INDEX

S.No:
1. CHAPTER-1
INTRODUCTION Scope of the Study Objectives of the Study Methodology of the Study Limitations of the Study

CHAPTER

PAGE NO.
1-4

2.

CHAPTER-1I
INDUSTRY PROFILE & COMPANY PROFILE

5-21

3.

CHAPTER-1II
REVIEW OF LITERATURE

22-50

4.

CHAPTER-1V
DATA ANALYSIS AND INTERPRETATION

51-73

5.

CHAPTER-V
FINDINGS CONCLUSIONS

74-82

RECOMMENDATIONS ON CEMENT INDUSTRY SUGGESTIONS: BIBLOGRAPHY

1

APPENDIX

CHAPTER-I INTRODUCTION

CAPITAL STRUCTURE DEFINED:

The assets of a company can be financed either by increasing the owners claim or the creditors claim. The owners claims increase when the firm raises funds by issuing ordinary shares or by retained the earnings, the creditors claims increase by borrowing .The various means of financing represents the financial structure of an enterprise .The financial structure of an enterprise is shown by the left hand side (liabilities plus equity) of the balance sheet. Traditionally, short-term borrowings are excluded from the list of methods of financing the firms capital expenditure, and therefore, the long term claims are said to form the capital structure of the enterprise .The capital structure is used to represent the proportionate relationship between debt and equity .Equity includes paid-up share capital, share premium and reserves and surplus.

The financing or capital structure decision is a significant managerial decision .It influences the shareholders returns and risk consequently; the market value of share may be affected by the capital structure decision. The company will have to plan its capital structure initially at the time of its promotion.

It refers to the mix of long-term sources of funds. Such as debentures, long-term debt, preference share capital including reserves and surplus (i.e., retained earnings) The board of directors or the chief financial officer (CFO) of a company should develop an appropriate capital structure, which are most important factors to the company. This can be done only when all those factors which are relevant to the companys capital structure decision are properly analysed and balanced. The capital structure should be planned generally keeping in view the interests of the equity shareholders, being the owners of the company and the providers of risk capital (equity) would be concerned about the ways of financing a companys operations. However, the interests of other groups, such as employees, customers, creditors, society and government, should also be given reasonable consideration.

NEED AND IMPORTANCE OF CAPITAL STRUCTURE:

The value of the firm depends upon its expected earnings stream and the rate used to discount this stream. The rate used to discount earnings stream its the firms required rate of return or the cost of capital. Thus, the capital structure decision can affect the value of the firm either by changing the expected earnings of the firm, but it can affect the retained earnings of the shareholders. The effect of leverage on the cost of capital is not very clear. Conflicting opinions have been expressed on this issue. In fact, this issue is one of the most continuous areas in the theory of finance, and perhaps more theoretical and empirical work has been done on this subject than any other. If leverage affects the cost of capital and the value of the firm, an optimum capital structure would be obtained at that combination of debt and equity that maximizes the total value of the firm or minimizes the weighted average cost of capital. The question of the existence of optimum use of leverage has been put very succinctly by Ezra Solomon in the following words.

Given that a firm has certain structure of assets, which offers net operating earnings of given size and quality, and given a certain structure of rates in the capital markets, is there some specific degree of financial leverage at which the market value of the firms securities will be higher than at other degrees of leverage? The existence of an optimum capital structure is not accepted by all. These exist two extreme views and middle position. David Durand identified the two extreme views the net income and net operating approaches.

SCOPE OF THE STUDY:

A study of the capital structure involves an examination of long term as well as short term sources that a company taps in order to meet its requirements of finance. The scope of the study is confined to the sources that Kesoram cements tapped over the years under study i.e. 2008-12

OBJECTIVES OF THE STUDY:

The project is an attempt to seek an insight into the aspects that are involved in the capital structuring and financial decisions of the company. This project endeavors to achieve the following objectives. 1. To Study the capital structure of Kesoram cements through EBIT-EPS analysis 2. Study effectiveness of financing decision on EPS and EBIT of the firm. 3. Examining leverage analysis of Kesoram cements. 4. Examining the financing trends in the Kesoram cements. For the period of 2008- 12. 5. Study debt/equity ratio of Kesoram cements for 2008-12.

RESEARCH METHODOLOGY AND DATA ANALYSIS

Data relating to Ultra tech cements. Has been collected through SECONDARY SOURCES: Published annual reports of the company for the year 2008-12. DATA ANALYSIS The collected data has been processed using the tools of Ratio analysis Graphical analysis Year-year analysis These tools access in the interpretation and understanding of the Existing scenario of the Capital Structure.

LIMITATION OF EPS AS A FINANCING-DECISION CRITERION

EPS is one of the mostly widely used measures of the companys performance in practice. As a result of this, in choosing between debt and equity in practice, sometimes too much attention is paid on EPS, which however, has serious limitations as a financing-decision criterion. The major short coming of the EPS as a financing-decision criterion is that it does not consider risk; it ignores variability about the expected value of EPS. The belief that investors would be just concerned with the expected EPS is not well founded. Investors in valuing the shares of the company consider both expected value and variability. The study is limited to KESORAM CEMENTS only. The study is limited to 45 days only.

CHAPTER-II INDUSTRY PROFILE & COMPANY PROFILE

INDUSTRY PROFILE Cement Industry in India

By standing production in 1914 the story of Indian cement is a stage of continues growth. Cement is derived from the Latin wordcementam . India is the world's fourth largest cement producer after china, Japan and USA the south industries have produced cement for the first time in 1904.the company was setup in Chennai with the installed capacity of 30 tons per day. Since then the most cement industry has processing leaps and 1950-51. The capacity of production was only 303 million tons. So far annual production and demand have been growing a pace at roughly 78 million tons with an installed capacity of 87 million tons. In the remaining two year of 8th plan an additional capacity of 23 million tones will actually come up. India is will endowed with cement grade limestone (90 billion tons) and coal (190 billion tons). During the ninesties it had a particularly impressive expansion with growth rate of 10 percent. The industry is posed for a high growth rates in nineties and the installed capacity is expected to cross 100 million tons and production 90 million tons by 2003AD. The industry has fabulous scope for exporting its to countries like the USA, UK., Bangladesh, Nepal and other several countries. But there are not enough wagons to transport cement for shipment. During September 2011, the cement production touched 12.54 million tons (MT), while the cement dispatches quantity was 12.56 MT during the month. The total cement production during April-September 2011-12 reached 81.54 MT as compared to 77.22 MT over the corresponding period last fiscal. Further, cement dispatches also witnessed an upsurge from 76.50 MT during April-September 2010-11 to 81.10 MT during AprilSeptember 2011-12.

10

Definition of cement
Cement may be defined as it is a mixture of calcium silicate and aluminates, which have the property of setting and hardening under water. The amount of silica, alumina who is present in each crust is sufficient to combine with calcium oxide( CaO2) to form the corresponding calcium silicate aluminates. Classification of cement Cement is three types. They are as fallows a) Puzzolantic cement b) Natural cement c) Portlant cement. B) Natural cement This is natural accruing material. It is obtained from cement rocks. The cement rocks are claying lime stones containing silicates aluminates of calcium. The selling property of this cement is more than the Portland cement but is comprehensive strength is half of its. C) Portland cement Portland cement is the most common type of cement in general use around the world because it is a basic ingredient of concrete, mortar, stucco and non-specialty grout. It is a fine power produced by grinding Portland cement clinker( more than 90%) a limited amount of calcium surface( which controls the set time ) and up to 5% minor constituents as allowed by various standards. Types of Portland cement Portland blastfurnace cement contains up to 70% ground granulated blast furnace slag, with the rest Portland clinker and a little gypsum. All compositions produce high ultimate strength, but as slag content is increased, early strength is reduced, while sulfate
11

resistance increases and heat evolution diminishes. Used as an economic alternative to Portland sulfate-resisting and low-heat cements. Portland fly ash cement contains up to 30% fly ash. The fly ash is pozzolanic, so that ultimate strength is maintained. Because fly ash addition allows a lower concrete water content, early strength can also be maintained. Where good quality cheap fly ash is available, this can be an economic alternative to ordinary Portland cement. Portland pozzolan cement includes fly ash cement, since fly ash is a pozzolan, but also includes cements made from other natural or artificial pozzolans. In countries where volcanic ashes are available (e.g. Italy, Chile, Mexico, the Philippines) these cements are often the most common form in use. Portland silica fume cement. Addition of silica fume can yield exceptionally high strengths, and cements containing 5-20% silica fume are occasionally produced. However, silica fume is more usually added to Portland cement at the concrete mixer. Masonry cements are used for preparing bricklaying mortars and stuccos, and must not be used in concrete. They are usually complex proprietary formulations containing Portland clinker and a number of other ingredients that may include limestone, hydrated lime, air entertainers, retarders, water proofers and coloring agents. They are formulated to yield workable mortars that allow rapid and consistent masonry work. Subtle variations of Masonry cement in the US are Plastic Cements and Stucco Cements. These are designed to produce controlled bond with masonry blocks. Expansive cements contain, in addition to Portland clinker, expansive clinkers (usually sulfoaluminate clinkers), and are designed to offset the effects of drying shrinkage that is normally encountered with hydraulic cements. This allows large floor slabs (up to 60 m square) to be prepared without contraction joints. White blended cements may be made using white clinker and white supplementary materials such as high-purity met kaolin. Colored cements are used for decorative purposes. In some standards, the addition of pigments to produce "colored Portland cement" is allowed. In other standards (e.g. ASTM), pigments are not allowed constituents of Portland cement, and colored cements are sold as "blended hydraulic cements". Very finely ground cements are made from mixtures of cement with sand or with slag or other pozzolan type minerals which are extremely finely ground together. Such cements can have the same physical characteristics as normal cement but with 50% less cement particularly due to their increased surface area for the chemical reaction. Even
12

