical waster. This department by not
wasting the powder and small pieces of iron ore coal manganese, dolomite and
limestone makes Sinter Cakes and put it for reuse. This increases the
productivity of Blast Furnace, improves the quality of pig iron and decreases

the consumption of coke rate.

Blast Furnace:-
Pig iron/hot metal is produced in blast furnace. The furnace is named
as blast furnace as it is running with blast at high pressure with a temperature
of 1150oC.
Raw materials required for iron making are iron ore, sinter coke and
limestone. For one tone of hot metal production, 310Kgs. iron ore, 1390Kgs.
sinter and 627Kgs. of coke with some other additives.
For production of pig iron/hot metal there are two blast furnaces
named Godavari and Krishna. They are of the largest and most modern
furnaces in the country.

Steel Melt Shop:-
Hot metal produced in blast furnace contains impurities like carbon,
sulphur, phosphorus, silicon, etc.; these impurities will be removed in steel
making by oxidation process.
There are three LD converters to convert hot metal in to steel, after the
conversion of hot metal in to steel, the steel is subjected to homogenization
treatment and cast in to blooms in continuous casting machines.

Rolling Mills:-
Blooms cannot be used as they are in daily life. These blooms have to
reduce in size and properly shaped to fit for various jobs. Rolling is one of the
mechanical processes to reduce larger size sections in to smaller cones. The
cast blooms are heated and rolled in to various long products of different
specifications at three high capacity sophisticated high-speed rolling mills.

Wire Rod Mill:-
WRM is a stand mill and is fully automated with computers. The mill
consists of 2.5 stands and a capacity of 850,000 tonnes per annum. The mill
product mix includes rounds and ribbed wire in the sizes of 5.5 mm to 12.7 mm
dia. wire rods are made in coil having maximum weight of 1200 Kgs. Liquid
Steel produced in LD Converters is solidified in the form of blooms in
continuous Bloom Casters. However, to homogenize the steel and to raise its
temperature, if needed, steel is first routed through, Argon rinsing station,
IRUT (Injection Refining & Up temperature) / ladle Furnaces.

Wire Rod Mill is fully automated & sophisticated mill. The billets are
rolled in 4 strand, high-speed continuous mill having a capacity of 8, 50,000
Tonnes of Wire Rod Coils. The mill produces rounds in 5.5 - 14 mm range and
rebars in 8, 10 & 12 mm sizes. The mill is equipped with standard and
Retarded Stelmore controlled cooling lines for producing high quality Wire
rods in Low, Medium & High carbon grade meeting the stringent National &
International standards viz. BIS, DIN, JIS, BS etc. and having high ductility, uni-
form grain size, excellent surface finish.

Medium Merchant & Structural Mill (MMSM):
This mill is a high capacity continuous mill. The feed material to
the mill is 250 x 250 mm size bloom, which is heated to rolling
temperatures of 1200 °C in two walking beam furnaces. The mill is
designed to produce 8,50,000 tons per annum of various products such
as rounds, squares, flats, angles (equal & unequal), T bars, channels,
IPE beams I HE beams (Universal beams)


Power Generation & Distribution:

The average power demands at all units of VSP when operating
the full capacity will be 221 MW. The captive generation capacity of
270 MW is sufficient to meet all the plant needs in normal operation
time. In case of partial outage of captive generation capacity due to
break down, shutdown or other reasons. The short fall of power is
availed from APSEB grid. The agreement with APSEB provides for
exporting of surplus power to APSEB. The captive generating capacity
comprises of
- TPP -247.5 MW (3x60 MW + 1 X 67.5 MW)
- Back pressure Turbines (C&CCD)* - 2 x 7.5 MW
- Gas Expansion Turbines (BF / ces)* - 2x12 MW
(*Power availability from BPT & GET is around 22MW)

Power plant also meets the Air Blast requirements of Blast Furnaces
thro' 3 Turbo blowers each of 6067 NM 3 / hr capacity.

Power from APSEB is received at Main Receiving Station thro'

220KV overhead distribution lines. The entire plant is configured as 5
electrical load blocks (LBSS 1 to 5) and step-down substations are
provided in each block with 220 KV transformers to step down to
33/11/6.6 KV for further distribution.

Traffic Department:-
A steel plant of the size of VSP has to handle around 60 to 65 MT
traffic comprising of incoming traffic in the form of raw materials and

outgoing traffic in the form of finished or saleable
steel, and also the in process traffic such as cast
pig iron, mill scrap, hot metal.

Of this 50% is transported by belt conveyors, 45% by Rail

Transport and 5% by Road. VSP has the distinction of having
peripheral unloading system for the 1st time in Steel Industry.

Engineering shops & Foundry (ES & F):-

Engineering Shops are set up to meet the requirements of
Ferrous & Non Ferrous spares of different departments. This complex
is divided into 1. Forge Shop 2. Structural shop 3. Foundry 4. Central
machine shop 5. Wood Working Shop and 6. Utility Equipment Repair
Shop (UERS).

The Forge shop is designed for production of shafts, coupling

flanges etc. and also of forge shapes such as crusher hammer heads,
special bolts, nuts etc. In the Structural shops the fabricated structural
of about 4500 Tonnes are produced annually and the input consisting
of sheets, plates, channels, angles beams etc. In Foundry Iron castings
up to a weight of 5 tons and non-ferrous casting up to a weight of 1
ton are produced. 2600 Tonnes of iron castings and 200 tones of non-
ferrous castings are produced annually. In steel foundry, steel casting
up to maximum piece weight of 10T is produced. Steel ingots up to 1.3
Tonnes for forging are also produced.

In the Central Machine Shop, various spares are made. The

machining section has over 100 major machine tools including lathes,
milling, boring, planning, slotting, shaping, grinding and other
machines. The Wood working Shop manufactures patterns for
foundries. The shop will require 300 Cu.m. Per year of wooden

Central Maintenance Electrical:-

Maintenance of all H.T motors, L.T motors and DC motors of
above 200KW. There are 810 such large rotating electrical machines

spread throughout the plant including 3 Nos. of 60
MW Turbo-Generators, 1 No of 67.5M TG in TPP, 2
no's of Back Pressure Turbo Generators of 7.5 MW each and 2 Nos. of
Gas Expansion Turbo- Generator of 12 MW each. The services provided
are as mentioned below.

a) Repairs, Maintenance and condition monitoring of all rotating

Electrical machines of the plant. The job includes transportation,
Overhauling and re-erection with precision alignment.
b) Maintenance of Electrics of all streetlights, Tower lights and
Weigh Bridges throughout the plant.

Electro Technical Laboratory:-

1) Repairs all the defective electronic PCB’s, which are taken out
from the equipment during their functioning.
2) Procures and arranges spare PCB’s for the equipment of PLC’s
and drive controls for motors in the plant and also for UPS
3) Involves in the plant modernization activities and up gradation
of equipment.

Electrical Repair Shop (ERS):

ERS is a central repair shop to carry out repair activities like
overhauling, rewinding, testing etc., of various types of AC Motors, DC
Motors, HT Motors, Submersible pumps, Distribution transformers,
Welding Machines, Control Transformers, Lifting magnets, Coils etc., of
the plant.

The Main Functions of ERS are:

a) Overhauling of motors
b) Rewinding of motors, magnets, transformers, pumps, coils
c) Testing of Electrical equipment
d) Emergency Site Repairs
e) Performance assessment of electrical motors

Utilities Department:-
Utilities dept. Consists of 1. Air Separation Plant 2. Compressor
Houses 3. Chilled water plants and Acetylene plants. The ASP is
designed to meet the maximum daily demand of gaseous oxygen,
gaseous nitrogen and gaseous argon. Compressor Houses produce
Compressed Air required for the operation of pneumatic devices, for
instruments and controls, pneumatic tools and for general purpose in
the various production units of Steel Plants. Chilled Water plants ( 2
No's ) produce chilled water required for use in the ventilation and air
conditioning system in areas such as office rooms, electrical control
room etc. Acetylene plant produces Acetylene gas required for general
purpose cutting and welding.

