project report mohit

7/27/2019 Project Report Mohit

1/76

APEEJAY SCHOOL OF MANAGEMENT AND TECHNOLOGY

A Project Report On:

Cost of Capital and Ratio Analysis

Of

SHREE CEMENT LTD.

(BANGUR NAGAR, BEAWAR, DISTT. AJMER)

UNDER GUIDANCE OF: Submitted By:

Mr. N.C. JAIN MOHIT RATHI

(A.V.P Finance) PGDM (IV TRIMESTER)


2/76

CERTIFICATE OF APPROVAL

The following Summer Project Report titled "Cost of Capital and Ratio

Analysis" is hereby approved as a certified study in management carried out and

presented in a manner satisfactory to warrant its acceptance as a prerequisite for the

award of Master of Business Administration for which it has been submitted. It is

understood that by this approval the undersigned do not necessarily endorse or

approve any statement made, opinion expressed or conclusion drawn therein but

approve the Summer Project Report only for the purpose it is submitted.

Summer Project Report Examination Committee for evaluation of Summer

Project Report:

Name Signature

1. Faculty Examiner __________ ____________

2. PG Summer Project Co-coordinator __________ ____________


3/76

ACKNOWLEDGEMENT

A large number of individual has contributed to this project. I am thankful to all of

them for their help and encouragement. Like other reports, this report is also drawn

from the work of large number of researchers and author in the field of finance.

I would like to express my gratitude to Mr. N.C. Jain A.V.P (finance) for

giving me the opportunity and enough of support to undergo training in their

organization, SHREE CEMENT LTD, BEAWER (RAJ)

I shall like to thanks SHREES finance department for their able guidance,

support, supervision and care during the whole training program and to whom wordscan never express my feeling of gratitude and reverence.

I would like to give my sincere thanks to officers, managers and employees of SHREE

CEMENT LTD, BEAWER (RAJ) for providing valuable information, reports and

data that were require for the study.

The successful completion of my project has been carried out under the

guidance of Mr. N.C Jain A.V.P (finance). I take upon this opportunity to thank them

for encouragement and guidance in completion of project. Their knowledge and

expertise was of great help for the project study.

Last but not least, I would like to express my deep sense of gratitude to my

parents and friends for their unflinching moral support. Their towering presence

instilled in me the carving to the work harder and completes this daunting task timely

with a sufficient degree of in depth study.

I have tried to give credit to all sources form where I have drawn material in

this project, still I felt obliged if they are brought to my notice.

Mohit Rathi


4/76

INDEX

S.NO. PARTICULARS

1. Preface2. Focus of the project, Objective of study3. The Indian Cement Industry Overview4. Major Cement Players, Region wise Cement

Production

5. Introduction about SCL: Origin of the Company6. Cement manufacture7. Weight average cost of capital8. Cost of equity9. Cost of debts10. Capital structure11. Analysis of capital structure12. Factor affecting cost of capital13. Optimal capital structure14. Ratio Analysis15. Inter firm Analysis

Intra firm Analysis


5/76

PREFACE

About three decade ago, the scope of financial management was confined to the

raising of funds, whenever needed and little significance used to be attached to

financial decision-making and problem solving. As a consequence, the traditional

finance texts were structured around this theme and contained description of the

instruments and institutions of raising funds and of the major events, such as

promotion, reorganization, readjustment, merger, consolidation etc.

In the mid fifties, the emphasis shifted to the judicious utilization of funds. The

modern thinking in financial management accords a far greater importance to

management decision-making and policy. Today, financial management does not

perform the passive role of scorekeepers of financial data and information, and

arranging funds, whenever directed to do so. Rather, they occupy the key position in

top management areas and play a dynamic role in solving complex management

problems. They are now responsible for the fortune of the enterprises and are involved

in the most vital management decision of allocation of capital. It is their duty to insure

the funds are raised most economically and used in the most efficient and effective

manner. Because of this change in emphasis, the descriptive treatment of the subject

of financial management is being replaced by growing analytical content and sound

theoretical underpinnings.


6/76

FOCUS OF THE PROJECT

The project is structured for the purpose of getting good insight of Ratio Analysis,Capital Structure and Cost of Capital, theory and its implication. The Project focuses

on different Ratios and its analization, Cost of Different Component of Capital and

Optimal Capital Structure for Minimizing the Cost and Risk. It also discusses the

different sources of funds, different approaches of cost of capital.

The project is being made as a part of summer training and gives good insight of

the topic covered under it.

OBJECTIVE OF THE STUDY

1. To get a good insight of the cement industry.2. To understand the theory of capital and its implication in business structure.3. To know about the various sources of funds in the company.4. To find out the cost of various components of capital and how to minimize it.


7/76

The Indian Cement Industry

The Indian Cement industry date back to 1914, with first unit was set-up at Porbandar

with a capacity of 1000 tones. The Indian cement industry is the second largest

producer of quality cement. Indian Cement Industry is engaged in the production of

several varieties of cement such as Ordinary Portland Cement (OPC), Portland

Pozzolana Cement (PPC), Portland Blast Furnace Slag Cement (PBFS), Oil Well

Cement, Rapid Hardening Portland Cement, Sulphate Resisting Portland Cement,

White Cement, etc. They are produced strictly as per the Bureau of Indian Standards

(BIS) specifications and their quality is comparable with the best in the world.

The Indian cement industry is the second largest in the world. It comprises of 140

large and more than 365 mini cement plants. The industry's capacity at the beginning

of the year 2009-10 was 217.80 million tons. During 2008-09, total cement

consumption in India stood at 178 million tons while exports of cement and clinker

amounted to around 3 million tons. The industry occupies an important place in the

national economy because of its strong linkages to other sectors such as construction,

transportation, coal and power. The cement industry is also one of the major

contributors to the exchequer by way of indirect taxes.

Cement production during April to January 2009-10 was 130.67 million tones as

compared to 115.52 million tons during the same period for the year 2008-09.

Dispatches were estimated at 129.97 million tons during April to January 2009-10

whereas during the same period for the year 2008-09,it stood at 115.07 million tones.

Over the last few years, the Indian cement industry witnessed strong growth, with

demand reporting a compounded annual growth rate (CAGR) of 9.3% and capacity

addition a CAGR of 5.6% between 2004-05 and 2008-09. The main factors prompting

this growth in demand include the real estate boom during 2004-08, increased

investments in infrastructure by both the private sector and Government, and higher

Governmental spending under various social programs. With demand growth being

buoyant and capacity addition limited, the industry posted capacity utilization levels

of around 93% during the last five years. Improved prices in conjunction with volumegrowth led to the domestic cement industry reporting robust growth in turnover and

profitability during the period 2005-09.


8/76

Although consolidation has taken place in the Indian cement industry with the top five

players controlling almost 50% of the capacity, the remaining 50% of the capacity

remains pretty fragmented. Per capita consumption has increased from 28 kg in 1980-

81 to 115 kg in 2005. In relative terms, Indias average consumption is still low and

the process of catching up with international averages will drive future growth.Infrastructure spending (particularly on roads, ports and airports), a spurt in housing

construction and expansion in corporate production facilities is likely to spur growth

in this area. South-East Asia and the Middle East are potential export markets. Low

cost technology and extensive restructuring have made some of the Indian cement

companies the most efficient across global majors. Despite some consolidation, the

industry remains somewhat fragmented and merger and acquisition possibilities are

strong. Investment norms including guidelines for foreign direct investment (FDI) are

investor-friendly. All these factors present a strong case for investing in the Indian

market.

The growth trend has been on for some time now. If these trends are anything to go

by, it will not be long before the sector will match the demand supply gap.

During the Tenth Plan, the industry, which is ranked second in the world in terms of

production, is expected to grow at 10 per cent per annum adding a capacity of 40-52

million tons, according to the annual report of the Department of Industrial Policy and

Promotion (DIPP). The report reveals that this growth trend is being driven mainly by

the expansion of existing plants and using more fly ash in the production of cement.

CEMENT

Cements are of two basic types- gray cement and white cement. Grey cement is

used only for construction purposes while white cement can be put to a variety of

uses. It is used for mosaic and terrazzo flooring and certain cements paints. It is used

as a primer for paints besides has a variety of architectural uses. The cost of whitecement is approximately three times that of gray cement. White cement is more

expensive because its production cost is more and excise duty on white cement is also

higher. Shree cement does not manufacture white cement at present.


9/76

Pozzolona used in the manufacture of Portland cement is burnt clay of fly ash

generated at thermal power plants. PPC is hydraulic cement. PPC differs from OPC ona number of counts. Pozzolona during manufacturing consumes lot of hydration heat

and forms cementious gel. Reduced heat of hydration leads to lesser shrinkage

cracks. An additional gel formation leads to lesser pores in concrete or mortar. It also

minimizes problem of leaching and efflorescence.