with intensive grinding they can use up to 50% less energy to fabricate than ordinary Portland cements. Non-Portland hydraulic cements Pozzolan-lime cements. Mixtures of ground pozzolan and lime are the cements used by the Romans, and are to be found in Roman structures still standing (e.g. the Pantheon in Rome). They develop strength slowly, but their ultimate strength can be very high. The hydration products that produce strength are essentially the same as those produced by Portland cement. Slag-lime cements. Ground granulated blast furnace slag is not hydraulic on its own, but is "activated" by addition of alkalis, most economically using lime. They are similar to pozzolan lime cements in their properties. Only granulated slag (i.e. water-quenched, glassy slag) is effective as a cement component. Super sulfated cements. These contain about 80% ground granulated blast furnace slag, 15% gypsum or anhydrite and a little Portland clinker or lime as an activator. They produce strength by formation of ettringite, with strength growth similar to a slow Portland cement. They exhibit good resistance to aggressive agents, including sulfate. Calcium aluminates cements are hydraulic cements made primarily from limestone and bauxite. The active ingredients are monocalcium aluminates CaAl2O4 (CaO Al2O3 or CA in Cement chemist notation, CCN) and mayenite Ca12Al14O33 (12 CaO 7 Al2O3 , or C12A7 in CCN). Strength forms by hydration to calcium aluminates hydrates. They are welladapted for use in refractory (high-temperature resistant) concretes, e.g. for furnace linings. Calcium sulfoaluminate cements are made from clinkers that include ye'elimite (Ca4(AlO2)6SO4 or C4A3 in Cement chemist's notation) as a primary phase. They are

used in expansive cements, in ultra-high early strength cements, and in "low-energy" cements. Hydration produces ettringite, and specialized physical properties (such as expansion or rapid reaction) are obtained by adjustment of the availability of calcium and sulfate ions. Their use as a low-energy alternative to Portland cement has been pioneered in China, where several million tons per year are produced. Energy requirements are lower because of the lower kiln temperatures required for reaction, and the lower amount of limestone (which must be endothermic ally decarbonated) in the mix. In addition, the lower limestone content and lower fuel consumption leads to a CO 2 emission around half that associated with Portland clinker. However, SO 2 emissions are usually significantly higher.
13

Geopolymer cements are made from mixtures of water-soluble alkali metal silicates and aluminosilicate mineral powders such as fly ash and metakaolin

Technology
Cement may be manufactured employing three alternative technologies. a) The largely out model well process technology. b) The more modern dry process that requires only 19% coal utilization ( as against 30% of the well process). c) The latest preceptor technology through which optimum utilization may be achieved here the calculator or raw. RECENT INVESTMENT IN THE INDIAN CEMENT INDUSTRY The second largest cement company in south India, dalmia cement declared that its going to invest more than US$652.6 million in the next 2-3 years to add 10mt capacities. Anil ambani led Reliance infrastructure is going to build up cement plants with a total capacity of yearly 20mt in the next 5years. For this, the company will invest US$ 2.1 billion. India cement is going to set up a 5mt integrated cement plant in Maharashtra. It will invest US$ 463.2 million for that.

14

COMPANY PROFILE
HISTORY OF THE KESORAM CEMENT INDUSTRY
The first unit at Basanthnagar with a capacity of 2.1 lakh tones per annum incorporating humble suspension preheated system was commissioner during the year 1969. The second unit was setup in year 1971 with a capacity of 2.1 lakh tones per annum went on stream in the year 1978. The coal for this company is being supplied from Singereni Colleries and the power is obtained from APSEB. The power demand for the factory is about 21 MW. Kesoram has got 2 DG sets of 4 MW each installed in the year 1987. Kesoram Cement has setup a 15 KW captor power plant to facilitate for uninterrupted power supply for manufacturing of cement at 24th august 1997 per hour 12 mw, actual power is 15 mw. The Company was incorporated on 18th October, 1919 under the Indian Companies Act, 1913, in the name and style of Kesoram Cotton Mills Ltd. It had a Textile Mill at 42, Garden Reach Road, Calcutta 700 024. The name of the Company was changed to Kesoram Industries & Cotton Mills Ltd. on 30th August, 1961 and the same was further changed to Kesoram Industries Limited on 9th July, 1986. The said Textile Mill at Garden Reach Road was eventually demerged into a separate company. The First Plant for manufacturing of rayon yarn was established at Tribeni, District Hooghly, West Bengal and the same was commissioned in December, 1959 and the second plant was commissioned in the year 1962 enabling it to manufacture 4,635 metric tons per annum (mtpa) of rayon yarn. This Unit has 6,500 metric tons per annum (mtpa) capacity aso n31.3.2009. The plant for manufacturing of transparent paper was also set up at the same location at
15

Tribeni, District Hooghly, West Bengal, in June, 1961. It has the annual capacity to manufacture 3,600 metrictons per annum (mtpa) of transparent Paper. The Company diversified into manufacturing of cast iron spun pipes and pipe fittings at Bansberia, District Hooghly, West Bengal, with a production capacity of 45,000 metric tons per annum (mtpa) of cast iron spun pipes and pipe fittings in December, 1964. The Company subsequently diversified into the manufacturing of Cement and in 1969 established its first cement plant under the name 'Kesoram Cement' at Basantnagar, Dist. Karimnagar (Andhra Pradesh) and to take advantage of favourable market conditions, in 1986 another cement plant, known as 'Vasavadatta Cement', was commissioned by it at Sedam, Dist. Gulbarga (Karnataka). The cement manufacturing capacities at both the plants were augmented from time to time according to the market conditions and as on 31.3.2009 Kesoram Cement and Vasavadatta Cement have annual cement manufacturing capacities of 1.5 million metric tons and 4.1 million metric tons respectively. The Company in March 1992, commissioned a plant at Balasore known as Birla Tyres in Orissa, for manufacturing of 10 lac MT p.a. automotive tyres and tubes in the first phase in collaboration with Pirelli Ltd., U.K., a subsidiary company of the world famous Pirelli Group of Italy - a pioneer in production and development of automotive tyres in the world. The capacity at the said plant was further augmented during the year by 19 MT per day aggregating to 271 MT per day production facility. The Greenfield Project of 257 MT per day capacity in the State of Uttarakhand with a capex of about Rs.760 crores commenced the commercial production in phases during the financial year 2008-09.The Company as on 31.3.2009 had the manufacturing capacities of 3.71 million tyres, 2.95 million tubes and 1.53 million flaps per annum in the Plants including at Uttarakhand Plant. It has small manufacturing capacities of various Chemicals at Kharda in the State of West Bengal also. It has the annual manufacturing capacities of 12,410 mtpa of Caustic Soda Lye, 5,045 mtpa of Liquid Chlorine, 6,205 mtpa of Sodium Hypochlorite, 8,200 mtpa of Hydrochloric Acid, 3,200 mtpa of Ferric Alum, 18,700 mtpa of Sulphuric Acid and 1,620,000 m3pa of purified Hydrogen Gas.
16

Kesoram Cement - advantages

1. Helps in designing sleeker and more elegant. Structures, giving greater flexibility in design concept.

2. Due to its fine quality, super fine construction can be achieved. 3. Its gives maximum strength at Minimum use of cement with water in the water cement ratio, especially the 53 grade Birlas supreme-gold.
Feathers in Kesoram's cap:

Kesoram has outstanding track record, achieving over 100% capacity utilization I productivity and energy conservation. It has proved its distinction by bagging several national and state awards, noteworthy being.

17

Welfare and Recreation Facilities:

RECREATION CLUB For the purpose of recreation facilities 2 auditoriums were provided for playing indoor games, cultural function and activities like drama, music and dance etc. LIBRARIES AND READING ROOMS The industry has provided libraries and reading rooms. About 1000 books are available in the library. All kinds of newspaper, magazines are made available. CANTEEN Canteen is provided to cater to the needs of the employees for supply of snacks, tea, coffee and meals etc. One English medium and one Telugu medium school are provided to meet the educational requirements.The company has provided a dispensar with a qualified medical office and paramedical staff for the benefit of the employees. The employees covered under ESI scheme have to avail the medical facilities from the ESI hospital. SPORTS AND GAMES Competitions in sports and games are conducted ever year for august 15th Independence Day and January 26th, republic day among the employees.