Quality Assurance and Technological Development (QA

The QA & TD dept. has been set up to take care of activities
pertaining to Quality Control of Raw Materials, Semi finished products
and finished products. The QA & TD labs are provided at major
department like CO&CCP, SP, BF, SMS, and Rolling Mills etc., in
addition to Central Laboratory. The department monitors the process
parameters for production of quality products. QA & TD carries out
analysis, testing and final inspection including spark testing of
finished products and assigns grades to them.

Calcining & Refractory Material Plant:

CRMP consists of two units - Calcining Plant & Brick Plant. In

Calcining plant limestone & dolomite are calcined for producing lime &
calcined dolomite, which are used for refining of steel in the
Roll shop & Repair shop:

Roll shop & Repair shop is in the complex of
Rolling Mills catering to the needs of mills in
respect of roll assemblies, guides few Maintenance spares and roll
pass design. Geographically this dept. is in three areas as roll shop-1,
Roll shop-II and Area Repair Shop. The main activities of this shop is
Roll pass Design, grooving of rolls, assembly of rolls with bearings,
preparation of guides and their service and manufacture / repair of mill
maintenance spares.

For the first time in the country, VSP has adopted CNC
technology for grooving of steel rolling mill rolls. High constant
respective accuracy, higher productivity, use of standard tool for any
groove turning, elimination of the use of different templates, easier to
incorporate groove modification etc., are some of the advantages of
CNC lathes over the conventional one.
Plant Design:
Major functions of this unit are

• Development of detailed Manufacturing Drawing and

Replacement Specification drawings
• Suggesting New Designs and detailing by doing elaborate
engineering study and Analysis
• Standardization

Works Contracts Department:-

• Obtaining administrative approval on receipt of proposal
from indenting departments, tendering and awarding of work
• Converting tender committee meetings and preparing
recommendations forwarding work.

• Preparing COM/Board Note for decisions at those forum

Participating in claims and arbitration proceedings and legal
cases pertaining to contracts

• Registration f agencies under various categories & classes of

works periodically.

 Directorate of Operations

Production Planning and Control:

 Formulation of long term production plans and
infrastructure support.
 Formulation of Annual and Monthly production plan.
This involves detailed planning for product mix and value added
steel along with Marketing Dept.
 Analyzing Plant performance against targets on a
periodic basis and taking necessary corrective actions.

Techno-economic and Quality:-

Formulation of techno-economic norms and energy management
parameters and reviewing the same against targets periodically.

Inputs and Basic Infrastructure:-

 Long term and short term planning for procurement of raw

materials like Imported Coking Coal (ICC), Medium Coking Coal
(MCC), Boiler Coal, Iron Ore Fines and Iron Ore Lumps etc.,

 Formulation of Annual Inward and Outward traffic movement plan

for raw materials and finished products in consultation with
Marketing and Material Management Depts.

Repairs and Maintenance Planning:

 Planning of major Capital Repairs, Shutdowns, Spares

requirement and ensuring preparedness before taking up the

Mines planning:-

 Formulation of annual and monthly production
plans for BF limestone, BF grade dolomite, Mn
Ore and Sand at VSP Captive Mines.

 Monitoring of production and dispatch of Limestone, Dolomite, Mn

Ore and Sand from Captive Mines.

Projects planning:-

 Long and short term planning for all developmental schemes of

capital nature comprising modernization and technology up-

 Planning and implementation of Additions, Modifications and

Replacement (AMR) schemes.

 Expansion of Plant Capacity from 3.0 Mt liquid steel to 6.3Mt.

Research and Development:-

 Identification of Technological Improvement scopes for various

processes and plan for adoption of them by acquiring design and
know-how capability.

 Indigenous development of technology involving laboratory


 Development of new grades and products in coordination with

marketing dept.

Information Technology:-

 Formulation of Organizational IT-Policy, IT-Security Policy and IT-


 Identification of IT enabled projects for various processes and

implements them.

Budget plan and control:-

 Identification of Budget requirement under various heads.

 Control of the Budget and Spares, Consumables & Raw Materials


Systems and Procedures:-

 Streamlining the contract management system to ensure

consistency of approach and adoption of sound principles of
contract management.

 Ensuring the implementation and maintenance of quality

management system requirements for ISO 9001:2000 Certificate.

 Monitoring pollution control activities of the Plant and interaction

with the State and Central Pollution Control Board.

Project Division:-

Design & Engineering Department:-

§ Liaisoning with Consultants and Government Authorities in

connection with designs, specifications, approval of drawings and
Liaisoning work for various types of clearances.

§ Preparation of drawings, design and specification for AMR and

Non-AMR jobs.

§ Assisting indenting departments in technical discussion with

parties and preparation of technical recommendation.

§ Layout clearances of various facilities coming in the Plant and


§ Operation of Consultancy contracts.

Construction Department:-

§ Exercising supervision of work at sites both for quality and quantity


§ Preparation of contractor’s bills, processing of extra items and

closure of contracts.

§ Liaisoning with suppliers, MM department, Design & Engineering

Department and Stores in connection with progress of work at site.

§ Arranging PAT/FAT will all concerned
departments like works, design, consultants and
suppliers in terms of contract and handing over the unit to works
department for operation.

Contracts Department:

§ Awarding of contract from the point on receipt of administrative

approval from indenting departments.

§ Conducting commercial discussions with parties.

§ Arranging Tender Committee meetings and preparing

recommendations for awarding work.

§ Preparing COM/Board Note for decisions at those forms.

§ Participating in claims and arbitration proceedings.

Project Monitoring Department:-

§ To monitor the physical and financial progress of all the works

executed by Construction department.

§ To monitor the progress of works executed by D&E as well as

Contracts department.

§ Preparation of various types of reports for information of

Government and different levels of Management.

§ Interaction with departments and consultant for updating the

schedules and networks for Project Monitoring.

Directorate of Finance & Accounts

• Making arrangement for long-term fund requirements.

• Accounting of all minority transactions and
preparation of financial statement of the
company and getting the same audited as required under law.
• Maintaining records with regard to the cost of products produced
by the company.
• Release of payments to suppliers/providers of goods and services.
• Release of salaries to the employees.
• According concurrence to proposals for investments &
expenditure as per the policies, procedures and the Delegation of
• Conduct Internal Audits, Stock Verification and Statutory
• Making working capital arrangements.
• Submission of periodical reports to banks as per their sanctioned
• Organizing for payment of Central Excise, Sales Tax, Income Tax
and other statutory payments.

 Directorate of Personnel

Personnel Department:-

 Manpower Planning,
 Employees’ induction,
 Service matters, policy & rules

 Industrial relations,

 Employees’ welfare

 Corporate Social Responsibility (CSR),

 Replies to parliamentary questions,

 Official Language implementation

Legal Affairs:

 Legal Affairs deals with all legal matters including arbitration,

coordination with Standing Councils, Legal Advices etc.

Management Services:
 Quality Circle,

 Suggestion Scheme,

 Incentive Scheme,

 Reward Scheme,

 Procedural Orders etc.

Training & HRD:-

 Leadership Training,

 Training on Motivation and Attitude,

 Team Building

 Skill Training.

 Induction and Orientation,

 Plant Practice Lectures,

 Basic Engineering Lectures,

 Plant Specialized Training,

 Management Development.