Major Cement Plants:

Plants : 143 Typical installed capacity Per plant : Above 1.5 mntpa Total installed capacity : 207.26 mntpa Production 08: 177.17 mntpa All India reach through multiple plants Export to Bangladesh, Nepal, Sri Lanka, UAE and Mauritius Strong marketing network, tie-ups with customers, contractors Wide spread distribution network. Sales primarily through the dealer channel

Mini Cement Plants:

Nearly 365 plants & Located in Gujarat, Rajasthan, MP mainly Typical capacity < 200 tpd Installed capacity around 11.10mn. Tones Production 2008 : 6.0 mn tones Mini plants were meant to tap scattered limestone reserves. However most set

up in AP

Most use vertical kiln technology

GREY WHITE

Portland Pozzolona Cement Ordinary Portland cement

CEMENT


10/76

Production cost / tone - Rs. 1,000 to 1,400 Presence of these plants limited to the state Infrastructural facilities not the best

Regional division (2009-10)

The Indian cement industry has to be viewed in terms of five regions:-

North (Punjab, Delhi, Haryana, Himachal Pradesh, Rajasthan, Chandigarh,J&K and Uttranchal);

West (Maharashtra and Gujarat); South (Tamil Nadu, Andhra Pradesh, Karnataka, Kerala, Pondicherry,

Andaman & Nicobar and Goa);

East (Bihar, Orissa, West Bengal, Assam, Meghalaya, Jharkhand andChhattisgarh); and

Central (Uttar Pradesh and Madhya Pradesh).

REGIONWISE CEMENT PRODUCTION

EAST (14%)

WEST (16%)

CENTRAL (14%

NORTH (23%)

SOUTH (33%)


11/76

Major Players in Cement Industry:

Shree

Shree Cements Ltd. is a Rajasthan based company, located at Beawer. The companyhas installed capacity of 9.1 mn tones per annumin Rajasthan. For the last 18 years,

it has been consistently producing many notches above the name plate capacity. The

company retains its position as north Indias largest single-location manufacturer.

Shrees principal cement consuming markets comprise Rajasthan, Delhi, Haryana,

Punjab, Uttar Pradesh and Uttranchal. Shree manufactures Ordinary Portland Cement

(OPC) and Portland Pozzolana Cement (PPC). Its output is marketed under the Shree

Ultra Ordinary Portland Cement and Shree Ultra Red Oxide Jung RodhakCementbrand names.

Ambuja

GACL was set up in 1986 with 0.7 million tones. The capacity has grown 25 times

since then to 18.5 million tones. GACL exports as much as 15 percent of its

production. Thirty five per cent of the companys products transported are by sea

which is the cheapest mode. It has earned the reputation of being the lowest cost

producer in the cement industry. Ambuja cement one of GACLs well establishedbrands. The company plans to increase capacity by 3-4 million tons in the near future.

ACC

Being formed in 1936, ACC has a capacity of 22.40 million (including 0.53 million

tons of Damodar Cement and Slag and 0.96 million tons of Bargarh Cement ). ACC

Super is one of the companys well established brands. It is planning to expand the

capacity of its wholly-owned subsidiary Damodar cement and Slag at Purulia in West

Bengal. This is aimed at increasing its presence in the eastern region.

As on FY07, ACC was the largest player with a capacity of 22.4 million tons per

annum (including 0.525 mn tones per annum of its subsidiary Damodar Cement).


12/76

The Aditya Birla Group

The Aditya Birla Group is the worlds eighth largest cement producer. The first

cement plant of Grasim, the flagship of the Aditya Birla Group, at Jawad in Madhya

Pradesh went on Stream in 1985. In total, Grasim has five integrated grey cementplants and six ready-mix concrete plants. The company is Indias largest white cement

producer with a capacity of 4 lakh tones. It has one of the worlds largest white

cement plant at Kharia Khangar (Raj.) Shree Digvijay Cement, a subsidiary of

Grasim, which was acquired in 1998, has its integrated grey cement plant at Sikka

(Gujrat). Finally Grasim acquired controlling stake in Ultra Tech Cement Limited

(Ultra Tech), the demerged cement business of L&T. Grasim has a total capacity of 31

million tones and eyeing to increase it to 48 MT by FY 09. Grasim has a portfolio of

national brands which include Birla Supar, Birla Plus, Birla White and Birla Ready

mix and also regional brands like Vikram Cement and Rajshree Cement.

Binani

A fierce competitor with a 2.2 MTPA plant is located at Binanigram, Pindwara, a

village in Sirohi in the state of Rajasthan. Its a tough nut player which is outside

CMA (Cement Manufacturers Association) and is prime reason for driving prices low

in market. Offers a good quality product at cheap rates and has very good brandimage. Sales are focused in the North India, Gujarat and Rajasthan markets and Holds

around 14% of Rajasthan market.

JK

An entrenched competitor that has brands across the price spectrum with JK

Nembahera leading the pack. Also operates in the white cement market with Birla asits only competitor. It lost significant market when Ambuja came to Rajasthan.

Others

Other players like Shriram have insignificant share and are highly localized. Shriram

has a small presence and that too largely in southern Rajasthan. There are various mini

plants operating too which supply cheap cement which has no ISI certification and

does not confirm BIS standards. Quite often they are supplied in other established

brands cement bags. L&T is a strong player nationally and regarded as quality

product. It has a footprint but not a foothold in Rajasthan market


13/76

INTRODUCTION

ABOUT THE ORGANISATION

Shree Cement Limited is a Beawar based company, located in Rajasthan. The

Company is a part of the Bangur Group and was incorporated on 25th October1979, at

Jaipur with a Vision: To register strong consumer surplus through a superior

cement quality at affordable price.Commercial production commenced from 1st

May1985 with a installed capacity of 6 lacs tones per annum in Beawar dist. Ajmer,

the capacity of this plant was upgraded to 7.6 lacs tones per annum during 1994-95

by a modernization and up gradation program. In 1995 - The Company undertook

the implementation of new unit of 1.24 MT capacities per annum named "Raj

Cement. In 1997 The Company commissioned its second cement plant - Raj Cement

with a capacity of 12.4 lacs tones per annum adjacent to its existing plant in order totake full advantage of its existing infrastructure and already developed captive mining

lease enough to sustain a new cement plan. The cumulative capacity was enhanced

by de-bottlenecking and balancing equipment in December 2001 to 2.6 MTPA. A

product called Tuff Cemento has also launched by the company in April 2007. At

present company is producing over 100% capacity utilization, it is the largest single

location cement producer in north India (sixth in country).

C O M P A N Y P R O F I L E

COMPANY SHREE CEMENT LTD.

INCORPORATION YEAR 1979

REGISTERED OFFICEBANGUR NAGAR, BEAWAR, AJMER

(RAJASTHAN)

CORPORATE OFFICE 21, STRAND ROAD, KOLKATA

INDUSTRY CEMENT MANUFACTURING

CHAIRMAN B.G. BANGUR

MANAGING DIRECTOR H.M. BANGUR

EXECUTIVE DIRECTOR M.K. SINGHI


14/76

Shree Cement Limited is one of the fastest growing Cement Companies in

India. Presently Shree Cement has 9.1 MTPA capacity in three plants (Shree in

Beawar 2.6 MTPA, Ras in Pali District 3 MT and Khushkhera capacity is 3.5

MTPA) The organization has performed exceptionally well in the year 2007-08increasing the PBT by 95% the reasons for this remarkable achievement and key

strengths of the company are discussed in the report. For the last 18 years, it has

been consistently producing many notches above the nameplate capacity. The

company retains its position as north Indias largest single-location manufacturer.

Shrees principal cement consuming markets comprise Rajasthan, Delhi, Haryana,

Punjab, Uttar Pradesh and Uttranchal. Shree manufactures Ordinary Portland Cement

(OPC) and Portland Pozzolana Cement (PPC). It has three brands under its portfolio

viz., Shree Ultra Jung Rodhak Cement, Bangur Cement and Tuff Cemento.

The Shree Vision

To be one of the Indias most respected enterprise through best-in-class

performance and leading by low carbon philosophy making it a progressive

organization that all stakeholders proud to deal with.

The Shree Mission

The company continues to be one of the most operationally efficient and

energy conserving cements producers in the world. Its mission statement is

To harness sustainability through low-carbon philosophy To sustain its reputation as one of the most efficient manufacture globally. To continually have most engaged team. To continually add value to its products and operation meeting expectations of

all its stakeholders.

To continually build and upgrade skills and competencies of its humanresource for growth

To be a responsible corporate citizen with total commitment to communities inwhich it operates and society at large.