18

CHAPTER-III REVIEW OF LITERATURE

19

CAPITAL STRUCTURE DEFINED The assets of a company can be financed either by increasing the owners claim or the creditors claim. The owners claims increase when the form raises funds by issuing ordinary shares or by retaining the earnings, the creditors claims increase by borrowing .The various means of financing represents the financial structure of an enterprise .The financial structure of an enterprise is shown by the left hand side (liabilities plus equity) of the balance sheet. Traditionally, short-term borrowings are excluded from the list of methods of financing the firms capital expenditure, and therefore, the long term claims are said to form the capital structure of the enterprise .The capital structure is used to represent the proportionate relationship between debt and equity .Equity includes paid-up share capital, share premium and reserves and surplus.

The financing or capital structure decision is a significant managerial decision .It influences the shareholders returns and risk consequently; the market value of share may be affected by the capital structure decision. The company will have to plan its capital structure initially at the time of its promotion.

FACTORS AFFECTING THE CAPITAL STRUCTURE LEVERAGE: The use of fixed charges of funds such as preference shares, debentures and term-loans along with equity capital structure is described as financial leverage or trading on. Equity. The term trading on equity is used because for raising debt. DEBT /EQUITY RATIO-Financial institutions while sanctioning long-term loans insists that companies should generally have a debt equity ratio of 2:1 for medium and large scale industries and 3:1 indicates that for every unit of equity the company has, it

20

can raise 2 units of debt. The debt-equity ratio indicates the relative proportions of capital contribution by creditors and shareholders. EBIT-EPS ANALYSIS-In our research for an appropriate capital structure we need to understand how sensitive is EPS (earnings per share) to change in EBIT (earnings before interest and taxes) under different financing alternatives. The other factors that should be considered whenever a capital structure decision is taken are Cost of capital Cash flow projections of the company Size of the company Dilution of control Floatation costs

FEATURES OF AN OPTIMAL CAPITAL STRUCTURE:

An optimal capital structure should have the following features, 1. PROFITABILITY: - The Company should make maximum use of leverages at a minimum cost. 2. FLEXIBILITY: - The capital structure should be flexible to be able to meet the changing conditions .The company should be able to raise funds whenever the need arises and costly to continue with particular sources. 3. CONTROL: - The capital structure should involve minimum dilution of control of the company. 4. SOLVENCY: - The use of excessive debt threatens the solvency of the company. In a high interest rate environment, Indian companies are beginning to realize the advantage of low debt.

CAPITAL STRUCTURE AND FIRM VALUE:

Since the objective of financial management is to maximize shareholders wealth, the key issue is: what is the relationship between capital structure and firm value? Alternatively, what is the relationship between capital structure and cost of capital? Remember that valuation and cost of capital are inversely related. Given a certain level of
21

earnings, the value of the firm is maximized when the cost of capital is minimized and vice versa. There are different views on how capital structure influences value. Some argue that there is no relationship what so ever between capital structure and firm value; other believe that financial leverage (i.e., the use of debt capital) has a positive effect on firm value up to a point and negative effect thereafter; still others contend that, other things being equal, greater the leverage, greater the value of the firm.

CAPITAL STRUCTURE DIAGRAM

The Capital Structure Decision Process

EMBED PBrush

22

Optimum capital opooooo structure

CAPITAL STRUCTURE AND PLANNING

Capital structure refers to the mix of long-term sources of funds. Such as debentures, long-term debt, preference share capital including reserves and surplus (i.e., retained earnings) The board of directors or the chief financial officer (CEO) of a company should develop an appropriate capital structure, which are most factors to the company. This can be done only when all those factors which are relevant to the companys capital structure decision are properly analysed and balanced. The capital structure should be planned generally keeping in view the interests of the equity shareholders, being the owners of the company and the providers of risk capital (equity) would be concerned about the ways of financing a companys operations. However, the interests of other groups, such as employees, customers, creditors, society and government, should also be given reasonable consideration. When the company lays down its objective in terms of the shareholders wealth maximization (SWM), it is generally compatible with the interests of other groups. Thus while developing an appropriate capital structure for its company, the financial manager should inter alia aim at maximizing the long-term market price per share. Theoretically, there may be a precise point or range within an industry there may be a range of an appropriate capital structure with in which there would not be great differences in the market value per share. One way to get an idea of this range is to observe the capital structure patterns of companies vis--vis their market prices of shares. It may be found empirically that there are not significant differences in the share values within a given range. The management of a company may fix its capital structure near the top of this range in order to make
23

maximum use of favorable leverage, subject to other requirements such as flexibility, solvency, control and norms set by the financial institutions, the security exchange Board of India (SEBI) and stock exchanges.

24

FEATURES OF AN APPROPRIATE CAPITAL STRUCTURE

The board of Director or the chief financial officer (CEO) of a company should develop an appropriate capital structure, which is most advantageous to the company. This can be done only when all those factors, which are relevant to the companys capital structure decision, are properly analyzed and balanced. The capital structure should be planned generally keeping in view the interest of the equity shareholders and financial requirements of the company. The equity shareholders being the shareholders of the company and the providers of the risk capital (equity) would be concerned about the ways of financing a companys operation. However, the interests of the other groups, such as employees, customer, creditors, and government, should also be given reasonable consideration. When the company lay down its objectives in terms of the shareholders wealth maximizing (SWM), it is generally compatible with the interest of the other groups. Thus, while developing an appropriate capital structure for it company, the financial manager should inter alia aim at maximizing the long-term market price per share. Theoretically there may be a precise point of range with in which the market value per share is maximum. In practice for most companies with in an industry there may be a range of appropriate capital structure with in which there would not be great differences in the market value per share. One way to get an idea of this range is to observe the capital structure patterns of companies Vis-a Vis their market prices of shares. It may be found empirically that there is no significance in the differences in the share value with in a given range. The management of the company may fit its capital structure near the top of its range in order to make of maximum use of favorable leverage, subject to other requirement (SEBI) and stock exchanges.

25

A SOUND OR APPROPRIATE CAPITAL STRUCTURE SHOULD HAVE THE FOLLOWING FEATURES

1)

RETURN: the capital structure of the company should be most advantageous, subject to the other considerations; it should generate maximum returns to the shareholders without adding additional cost to them.

2) 3)

RISK: the use of excessive debt threatens the solvency of the company. To the point debt does not add significant risk it should be used other wise it uses should be avoided. FLEXIBILITY: the capital structure should be flexibility. It should be possible to the company adopt its capital structure and cost and delay, if warranted by a changed situation. It should also be possible for a company to provide funds whenever needed to finance its profitable activities.

4)

CAPACITY: - The capital structure should be determined within the debt capacity of the company and this capacity should not be exceeded. The debt capacity of the company depends on its ability to generate future cash flows. It should have enough cash flows to pay creditors, fixed charges and principal sum.

5)

CONTROL: The capital structure should involve minimum risk of loss of control of the company. The owner of the closely held companys of particularly concerned about dilution of the control. APPROACHES TO ESTABLISH APPROPRIATE CAPITAL STRUCTURE: The capital structure will be planned initially when a company is incorporated .The initial capital structure should be designed very carefully. The management of the company should set a target capital structure and the subsequent financing decision should be made with the a view to achieve the target capital structure .The financial manager has also to deal with an existing capital structure .The company needs funds to finance its activities continuously. Every time when fund shave to be procured, the financial manager weighs the pros and cons of various sources of finance and selects the most advantageous sources keeping in the view the target capital structure. Thus, the capital structure decision is a continues one and has to be taken whenever a firm needs additional Finances.

26

The following are the three most important approaches to decide about a firms capital structure. EBIT-EPS approach for analyzing the impact of debt on EPS. Valuation approach for determining the impact of debt on the shareholders value. Cash flow approached for analyzing the firms ability to service debt. In addition to these approaches governing the capital structure decisions, many other factors such as control, flexibility, or marketability are also considered in practice. EBIT-EPS APPROACH: We shall emphasize some of the main conclusions here .The use of fixed cost sources of finance, such as debt and preference share capital to finance the assets of the company, is know as financial leverage or trading on equity. If the assets financed with the use of debt yield a return greater than the cost of debt, the earnings per share also increases without an increase in the owners investment. The earnings per share also increase when the preference share capital is used to acquire the assets. But the leverage impact is more pronounced in case of debt because 1. The cost of debt is usually lower than the cost of performance share capital and 2. The interest paired on debt is tax deductible. Because of its effect on the earnings per share, financial leverage is an important consideration in planning the capital structure of a company. The companies with high level of the earnings before interest and taxes (EBIT) can make profitable use of the high degree of leverage to increase return on the shareholders equity. One common method of examining the impact of leverage is to analyze the relationship between EPS and various possible levels of EBIT under alternative methods of financing. The EBIT-EPS analysis is an important tool in the hands of financial manager to get an insight into the firms capital structure management .He can considered the possible fluctuations in
27

EBIT and examine their impact on EPS under different financial plans of the probability of earning a rate of return on the firms assets less than the cost of debt is insignificant, a large amount of debt can be used by the firm to increase the earning for share. This may have a favorable effect on the market value per share. On the other hand, if the probability of earning a rate of return on the firms assets less than the cost of debt is very high, the firm should refrain from employing debt capital .it may, thus, be concluded that the greater the level of EBIT and lower the probability of down word fluctuation, the more beneficial it is to employ debt in the capital structure However, it should be realized that the EBIT EPS is a first step in deciding about a firms capital structure .It suffers from certain limitations and doesnt provide unambiguous guide in determining the capital structure of a firm in practice.