3.18 Corporate Strategic Management (CSM):-

CSM is a “think tank” of the organization. The Department is
engaged in formulation of VMO (Vision, Mission & Objectives) of the
organization and developing the strategy to achieve VMO. It has
various wings which inter-alia includes Knowledge Management Cell
(KM Cell). It has also developed the Corporate Plan of RINL. It takes
up strategic tasks of the organization.

 Town Administration & Administration:-

 Matters relating to Land & State,
 Civil Maintenance,

 Electrical Maintenance,

 Water Supply,

 Roads and Drain Maintenance,

 Horticulture and Afforestation,

 Peripheral Development and

Medical & Health Services:-

The Medical & Health Services Division of RINL consists of Visakha

Steel General Hospital (VSGH) & Peripheral Units viz. Pedagantyada
Health Center (PGHC), Health Center – II, Occupational Health Services
& Research Center (OHSRC), Emergency Unit – I & II and Hospitals in
Mines – Jaggayyapeta Limestone Mines and Madharam Mines. The
special features of Visakha Steel General Hospital are:

 Full fledged Modern American Designed ICU and MBU capable of

treating 6 patients at a time.

 Full fledged Modern Radiology with Central A/c systems

 Well equipped Path. Lab with Blood bank facility

 Cluster type Wards & Casualty with Central Nursing Station

 Modern Operation Theatre couples with Shadow less cold lights

and 100% bacterial free A/c system

 Directorate of Commercial:-

Marketing Department:-
 It has 24 no. of Branch Sales Offices all over India and four
Regional Offices viz. North Delhi, South – Chennai, West –
Mumbai, East – Kolkata and Headquarter Sales. Main Activities
of Marketing are as follows:
 Collecting Market feedback and Customers requirements for the
preparation of Annual Plan in coordination with Works
Department, for the sale of Pig Iron Steel and Byproducts
 Preparation of Marketing Policies

 Finalization of Long Term Contracts, MOUs, Spot sale

agreements etc., in Domestic and Export Markets

 Preparation of Monthly Rolling Plans in
coordination with Works Department for
meeting the sale commitments

 Processing of Materials like straightening of coils, cutting,

bending, bundling, packaging etc., at the plant premises and in
branches to meet customers as well as transportation

 Dispatch of products to various stockyards by road or rail or to

customers from the plant on direct dispatch basis

 Operation of the contracts for transportation of products by

road and stockyard handling/ consignment agency contracts for
domestic sales, stevedoring contracts and third party inspection
agency for exports

 Sale of products at branches, Headquarters and on direct

dispatch basis to the customers in domestic markets and on Ex-
works and fob Visakhapatnam basis in exports subject to tying
up of commercial and financial terms and conditions. Ensure
documentation as per the procedures and as per the statutory

 Rendering after sales services, obtaining customer feedback and

Customer Relations Management.

Materials Management Department:-

 Procurement of all materials such as Raw materials, Spares and

consumables required for the entire Plant Operations.
 To enter into long term agreements for supply of major & minor
raw materials with indigenous and imported suppliers.
 To effect economy in the cost of materials by purchasing
materials of the right quality, in the right quantity at the right
time from the right source at the right place.
 To arrange inspection of materials prior to handing over to
Production Units to ensure quality materials only are issued to
Production Units.

 Storage of materials & issue the same to the
Production Units as per their requirement.
 To develop and encourage ancillary industries so that the
availability of the materials at right time is ensured.


Sl. Date Milestone

Prime Minister of India Announced in Parliament to
1 17-04-1970 construct new steel plant at Visakhapatnam
2 June 1970 Site selection committee appointed
3 30-11-1970 Committee report approved for site
4 20-01-1971 Foundation stone laid by Prime Minister
Consultant appointed Feasibility reports submitted in
5 27-02-1971 1972 & other investigation carried out
6 07-04-1974 First block of land taken over for VSP
7 15-10-1977 Detailed Project report submitted by consultant
8 24-05-1979 Public investment aboard accords approval for 3.4 million
tonnes steel project
9 12-06-1979 Inter-Government agreement signed between India
erstwhile USSR at Moscow for the co-op in the
construction of VSP
Government approved setting up of VSP. Soviet side
10 19-10-1979 carried out the revision of details project work
11 January Site levelling work started
M. N. Dastur & co principal consultant submits the
12 30-11-1980 comprehensive revised detailed project report
Expert committee submits Recommendations for approval
13 06-01-1981 of comprehensive revised detailed project report with
Contract signed with erstwhile Soviet Union for
14 05-02-1981 preparation of working drawings for Coke Oven, Blast
Furnace Sinter plant.

Comprehensive revised detailed project report along with

15 23-02-1981 expert committee recommendations approved
16 10-07-1981 Protocol signed with erstwhile Soviet Union for supply of
equipments and specialists
17 To Blast Furnace foundations
26-01-1982 (First mass concreting in the project)
18 01-02-1982 Zero date of construction of the project
19 18-02-1982 RASHTRIYA ISPAT NIGAM Limited formed
Commissioning of structural shop with this
20 29-01-1987 commissioning of various auxiliary units commenced.
Coke Oven battery # 1 starts pushing of come with this
21 06-09-1989 the commissioning of metallurgical units started
22 14-11-1989 Sinter Plant (Machine 1) commissioned

23 28-03-1990 “GODAVARI” the first Blast
Furnace commissioned
24 03-05-1990 Prime Minister decided “GODAVARI” to the nation

The first converter and the first continuous casting

25 06-09-1990 machine of the steel melt shop started production
26 28-09-1990 Billet production in the light and medium merchant mill
27 21-11-1990 Wire rod mill commissioned
28 04-03-1991 The second converter commissioned
29 30-06-1991 Yarada water supply scheme made obey for supply of VSP
30 28-10-1991 First production commences in the plant of Light &
Medium merchant mill
31 31-10-1991 Coke Oven battery # 2 commissioned
32 27-12-1991 Sinter Machine # 2 commissioned

33 20-03-1992 Medium merchant and Structural mill commissioned

34 21-03-1992 “KRISHNA” Blast Furnace # 2 commissioned
35 July 1992 Coke Oven batter # 3 commissioned
36 July 1992 Converter # 3 of steel melt shop commissioned of all the
units of the 3 million tonnes plant
37 July 1992 Dedication of plant to the nation by the Prime Minister
38 1992-93 Indira Priyadarshini Vriksha Mitra Award
39 1992-93 Nehru Memorial National Award for Pollution Control
40 1994-95 EEPC Export Excellence Award
41 1991-94 Ispat Suraksha Puraskar (First Prize) for longest Accident
free period
42 1995-96 CII Energy Conservation Award
43 1996 Steel Ministers’ Trophy for “Best Safety Performance”


Achieving new targets year after year in
production has become a part of the work culture.
The production performance of VSP in the last four years is as follows:


3165 2909 2507


2001-2002 3485 3080 2757

3941 3356 3056


4055 3508 3169


3920 3560 3173


4153 3603 3237


4046 3606 3290


3913 3322 3074


2008-2009 3546 3145 2701


production performance

production in tons

Hot metal
Liquid Steel
Salable Steel


































Figure of production performance-3.a


The commercial performance of VSP for the past four years is as follows:

Commercial Performance (In crores):



2000-2001 3436 3122 322
2001-2002 4081 3710 371
2002-2003 5059 4433 626
2003-2004 6174 5406 768
2004-2005 8181 7933 248
2005-2006 8469 8026 443
2006-2007 9131 8487 424
2007-2008 10433 9878 555
2008-2009 10411 10332 78
(Rupees in

Commercial Performance Line Chart (In crores):

12000 900


8000 600
4000 300


0 0
2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008-
2001 2002 2003 2004 2005 2006 2007 2008 2009

Figure of commercial performance-3.b


VSP had to bear the burnt of huge project cost right from the day of its

inception. This has affected the company’s balance sheet due to very high

interest burden. The company, in spite of making operating profit every year

had to report net loss during all financial years. This on the other hand had

resulted in making VSP to take great care in planning the financial resources.