EQUITY CAPITAL 34.84 CRORES

FACE VALUE OF SHARE 10

EQUITY CAPITAL 34.84 CRORES

FACE VALUE OF SHARE 10


15/76

Origin of the Company

Promoted by the Bangur Group, Shree Cements is the largest cement producer in

Rajasthan. The company has a total installed capacity of 9.1 million tonne .The plants

are strategically located in central Rajasthan, from where it can cater to the entireRajasthan market as well as Delhi and Haryana. The company has about 100 sales

offices spread across the states of Rajasthan, Uttar Pradesh, Uttaranchal, Delhi,

Haryana, Punjab and Jammu & Kashmir. Its cement is marketed under the brand name

of Shree Ultra Cement with different grades like 33, 43 and 53 and sub-brand names

like "red oxide cement", "Jung Rodhak Cement", etc.

Shree Cement Ltd (SCL) is located at Beawer, Rajasthan, Indias largest cement

producing state. It was incorporated in 1979. Commercial production at its 0.6 million

tons per annum (mtpa) cement plant in Rajasthan commenced in May 1985. Threecompanies of the Bangur group promoted SCL. These companies are Shree Digvijay

Company Ltd, Graphite India Ltd and Fort Gloster Industries Ltd. Over the years,

SCL's capacity rose and touched 2 mtpa by 1997-98. Its current cumulative installed

capacity stands at 2.6 mtpa & in 2003-04 the company produced 2.84 million tones of

cement making it the largest single location cement

Cement making it the largest single location cement producer in north India. It is

operating at over 100% capacity utilization.

Shree caters to cement demand arising in Rajasthan, Delhi, Haryana, UP and Punjab.

What is strategic for SCL is that it is located in central Rajasthan so it can cater to the

entire Rajasthan market with the most economic logistics cost. Also, Shree Cement is

the closest plant to Delhi and Haryana among all cement manufacturers in its state and

proximity to these profitable cement markets renders the company an edge over other

cement companies of the company in terms of lower freight costs. Shrees total

captive power plant capacity today stands at 101.5 MW. In 2000-01, the company has

succeeded in substituting conventional coke with 100 per cent pet coke, a waste from

refineries, as primary fuel resulting in lower inventory and input costs. In the past two

years the price of coal has gone up. Earlier dependent on good quality imported coal,

the company's switch to pet coke could not have come at a better time. The company

also replaced indigenous refractory bricks with imported substitutes, reducing its

consumption per ton of clinker. The company has one of the most energy efficient

plants in the world. The captive plant generates power at a cost of Rs 4.5 per unit

(excluding interest and depreciation) as compared to over Rs 5 per unit from the grid.

In appreciation of its achievements in Energy sector, the Company has been awarded

the prestigious 'National Energy Conservation Award" for the year 1997. Shree is

rated best by Whitehopleman, an international agency specializing in the rating ofcement plants.


16/76

MULTIPLE COMPETITIVE BRANDS

Incisive execution of Shrees multiple competitive brand strategy has been delivering

results along anticipated lines. Consistency in brand strategy is helping Shree to

sustain its brands having lasting impression among its consumers.

The steady growth in Shreee volume especially year-onyear in the last two fiscals,

testifies to the effectiveness of its multi brand marketing strategy.

SHREE ULTRA

Launched in 2002, Shree Ultra was the companys first brand, the first manifestation

of Shrees strategic move from commodity to brand marketing.

Its generic OPC version has been joined by a variant, Shree Ultra Jung Rodhak, on the

functional differentiator of rust prevention. Together the two variance have made

Shree Ultra the flagship brand of the company, contributing half of the Shrees total

sales.

The brand was launched with powerful media and promotional support, the

imaginative advertising and the momentum has clearly sustained its growth over

time.

Today it is present all of Shree Cements market territories. In 07-08 it chalked up its

highest volumes in the home market of Rajasthan, and in the NCR, the main focus of

the construction boom in north India.

Overall, a Shree Ultra volume reflects its acceptance by professional influencers.

Which in turn facilities acceptance by domestic consumers. Their support, as well as

sustained local promotions, has helped to improve brand recall, and prepared the

ground for fresh initiatives in the market place.

BANGUR CEMENT

Bangur Cement was launched in 2006 as a premium brand, competitive with best in

the market designed to full fill user aspiration for high quality construction; the brand

tagline reflects its promise of top-of-market value: Sasta Nahi, Sabse Achcha.

Given the premium profile design for it the brand is supported by a matching network

of business partners and business associates carefully selected for the track record in

selling to high end market segment.


17/76

Its early successes are founded on a two tier marketing and distribution programme.

At one level Shrees field forts takes the trades in to the confident with transparent

terms and tested and proven promotional offerings.

On a more exclusive level, it deploys special teams of highly professional technical

sales experts t conduct direct, one on one interaction with opinion builders and

influencers if high standing among the fraternity of respected construction space list.

Bangur Cement has achieved 95% of its total sales in the trade segment. It has made

selective penetration in both urban and rural markets. Bangur cement maintained its

zero outstandings status in this year as well.

TUFF CEMENTO

This is the latest brand offering from Shree Cement, directed at a highly competitive

niche market, with aggressive and establish competitors.

It has been position as rock strong- on the promise of high performance, able to

withstand exceptionally harsh environmental conditions.

Launched in the first month of the year under review, Tuff Cemento was able to

secure a network of the 1000 dynamic and resourceful dealers in a record time of

about four months.

The brand is consolidated its position in the market, and the making further highway

in Rajasthan, Delhi, Haryana, parts of south Punjab and Western U.P.

While its current status would otherwise be regarded as reasonable. Tuff Cemento

has an altogether more ambitious agenda: to be aggressively competitive and become

a leading brand in the coming months, and to enable Shree Cement to achieve the

maximum possible combined market share in its market.


18/76

POLICIES

Quality Policy:

To provide products conforming to national standards and meeting customersrequirements to their total satisfaction.

To continually improve performance and effectiveness of quality managementsystem by setting and reviewing quality objectives for:

Customer Satisfaction Cost Effectiveness

Energy Policy:

To reduce to the maximum extent possible the consumption of energy withoutimparting productivity which should help in:

Increase in the profitability of the company Conservation of Energy Reduction in Environmental pollution at energy producing areas Since Energy

is Blood of Industry, It is the responsibility of all of us to utilize energy

effectively and efficiently

Environment Policy:

To ensure:

Clean, green and healthy environment Efficient use of natural resources, energy, plant and equipment Reduction in emissions, noise, waste and greenhouse gases Continual improvement in environment management Compliance of relevant environmental legislation

Water Policy:

To provide sufficient and safe water to people & plant as well as to conservewater, we are committed to efficient water management practices viz,

Develop means & methods for water harvesting Treatment of waste discharge water for reuse Educate people for effective utilization and conservation of water Water audit & regular monitoring of water consumption.

Health & Safety Policy:

To ensure good health and safe environment for all concerned by:


19/76

Promoting awareness on sound health and safe working practices Continually improving health and safety performance by regularly setting and

reviewing objectives & Targets

Identifying and minimizing injury and health hazards by effective risk controlmeasures

Complying with all applicable legislations and regulationsHuman Resource Policy:

We at Shree Cement are committed to Empower People Honor individuality Non discrimination in recruitment process Develop Competency Employees shall be given enough opportunity for betterment None of the person below the age of 18 years shall be engaged to work Incidence of Sexual Harassment shall be viewed seriously Statute enacted shall be honored in letter & spirit & standard Labor Practices

shall be followed. Every employee shall be accountable to the law of the land

& is expected to follow the same without any deviation

Management will appreciate observance of Business ethics & professional codeof conduct

To follow safety & Health. Quality, Environment, Energy Policy

IT Policy:

To provide a robust IT platform suitable to the business processes and integrated

management practices of the company, resulting into better speed, efficiency,

transparency, internal controls and profitability of business


20/76

Trade and Non-Trade Networks

There are two types of Networks: Trade and Non-trade

a) Non-tr ade Network

Non-trade Network:

b) Trade Network

Company Handling Agent Stockiest Retailers

Consumers

Govt. Non-trade Private Non-trade

- for Group housing / retailhousing

- Contractors projects onbehalf of govt.

- Any industrial projects takenup by the private sector like

bridges, roads etc.

- for govt. infrastructurebuilding

- Govt. Housing Projects- Railways- Airports- Cement Roads- Bridges- Dams- CanalsThese are all bulk requirements


21/76

Advertising

Need for Advertising

Cement has evolved into a highly commoditized product category. Due tocompetitive pricing within the industry, there was not much differentiation

among the various brands on offer.

People too did not pay much attention to this product unless there was a need.Hence people who were currently making their houses or were soon to embark

on such a project became the target market.

Because of the product being commoditized, there was a need fordifferentiation for which there was made some changes in the form of the

product.

Shree Cement ltd. was not advertising its products past few years but looking at thecompetitive market and opportunities ahead it introduced a new ad campaign which

was targeted to differentiate its product from other cement brands. It introduced an ad

campaign showing the anti rusting capability of the Red Oxide Cement of the

company. But still the presence of the company has not been so intense as other

brands have like Ambuja and Grasim etc.