RATIO ANALYSIS: The primary user of financial statements are evaluating part performance and predicting future performance and both of these are facilitated by comparison. Therefore the focus of financial analysis is always on the crucial information contained in the financial statements. This depends on the objectives and purpose of such analysis. The purpose of evaluating such financial statement is different form person to person depending on its relationship. In other words even though the business unit itself and shareholders, debenture holders, investors etc. all under take the financial analysis differs. For example, trade creditors may be interested primarily in the liquidity of a firm because the ability of the business unit to play their claims is best judged by means of a thorough analysis of its l9iquidity. The shareholders and the potential investors may be interested in the present and the future earnings per share, the stability of such earnings and comparison of these earnings with other units in thee industry. Similarly the debenture holders and financial institutions lending longterm loans maybe concerned with the cash flow ability of the business unit to pay back the debts in the long run. The management of business unit, it contrast, looks to the financial statements from various angles. These statements are required not only for the managements own evaluation and decision making but also for internal control and overall performance of the firm. Thus the scope extent and means of any financial analysis vary as per the specific
28

needs of the analyst. Financial statement analysis is a part of the larger information processing system, which forms the very basis of any decision making process. The financial analyst always needs certain yardsticks to evaluate the efficiency and performance of business unit. The one of the most frequently used yardsticks is ratio analysis. Ratio analysis involves the use of various methods for calculating and interpreting financial ratios to assess the performance and status of the business unit. It is a tool of financial analysis, which studies the numerical or quantitative relationship between with other variable and such ratio value is compared with standard or norms in order to highlight the deviations made from those standards/norms. In other words, ratios are relative figures reflecting the relationship between variables and enable the analysts to draw conclusions regarding the financial operations. However, it must be noted that ratio analysis merely highlights the potential areas of concern or areas needing immediate attention but it does not come out with the conclusion as regards causes of such deviations from the norms. For instance, ABC Ltd. Introduced the concept of ratio analysis by calculating the variety of ratios and comparing the same with norms based on industry averages. While comparing the inventory ratio was 22.6 as compared to industry average turnover ratio of 11.2. However on closer sell tiny due to large variation from the norms, it was found that the business units inventory level during the year was kept at extremely low level. This resulted in numerous production held sales and lower profits. In other words, what was initially looking like an extremely efficient inventory management, turned out to be a problem area with the help of ratio analysis? As a matter of caution, it must however be added that a single ration or two cannot generally provide that necessary details so as to analyze the overall performance of the business unit. In order to arrive at the reasonable conclusion regarding overall performance of the business unit, an analysis of the entire group of ratio is required. However, ration analysis should not be considered as ultimate objective test but it may be carried further based on the out come and revelations about the causes of variations. Sometimes large variations are due to unreliability of financial data or inaccuracies contained therein therefore before taking any decision the basis of ration analysis, their reliability must be ensured.
29

Similarly, while doing the inter-firm comparison, the variations may be due to different technologies or degree of risk in those units or items to be examined are in fact the comparable only. It must be mentioned here that if ratios are used to evaluate operating performance, these should exclude extra ordinary items because there are regarded as nonrecurring items that do not reflect normal performance. Ratio analysis is the systematic process of determining and interpreting the numerical relationship various pairs of items derived from the financial statements of a business. Absolute figures do not convey much tangible meaning and is not meaningful while comparing the performance of one business with the other. It is very important that the base (or denominator) selected for each ratio is relevant with the numerator. The two must be such that one is closely connected and is influenced by the other

CAPITAL STRUCTURE RATIOS

Capital structure or leverage ratios are used to analyze the long-term solvency or stability of a particular business unit. The short-term creditors are interested in current financial position and use liquidity ratios. The long-term creditors world judge the soundness of a business on the basis of the long-term financial strength measured in terms of its ability to pay the interest regularly as well as repay the installment on due dates. This long-term solvency can be judged by using leverage or structural ratios. There are two aspects of the long-term solvency of a firm:1. Ability to repay the principal when due, and 2. Regular payment of interest, there are thus two different but mutually dependent and interrelated types of leverage ratio such as: 3. Ratios based on the relationship between borrowed funds and etc.,
30

owners capital, computed

form balance sheet eg: debt-equity ratio, dividend coverage ratio, debt service coverage ratio

THE CAPITAL STRUCTURE CONTROVERSY

The value of the firm depends upon its expected earnings stream and the rate used to discount this stream. The rate used to discount earnings stream its the firms required rate of return or the cost of capital. Thus, the capital structure decision can affect the value of the firm either by changing the expected earnings of the firm, but it can affect the reside earnings of the shareholders. The effect of leverage on the cost of capital is not very clear. Conflicting opinions have been expressed on this issue. In fact, this issue is one of the most continuous areas in the theory of finance, and perhaps more theoretical and empirical work has been done on this subject than any other. If leverage affects the cost of capital and the value of the firm, an optimum capital structure would be obtained at that combination of debt and equity that maximizes the total value of the firm or minimizes the weighted average cost of capital. The question of the existence of optimum use of leverage has been put very succinctly by Ezra Solomon in the following words.

Given that a firm has certain structure of assets, which offers net operating earnings of given size and quality, and given a certain structure of rates in the capital markets, is there some specific degree of financial leverage at which the market value of the firms securities will be higher than at other degrees of leverage? The existence of an optimum capital structure is not accepted by all. These exist two extreme views and middle position. David Durand identified the two extreme views the net income and net operating approaches.
31

1. Net Income Approach Under the net income approach (NI), the cost of debt and cost of equity are assumed to be independent to the capital structure. The weighted average cost of capital declines and the total value of the firm rise with increased use of leverage. 2. Net Operating Income Approach Under the net operating income (NOI) approach, the cost of equity is assumed to increase linearly with average. As a result, the weighted average cost of capital remains constant and the total value of the firm also remains constant as leverage is changed. 3. Traditional Approach According to this approach, the cost of capital declines and the value of the firm increases with leverage up to a prudent debt level and after reaching the optimum point, coverage cause the cost of capital to increase and the value of the firm to decline. Thus, if NI approach is valid, leverage is significant variable and financing decisions have an important effect on the value of the firm. On the other hand, if the NOI approach is correct then the financing decisions should not be a great concern to the financing manager, as it does not matter in the valuation of the firm. Modigliani and Miller (MM) support the NOI approach by providing logically consistent behavioral justifications in its favor. They deny the existence of an optimum capital structure between the two extreme views; we have the middle position or intermediate version advocated by the traditional writers.

32

Thus these exists an optimum capital structure at which the cost of capital is minimum. The logic of this view is not very sound. The MM position changes when corporate taxes are assumed. The interest tax shield resulting from the use of debt adds to the value of the firm. This advantage reduces the when personal income taxes are considered.

The Net Income Approach

The essence of the net income (NI) approach is that the firm can increase its value or lower the overall cost of capital by increasing the proportion of debt in the capital structure. The crucial assumptions of this approach are: 1.The use of debt does not change the risk perception of investors; as a result, the equity capitalization rate, kc and the debt capitalization rate, k d, remain constant with changes in leverage. 2.The debt capitalization rate is less than the equity capitalization rate (i.e. kd<ke) 3.The corporate income taxes do not exist. The first assumption implies that, if ke and kd are constant increased use by debt by

magnifying the shareholders earnings will result in higher value of the firm via higher value of equity consequently the overall or the weighted average cost of capital k o, will decrease. The overall cost of capital is measured by equation: (1)

It is obvious from equation 1 that, with constant annual net operating income (NOI), the overall cost of capital would decrease as the value of the firm v increases. The overall cost of capital ko can also be measured by KO = Ke - (Ke - Kd) D/V

As per the assumptions of the NI approach K e and Kd are constant and Kd is less than Ke. Therefore, Ko will decrease as D/V increases. Equation 2 also implies that the

33

overall cost of capital Ko will be equal to Ke if the form does not employ any debt (i.e. D/V =0), and that Ko will approach Kd as D/V approaches one.

NET OPERATING INCOME APPROACH According to the met operating income approach the overall capitalization rate and the cost of debt remain constant for all degree of leverage.

rA and rD are constant for all degree of leverage. Given this, the cost of equity can be expressed as.

The critical premise of this approach is that the market capitalizes the firm as a whole at discount rate, which is independent of the firms debt-equity ratio. As a consequence, the decision between debt and equity is irrelevant. An increase in the use of debt funds which are apparently cheaper or offset by an increase in the equity capitalization rate. This happens because equity investors seek higher compensation as they are exposed to greater risk arising from increase in the degree of leverages. They raise the capitalization rate rE (lower the price earnings ratio, as the degree of leverage increases.