The financial performance of VSP for the past ten years is as follows:




2000-2001 504 153 (-) 291
2001-2002 690 400 (-) 75
2002-2003 1049 915 521
2003-2004 2073 2024 1547
2004-2005 3271 3260 2008
2005-2006 2383 2355 1252
2006-2007 2633 2584 1363
2007-2008 3515 3483 1943
2008-2009 2356 2267 1336










2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008-
2001 2002 2003 2004 2005 2006 2007 2008 2009


Figure of Financial performance-3.c

Manpower at a Glance in VSP

2004-2005 2005-2006
As on 31/3/2005 As on 30/04/2006 As on 31/05/2006
Executives 3257 3225 3520
Works 1994 2142 2140
Projects 145 227 227
Mines 51 53 53
Others 1067 1103 1100
Junior officers 1255 1105 1104
Works 925 776 775
Projects 21 27 27
Mines 20 22 22
Others 280 280 280
Non Executives Works 12101 11932 11923
Projects 10778 10673 10676
Mines 73 74 62
Others 289 281 281
961 904 904
Total Works 16613 16561 16547
Projects 13697 13590 13591
Mines 239 328 316
Others 360 356 356
2317 2287 2284

Manpower at a Glance in VSP

2006-2007 2007-2008 2008-2009

As on 31/3/2007 As on 31/03/2008 As on 31/03/09
Executives 3860 4208 4534
Works 2362 2577 2745
Projects 263 275 316
Mines 56 64 71
Others 1179 1290 1402
Junior officers 814 761 684
Works 559 564 504
Projects 18 10 13
Mines 22 21 22
Others 215 166 145
Non Executives Works 11727 11449 12007
Projects 10533 10302 10476
Mines 64 61 63
Others 2732 263 267
857 823 1201
Total Works 16401 16416 17225
Projects 13454 13443 13725
Mines 345 346 392
Others 351 348 360
2251 2279 2748

Organisational Chart of Visakhapatnam Steel


Director Director Director Director Director
(Projects) (Personnel) (Finance) (Commercial) (Operations)

(F & A) GM
(Projects) (M M) ED (Vigilance)
Director (Works)
(Projects) DGM(F&A) GM
(PM&MIS) IA & SV (Mktg.)

(Projects) (CSM) GM
(P & IR) (CA & CS) (Maint.) (IT & SC)
Pers&Coord.) (M & HS) GM (Corp (Automn.) (Power)
(P & A) (MS) (Elect.) (Operations)

GM (Projects) Logistics) (Utilities)

Comm.dt GM GM GM
(CISF) (TIC) (Const.) (E & S)



An efficient allocation of capital is the most important finance function
in the modern times. It involves decisions to commit the firm’s funds to the
long - term assets. Capital budgeting for investment decisions is of
considerable importance to the firm since they tend to determine its value by
influencing its growth, evaluation of capital budgeting decisions.


The investment decisions of a firm are generally known as the capital
budgeting, or capital expenditure decisions. A capital budgeting decision may
be defined as the firm’s decision to invest its current funds most effectively in
the long- term assets in anticipation of an expended flow of benefits over a
series of years. The long-term assets are those that affect the firm’s operational
beyond the one year period.
Investment decisions generally include expansion, acquisition
modernization and replacement of the long-term assets. Sale of a division or
business (Divestment) is also an investment decision. Decision like the change
in the methods of sales distribution, or an advertisement campaign or a
research and development program have long-term implications for the firm’s
expenditures and benefit, and therefore, they should also be evaluated as
investment decisions.
The following are the features of investment decisions.
 The exchange of current funds for future benefits.
 The funds are invested in long-term assets.
 The feature benefits will occur to the firm over a series of years.


 Understand the nature and importance of investment decisions.

 Explain the methods of calculating net present value (NPV) and

internal rate of return (IRR)

 Show the implicated of net present value (NPV) and internal rate
return (IRR)
 Describe the Non- DCF evaluation Criteria. Payback period and
accounting rate of return (ARR).
 Institute the competition of the discounted payback.
 Compare and contract NPV and IRR and emphasize the
superiority of
NPV rule.


Capital Budgeting is a complex process which may be divided into the
following phases.
Capital Budgeting Process:-
1. Identification of investment proposal.

2. Screening the proposal.

3. Evaluation of various proposals.

4. Fixing priorities.

5. Final approval & preparation of capital expenditure

6. Implementing proposal.

7. Performance review.

Identification of investment proposal:-

The capital budgeting process begins with the identification of
investment proposal. The proposal or idea about potential investment
opportunities may originate from the top of management or may come from
the rank and file workers of any department or from any officers of the
organization. The departmental head analyses the various proposals in the
light of the corporate strategies and submits the suitable proposals to the

capital expenditures planning committee in case of large organization or to the
officers a concerned with the corporate strategies and submits the suitable
proposals to the capital expenditures. Capital expenditures planning
committee in the case of large organization or the officers concerned with the
process of long-term investment decision.

Screening the proposal:-

The expenditures planning committee screens the various proposals received
from different departments. The committee view these proposals form various
angles to ensure that these are in accordance with the corporate strategies or
selection criterion of the firm and also do not lead to the department

Evaluation of various proposals:-

The next step in the capital budgeting process is to evaluate the profitability of
various proposals. There are many method which may be used for this purpose
such as pay back period method, rate of return method, net present value
method, internal rate of return, etc. All these method of evaluating profitability
of capital investment proposals have been discussed in detail separately in the
page of this chapter. It should be classified as below.
i. Independent proposals.
ii. Contingent or dependent proposals and
iii. Mutually exclusive proposals.

Fixing priorities:-
After evaluating various proposals, the unprofitable proposals may be rejected
straight away. But it may not be possible for the firm to invest immediately in
the all the acceptable proposals due to limitation of funds. Hence, it is very
essentials to rank the various proposals and to establish priorities after
considering urgency, risk and profitability involved there in.

Final approval & preparation of capital expenditure budget:-

Proposals meeting the evaluation and other criteria are finally approved to be
included in the capital expenditure budget. However, a proposal involving
smaller investment may be decides at the lower levels for expenditure action.
The capital expenditures a budget lays down the amount of the estimation
expenditures to be incurred on fixed assets during the budget period.

Implementing proposals:-
Translating an investment proposal into a concrete project is a complex,
time consuming, and risk- fraught task.
1. Adequate formulation of projects
The major reason for delay is insinuate formulation of projects put
differently, if necessary homework in terms of preliminary comprehensive and
detailed formulation of the project.

2. Use of the principle of responsibility accounting

Assigning specific responsibility to project managers for completing the
project within the defined time-frame and cost limits is helpful for expeditious
execution and cost control.
3. Use of Network Techniques
For project planning and control several network techniques like PERT
(Programme Evaluation Review Techniques) and CPM (Critical Path Method)
are available.

Performance Review:-

Performance review, or post – completion audit, is a feedback device. It
is a means for comparing actual performance with projected performance. It
may be conducted, most appropriately. When the operations of the project
have stabilized.
It is useful several ways.
I. It throws light on how realistic were the assumptions underlying the
II. It provided a documented log of experience that is highly valuable for
decision making.