SWOT Analysis for Shree Cements

Strengths

Focused strategy. Lowest cost producer of cement in north India. A secure source of raw materials. High penetration in Govt. Projects. Largest single plant capacity in India. Shree power plant, which is producing electricity enough for Ras plant.

Weaknesses

Less dealer incentives as compared to its competitors. Color of the cement has not been perceived greatly, green color was preferred

the most.

Poor advertising and brand promotion.


22/76

Opportunities

Real estate boom will lead to increased demand. International expansion. Demand from Pakistan side. Reduction in customs duties. Governments thrust on infrastructure and tax incentives on housing loans.

Threats

Increased competition from domestic as well as international players. Rising input (oil) prices. Sales highly dependent on monsoons. Growth of counterfeits.


23/76

Creating Multiple Brands to Increase Market Share

Company wanted to increase its share in the more remunerative markets. Rajasthan

and Haryana are the markets where Shree have high realization. They realized that a

single brand has limited potential for faster increase in market share in these markets.

This is because there are limits to the volume that a distribution and retail network

could handle. Thus there was a requirement for increasing distribution network in

these markets. To alleviate this, they studied the brand strategy of a fast moving

Consumer Goods Company. This company had multiple brands for soaps. Each brand

had a unique products differentiation property. All bands were competing with each

other.

The marketing teams, distribution channel and logistics were all different for each

brand. They found the same model could be applied in cement business as well. They

realized that they can also achieve their objective by introducing another brand in the

market.

The new brand would have its own marketing strategy, distribution network and

penetration. It required deployment of almost twice the quantum of resources to

sustain two brands in the markets.

An altogether new marketing team, additional advertising cost, another set of storage

and distribution logistics like godowns and offices, thus all such costs were doubling.Yet, Shree Cement chose to go ahead and launched Bangur Cement in 2006 and Tuff

Cemento in 2007.The result, market share in Rajasthan has substantially increased in

last three years. In Haryana it rose by almost 50 percent.

Encouraged by the success of having two brands, we decided to launch a third brand-

Tuff Cemento. With three brands we have further consolidated our position in the

market. Today Shree have three brands in the same market: Shree Ultra, Bangur

Cement and Tuff Cemento.

Each of these brands has been built on a unique product promise.

As a result of multiple brand strategy Companys market shares have shown

appreciable growth, as demonstrated below:


24/76

Market share in different states

STATE 2006-07 2007-08 2008-09

RAJASTHAN 20.36% 22.17% 35.40%

HARYANA 19.03% 23.91% 22.03%

DELHI 17.94% 17.97% 11.22%

PUNJAB 7.32% 8.29% 7.56%

U.P. 3.98% 4.86% 14.40%

UTTARANCHAL 7.96% 10.13% 3.98%

Efforts made to maintain three brands

Independent marketing team Separate distribution and retail network Separate storage and logistics supports Higher advertisement cost

Achievements by maintaining three brands

Higher Dealer Density Higher market share Better Realization Lower logistics cost


25/76

0

5

10

15

20

25

30

35

40

Rajasthan Delhi U.P

2006-07

2007-08

2008-09


26/76

SUCCESS DRIVERS AT SHREE

PEOPLE AS PROGRESS DRIVERS

Shree believes that what is present in the minds of people is more valuable than the

assets on the shop floor. All the companys initiatives are directed to leverage the

value of this growing asset.

TEAMWORK

Shree leverages effective team working to generate a sustainable improvement.

LEADERS AT EVERY LEVEL

Shree believes in creating leaders -not just at the organizational apex but at every

level, resulting in a strong sense of emotional ownership.

CULTURE OF INNOVATION

Shree believes that what is good can be made better -across the organization.

CUSTOMER FOCUS

Shree is committed to deliver a superior quality of cement at attractively affordable

prices.

SHAREHOLDER VALUE

Shree is focused on the enhancement of value through a number of strategic and

business initiatives that generate larger and a better quality of earnings.


27/76

COMMUNITY AND ENVIRONMENT

Shrees community concern extends from direct assistance to safe and dependable

operations for its members and the environment.

LOWEST COST OF PRODUCTION

Its cost of production is around Rs.860 per ton, making it the lowest cost cement

producer in India.

ENERGY EFFICIENT PRODUCER

Shree Cement is one of the most power efficient units in the country with a power

consumption of 75 units per ton. The Company sources 100% of power requirement

from its captive power plants. The company has existing power plant capacity of

117.5 MW. The company is installing additional power plant of 143MW capacity,

which would supply power to its new cement units, thus ensuring self-sufficiency.

ALTERNATE FUEL IN PET COKE

The Companys captive power plant as well as cement plants runs on alternate fuel,

i.e., pet coke, the first in India to do so. Until recently, it was obtaining pet coke

domestically from Reliance Industries Ltd., Jamnagar refinery. Imported pet coke and

the future plan to source it from Panipat refinery of IOCL will further bring down

costs by around Rs.300 per tones.

INCREASED BLENDING

SCL is continuously trying to improve the ratio of sale of blended cement (ROC) to

50:50 very soon. Although cost of production is lower because of addition of cheap

fly-ash, it commands higher prices due to rust-retarding properties.


28/76

CEMENT MANUFACTURING

Raw Material Preparation

Limestone of differing chemical composition is freely available inthe quarries. This limestone is carefully blended before being

crushed. Red mineral is added to the limestone at the crushing

stage to provide consistent chemical composition of the raw

materials. Once these materials have been crushed and subjected to

online chemical analysis they are blended in a homogenized

stockpile. A bucket wheel declaimer is used to recover and further

blend this raw material mix before transfer to the raw material grinding mills.

Raw Mill

Transport belt conveyor transfers the blended raw materials

to ball mills where it is ground. The chemical analysis is

again checked to ensure excellent quality control of the

product. The resulting ground and dried raw meal is sent to

a homogenizing and storage silo for further blending before

being burnt in the kilns.

Fuels

The heat required to produce temperatures of 1,800C at the flame is

supplied by ground and dried petroleum coke and/or fuel oil. The

Petcoke is imported via the companies' internal wharf, stored and

then ground in dedicated mills. Careful control of the mills ensures

optimum fineness of the Petcock and excellent combustion

conditions within the kilns system.

Limestone Extraction

Fin side of Kiln

Kiln


29/76

Burning

The raw meal is fed into the top of a pre-heater tower equipped

with four cyclone stages. As it falls, the meal is heated up by the

rising hot gases and reaches 800C. At this temperature, The

meal dehydrates and partially decarbonizes. The meal then enters

a sloping rotary kiln, which is heated by a 1,800C flame, which

completes the burning process of the meal. The

Meal is heated to a temperature of at least 1,450C. At this

temperature the chemical changes required to produce cement clinker are achieved.

The dry process kiln is shorter than the wet process kiln and is the most fuel-efficient

method of cement production available.

Cooler Units

The clinker discharging from the kiln is cooled by air to a

temperature of 70C above ambient temperature and heat is

recovered for the process to improve fuel efficiency. Some of the

air from the cooler is de-dusted and supplied to the coal grinding

Plant. The remaining air is used as preheated secondary air for

the main combustion burner in the kiln. Clinker is analyzed

to ensure consistent product quality as it leaves the cooler. Metal conveyors transport

the clinker to closed storage areas.

Filters

Dedicated electrostatic precipitators dedust the air and gases used in the ClinkerProduction Line Process. In this way, 99.9% of the dust is collected before venting to

the atmosphere. All dust collected is returned to the process.

Constituents

Different types of cement are produced by mixing and weighing proportionally the

following constituents:

Clinker Gypsum Limestone addition Blast Furnace Slag

Cement Plant


30/76

Cement manufacturing from the quarrying of limestone to the bagging of

cement.


31/76

COST OF CAPITAL

The main objective of a business firm is to maximize the wealth of its

shareholders in the long-run, the Management Should only invest in those projects

which give a return in excess of cost of fund invested in the project of the business.The difficulty will arise in determination of cost of funds, if is raised from different

sources and different quantum. The various sources of funds to the company are in the

form of equity and debt. The cost of capital is the rate of return the company has to

pay to various suppliers of fund in the company. There are main two sources of capital

for a company shareholder and lender. The cost of equity and cost of debt are the

rate of return that need to be offered to those two groups of suppliers of the capital in

order to attract funds from them.

The primary function of every financial manager is to arrange adequatecapital for the firm. A business firm can raise capital from various sources such as

equity and or preference shares, debentures, retain earning etc. This capital is invested

in different projects of the firm for generating revenue. On the other hand, it is

necessary for the firm to pay a minimum return to each source of capital. Therefore,

each project must earn so much of the income that a minimum return can be paid to

these sources or supplier of capital. What should be this minimum return? The concept

used to determine this minimum return is called Cost of Capital. On the basis of it the

management evaluates alternative sources of finance and selects the optimal one. In

this chapter, concepts and implications of firms cast of capital, determination of cast

of difference sources of capital and overall cost of capital are being discussed.