34

The net operating income position has been \advocated eloquently by David Durand. He argued that the market value of a firm depends on its net operating income and business risk. The change in the financial leverage employed by a firm cannot change these underlying factors. It merely changes the distribution of income and risk between debt and equity, without affecting the total income and risk which influence the market value (or equivalently the average cost of capital) of the firm. Arguing in a similar vein, Modigliani and Miller, in a seminal contribution made in 1958, forcefully advanced the proposition that the cost of capital of a firm is independent of its capital structure.

COST OF CAPITAL AND VALUATION APPROACH The cost of a source of finance is the minimum return expected by its suppliers. The expected return depends on the degree of risk assumed by investors. A high degree of risk is assumed by shareholders than debt-holders. In the case of debt-holders, the rate of interest is fixed and the company is legally bound to pay dividends even if the profits are made by the company. The loan of debt-holders is returned within a prescribed period, while shareholders will have to share the residue only when the company is wound up. This leads one to conclude that debt is cheaper source of funds than equity. This is generally the case even when taxes are not considered. The tax deductibility of interest charges further reduces the cost of debt. The preference share capital is also cheaper than equity capital, but not as cheap as debt. Thus, using the component, or specific, cost of capital as criterion for financing decisions and ignoring risk, a firm would always like to employ debt since it is the cheapest source of funds. CASH FLOW APPROACH:
35

One of the features of a sound capital structure is conservatism does not mean employing no debt or small amount of debt. Conservatism is related to the fixed charges created by the use of debt or preference capital in the capital structure and the firms ability to generate cash to meet these fixed charges. In practice, the question of the optimum (appropriate) debt equity mix boils down to the firs ability to service debt without any threat of insolvency and operating inflexibility. A firm is considered prudently financed if it is able to service its fixed charges under any reasonably predictable adverse conditions. The fixed charges of a company include payment of interest, preference dividend and principal, and they depend on both the amount of loan securities and the terms of payment. The amount of fixed charges will be high if the company employs a large amount of debt or preference capital with short-term maturity. Whenever a company thinks of raising additional debt, it should analyse its expected future cash flows to meet the fixed charges. It is mandatory to pay interest and return the principal amount of debt of a company not able to generate enough cash to meet its fixed obligation, it may have to face financial insolvency. The companies expecting larger and stable cash inflows in to employ fixed charge sources of finance by those companies whose cash inflows are unstable and unpredictable. It is possible for high growth, profitable company to suffer from cash shortage if the liquidity (working capital) management is poor. We have examples of companies like BHEL, NTPC, etc., whose debtors are very sticky and they continuously face liquidity problem in spite of being profitability servicing debt is very burdensome for them. One important ratio which should be examined at the time of planning the capital structure is the ration of net cash inflows to fixed changes (debt saving ratio). It indicates the number of times the fixed financial obligation are covered by the net cash inflows generated by the company.

LIMITATION OF EPS AS A FINANCING-DECISION CRITERION

36

EPS is one of the mostly widely used measures of the companys performance in practice. As a result of this, in choosing between debt and equity in practice, sometimes too much attention is paid on EPS, which however, has serious limitations as a financing-decision criterion. The major short coming of the EPS as a financing-decision criterion is that it does not consider risk; it ignores variability about the expected value of EPS. The belief that investors would be just concerned with the expected EPS is not well founded. Investors in valuing the shares of the company consider both expected value and variability. EPS VARIABILITY AND FINANCIAL RISK: The EPS variability resulting from the use of leverage is called financial risk. Financial risk is added with the use of debt because of (a) The increased variability in the shareholders earnings and (b) The threat of insolvency. A firm can avid financial risk altogether if it does not employ any debt in its capital structure. But then the shareholders will be deprived of the benefit of the financial risk perceived by the shareholders, which does not exceed the benefit of increase EPS. As we have seen, if a company increase its debt beyond a point the expected EPS will continue to increase but the value of the company increases its debt beyond a point, the expected EPS will continue to increase, but the value of the company will fall because of the greater exposure of shareholders to financial risk in the form of financial distress. The EPS criterion does not consider the long-term perspectives of financing decisions. It fails to deal with the risk return trade-off. A long term view of the effects of the financing decisions, will lead one to a criterion of the wealth maximization rather that EPS maximization. The EPS criterion is an important performance measure but not a decision criterion. Given limitations, should the EPS criterion be ignored in making financing decision? Remember that it is an important index of the firms performance and that investors rely heavily on it for their investment decisions. Investors do not have information in the projected earnings and cash flows and base their evaluation and historical data. In choosing between

37

alternative financial plans, management should start with the evaluation of the impact of each alternative on near-term EPS. But managements ultimate decision making should be guided by the best interests of shareholders. Therefore, a long-term view of the effect of the alternative financial plans on the value of the shares should be taken, o management opts for a financial plan which will maximize value in the long run but has an adverse impact in near-term EPS, and the reasons must be communicated to investors. A careful communication to market will be helpful in reducing the misunderstanding between management and Investors. COMPOSITION AND OBSERVATION The sources tapped by ULTRA TECH CEMENTS Industries Ltd. Can be classified into: Shareholders funds resources Loan fund resources SHAREHOLDER FUND RESOURCES: Shareholders fund consists of equity capital and retained earnings. EQUITY CAPITAL BUILD-UP 1.From 1995, the Authorized capital is Rs.450 lacs of equity shares at Rs.10 each. The issued equity capital is RS.1622.93 lacs at Rs.10 each for the period 2002-2009 and subscribed and paid-up capital is Rs. 1622.93 lacs at Rs.10 each for the period of 2004-2009. 3.There is an increase of 1.38% in the equity from 2005-2010. RETAINED EARNINGS COMPOSITION This includes Capital Reserve Share Premium Account General Reserve Contingency Reserve Debentures Redemption Reserve Investment Allowance Reserve
38

 1.

Profit & Loss Account The profit levels, company dividend policy and growth plans determined. The amounts transferred from P&L A/c to General Reserve. Contingency Reserve and Investment Allowance Reserve.

2.

The Investment Allowance Reserve is created for replacement of long term leased assets and this reserve was removed from books because assets pertaining to such reserves ceased to exist. The account was transferred to investment allowance utilized.

CHAPTER-IV DATA ANALYSIS & INTERPRETATION

39

a) RETURN ON ASSETS In this case profits are related to assets as follows(Rs Crs) Return on assets = Particulars Net profit after tax Total assets Return on assets (%) Net profit after tax Total assets 2008 178.24 6453.1 2.76208 2009 82.71 5753.21 1.43763 2010 279.52 3992.67 7.00083 2011 313.92 2972.9 2 10.559 3 2012 214.82 2002.17 10.7294

b). RETURN ON CAPITAL EMPLOYED (Rs Crs) Here return is compared to the total capital employed. A comparison of this ratio with that of other units in the industry will indicate how efficiently the funds of the business have been employed. The higher the ratio the more efficient is the use of capital employed. Return on capital employed = Net profit after taxes & Interest
40

Total capital employed (Total capital employed = Fixed assets + Current assetsCurrent liabilities) particulars Profit After tax Fixed assets + Current assets Current liabilities capital employed return on capital employed

2008 178.24 6453.1 767.54 5685.56 3.134959

2009 82.71 5753.21 543.61 5209.6 1.58764 6

2010 279.52 3992.67 394.5 3598.17 7.768393

2011 313.92 2972.92 633.42 2339.5 13.41825

2012 214.82 2002.17 362.53 1639.64 13.10166

YEAR 2007-2008 PERFORMANCE OF COMPANY (AMOUNT IN RS. Crs) Gross Revenue Profit (Loss) before tax Earnings per share Rs. 2576.98 400.09 58.08 Total Expenditure Profit after tax Dividend ratio 2176.89 214.82 7.85%

Interpretation
There has been an increase of over 20% sales when compared to cost year. which resulted in Gross Profit of Rs.400.09 Cr. Because of decrease in Non-Operating expenses to the time of 214.82 Cr the Net profit has increased. It stood at in current year increase because of redemption of debenture and cost reduction. A dividend of Rs.45.74 Cr as declared during the year at 7.85% on equity.

41

YEAR 2008-2009 PERFORMANCE OF COMPANY (AMOUNT IN RS. Crs) Gross Revenue Profit (Loss) before tax Earnings per share Rs. 3518.10 641.80 83.80 Total Expenditure Profit after tax Dividend ratio 2876.30 313.92 7.67%

Interpretation
The Cement Industry has a successful year because of Govt. policies such as infrastructure Development a Rural housing. There has been a small reduction in Gross Sales and with the performance of prefab Division the Gross Profit gap has narrowed and contributing to the EBIT. The Gross Profit has increased considerably from 520.99 Cr in Last year to 641.80 Cr in year. The interest payment has increased by 51 Cr in the Current year and the Profit before Tax at 520.99 when compared to 641.80 cr in Last year.