4.5 Importance of Investment Decisions:-

Investment decisions require special attention because of the following
 They influence the firm’s growth in the long term.
 They affect the risk of the firm.
 They involve commitment of large amount of funds.

 They are irreversible, or reversible at substantial loss.

 They are among the most difficult decisions to make.

4.6 Types of investment decisions:-

There are many ways to classify investments one classification is as
Expansion of existing business.
Expansion of new business.
Replacement and modernization.

Expansion and diversifications

A company may add capacity to its existing product lines to expand
existing operations. For example, the Visakhapatnam Steel Plant (VSP) may
increase its plant capacity to manufactures more liquid steel. It is an example
of related diversification.
A firm mat expand is activities in a new business expansion of a new
business requires investment in new products and new kind of production

activating within the firm. If packing manufacturing company invests in a new
plant and machinery to produce ball bearings, which the firm has not
manufactured before, this represents expansion of new business or unrelated
diversification. Sometimes a company acquires existing firms to expand its

Replacement and modernization.

The main objective of modernization and replacement is to improve
operating efficiency reduce costs. Cost savings will reflect in the increased
profits, but the firm’s revenue may remain unchanged. Assets become outdated
and absolute with technological changes. The firm must decide to replace those
assets with new assets that operate more economically. Replacement decisions
help to introduce more efficient and economical assets and therefore, are also
called cost- reduction investments.
How ever replacement decisions that involve substantial modernization
and technological improvements expand revenues as well as reduce costs.
Yet another useful way to classify investments is as follows;
 Mutually exclusive investments
 Independent investments
 Contingent investments

Mutually exclusive investments

Mutually exclusive investments serve the same purpose and compete
with each other. If one investment understands others will have to be excluded.
Accompany May, for example, either use a more labour- intensive, semi-
automatic machine, or employ a more capital intensive, highly automatic
machine for production.

Independent investments
Independent investments serve different purposes and do not compete
with each other. For example, a heavy engineering company may have been
considering expansion of its plant capacity to manufacture additional

excavators and addition of new production facilities to manufacture a new
Contingent Investments
Contingent investments are dependent projects; the choice of one
investment necessitates understanding one or more other investments for
example, if a company decides to build a factory in a remote, backward area, it
may have to invest in houses, roads, hospitals, schools, etc., and the total
expenditure will be treated as one single investment.

4.7 Investment Evaluation Criteria:-

Three steps are involved in the evaluation of investment.
• Estimation of cash flows
• Estimation of the required rate of return
• (the opportunity cost of capital )
• Application of a decision rule for making the choice.

Evaluation Criteria:-
A number of investment criteria (or capital budgeting techniques) are in
use in practice. They may be grouped in the following two categories.

Capital budgeting techniques:

Capital Budgeting

DCF Criteria Non – DCF Criteria

Paybac Accounting
NPV I.R.R. P. I k Rate of
Non DCF Criteria:-

Payback period (PB):

The payback period (PB) is one of the most popular and widely
recognized traditional methods of evaluating investment proposals. Pay back is
the number of years required to recover the original cash outlay invested in a

If the project generates constant annual cash inflows, the payback

period can be computed by dividing cash outlay by the annual cash inflow.

Payback = Initial Investment Co
Annual cash flow C

Co : Initial Investment
C : Annual Cash in flow

In case of UN equal cash inflows, the payback period can be found out
by adding up the cash inflows until the total is equal to the initial cash outlay.

Accounting Rate of Return (ARR):

The accounting rate of return (ARR) also known as the return on
investment (ROI) uses accounting information, as revealed by financial
statements, to measure the profitability of an investment. The Accounting rate
of return is the ratio of the average after fax profit divided by the average
investment. The average investment would be equal to half of the original
investment if it were depreciated constantly.

Average income

Average 70
A R R = x 100

DCF Criteria:
Net Present Valued Method (NPV):

The NPV present value (NPV) method is the classic economic method of
evaluating the investment proposals. If is a DCF technique that explicitly
recognizes the time value at different time periods differ in value and are
comparable only when their equipment present values- are found out.

C1 + C2 + C3 + ………
NPV= + Cn - Co

(1+k) (1+k)2 (1+k)3

n Ci
NPV= Σ - Co
i = 0 (1+k)i
N P V = Net present value
Cfi = Cash flows occurring at time
k = the discount rate
n = life of the project in years
Co = Cash out lay

Internal Rate of Return (IRR):

The internal rate of return (IRR) method is another discounted cash
flow technique which takes account of the magnitude and thing of cash flows,
other terms used to describe the IRR method are yield on an investment,
marginal efficiency of capital, rate of return over cost, time- adjusted rate of
internal return and soon.

i=0 71
NPV= Σ +
(1+k) i
(1+k) n

Cfi = Cash flows occurring at different point of time
k = the discount rate
n = life of the project in years
Co = Cash out lay
SV & WC = Salvage value and Working Capital at the end of the n years.

IRR= L+ (H – L)
(A – B)

L : Lower discount rate at which NPV is positive
H : Higher discount rate at which NPV is negative
A : NPV at lower discount rate, L
B : NPV at higher discount rate, H

Profitability Index (PI):-

Yet another time- adjusted method of evaluating the investment
proposals is the benefit- cost (B/C.) ratio or profitability index (PI) Profitability
Index is the ratio of the present valued of cash inflows, at the required rate of
return, to the initial cash out flow of the investment.

PV of cash inflow
PI =
Initial Cash
Where PV: Present Value

4.8 Cost Effective Analysis:-

In the cost effectiveness analysis the project selection or technological
choice, only the costs of two or more alternative choices are considered
treating the benefits as identical. This approach is used when the acquisition of
how to minimize the costs for undertaking an activity at a given discount rates
in case the benefits and operating costs are given, one can minimize the capital
cost to obtain given discount.

4.9 Project Planning:

The planning of a project is a technically pre- determined set of inter
related activities involving the effective use of given material, human,
technological and financial resources over a given period of time. Which in

association with other development projects result in the achievement of
certain predetermined objectives such as the production of specified goods &

Project planning is spread over a period of time and is not a one shot
activity. The important stages in the life of a project are:

 It’s Identification
 It’s initial formulation
 It’s evaluation (Whether to select or to project)
 It’s final formulation
 It’s implementation
 It’s completion and operation

The time taken for the entire process is the gestation period of the
project. The period of the project. The process of identification of a project
begins when we are seriously trying to overcome certain problems. They may
be non- utilization to overcome available funds. Plant capacity, expansion etc

Contents of the project report:

1. Market and marketing
2. Site of the project
3. Project engineering dealing with technical aspects of the project.
4. Location and layout of the project building
5. Building
6. Production capacity.
7. Work Schedule

Details of the cost of the Project:-

1. Cost of land
2. Cost of Building
3. Cost of plant and machinery
4. Engineering know how fee
5. Expenses on training Erection supervision
6. Miscellaneous fixed assets
7. Preliminary expenses
8. Pre-operative expenses
9. Provision for contingencies




Project financing is considered right from the time of the conception of
the project. The proposal of the project progress working capital, so, in general
a project is considered as a ‘mini firm’ is a part and parcel of the organization.

5.1 Sources of Finance:

 Loan Financing
 Security Financing
 Internal Financing

5.1.1. Loan Financing:

(a) Short- Term Loans & Credits
Short – Term Loans & Credits are raised by a firm for meeting its
working capital requirements. These are generally for a short period not
exceeding the accounting period i.e., one – year.