CONCEPT OF COST OF CAPITAL

Cost of capital is the measurement of the sacrifice made by investors in

order to invest with a view to get a fair return in future on his investments as a reward

for the postponement of his present needs. On the other hand form the point of view of

the firm using the capital, cast of capital is the price paid to the investor for the use of

capital provided by him. Thus, cost of capital is reward for the use of capital. Author

Lutz has called it BORROWINGAND LANDING RATES. The borrowing rates

means the rate of interest which must be paid to obtained and use the capital.

Similarly, landing rate is the rate at which the firm discounts its profits. It may also the

opportunity cost of the funds to the firm i.e. what the firm would earn by investing

these funds elsewhere. In practice the borrowing rates used indicate the cost of capital

in preference to landing rates.


32/76

Technically and Operationally, the cost of capital define as the minimum rate

of return a firm must earn on its investment in order to satisfy investors and to

maintain its market value. I.e. it is the investors required rate of return. Cost of capital

also refers to the discount rate which is used while determining the present value of

estimated future cash flows. In the other word of John J. Hampton, The cost ofcapital is the rate of return in the firm requires from investment in order to

increase the value of firm in the market place. For example if a firm borrows Rs. 5

crore at an interest of 11% P.A., then the cost of capital is 11%. Hear its the essential

for the firm to invest these Rs. 5 Crore in such a way that it earn at least Rs. 55 lacks

i.e. rate of return at 11%. If the return less than this, then the rate of dividend which

the share holder are receiving till now will go down resulting in a decline in its market

value thus the cost of capital is the reward for the use capital. Solomon Ezra, has

called It the minimum required rate of return or the cut of rate for capital

expenditure.

FEATURES OF COST OF CAPITAL

It is not a cost in reality the cost of capital is not a cost as such, but its rate of return

which it requires on the projects.

MINIMUM RATE OF RETURN:

Cost of capital is the minimum rate of return a firm is required in order to maintain the

market value of its equity shares.

REWARDS FOR RISKS

Cost of capital is the reward for the business and financial risk. Business risks is the

measurement of variability in profits due to changes in sales, while financial risks

depends on the capital structure i.e. that equity mix of the firm.

SIGNIFICANCE OF CONCEPT OF COST OF CAPITAL

The cost of capital is very important concept in the financial decision making. The

progressive management always likes to consider the cost of capital while taking

financial decisions as its very relevant in the following spheres...


33/76

1. Designing the capital structure: the cost of capital is the significant factor indesigning a balanced an optimal capital structure of a firm. While designing it,

the management has to consider the objective of maximizing the value of the

firm and minimizing cost of capita. I comparing the various specific costs of

different sources of capital, the financial manager can select the best and themost economical source of finance and can designed a sound and balanced

capital structure.

2. Capital budgeting decisions: the cost of capital sources as a very useful tool inthe process of making capital budgeting decisions. Acceptance or rejection of

any investment proposal depends upon the cost of capital. A proposal shall not

be accepted till its rate of return is greater than the cost of capital. In various

methods of discounted cash flows of capital budgeting, cost of capital

measured the financial performance and determines acceptability of all

investment proposals by discounting the cash flows.

3. Comparative study of sources of financing: there are various sources offinancing a project. Out of these, which source should be used at a particular

point of time is to be decided by comparing cost of different sources of

financing. The source which bears the minimum cost of capital would be

selected. Although cost of capital is an important factor in such decisions, butequally important are the considerations of retaining control and of avoiding

risks.

4. Evaluations of financial performance of top management: cost of capital can beused to evaluate the financial performance of the top executives. Such as

evaluations can be done by comparing actual profitability of the project

undertaken with the actual cost of capital of funds raise o finance the project. If

the actual profitability of the project is more than the actual cost of capital, the

performance can be evaluated as satisfactory.

5. Knowledge of firms expected income and inherent risks: investors can knowthe firms expected income and risks inherent there in by cost of capital. If a

firms cost of capital is high, it means the firms present rate of earnings is less,

risk is more and capital structure is imbalanced, in such situations, investors

expect higher rate of return.


34/76

6. Financing and Dividend Decisions: the concept of capital can be convenientlyemployed as a tool in making other important financial decisions. On the basis,

decisions can be taken regarding dividend policy, capitalization of profits and

selections of sources of working capital.

CLASSIFICATION OF COST OF CAPITAL

1. Historical Cost and future CostHistorical Cost represents the cost which has already been incurred for financing a

project. It is calculated on the basis of the past data. Future cost refers to the expected

cost of funds to be raised for financing a project. Historical costs help in predicting the

future costs and provide an evaluation of the past performance when compared withstandard costs. In financial decisions future costs are more relevant than historical

costs.

2. Specific Costs and Composite CostSpecific costs refer to the cost of a specific source of capital such as equity share.

Preference share, debenture, retain earnings etc. Composite cost of capital refers to the

combined cost of various sources of finance. In other words, it is a weighted average

cost of capita. It is also termed as overall costs of capital. While evaluating a capital

expenditure proposal, the composite cost of capital should be as an acceptance/

rejection criterion. When capital from more than one source is employed in the

business, it is the composite cost which should be considered for decision-making and

not the specific cost. But where capital from only one source is employed in the

business, the specific cost of those sources of capital alone must be considered.

3. Average Cost and Marginal CostAverage cost of capital refers to the weighted average cost of capital calculated on the

basis of cost of each source of capital and weights are assigned to the ratio of their

share to total capital funds. Marginal cost of capital may be defined as the Cost of

obtaining another rupee of new capital. When a firm raises additional capital from

only one sources (not different sources), than marginal cost is the specific or explicit

cost. Marginal cost is considered more important in capital budgeting and financing

decisions. Marginal cost tends to increase proportionately as the amount of debt

increase.


35/76

4. Explicit Cost and Implicit CostExplicit cost refers to the discount rate which equates the present value of cash

outflows or value of investment. Thus, the explicit cost of capital is the internal rate of

return which a firm pays for procuring the finances. If a firm takes interest free loan,

its explicit cost will be zero percent as no cash outflow in the form of interest are

involved. On the other hand, the implicit cost represents the rate of return which can

be earned by investing the funds in the alternative investments. In other words, the

opportunity cost of the funds is the implicit cost. Port field has defined the implicit

cost as the rate of return with the best investment opportunity for the firm and its

shareholders that will be forgone if the project presently under consideration by the

firm were accepted. Thus implicit cost arises only when funds are invested

somewhere, otherwise not. For example, the implicit cost of retained earnings is the

rate of return which the shareholder could have earn by investing these funds, if thecompany would have distributed these earning to them as dividends. Therefore,

explicit cost will arise only when funds are raised whereas implicit cost arises when

they are used.

Assumption of Cost of Capital

While computing the cost of capital, the following assumptions are made:

The cost can be either explicit or implicit. The financial and business risks are not affected by investing in new

investment proposals.

The firms capital structure remains unchanged. Cost of each source of capital is determined on an after tax basis. Costs of previously obtained capital are not relevant for computing the cost of

capital to be raised from specific source.

Computation of specific costs

A firm can raise funds from different sources such as loan, equity shares, preference

shares, retained earnings etc. All these sources are called components of capital. The

cost of capital of these different sources is called specific cost of capital. Computation

of specific cost of capital helps in determining the overall cost of capital for the firm

and in evaluating the decision to raise funds from a particular source. The computation

procedure of specific costs is explained in the pages that follow


36/76

COST OF DEBT CAPITAL

Cost of Debt is the effective rate that a company pays on its current debt. This can be

measured in either before- or after-tax returns; however, because interest expense is

deductible, the after-tax cost is seen most often. This is one part of the company'scapital structure, which also includes the cost of equity.

Much theoretical work characterizes the choice between debt and equity, in a trade-

off context: Firms choose their optimal debt ratio by balancing the benefits and costs.

Traditionally, tax savings that occur because interest is deductible while equity payout

is not have been modeled as a primary benefit of debt. Large firms with tangible assets

and few growth options tend to use a relatively large amount of debt. Firms with high

corporate tax rates also tend to have higher debt ratios and use more debt

incrementally. A company will use various bonds, loans and other forms of debt,so this measure is useful for giving an idea as to the overall rate being paid by the

company to use debt financing. The measure can also give investors an idea as to the

riskiness of the company compared to others, because riskier companies generally

have a higher cost of debt.

Example-: If a company issues 12% debentures worth Rs. 5 lacs of Rs. 100 each at

par, then it must be earn at least Rs.60000(12% of Rs. 5 lacs) per year on this

investment to maintain the income available to the shareholders unchanged. If the

company earnings were less than this interest rate (12%) than the income available tothe shareholders will be reduced and the market value of the share will go down.