42

YEAR 2009-2010
PERFORMANCE OF COMPANY (AMOUNT IN RS. Crs) Gross Revenue Profit (Loss) before tax Earnings per share Rs. 4447.95 520.99 82.80 Total Expenditure Profit after tax Dividend ratio 3926.96 279.52 7.77%

Interpretation
In 2009-10 the company has performed well in all decisions because of high demand and realizations. The Gross Profit Increased considerably and the interest payments have decreased at about 82.71 because of loans taken from the bank at a lesser rate of interest and payment of loan funds for which the company is paying higher rate of interest. In the previous year, the cash credit granted by bank to the tune of Rs.648.29 Cr and losing of loan funds

43

YEAR 2010-2011
PERFORMANCE OF COMPANY (AMOUNT IN RS. Crs) Gross Revenue Profit (Loss) before tax Earnings per share Rs. 5318.39 648.29 51.88 Total Expenditure Profit after tax Dividend ratio 4670.10 82.71 12.37%

Interpretation
borrowed from Bank &Bank factors, which can tribute to increase in the Profit before Tax to the tune of 648.29 the company declared a dividend of 12.37% on its equity to its shareholders when compared to 7.77% in the previous year. The EPS of the company also increased considerably which investors in coming period. The company has taken up a plant expansion program during the year to increase the production activity and to meet the increase in the demand

44

YEAR 2011-2012
PERFORMANCE OF COMPANY (AMOUNT IN RS. Crs) Gross Revenue Profit (Loss) before tax Earnings per share Rs. 6070.13 120.24 45.95 Total Expenditure Profit after tax Dividend ratio 5949.89 178.24 15%

Interpretation
Company is operating in 3 segments, out of which cement contributes about 55% of turnover while the Boards and prefab segments contribute about 45%. Huge investment in the industrial sector over the next 3 years is expected to lead to higher cement off take on the back of strong GDP growth across the country. It is expected that the domestic cement consumption would grow at a CAGR of 8% for the next 5 years. By FY 2008 the domestic consumption is expected to grow to 199 million Tons from 136 million Tons consumption FY2010. During the year 2011-12 your companys Gross sales increased by about 38% to 178.24 Cr from Rs.82.71 Cr in FY 2011-12. Net sales increased by about 39% to Rs.120.24Cr. Improved sales from all the tree divisions particularly from prefab division contributed for increased turnover.

45

EBIT LEVELS

Particulars Earnings Before Interest & Tax Change % Change

2008 400.09 ----

2009 641.80 241.71

2010 520.99 120.81 -8.11%

2011 648.29 127.30 12.44 %

2012 120.24 -528.05

--------

16.04 %

-1.18%

DEGREE OF FINANCIAL LEVERAGE:

The higher the quotient of DFL, the greater the leverage. In Kesoram Industries case it is increasing because of decrease in EBIT levels to 2010-2011. The EBIT level is in a decreasing trend because of drastic decline in prices in Cement Industry during above period.

46

In the year 2011 and 2012 the EBIT level has increased substantially because of Raise inn Cement prices because of demand and the policies of Govt. such as rural housing and irrigation project taken up.

INTERPRETATION The EBIT level in 2008 is at 400.09 Cr and is increasing every year till 2011. Because of slump in the Cement Industry less realization. The EBIT levels in 2011 again started growing and reached to 648.29 Cr and in 2011 were at 648.29 Cr and in 2012 were at 120.24, because of the sale price increase per bag and increase in demand. The infrastructure program taken up by the A.P. Govt. in the field s of rural housing irrigation projects created demand and whole Cement Industries are making profits.

47

PERFORMANCE

EPS ANALYSIS
Particulars Profit After Tax Less: Preference Dividend Amount of Equity share holder(Cr) No. OF equity share of Rs.10/- each EPS 2008 214.82 45.74 45743318 -45.95 2009 313.92 45.74 45743318 51.88 2010 279.52 45.74 45743318 82.80 2011 82.71 45.74 45743318 83.80 2012 178.24 45.74 45743318 58.80

INTERPRETATION The PAT is in an increasing trend from 2009-2010 because of increase in sale prices and also decreases in the cost of manufacturing. In 2011 and 2012even the cost of manufacturing has increased by 5% because of higher sales volume PAT has increased considerably, which leads to higher EPS, which is at 83.80 in 2011.

48

EBIT EPS CHART One convenient and useful way showing the relationship between EBIT and EPS for the alternative financial plans is to prepare the EBIT-EPS chart. The chart is easy to prepare since for any given level of financial leverage, EPS is linearly related to EBIT. As noted earlier, the formula for calculating EPS is EPS = (EBIT - INT) (1 T) N = (EBIT - INT) (1 T) N

We assume that the level of debt, the cost of debt and the tax rate are constant. Therefore in equation, the terms (1-T)/N and INT (=iD) are constant: EPS will increase if EBIT increases and fall if EBIT declines. Can also be written as follows

Under the assumption made, the first part of is a constant and can be represented by an EBIT is a random variable since it can assume a value more or less than expected. The term (1 T)/N are also a constant and can be shown as b. Thus, the EPS, formula can be written as: EPS = a + bEBIT Clearly indicates that EPS is a linear function of EBIT.

49

FINANCING DECISION
Financing strategy forms a key element for the smooth running of any organization where flow, as a rare commodity, has to be obtained at the optimum cost and put into the wheels of business at the right time and if not, it would lead intensely to the shutdown of the business. Financing strategies basically consists of the following components: Mobilization Costing Timing/Availability Business interests

Therefore, the strategy is to always keep sufficient availability of finance at the optimum cost at the right time to protect the business interest of the company. STRATEGIES IN FINANCE MOBILIZATION There are many options for the fund raising program of any company and it is quite pertinent to note that these options will have to be evaluated by the finance manager mainly in terms of:

Cost of funds Mode of repayment Timing and time lag involved in mobilization Assets security

50

Stock options Cournands in terms of participative management and Other terms and conditions. Strategies of finance mobilization can be through two sectors, that is, owners resources and the debt resources. Each of the above category can also be split into: Securitized resources; and non-securities resources. Securitized resources are those who instrument of title can be traded in the money market and non-securities resources and those, which cannot be traded in the market

THE FORMS OF FUNDS MOBILIZATION IS ILLUSTRATED BY A CHART:

FUNDING MIX - SOURCES

OWNERS FUND

BORROWED FUND

EQUITY CAPITAL

RETAINED EARNINGS

PREFERENCE CAPITAL

CONVENTIONAL SOURCES

NON- CONVENTIONAL SOURCES

FINANCIAL INSTITUTION BANK CASH CREDIT DEBENTURES

SUPPLIERS CREDIT SHORT TERM BANK BORROWINGS HIRE PURCHASE

51

FIXED DEPOSITS ICD

ULTRA TECH CEMENTS INDUSTRIES LTD. THE FUNDING MIX Rs. Cr Particulars Source of funds Share holders funds a) Share capital b) Reserves and surplus c)Deferred tax TOTAL (A) Loan Funds a) Secured Loans b) Unsecured Loans TOTAL (B) TOTAL (A+B) INTERPRETATION The Funding Mix on an average for 4 years will be 45% of shareholders Fund and 55% of Loan Funds there by the company is trying to maintain a good Funding Mix. The leverage or trading on equity is also good because the company affectively utilizing the Loan Funds in the Capital Structure. So that it leads to higher profit increase of EPS in 2009 -2010. 2371.83 1627.44 3999.27 11997.8 1 1863.72 1477.2 3340.92 10022.7 6 1536.27 605.65 2141.92 6425.76 971.06 243.75 1214.81 3644.43 643.2 229.6 872.8 2618.4 45.74 608.69 112.41
766.84

2007-08

2008-09

2009-10

2010-11

2011-12

45.74 963.18 142.77

1151.6 9

45.74 1284.36 126.15

1456.2 5

45.74 1495.5 328.44

1869.6 8

45.74 1254.51 386.42

1686.67

52

FINANCIAL LEVERAGE INTRODUCTION: Leverage, a very general concept, represents influence or power. In financial analysis leverage represents the influence of a financial variable over same other related financial variable. Financial leverage is related to the financing activities of a firm. The sources from which funds can be raised by a firm, from the viewpoint of the cost can be categorized into: Those, which carry a fixed finance charge. Those, which do not carry a fixed charge. The sources of funds in the first category consists of various types of long term debt including loans, bonds, debentures, preference share etc., these long-term debts carry a fixed rate of interest which is a contractual obligation for the company except in the case of preference shares. The equity holders are entitled to the remainder of operating profits if any. Financial leverage results from presence of fixed financial charges in eh firms income stream. These fixed charges dont vary with EBIT or operating profits. They have to be paid regardless of EBIT availability. Past payment balances belong to equity holders. Financial leverage is concerned with the effect of changes I the EBIT on the earnings available to shareholders.