Types of Short Term Loans & Credits:

1. Trade Credit.

2. Installment Credit.

3. Advances.

4. Commercial papers

5. Commercial banks

6. Cash Credits

7. Over Drafts

8. Public Deposits.

(b) Term Loans:

Term loans are given by the financial institutions and banks, which
form the primary source of long term debt for both private as well as the
Government organizations. Term loans are generally employed to finance the
acquisition of fixed assets that are generally repayable in less than 10 years. In

addition to short- term loans, company will raise medium term and long term

5.1.2. Security Financing:

Corporate Securities can be classified into two categories.

(a) Ownership Securities or capital stock.

(b) Creditor ship Securities or debt Capital.

(a) Ownership Securities or capital Stock:

Types of Ownership Securities or Capital Stock:

i) Equity Capital:
Equity Capital is also known as owner’s capital in a firm. The holders of
these shares are the real owners of the company. They have a control over the
working of the company. Different ways to raise the equity capital.
o Initial public offering.
o Seasoned offering
o Rights issue.
o Private placement
o Preferential allotment.

ii) Preference Capital:

These shares have certain preferences as compared to other type of
1. Payment of Divided
2. Repayment of the capital at the time of liquidation of the

b) Types of Creditor ship Securities:

i) Debentures:

Debentures are an alternative to the term loans and are instruments for
raising the debt finance. Debenture holders are the creditors of a company and
the company and the company have the obligations to pay the interest and
principal at specified times. Debentures provide more flexibility, with respect
to maturity, interest rate, security and repayment Debentures may be fixed
rate of interest or floating rate or may be zero rates. Debentures & Ownership
Securities help the management of the company to reduce the cost of capital.

5.1.3. Internal Financing:

A new company can raise finance only through external sources such as
shares, debentures, loans and public deposits. For existing company they need
to raise funds through internal source. Such as retained earnings depreciation
as a source of funds. Some other innovative source of finance.

♦ Venture Capital
♦ Seed Capital
♦ Bridge Finance
♦ Lease Financing
♦ Euro- Issues

a) Equity Capital:
1. Infusion of Government equity either from budgetary resources or
from Steel Development Funds (SDF).
2. Induction of equity by agencies/ companies who are setting up
separate stand alone blast furnaces or blast furnace based steel
plant complexes without captive coke oven plant.
3. Equity by overseas buyer suppliers of coking coal.
4. Equity by overseas buyer of coke, whom may hedge initial capital
invested and assured by buy – back arrangement for limited number
of years.

b) Loan Capital:

1. Loan capital from financial installations like TDBI, IFCI, ICICI etc.,
guaranteed by the central Government who is the owner of RINI.
2. Surplus credit by major supplier of plant & equipment.
3. Providing loan by agencies that enter into an assured buy- back
arrangement at the terms and condition mutually agreed upon.



VSP is operating at 6.3 M.T. of liquid steel at present. It is framed to

Enhance its capacity to produce 6.3M.T of liquid steel by expansion.
The estimated cost of expansion is:
Approved cost: 8692 Crs (Base Jun, 05)
Debt component: 4346Crs.
Assumed in calculation as per rate as 5.5%.

How expansion will affect the capacity in positive way:

Project Schedule:

Divided in two stage Time

Stage –I 36 Months

Stage-II Structural mills -48 Months

Pay Back Period:

(Profit Depreci Cash Cumulative
Sl.No Years After Tax) ation Inflows Cash In Flows
1 2005-06 1493 474 1967 1967
2 2006-07 1316 474 1790 3757
3 2007-08 1457 527 1984 5741
4 2008-09 2645 874 3519 9260
5 2009-10 3022 919 3941 13201
6 2010-11 3100 924 4024 17225
7 2011-12 3331 685 4016 21241
8 2012-13 3519 507 4026 25267
9 2013-14 3553 513 4066 29333
10 2014-15 3619 518 4137 33470
11 2015-16 3686 524 4210 37680
12 2016-17 3755 529 4284 41964

13 2017-18 3839 535 4374 46338
14 2018-19 3931 540 4471 50809
15 2019-20 4030 546 4576 55385
(a) Cash Outlay : 8692

(b) Payback Period : INITIAL INVESTMENT

3+ 3519

= 3.10 years

Pay Back Period:

It is assumed that the profit earning of the project will start from

Taken consideration of (incremental adjusted cash flow) i.e. expansion

Base year, for calculation PAY BACK PERIOD.

• Estimated profits are taken from the data provided.

• For CIF we have deducted depreciation from profit &then

Cumulative profit.

So the projected payback period is calculated as 3.10 years.

We should increase this period with same exception as there

May be any additional factor and other cause so rounding of
3.10 to 4 years will be right, so that it will give more assistance
To the calculation.

Average Rate of Return:

Cash Inflows (Before

SL.No Years Income Depreciation depreciation)
1 2005-06 1967 474 1493
2 2006-07 1790 474 1316
3 2007-08 1984 527 1457
4 2008-09 3519 874 2645
5 2009-10 3941 919 3022
6 2010-11 4024 924 3100
7 2011-12 4016 685 3331
8 2012-13 4026 507 3519
9 2013-14 4066 513 3553
10 2014-15 4137 518 3619
11 2015-16 4210 524 3686

12 2016-17 4284 529 3755
13 2017-18 4374 535 3839
14 2018-19 4471 540 3931
15 2019-20 4576 546 4030

Average profit
ARR = x 100
Average investment

Total cash inflows

Average Profit=
No. of years

= 3086.4

Average investment:

here the additional working capital is also taken the consideration while calculating the ARR.

Average investment = + Ad. WC

+ 702

= 5048

ARR = x 100

= 61.14%

Average Annual profit
ROI = x 100
Total initial investment

ROI = x 100

ROI = 35.51%

It is more calculation taking total profit and taking average of it.

Show the return on an average as what an average income of the firm on
Long run basis with certain assumption 61.14% for any firm at long run is
Good but there must be some decrease as future is not certain.


Cash Present Values of

Sl.No Years Inflows DCF(19%) Inflows
1 2005-06 1967 0.840 1652.28
2 2006-07 1790 0.706 1263.74
3 2007-08 1984 0.593 1176.51
4 2008-09 3519 0.499 1755.98
5 2009-10 3941 0.419 1651.28
6 2010-11 4024 0.352 1416.45
7 2011-12 4016 0.296 1188.74
8 2012-13 4026 0.249 1002.47
9 2013-14 4066 0.209 849.79
10 2014-15 4137 0.176 728.11
11 2015-16 4210 0.148 623.08
12 2016-17 4284 0.124 531.22
13 2017-18 4374 0.104 454.90
14 2018-19 4471 0.088 393.45
15 2019-20 4576 0.074 338.62
Total Present Values of Inflows 15026.62

N P V = Total Present Value of Cash inflows – Total Outlay

= 15026.62 – 8692
= 6334.62
It is the factor of Re.1 calculation at the end of the year. It will be
Value of Re.1 at the end of the year which is based interest rate, cost of
Capital and market state which is called as discounted rate to get an
Discounted rate to get an approximate decision.
It should be taken in every calculation of project so that an approximate.
Decision can be taken. As it is more reliable the simple cash inflows (profits).