Therefore, the cost of debt capital is the contractual interest rate adjusted further for

the tax liability of the firm. But, to know the real cost of debt, the relation of the

interest rate is to be established with the actual amount realized or net proceeds from

the issue of debentures.

To get the after-tax rate, you simply multiply the before-tax rate by one minus the

marginal tax rate.

Cost of Debt = (before-tax rate x (1-marginal tax))

The before tax rate of interest can be calculated as below:

Interest Expense of the company

= ---------------------------------------- * 100

Total Debt


37/76

Net Proceeds:

1. At par = Par valueFloatation cost2. At premium = Par value + PremiumFloatation cost3. At Discount = Par valueDiscountFloatation cost

COST OF PREFERENCE SHARE CAPITAL

Preference share is another source of Capital for a company. Preference Shares are theshares that have a preferential right over the dividends of the company over the

common shares. A preference shareholder enjoys priority in terms of repayment vis--

vis equity shares in case a company goes into liquidation. Preference shareholders,

however, do not have ownership rights in the company. In the companies under

observation only India Cement has preference shares issued.

Cost of Preference Capital = Preference Dividend/Market Value of Preference

Shree Cement has not paid any dividend to the Preference Shareholders. Thus the Costof Preference Capital is 0 (Zero).

COST OF EQUITY SHARE CAPITAL

The computation of cost of equity share capital is relatively difficult because neither

the rate of dividend is predetermined nor the payment of dividend is legally binding,

therefore, some financial experts hold the opinion the p.s capital does not carry any

cost but this is not true. When additional equity shares are issued, the new equity share

holders get propionate share in future dividend and undistributed profits of the

company. If reduces the earning per shares of existing share holders resulting in a fall

in marker price of shares. Therefore, at the time of issue of new equity shares, it is the

duty of the management to see that the company must earn at least so much income

that the market price of its existing share remains unchanged. This expected minimum

rate of return is the cast o equity share capital. Thus, cost of equity share capital may

be define as the minimum rate of return that a firm must earn on the equity financed


38/76

portion of a investment- project in order to leave unchanged the market price of its

shares. The cost of equity can be computed by any of the following method:

1. Dividend yield method:Ke = DPS\mP*100

Ke= cost of equity capital

Dps= current cash dividend per share

Mp=current market price per share

2. Earning yield method:Ke= EPS\mp*100

Eps= earnings per share

3. Dividend yield plus growth in dividend method:While computing cost of capital under dividend yield (d\p ratio) method, it had been

assumed that present rate of dividend will remain the same in future also. But, if the

management estimates that companys present dividend will increased continuously

for the year to come, then adjustment for this increase is essential to compute the cost

of capital.

The growth rate in dividend is assumed to be equal to the growth rate in earning per

share. For example if the EPS increase at the rate of 10% per year, the DPS and

market price per share would show an increase at the rate of 10%. Therefore, under

this method, cost of equity capital is computed by adjusting the present rate ofdividend on the basis of expected future increase in companys earning.

Ke= DPS\MP*100+G

G= Growth rate in dividend.

4. Realized yield method:In case where future dividend and market price are uncertain, it is very difficult to

estimate the rate of return on investment. In order to overcome this difficulty, the


39/76

average rate of return actually realizes in the past few years by the investors is used to

determine the cost of capital. Under this method, the realized yield is discounted at the

present value factor, and then compare with value of investment this method is based

on these assumptions.

The companys risk does not change i.e. dividend and growth rate are stable.

The alternative investment opportunities, elsewhere for the investor, yield the return

which is equal to realized yield in the company, and the market of equity share of the

company does not fluctuate widely.

Cost of newly issued equity shares

when new equity share are issued by a company, it is not possible to realise the market

price per share, because the company has to incur some expenses on new issue,

including underwriting commission, brokerage etc. so, the amount of net proceeds is

calculated by deducting the issue expenses form the expected market value or issue

price. To ascertain the cost of capital, dividend per share or EPS is divided by the

amount of net proceeds. Any of the following formulae may be used for this purpose:

Ke= DPS\NP*100

Or

Ke= EPS\NP*100

Or

Ke=DPS\NP*100+G

COST OF RETAIN EARNINGS OR INTERNAL EQUITY

Generally, companies do not distribute the entire profits by way of dividend

among their share holders. A part of such profit is retained for future expansion and

development. Thus year by year, companies create sufficient fund for the financing

through internal sources. But, neither the company pays any cost nor incurs any

expenditure for such funds. Therefore, it is assumed to cost free capital that is not true.

Though retain earnings like retained earnings like equity funds have no explicit cost


40/76

but do have opportunity cost. The opportunity cost of retained earnings is the income

forgone by the share holders. It is equal to the income what a share holders could have

earns otherwise by investing the same in an alternative investment, If the company

would have distributed the earnings by way of dividend instead of retaining in the

business. Therefore, every share holders expects from the company that much ofincome on retained earnings for which he is deprived of the income arising o its

alternative investment. Thus, income forgone or sacrificed is the cost of retain

earnings which the share holders expects from the company.

WEIGHTED AVERAGE COST OF CAPITAL

Once the specific cost of capital of the long-term sources i.e. the debt, the preference

share capital, the equity share capital and the retained earnings have been ascertained,

the next step is to calculate the overall cost of capital of the firm. The capital raised

from various sources is invested in different projects. The profitability of these

projects is evaluated by comparing the expected rate of return with overall cost of

capital of the firm. The overall cost of capital is the weighted average of the costs of

the various sources of the funds, weights being the proportion of each sources of funds

in the total capital structure. Thus, weighted average as the name implies, is an

average of the cost of specific sources of capital employed in the business

properly weighted by the proportion they held in firms capital structure. It isalso termed as Composite Cost of Capital or Overall Cost of Capital or Ave rage

Cost of Capital.

WEIGHTED AVERAGE, How to calculate?

Though, the concept of weighted average cost of capital is very simple. Yet there are

many problems in its calculation. Its computation requires:

1. Assignment of Weights :First of all, weights have to be assigned to each source of capital for calculating the

weighted average cost of capital. Weight can be either book value weight or market

value weight. Book value weights are the relative proportion of various sources of

capital to the total capital structure of a firm. The book value weight can be easily

calculated by taking the relevant information from the capital structure as given in thebalance sheet of the firm. Market value weights may be calculated on the basic on the

market value of different sources of capital i.e. the proportion of each source at its


41/76

market value. In order to calculate the market value weights, the firm has to find out

the current market price of each security in each category. Theoretically, the use of

market value weights for calculating the weighted average cost of capital is more

appealing due to the following reasons:

The market values of securities are closely approximate to the actual amount tobe received from the proceeds of such securities.

The cost of each specific source of finance is calculated according to theprevailing market price.

But, the assignment of the weight on the basic of market value is operationally

inconvenient as the market value of securities may frequently fluctuate. Moreover,

sometimes, no market value is available for the particular type of security, especiallyin case of retained earnings can indirectly be estimated by Gitmans method.

According to him, retained earnings are treated as equity capital for calculating cost of

specific sources of funds. The market value of equity share may be considered as the

combined market value of both equity shares and retained earnings or individual

market value (equity shares and retained earnings) may also be determined by

allocating each of percentage share of the total market value to their respective

percentage share of the total values.

For example: -the capital structure of a company consists of 40,000 equity shares ofRs. 10 each ad retained earnings of Rs. 1,00,000. if the market price of companys

equity share is Rs. 18, than total market value of equity shares and retained earnings

would be Rs. 7,20,000 (40,000* 18) which can be allocated between equity capital

and retained earnings as follows-

Market Value of Equity Capital = 7, 20,000*4, 00,000/5, 00,000

=Rs. 5, 76,000.

Market Value of Retained Earnings= 7, 20,000*1, 00,000/5, 00,000

=Rs. 1, 44,000.

2. Computation of Specific Cost of Each Source :After assigning the weight; specific costs of each source of capital, as explained

earlier, are to be calculated. In financial decisions, all costs are after tax costs.Therefore, if any source has before tax cost, it has to be converted in to after tax

cost.


42/76

3. Computation of Weighted Cost of Capital :After ascertaining the weights and cost of each source of capital, the weighted average

cost is calculated by multiplying the cost of each source by its appropriate weights and

weighted cost of all the sources is added. This total of weighted costs is the weighted

average cost of capital. The following formula may be used for this purpose:

Kw = XW/W

Here; Kw = Weighted average cost of capital

X = after tax cost of different sources of capital

W = Weights assigned to a particular source of capital

Example: Following information is available with regard to the capital structure of

ABC Limited:

Sources of Funds Amount (Rs.) after tax cost of Capital

E.S. Capital 3, 50,000 .12

Retained Earnings 2, 00,000 .10

P.S. Capital 1, 50,000 .13

Debentures 3, 00,000 .09

You are required to calculate the weighted average cost of capital.