53

DEFINITION: Financial leverage is the ability of the firm to use fixed financial charges to magnify the effects of changes in EBIT on EPS i.e., financial leverage involves the use of funds obtained at fixed cost in the hope of increasing the return to shareholder. The favorable leverage occurs when the Firm earns more on the assets purchase with the funds than the fixed costs of their use. The adverse business conditions, this fixed charge could be a burden and pulled down the companies wealth MEANING OF FINANCIAL LEVERAGE: As stated earlier a company can finance its investments by debt/equity. The company may also use preference capital. The rate of interest on debt is fixed, irrespective of the companys rate of return on assets. The company has a legal banding to pay interest on debt .The rate of preference dividend is also fixed, but preference dividend are paid when company earns profits. The ordinary shareholders are entitled to the residual income. That is, earnings after interest and taxes belong to them. The rate of equity dividend is not fixed and depends on the dividend policy of a company. The use of the fixed charges, sources of funds such as debt and preference capital along with owners equity in the capital structure, is described as financial leverages or gearing or trading or equity. The use of a term trading on equity is derived from the fact that it is the owners equity that is used as a basis to raise debt, that is, the equity that is traded upon the supplier of the debt has limited participation in the companies profit and therefore, he will insists on protection in earnings and protection in values represented by owners equitys

54

FINANCIAL LEVERAGE AND THE SHAREHOLDERS RISK Financial leverage magnifies the shareholders earnings we also find that the variability of EBIT causes EPS to fluctuate within wider ranges with debt in the capital structure that is with more debt EPS raises and falls faster than the rise and fall in EBIT. Thus financial leverage not only magnifies EPS but also increases its variability.

The variability of EBIT and EPs distinguish between two types of riskoperating risk and financial risk. The distinction between operating and financial risk was long ago recognized by Marshall in the following words.

OPERATING RISK: Operating risk can be defined as the variability of EBIT (or return on total assets). The environment internal and external in which a firm operates determines the variability of EBIT. So long as the environment is given to the firm, operating risk is an unavoidable risk. A firm is better placed to face such risk if it can predict it with a fair degree of accuracy.

55

THE VARIABILITY OF EBIT HAS TWO COMPONENTS 1. 2. Variability of sales Variability of expenses 1. VARIABILITY OF SALES: The variability of sales revenue is in fact a major determinant of operating risk. Sales of a company may fluctuate because of three reasons. First the changes in general economic conditions may affect the level of business activity. Business cycle is an economic phenomenon, which affects sales of all companies. Second certain events affect sales of company belongings to a particular industry for example the general economic condition may be good but a particular industry may be hit by recession, other factors may include the availability of raw materials, technological changes, action of competitors, industrial relations, shifts in consumer preferences and so on. Third sales may also be affected by the factors, which are internal to the company. The change in management the product market decision of the company and its investment policy or strike in the company has a great influence on the companys sales. 2. VARIABILITY OF EXPENSES: Given the variability of sales the variability of EBIT is further affected by the composition of fixed and variable expenses. Higher the proportion of fixed expenses relative to variable expenses, higher the degree of operating leverage. The operating leverage affects EBIT. High operating leverage leads to faster increase in EBIT when sales are rising. In bad times when sales are falling high operating leverage becomes a nuisance; EBIT declines at a greater rate than fall in sales. Operating leverage causes wide fluctuations in EBIT with varying sales.

56

Operating expenses may also vary on account of changes in input prices and may also contribute to the variability of EBIT.

FINANCIAL RISK: For a given degree of variability of EBIT the variability of EPS and ROE increases with more financial leverage. The variability of EPS caused by the use of financial leverage is called financial risk. Firms exposed to same degree of operating risk can differ with respect to financial risk when they finance their assets differently. A totally equity financed firm will have no financial risk. But when debt is used the firm adds financial risk. Financial risk is this avoidable risk if the firm decides not to use any debt in its capital structure.

MEASURES OF FINANCIAL LEVERAGE: The most commonly used measured of financial leverage are: 1.Debt ratio: the ratio of debt to total capital, i.e.,

Where, D is value of debt, S is value of equity and V is value of total capital D and S may be measured in terms of book value or market value. The book value of equity is called not worth. 2.Debt-equity ratio: The ratio of debt to equity, i.e.,

3.Interest coverage: the ration of net operating income

(or EBIT) to interest charges, i.e.,

The first two measures of financial leverage can be expressed in terms of book or market values. The market value to financial leverage is the erotically more appropriate

57

because market values reflect the current altitude of investors. But, it is difficult to get reliable information on market values in practice. The market values of securities fluctuate quite frequently. There is no difference between the first two measures of financial leverage in operational terms. They are related to each other in the following manner.

These relationships indicate that both these measures of financial leverage will rank companies in the same order. However, the first measure (i.e., D/V) is more specific as its value ranges between zeros to one. The value of the second measure (i.e., D/S) may vary from zero to any large number. The debt-equity ratio, as a measure of financial leverage, is more popular in practice. There is usually an accepted industry standard to which the companys debt-equity ratio is compared. The company will be considered risky if its debt-equity ratio exceeds the industry-standard. Financial institutions and banks in India also focus on debtequity ratio in their lending decisions.

The first two measures of financial leverage are also measures of capital gearing. They are static in nature as they show the borrowing position of the company at a point of time. These measures thus fail to reflect the level of financial risk, which inherent in the possible failure of the company to pay interest repay debt.

The third measure of financial leverage, commonly known as coverage ratio, indicates the capacity of the company to meet fixed financial charges. The reciprocal of interest coverage that is interest divided by EBIT is a measure of the firms incoming gearing. Again by comparing the companys coverage ratio with an accepted industry standard, the investors, can get an idea of financial risk .however, this measure suffers from certain limitations. First,
58

to determine the companys ability to meet fixed financial obligations, it is the cash flow information, which is relevant, not the reported earnings. During recessional economic conditions, there can be wide disparity between the earnings and the net cash flows generated from operations. Second, this ratio, when calculated on past earnings, does not provide any guide regarding the future risky ness of the company. Third, it is only a measure of shortterm liquidity than of leverage. FINANCIAL LEVERAGE AND THE SHARE HOLDERS RETURN: The primary motive of a company in using financial leverage is to magnify the shareholders return under favorable economic conditions. The role of financial leverage in magnifying the return of the shareholders is based under assumption that the fixed charges funds (such as the loan from financial institutions and other sources or debentures) can be obtained at a cost lower than the firms rate of return on net assets. Thus, when the difference between the earnings generalized by assets financed by the fixed charges funds and cost of these funds is distributed to the shareholders, the earnings per share (EPS) or return on equity increase. However, EPS or ROE will fall if the company obtains the fixed charges funds at a cost higher than the rate of return on the firms assets. It should, therefore, be clear that EPS, ROE and ROI are the important figures for analyzing the impact of financial leverage.

COMBINED EFFECT OF OPERATING AND FINANCIAL LEVERAGES Operating and financial leverages together cause wide fluctuations in EPS for a given change in sales. If a company employs a high level of operating and financial leverage, even a small change in the level of sales will have dramatic effect on EPS. A company with cyclical sales will have a fluctuating EPS; but the swings in EPS will be more pronounced if the company also uses a high amount of operating and financial leverage. The degree of operating and financial leverage can be combined to see the effect of total leverage on EPS associated with a given change in sales. The degree of combined leverage (DCL) is given by the following equation:

59

Yet another way of expressing the degree of combined leverage is as follows:

Since Q (S-V) is contribution and Q (S-V)-F-INT is the profit after interest but before taxes, Equation 2 can also be written as follows:

RATIO ANALYSIS: The primary user of financial statements are evaluating part performance and predicting future performance and both of these are facilitated by comparison. Therefore the focus of financial analysis is always on the crucial information contained in the financial statements. This depends on the objectives and purpose of such analysis. The purpose of evaluating such financial statement is different from person to person depending on its relationship. In other words even though the business unit itself and shareholders, debenture holders, investors etc. all under take the financial analysis differs. For example, trade creditors may be interested primarily in the liquidity of a firm because the ability of the business unit to play their claims is best judged by means of a thorough analysis of its l9iquidity. The shareholders and the potential investors may be interested in the present and the future earnings per share, the stability of such earnings and comparison of these earnings with other units in the industry. Similarly the debenture holders and financial institutions lending longterm loans maybe concerned with the cash flow ability of the business unit to pay back the debts in the long run. The management of business unit, it contrast, looks to the financial statements from various angles. These statements are required not only for the managements own evaluation and decision making but also for internal control and overall performance of the firm. Thus the scope extent and means of any financial analysis vary as per the specific
60

needs of the analyst. Financial statement analysis is a part of the larger information processing system, which forms the very basis of any decision making process. The financial analyst always needs certain yardsticks to evaluate the efficiency and performance of business unit. The one of the most frequently used yardsticks is ratio analysis. Ratio analysis involves the use of various methods for calculating and interpreting financial ratios to assess the performance and status of the business unit. It is a tool of financial analysis, which studies the numerical or quantitative relationship between with other variable and such ratio value is compared with standard or norms in order to highlight the deviations made from those standards/norms. In other words, ratios are relative figures reflecting the relationship between variables and enable the analysts to draw conclusions regarding the financial operations. However, it must be noted that ratio analysis merely highlights the potential areas of concern or areas needing immediate attention but it does not come out with the conclusion as regards causes of such deviations from the norms. For instance, ABC Ltd. Introduced the concept of ratio analysis by calculating the variety of ratios and comparing the same with norms based on industry averages. While comparing the inventory ratio was 22.6 as compared to industry average turnover ratio of 11.2. However on closer sell tiny due to large variation from the norms, it was found that the business units inventory level during the year was kept at extremely low level. This resulted in numerous production held sales and lower profits. In other words, what was initially looking like an extremely efficient inventory management, turned out to be a problem area with the help of ratio analysis? As a matter of caution, it must however be added that a single ration or two cannot generally provide that necessary details so as to analyze the overall performance of the business unit.