Internal Rate of Return:
Discount rate taken as 18%
(in crores)

Cash Values of
Sl.No Years Inflows DCF(18%) Inflows
1 2005-06 1967 0.847 1666.049
2 2006-07 1790 0.718 1285.220
3 2007-08 1984 0.609 1208.256
4 2008-09 3519 0.516 1815.804
5 2009-10 3941 0.437 1722.217
6 2010-11 4024 0.370 1488.880
7 2011-12 4016 0.314 1261.024
8 2012-13 4026 0.266 1070.916
9 2013-14 4066 0.225 914.850
10 2014-15 4137 0.191 790.167
11 2015-16 4210 0.162 682.020
12 2016-17 4284 0.137 586.908
13 2017-18 4374 0.116 507.384
14 2018-19 4471 0.099 442.629
15 2019-20 4576 0.084 384.384
Total Present Values of Inflows 15826.708

Discount rate taken as 35% (in crores)

Cash Present Values of

SL.No Years Inflows DCF(35%) Inflows
1 2005-06 1967 0.741 1457.5
2 2006-07 1790 0.549 982.71
3 2007-08 1984 0.406 805.5
4 2008-09 3519 0.301 1059.2
5 2009-10 3941 0.223 878.84
6 2010-11 4024 0.165 663.96
7 2011-12 4016 0.122 489.95
8 2012-13 4026 0.091 366.37
9 2013-14 4066 0.067 272.42
10 2014-15 4137 0.050 206.85
11 2015-16 4210 0.037 155.77
12 2016-17 4284 0.027 115.67
13 2017-18 4374 0.020 87.48
14 2018-19 4471 0.015 67.065
15 2019-20 4576 0.011 50.336
Total Present Values of Inflows 7659.621

A - Cash out lay

IRR = L+ X (H – L)

15826.708 - 8692

= 18 + X (35-18)
15826.708 – 7659.6921

7134.708 X 17
= 18 +

= 18 + 0.874 X 17

= 32.85

In this calculation, is done on the basis of trail and errors. By taking
various percentage of (DCF).So that an appropriate percentage of Internal
Rate of Return can be judge out.
Calculated figure is 32.85%, so we can take it as 35% cause at market

Profitability Index Method:

Cash Present Values of

Sl.No Years Inflows DCF(19%) Inflows
1 2005-06 1967 0.840 1652.28
2 2006-07 1790 0.706 1263.74
3 2007-08 1984 0.593 1176.51
4 2008-09 3519 0.499 1755.98
5 2009-10 3941 0.419 1651.28
6 2010-11 4024 0.352 1416.45
7 2011-12 4016 0.296 1188.74
8 2012-13 4026 0.249 1002.47
9 2013-14 4066 0.209 849.79
10 2014-15 4137 0.176 728.11
11 2015-16 4210 0.148 623.08
12 2016-17 4284 0.124 531.22
13 2017-18 4374 0.104 454.90
14 2018-19 4471 0.088 393.45
15 2019-20 4576 0.074 338.62
Total Present Values of Inflows 15026.62

P. I = Cash Inflows
Cash Outflows


= 1.73

In calculation of P.I. simple income is taken in to consideration that’s why

P.I =1.73.
But it is not correct as per practical study. So discounted rate will help to get
A good path to get an approximate P.I and it will be more reliable than old
Traditional approach.



Framework for Capital Structure:
The FRICT analysis a financial structure may be evaluated from various
perspectives. From the owners’ point of view, return risk and value are
important consideration. From the strategic point of view, flexibility assumes
great significance. A sound capital structure will be achieved by balancing all
these considerations.

The capital structure should be determined within the debt capacity
debt capacity of the company, and this capacity should not be exceeded. The
debt capacity of a company depends on its ability to generate future cash flows,
it should have enough cash to pay creditors’ fixed charges and principal sum
and leave some excess cash to meet future contingency. The capital structure
should be flexible. It structure should be flexible. It should be possible for a
company to adapt if warranted by a changed situation. It should also be
possible for a company to adapt its capital structure with a minimum cost and
delay if warranted by changed situation. It should also be possible for the
company to provide funds whenever needed to finance its profitable activities.

Risk: The risk depends on the variability in the firm’s

operations. It may be caused by the macroeconomic factors and industry and
firm specific factors. The excessive use of debt magnifies the variability of

shareholders earnings, and threatens the solvency of the company.

Income: The capital structure of the company should be most

advantageous to the owners (Shareholders) of the firm. It should create value;
subject to other considerations, it should generate maximum returns to the
shareholders with minimum additional cost.

Control: The Capital structure should involve minimum risk of loss of

control of the company. The owners of closely held companies are particularly
concerned about dilution of control.

Timing: The capital structure should be feasible to implement given the
current and future conditions of the capital market. The sequencing of sources
of financing is important. The current decision influences the future options of
raising capital.

The FRICT (Flexibility, Risk, Income, Control and Timing) analysis

provides the general framework for evaluating a firm’s capital structure. The
particular characteristics of a company may reflect some additional specific
features. Further, the emphasis given to each of these features will differ from
company may reflect some additional specific features. Further the emphasis
given to each of these features will differ from company to company. For
example, a company may give more importance to flexibility than control,
while another company may be more concerned about solvency than any other
requirement. Furthermore, the relative importance of these requirements may
change with shifting conditions. The company’s capital structure should,
therefore, be easily adaptable.



The capital structure will be planned initially when a company is

incorporated. The initial capital structure should be designed very carefully.
The management of Ht Company should set a Target Capital Structure and the
subsequent financing decisions should be made with a view to achieve the
target capital Structure. The company needs funds to finance its activities
continuously. Every time when funds have to be procured, the financial
manager weighs the pros and cons of various sources of finance and selects the
most advantageous sources keeping in view the target capital Consequently, it
is being increasingly realized that a company should plan its capital structure
to maximize the use of the funds and to be able to adapt more easily to the
changing conditions.

Theoretically, the financial manager should plan an Optimum Capital
Structure for his company. The optimum capital structure is one that
maximizes the market value of the firm. So far out discussion of the optimum
capital structure has been theoretical. In practice, the optimum capital
structure has been theoretical. In practice, the determination of an optimum
capital structure is a formidable task, and one has to go beyond the theory.
There are significant variations among industries and among companies
within an industry in terms of capital structure. Since a number of factors
influence the capital structure decision of a company, the judgment of the
person making the capital structure decision plays a crucial part. Two similar
companies may have different capital structures if the decision- makers differ
in their judgment of the significance of various factors.
A totally theoretical model perhaps cannot adequately handle all those
factors, which affect the capital structure decision in practice these factors are
highly psychological, complex and qualitative and do not always follow
accepted theory, since capital markets are not perfect and the decision has to
be taken under imperfect knowledge and risk.

Elements of Capital Structure:

A company formulating its long-term financial policy should first of all,
analyze its current financial structure. The following are the important
elements of the company’s financial structure that need proper security and


Capital Mix: Firms have to decide about the mix of debt and equity
capital. Debt capital can be mobilized from a variety of sources. How heavily
does the company depend on debt? What is the mix of debt instruments? Given
the company’s risks, is the reliance on the level and instruments of debt

reasonable? Does the firm’s debt policy allow it flexibility to undertake
strategic investments in adverse financial conditions? The firms and analysis
use debt ratios, debt-service coverage ratios, and the funds flow statement to
analyze the capital mix.

1. Net Income Approach (NI Approach):

Accounting to NI Approach, the debt in the capital structure influences
the total value of the enterprise. In other words the overall cost of capital as
well as the total value of the enterprise, in other words, the overall cost of
capital as well as the value of the firm would change with change in debt in the
capital structure.
NI Approach states that if the proportion of debt in the capital structure
in increased, the weighted average cost of capital would decrease and the
market value of the firm would increase. On the other hand a decrease in the
financial leverage will lead to an increase in the overall cost of capital thus
reducing the value of the firm.

2 Net Operating Income Approach (NOI Approach)

NOI Approach is contrary to the NI Approach. It argues that the capital
structure changes do not influence the value of the firm. In other words, the
value of the firm and the overall cost of capital are independent of the degree of
leverage (Debt)
The Net Operating Income Approach has made the following
1. The market evaluates the value of the firm as a whole. So the split
between debt and equity is insignificant.
2. Net Operating Income is capitalized at the overall cost of capital (K0)
which is dependent on the business risk. If business risk is assumed to
be constant K0) remains unchanged.