43/76

Computation of Weighted Average Cost of Capital

Source

(1)

Amount

Rs.

(2)

Weights

(3)

After tax

Cost

(4)

Weighted

Cost

(5)= (3) * (4)

E.S. Capital 3,50,000 .35 .12 .0420

Retained Earning 2,00,000 .20 .10 .0200

P.S. Capital 1,50,000 .10 .13 .0195

Debentures 3,00,000 .09 .09 .0270

Total 10,00,000 1.00 .1085

Weighted Average Cost of Capital (WACC) .10850 or 10.85%

.


44/76

S H R E E C E M E N T L I M I T E D

BALANCE SHEET AS AT 31ST MARCH, 2010

As at As at

31.03.2010 31.03.2009

Schedul

e (Rs.in Lac) (Rs.in Lac)

SOURCES OF FUNDS

Shareholders' Funds

Share Capital 1 3,483.72 3,483.72

Reserves & Surplus 2 179,840.25 117,517.97

183,323.97 121,001.69

Loan Funds

Secured Loans 3 178,853.25 122,050.73

Unsecured Loans 4 31,770.52 27,564.60

210,623.77 149,615.33

Total 393,947.74 270,617.02

APPLICATIONS OF FUNDS

Fixed Assets 5

Gross Block 295,086.48 225,591.46

Less: Depreciation 219,891.10 162,905.89

Net Block 75,195.38 62,685.57

Capital Work-in-Progress 96,741.59 47,888.98

171,936.97 110,574.55

Investments 6 159,224.04 84,483.47

Deferred Tax Assets (Net) 7 1,240.38 1,038.98


45/76

Current Assets, Loans & Advances

Inventories8

35,813.30 15,445.84

Sundry Debtors 9 8,241.79 5,831.73

Cash & Bank Balances10

41,637.42 47,226.05

Other Current Assets11

1,127.84 755.20

Loans & Advances12

71,397.03 73,678.81

158,217.38 142,937.63

Less: Current Liabilities & Provisions 13

Liabilities 46,684.53 29,000.38

Provisions 49,986.50 39,417.23

96,671.03 68,417.61

Net Current Assets 61,546.35 74,520.02

Total 393,947.74 270,617.02Significant Accounting Policies & Notes on

Accounts 22


46/76

PROFIT & LOSS ACCOUNT

FOR THE YEAR ENDED 31ST MARCH, 2010

For the

Year

For the

Year

ended ended

31.03.2010 31.03.2009

Schedule (Rs. in Lac) (Rs. in Lac)

INCOME

Sales 14 401,408.60 309,159.96

Less: Excise Duty 38,196.30 38,096.87

Net Sales 363,212.30 271,063.09

Other Income 15 7,583.79 3,914.91

370,796.09 274,978.00

EXPENDITURE

Manufacturing Expenses 16 131,234.03 114,246.30

Captive consumption of Cement [Net of

Excise Duty Rs. 165.43 Lac (1,019.61) (438.93)(Previous year Rs. 117.80 Lac)]

(Increase) / Decrease in Stock 17 (1,965.58) 962.74

Purchase of Finished Goods 918.42 652.47

Payment to and Provision for Employees 18 15,861.19 10,387.43

Administrative Expenses 19 4,949.31 3,976.39

Freight & Selling Expenses 20 62,983.14 45,927.70

Interest and Financial Expenses (Net) 21 7,658.07 3,341.11

220,618.97 179,055.21

PROFIT BEFORE DEPRECIATION,

EXCEPTIONAL ITEMS & TAX 150,177.12 95,922.79

Depreciation & Amortisation 57,042.98 20,538.70

Exceptional Items


47/76

Provision for Statutory Liabilities of Earlier Years'

(Refer Note 7) 4,367.62 -

Assets Constructed at Others' Premises W/off 1,975.23 3,093.05

PROFIT BEFORE TAX 86,791.29 72,291.04

Provision for Current Tax 20,885.00 13,475.00

Prior Period Tax Expense (Net) (1,476.00) -

Provision for Fringe Benefit Tax [Includes

excess provision written back (26.34) 211.98

pertaining to earlier years Rs. 26.34 lac

(Previous Year Rs. Nil)]

Provision for Deferred Tax (201.40) 807.12

PROFIT AFTER TAX 67,610.03 57,796.94

Balance Brought Forward from Previous Year 80,793.18 34,869.59

Debenture Redemption Reserve No Longer Required - 202.43

PROFIT AVAILABLE FOR APPROPRIATION 148,403.21 92,868.96

Transferred to Debenture Redemption Reserve 7,500.00 -

Transferred to General Reserve 22,000.00 8,000.00

Interim Dividend on Equity Shares 1,741.86 1,741.86

Corporate Dividend Tax on Interim Dividend 296.03 296.03

Proposed Final Dividend on Equity Shares 2,786.98 1,741.86

Corporate Dividend Tax on Final Dividend 462.88 296.03

34,787.75 12,075.78

Balance Carried Over to Balance Sheet 113,615.46 80,793.18

148,403.21 92,868.96

Earning Per Equity Share of Rs. 10 each (In Rs.) - Cash 369.77 227.18

- Basic

& Diluted 194.07 165.91

Significant Accounting Policies & Notes on

Accounts 22


48/76

Five Years Financial Highlights

Rs. In lacs

Particular 2005-06 2006-07 2007-08 2008-09 2009-10

Sales-Gross 82412.79 161314.44 244032.08 309716.69 401408.60

Other Income 330.47 2127.33 7683.91 8289.61 7583.79

Total Income 82743.26 163441.77 251715.99 318006.30 408992.39

Operating Expenses 60963.58 102342.04 157791.11 214640.33 251157.20

Operating Profit 21779.68 61099.73 93924.88 103365.97 157835.19

Interest 1283.36 1037.37 5329.64 7443.18 7658.07

PBDT 20496.32 60062.36 88595.24 95922.79 150177.12

Less: Dep. &Amort. 18520.68 43305.33 47875.86 20538.70 57042.98

Less: Exceptional Items - (2123.73) 3888.46 3093.05 6342.85

Profit Before Tax 1975.64 18880.76 36830.92 72291.04 86791.29

Tax (Including FBT) 286.24 8451.75 12265.32 13686.98 19382.66

Deferred Tax 587.35 (7271.22) (1471.60) 807.12 (201.40)

Profit after Tax 1102.05 17700.22 26037.20 57796.94 67610.03


49/76

CALCULATION OF COST OF CAPITAL OF SHREE CEMENT

LTD.

Cost of Debt Capital:

For the year 2009-10:

= 131570.37+30000 = 161570.37 lacs

Total Interest Paid = 7658.07 lacs

Tax Rate = 30%

7658.07

Kd (before tax) = ---------------------- X 100 = 4.73 %

161570.37

Kd (after tax) = 4.73% - 30% = 3.31 %

Total Debt Capital = Term loan from

Interest Expense of the company

Kd (before tax) = -------------------------------------------- X 100

Total Debt

Kd (after tax) = Interest Rate Before TaxTax


50/76

For the year 2008-09

Total Debt Capital = Term loan from Banks + Debts

= 105716.94+000 =105716.94 lacs


Tax Rate = 30%

7443.18

Kd (before tax) = ---------------------- X 100 = 7.04%

105716.94

Kd (after tax) = 7.04% - 30% = 4.93%

For the year 2007-08

Total Debt Capital = Term loan from Banks + Debts

= 112573.18+800= 113373.18 lacs


Tax Rate = 30%

5329.64

Kd (before tax) = ---------------------- X 100 = 4.7%

113373.18

Kd (after tax) = 4.7% - 30% = 3.3%


51/76

COMPARATIVE CALCULATION OF Kd FOR THREE YEAR

Particular 2009-10 2008-09 2007-08

Total Debts (Term loan from

Bank+ Debts)

131570.37

+ 30000 =

161570.37

lacs

105716.94

+000

=105716.9

4

112573.18

+800

=113373.1

8

Total Interest paid 7658.07 7443.18 5329.64

Interest Rate (Before Tax) 4.73% 7.04% 4.7%

Interest Rate (After Tax) =

Interest Rate Before Tax Tax

Rate 30%.

3.31% 4.93% 3.3%


52/76

COST OF EQUITY CAPITAL:

EQUITY SHARE CAPITAL

Particular 2009-10 2008-09 2007-08 2006-07

No. of Shares (In lacs) 348.37 348.37 348.37 348.73

DPS Given 13 10 8 6

Market Price (at the

end of March)

2300.05 710.50 1079.40 921.85

Earning per equity

share of Rs. 10(in Rs.)

194.07 165.91 74.74 50.81

Proposed final

dividend on equity

share (in lacs)

4528.84 3483.72 2786.98 Not given

Market Capitalization

(in Lacs)

801268.4 247516.88 376033.01 321146.96

1. Dividend yield plus growth in dividend method:-Ke = DPS\mP*100 + G

Dps = Current cash dividend per share = 13Rs.