61

62

CHAPTER-V

FINDINGS CONCLUSIONS
RECOMMENDATIONS ON CEMENT INDUSTRY

SUGGESTIONS:

BIBLOGRAPHY

Appendix

63

FINDINGS 1. The PAT is in an increasing trend from 2009-2010 because of increase in sale prices and also decreases in the cost of manufacturing. In 2011 and 2012even the cost of manufacturing has increased by 5% because of higher sales volume PAT has increased considerably, which leads to higher EPS, which is at 83.80 in 2011. 2. The EBIT level in 2008 is at 400.09 Cr and is increasing every year till 2011. Because of slump in the Cement Industry less realization. The EBIT levels in 2011 again started growing and reached to 648.29 Cr and in 2011 were at 648.29 Cr and in 2012 were at 120.24, because of the sale price increase per bag and increase in demand. The infrastructure program taken up by the A.P. Govt. in the field s of rural housing irrigation projects created demand and whole Cement Industries are making profits. 3. During the year 2011-12 your companys Gross sales increased by about 38% to 178.24 Cr from Rs.82.71 Cr in FY 2011-12. 4. The EPS of the company also increased considerably which investors in coming period. The company has taken up a plant expansion program during the year to increase the production activity and to meet the increase in the demand 5. There has been a small reduction in Gross Sales and with the performance of prefab Division the Gross Profit gap has narrowed and contributing to the EBIT. The Gross Profit has increased considerably from 520.99 Cr in Last year to 641.80 Cr in year. The interest payment has increased by 51 Cr in the Current year and the Profit before Tax at 520.99 when compared to 641.80 cr in Last year. 6. Perform Division realization has increased by 8% even the Turnover has come to 641.80 Cr from 400.09 Cr in last year. 7. The profit After Tax has came 313.92 Cr to 214.82Cr in Current year because of slope in Cement Industry. 8. Because of decrease in Non-Operating expenses to the time of 214.82 Cr the Net profit has increased. It stood at in current year increase because of redemption of debenture and cost reduction. A dividend of Rs.45.74 Cr as declared during the year at 7.85% on equity.
64

CONCLUSIONS

1)

Sales in 2009-2010 and in 2011-2012 those in a decreasing trend to the extent of 20% every year. On the other hand manufacturing expenses are high from 2010-2011. There has been significant increase in cost of production during 2009-2010 because of increase in Royalty.

2)

The interest charges were 492.21 in 2010 and 357.07in 2011 and 522.56 respectively shows that the company redeemed fixed interest bearing funds from time to time out of profit from 2009-2010.Debantures were partly redeemed with the help of debenture redemption reserve and other references.

3)

The PAT (Profit After Tax) in 2011-2012 is at 178.24 cr. The PAT has increased in prices in whole Cement industry during the during the period 2010-2011. above period. The profit has increased almost 35%

4) 5)

Debentures were redeemed by transfers to D.R.R. in 2010-2011. A steady transfer for dividend during 2008-2012 from P&L appropriation but in 2011 there is no adequate dividend equity Shareholders.

6)

The share capital of the company remained in charge during the three-year period because of no public issues made by the company.

7)

The secured loans have decreased consistently from 2010-2011 and slight increase in 2012.

65

RECOMMENDATIONS ON CEMENT INDUSTRY For the development of the cement industry Working Group on cement Industry was constituted by the planning commission for the formulation of Five Year Plan. The working Group has projected a growth rate of 10% for the cement industry during the plan period and has projected creation of additional capacity of 40-62 million tones mainly through expansion of existing plants. The working Group has identified following thrust areas for improving demand for cement; Further push to housing development programmers; Promotion of concrete Highways and roads; and Use of ready-mix concrete in large infrastructure project. Further, in order to improve global competitiveness of the Indian Cement Industry, the Department of Industrial policy & promotion commissioned a study on the global competitiveness of the Indian industry through an organization of international repute, viz.. The report submitted by the organization has made several recommendations for making the Indian Cement Industry more competitive in the international market. The recommendations are under consideration.

66

SUGGESTIONS:

1. The company has to maintain the optimal capital structure and leverage so that in coming years it can contribute to the wealth of the shareholders. 2. The mining loyalty contracts should be revised so that it will decrease the direct in the production 3. The company has to exercise control over its outside purchases and overheads which have effect on the profitability of the company. 4. As the interest rates in pubic Financial institutions are in a decreasing trend after globalization the company going on searching for loan funds at a less rate of interest as in the case of Banks. 5. Efficiency and competency in managing the affairs of the company should be maintained.

67

BIBLOGRAPHY
1) Financial Management : Khan & Jain

2)

Financial Management

I.M. Pandey

3)

Financial Management

Prasanna Chandra

4)

News Papers

Financial Express Economic Times

68

Appendix

(Rupees in Crore) 2011-12 RECEIPTS 1 Sales (including . Excise Duty) 2 Other Income . 3 Increase / . (Decrease) in Stock Total Receipts EXPENDITURES 1 Raw Materials and . other purchases 2 Stores and Power . 3 Salary, Wages and . other Amenities 4 Excise Duty . 5 Sales Expenses . 1146.62 3157.45 797.46 273.55 351.82 782.54 2405.30 729.76 225.29 299.97 649.91 1741.47 641.25 180.21 409.64 554.56 473.42 153.24 454.29 450.19 936.06 288.63 128.60 307.49 372.52
69

201011

200910

2008-09

2007-08

5750.72 155.29 164.12 6070.13

5020.63 124.69 173.07 5318.39

4292.07 67.92 87.96 4447.95

3440.32 36.90 40.88 3518.10

2516.46 45.45 15.07 2576.98

6 Manufacturing and . other Miscellaneous Expenses 7 Interest (Net) . Total Expenses GROSS PROFIT

353.57 233.50 5949.89 120.24 120.24

256.87 103.00 4670.10 648.29 648.29

286.98 112.85 3926.96 520.99 520.99

146.43 52.11 2876.30 641.80 641.80

113.68 29.91 2176.89 400.09 400.09

APPROPRIATIONS/TRANSFERS 1 Depreciation (Net) . 2 Provision for . Taxation 3 Provision for . Deferred Tax 4 Provision for Fringe . Benefit Tax 5 Transfer to . Debenture Redemption Reserve 6 Interim Dividend . (with Distribution Tax thereon) 7 Proposed Dividend . (with Distribution Tax thereon) 8 Reserves . 9 Surplus / (Deficit) . 272.59 0.00 57.98 (0.12) 172.80 36.00 202.29 (0.13) 111.87 45.00 (16.62) 2.00 89.27 165.00 2.81 1.37 58.31 75.00 1.10

(61.25)

101.25

25.00

12.00

12.03

12.04

17.28 0.00 (178.24 ) 120.24

17.34 24.00 82.71 648.29

17.40 44.78 279.52 520.99

29.43 40.00 313.92 641.80

20.86 30.00 214.82 400.09

Figures for the previous year has been regrouped / rearranged where considered necessary.
70

(Rupees in Crore) 2011-12 A. 2010-11 2009-10 2008-09 2007-08

ASSETS OWNED BY THE COMPANY 1. Net Fixed Assets Gross Fixed Assets 5478.69 Less : Total Depreciation 1349.16 4129.53 2. Investments 3. Inventories 1118.55 4. Sundry Debtors 5. All Other Assets Total Assets 631.34 507.24 6453.10 916.19 542.89 398.05 5753.21 589.06 380.17 292.46 3992.67 273.07 491.01 2972.92 65.82 4926.99 1082.34 3844.65 51.43 3582.42 913.22 2669.20 61.78 2530.04 811.20 1718.84 47.83 442.17 376.88 245.95 245.28 2002.17 721.93 1105.19 28.87 1827.1 2

B. (i) DUES TO BE PAID BY THE COMPANY 1. Secured Loans 2. Unsecured Loans and Deposits 3. Other Liabilities 4. Provisions 2371.83 1627.44 752.60 14.94 1863.72 1477.20 528.62 14.99 1536.27 605.65 363.11 31.39 971.06 243.75 303.03 330.39 643.20 229.60 226.83 135.70
71

5. Deferred Tax Liabilities (Net)

386.42 5153.23

328.44 4212.97

126.15 2662.57

142.77 1991.00

112.41 1347.74

B. (ii) THEREFORE, COMPANYS NET WORTH REPRESENTED BY 1. Ordinary Share Capital 2. Reserves and Surplus 45.74 1254.51 1300.25 45.74 1494.50 1540.24 45.74 1284.36 1330.10 45.74 936.18 981.92 45.74 608.69 654.43

72