3. Cost of Debt (K0) is constant.
4. Cost of Equity (K0) increases with the degree leverage.
5. Corporate taxes do not exist...

3. Traditional Approach:

First Stage:
In the first stage Overall cost of capital is reduced or the value of the firm
is increased with increasing leverage. Cost of equity (Ke) remains constant or
there may be a slight rise because the increased use of debt increases the
financial risk to shareholders, only to some extent. But this rise is not
sufficient to offset the advantage derived than using cheaper source of debt.
Cost of debt (K0) remains constant since the proportion of debt is considered to
be within reasonable limit. As a result, with the use of more debt. A cheaper
source, the value of the firm increase or the overall cost of capital decreases
with increasing leverage (proportion of debt.)

Second Stage:
After reaching a certain level of debt, the degree of leverage has little or
no effect on the value or the overall cost of the firm. This is because the
advantage of low cost debit is offset by increased cost of equity. The cost of
equity is increased due to a higher financial risk. In this stage. Overall cost of
capital is minimum or the value of the firm is maximum.

Third Stage:
Beyond the acceptable limit, if the amount of debt is increased, the cost of
equity would show a great rise thus offsetting advantage of low cost debt.
Further, the cost of debt (Kd) also rises because the firm’s capacity to borrow
decreases. Thus, during this stage, the cost of capital increases or the value of
the firm decreases with leverage.


The ensure viability and to prevent from becoming potentially sick under
sick industrial companies (Special Provisions) Act 1985 as the analysis made
in 1989 indicated non- viability even at 100% capability utilization due to high
capital related charges.

Approval Reference:
10 (13)/89- VSP (Vol- III) Dt. 26th July, 1993

Salient Features:
o Conversion of Rs. 1184 Crs Govt. of India Loans the Equity
o Conversion of Rs. 1185 Crs Govt. of India loans into 7% non-
cumulative preference shares redeemable at the end of 10 years.
o Conversion of Rs.791, Crs interest due on Govt. of India loans into
interest free loan for a period of seven years.
o Conversion of Govt. of India loans receivable in 1992-1993 into
7% non- cumulative preference shares redeemable at the end of 10
years from the date of allotment (Rs. 419 Crs released after 31st July,
o Conversion of Govt. of India Loans receivable in 1993-94 into
preference shares to be decided after review.
o Waiver of penal interest that become due up to July, 1992
(Rs.149.40. Crores)
o Govt. of India ensures funds (Rs. 1507 Crs) in the plan period for
the project.

Challenges Set:
• 100% Capacity utilization by 1996-97.

• Net profit with no interest on Govt. of India funds by 1997-


• Cumulative losses to be wiped out by 2004-05.

Benefits from Capital Restructuring:

 Reduction of loss by Rs. 432.47 crores annually on
account of interest saving due to conversion of loans to equity capital,
preference capital and interest free loan.

 Reduction of loss by Rs. 149.40 crores on account of

interest saving due to waive of penal interest.


To prevent becoming potentially sick unit under sick industrial
companies (Special Provision) Act 1985.

Approval Preference:
10 (13)/89- VSP (Vol- III) Dt. 27th May, 1998.

Salient Features:
o Conversion of Rs. 542.47 Crs loan into 7% non – cumulative
preferences capital redeemable after 10 years...
o Conversion of Rs.791, Crs interest free loan to 7% non-
cumulative preference capital with effect from 31.03.1998
redeemable after 2000-01 with repayment schedule to be
communicated in due course.

Benefits from capital Restructuring:

o Reduction of loss by Rs. 235.85 Crs on account of interest saving
due to conversion of loans to preference capital retrospectively.
o Interest saving of Rs. 88.47 Crs. Per annum.
o Company could avoid attracting provisions of sick industrial
companies (Special Provisions) Act 1985.



1ST Condition:
When 70% of the project expenses is taken through loans (long term

at 5.5%) & rest. 30% as equity.

Particular Amou
EBIT 1629.000
Less : Interest
(8692 X 70%) = 6084. 4 Cr X 334.642
5.5% as int
EBT 1294.358
Less : Tax at 35% as on
1294.358 x 35% 453.025
EAT 841.333
Less: Pref. Share at 7% 322.646

Calculation of EPS:
Project cost 8692 Cr
Its 30% as equity

 8692 x 30 % = 2607.6 Cr into Rs. 26076000000

and divide it by face value of equity - 1000 Rs/- share
Total Equity share value
No of Equity =
Value of the Share

No of Equity =

= 26076000

For EPS = Earning’s to Equity (E to E)
No of Equity Share

= 322.646

2 nd Condition:
When the mix ratio between debt & Equity is change as 70%
equity & 30% as debts. Then the level of impact,
With same assumptions
Particular Amount
EBIT 1629.000
Less : Interest
(8692 X 30%) = 2607.6 Cr X 5.5% 143.418
as int
EBT 1485.582
Less : Tax at 35% as on
1485.582 x 35% 519.954
EAT 965.628
Less: Pref. Share at 7%
(No – issue of pref. Share) ____
E To E 965.628
For EPS – Earning per share 158.706

EPS calculation:
8692 cr X 70% = 6084.4 Cr
Total Equity share value
No of Equity =
Value of the Share

In Rs. = 60844000000 = 60844000


So EPS = E to E = 9656280000
= 158.706
No of Equity 60844000

3rd Condition:
In this part debt Equity mix are divided in ratio 60:40 as debt as
60% and equity as 40%.
Particular Amou
EBIT 1629.000
Less : Interest
(8692 X 60%) = 5215.2 Cr X 5.5% as int 286.836
EBT 1342.164
Less : Tax at 35% as on
1342.164 x 35% 469.757
EAT 872.407
Less: Pref. Share at 7%
(No – issue of pref. Share) ____
E To E 872.407
For EPS – Earning per share 250.922

EPS Calculations:
Project cost = 8692 Cr
40%as equity = 3476.80 Cr
Total Equity share value
No of Equity =
Value of the Share

in Rs. = 34768000000 = 34768000

For EPS = E to E 8724070000

= = 250.922
No of Equity 34768000





 The project completion cost is estimated to be Rs. 8692. Cr.

 The payback period of the project in VSP is 3 years and 10 months. The
payback period is less than the target period so the project may be

 The NPV of the project is positive than the value of the capital.

 The Internal rate of return is Internal rate of 31.85% it is greater than

the cost of capital i.e., 19% so the project accepted.

 The profitability index is also more than 3 times returns on investment

so the project is accepted.

 The estimated cash flows of the project include interest and tax.

 Before expansion the EPS value is Rs. 13,603.6

 For only expansion the EPS (at 7 : 3) of VSP is Rs. 322.646

 For expansion project the mix of Capital structure (6: 4) is also best for
the company, but equity to be raised and debt to be lowered.


 The project completion cost is estimated to be Rs. 8692. Cr.

 The payback period of the project in VSP is 3 years and 10 months. The
payback period is less than the target period so the project may be

 The NPV of the project is positive than the value of the capital.

 The Internal rate of return is Internal rate of 31.85 % it is greater than

the cost of capital i.e., 19% so the project accepted.

 The best Capital restructuring mix is 70: 30, because it having EPS
(Equity per Share) value is higher than the other mixes.

 The company has to maintain at 7: 3 (debt: equity), that is better for


 It also maintains 60: 40, but equity to be raised.


Financial Management - I. M. Pandey

Financial Management - Prasanna


Financial Management - M. Y. Khan & Jain

URL: http://www.vizagsteel.com

VSP profile & Annual Reports