Mp = Current market price per share = 2300.05Rs.

G = Growth rate


53/76

13

Ke = -------------------- X 100 + 10% = 10.57%

2300.05

2. Earning yield method:-Ke= EPS\mp*100

Eps= earnings per share = 194.07 Rs.

Mp= Market prize = 2300.05 Rs.

194.07

Ke = -------------------- X 100 = 8.43%

2300.05

3.

Dividend per share method:-Ke = Proposed final dividend on Equity Share / No. of Equity Share

Proposed final dividend on Equity Share = 4528.84 Lacs

No. of Equity Share = 348.37 Lacs

4528.84

Ke = -------------------- = 13

348.37


54/76

COST OF EQUITY SHARE CAPITAL (KE)

Particular 2009-10

Dividend Per share method 13.0

Earning Yield Method 8.43

Dividend yield plus growth method 10.57

WEIGHTED AVERAGE COST OF CAPITAL (WACC)

WACC = (We * Ke) + (Wd * Kd)

Where... We= Weight of equity

Wd = Weightof Debt.

Ke = Cost of Equity Share capital

Kd = Cost of Debt. Capital

WACC = (0.83 * 10.57) + (0.17 *03.31) = 9.33%


55/76

WACC OF SHREE CEMENT LIMITED (2009-2010)

Source

(1)

Amount

Rs.

(2)

Weights

(3)

After tax

Cost

(4)

Weighted

Cost

(5)= (3) * (4)

E.S. Capital 801268.42 .83 10.57 8.77

Debentures 161570.37 .17 03.31 0.56

Total 962838.79 1.00 9.33

Weighted Average Cost of Capital (WACC) 9.33%


56/76

MERITS OF WEIGHTED AVERAGE COST OF CAPITAL

The WACC is widely used approach in determining the required return on a

firms investments. It offers a number of advantages including the followings-

1. Straight forward and logical: It is the straightforward and logical approach toa difficult problem. It depicts the overall cost of capital as the some of the cost

of the individual components of the capital structure. It employs a direct and

reasonable methodology and is easily calculated and understood.

2. Responsiveness to Changing Condition: Since, it is based upon individualdebt and equity components; the weighted average cost of capital reflects each

element in the capital structure. Small changes in the capital structure of thefirm will be noted by small changes in overall cost of capital of the firm.

3. Accurate when Profits are Normal:During the period of normal profits, theweighted average cost of capital is more accurate as a cut-off rate in selecting

the capital budgeting proposals. It is because the weighted average cost

recognizes the relatively low debt cost and the need to continue to achieve the

higher return on the equity financed assets.

4. Ideal Creation for Capital Expenditure Proposals: With the help ofweighted average cost of capital, the finance manager decides the cut-off rate

for taking decisions relating to capital expenditure proposals. This cut-off rate

determines the minimum limit for accepting an investment proposal. If an

investment proposal is accepted below this limit, the firm incur a loss.

Therefore, this cut-off rate is always decided above the weighted average cost

of capital.


57/76

LIMITATION OF WEIGHTED AVERAGE COST OF CAPITAL

The weighted Average cost approach also has some weaknesses, important among

them are as follows:

1. Unsuitable in case of Excessive Low-cost Debts: Short term loan canrepresent important sources of fund for firm experiencing financial difficulties.

When a firm relies on Zero cost (in the form of payables) or low cost short term

debt, the inclusion of such debts in the calculation of cost of capital will result

in a low WACC. If the firm accepts low-return projects on the basic of this low

WACC, the firm will be in a high financing risk.

2.

Unsuitable in Case of Low Profits : If a firm is experiencing a period of lowprofits, not earning profit as compared to other firms in the industry, WACC

will be inaccurate and of limited value.

3. Difficulty in Assigning Weights: The main difficulty in calculating theWACC is to assign weight to different components of capital structure.

Normally, there are two type of weights- (i) book value weights and (ii) market

value weight. These two type of weights give different results. Hence, the

problem is which type of weight should be assigned. Though, market value is

more appropriate than book value, but the market value of each component of

capital of a company is not readily available. When the securities of the

company are unlisted, the problem becomes more intricate.

4. Selection of Capital Structure: The selection of capital structure to be usedfor determining the WACC is also not easy job. Three types of capital structure

are there i.e. current capital structure, marginal capital structure and optimal

capital structure. Which of these capital structures is selected? Generally,

current capital structure is regarded as the optimal structure, but it is not always

correct.


58/76

Ratio Analysis

Ratio Analysis is widely used tool of financial analysis. It can be used to compare the

risk and return relationship of firm of different sizes. It is defined as the systematic use

of ratio to interpret the financial statements so that the strengths and the weaknesses ofa firm as well as its historical performance and current financial condition can be

determined. The term ratio refers to the numerical and quantitative relationship

between two variables. The relationship can be expressed as (a) percentage, (b)

fraction, (c) proportion of numbers. These alternative methods of expressing items

which are related to each other are, for purpose of financial analysis, referred to as

Ratio Analysis. It should be noted that computing the ratio does not add any

information, what the ratio do is that they reveal the relationship in a more meaningful

way so as to enable equity investors, management and lenders make better investment

and credit decisions.

The rationale of ratio analysis of lies in the fact that it makes related information

comparable. A single figure by itself has no meaning but when expressed in terms of a

related figure, it yields significant interferences.

Types of Ratios-

Accounting Ratio may be classified in a number of ways keeping in view the purposeof study. However, for the sake of convenience and simplicity ratios may be classified

as follow:

1. Profitability Ratio-Gross Profit Ratio, Net profit Ratio, Operating Ratio,Return on shareholders investment

2. Turnover or activity Ratio-Stock Turnover Ratio, Debtors turnover Ratio,Creditors Turnover Ratio, Working Capital Turnover Ratio.

3. Liquidity Ratio-Current Ratio, Liquid Ratio4. Long term Solvency Ratio


59/76

Type of Ratio Analysis:

1. Inter Firm Ratio Analysis2. Intra Firm Ratio Analysis

1. Inter firm Ratio Analysis:

Companies

1. Acc Ltd.2. Shree Cement.3. Ambuja Cement.4. JK Lakshmi.5. Ultratech.


60/76

Current Ratio:

Ideal Ratio: - 2:1

Formula: - Current Assets/Current Liabilities

Co. year 2008-09 2007-08 2006-07 2005-06 2004-05

Acc 0.7 1.0 0.9 1.2 1.1

Shree 2.1 2.3 2.7 1.4 2.1

Ambuja 1.1 1.6 - - -

JK Lakshmi 2.4 3.3 - - -

Ultratech 1.1 1.0 1.3 1.4 1.9

Best Performer: - JK Lakshmi Cement

Comments:

This ratio shows the ability of a business firm to meet its Current obligations as and

when they become due.

A relatively high current ratio is an indication that the firm is liquid and has the ability

to pay its current obligations in time and when they become due. On the other hand, a

relatively low current ratio represents that the liquidity position of the firm is not good

and the firm shall not be able to pay its current liabilities in time without facingdifficulties.

The above table shows that Shree cement and JK Lakshmi cement have a good current

ratio but the other companies like Acc, Ambuja, and Ultratech do not have sufficient

current ratio. So the company can improve this ratio by either increase the currentassets like cash and bank balances etc. or decrease the current liabilities.

The JK Cement is a best performer because this company has more cash and bank

balances as compare to debtors and inventory.


61/76

Return on shareholders investment:

Formula: - Net Profit after interest and taxes * 100/Share holders fund

Co. year 2008-09 2007-08 2006-07 2005-06 2004-05

Acc 27 25 35 39 34

Shree 48 39 39 4 10

Ambuja 19 25 38 43 22

JK Lakshmi 22 34 - - -

Ultratech 27 37 44 22 .28

Best Performer: - Shree Cement

Comments:

This ratio is also called as Return on net worth Ratio. Return on equity reveals how

much profit a company earned in comparison to the total amount of shareholder equity

found on the balance sheet. A business that has a high return on equity is more likely

to be one that is capable of generating cash internally.Return on equity (ROE) is one

of the most important indicators of a firms profitability and potential growth.

Companies that boast a high return on equity with little or no debt are able to grow

without large capital expenditures, allowing the owners of the business to withdrawal

cash and reinvest it elsewhere. Many investors fail to realize, however, that two

companies can have the same return on equity, yet one can be a much better business.

Higher the ratio better for the organization from the point of view of its share holders.

We can see from the above table that return on shareholders investment is improving

in some company like Shree cement and Acc cement but in some company it has gone

down. So it is advisable to those companies which have lesser Return on net worth, to

increase their net profit.

Shree cement have a good position among all the above five companies because it

have earned double net profit as compare to the 2008.


62/76

Debt-Equity Ratio-

Formula: -Outsid

project report mohit

Documents