Capital Structure Project

A STUDY ON CAPITAL STRUCTURE WITH REFERENCE TO ULTRATECH CEMENT LTD A Project report submitted to Jawaharlal Nehru Technological University, Hyderabad,

in partial fulfillment of the requirements for the award of the degree of  MASTER OF BUSINESS ADMINISTRATION

By K.RAVI KISHORE Reg. No. 10241E0039

Under the Guidance of  D.INDIRA Associate Professor

Department of Management Studies Gokaraju Gokaraju Rangaraju Rangaraju Institute Institute of Engineering & Technology Technology (Aff (Affil ilia iate ted d

to

Jawa Jawaha harl rlal al

Tech Techno nolo logi gica call

Hyderabad) Hyderabad 2010-2012

Univ Univer ersi sity ty,,

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DECLARATION

I hereby declare that the project entitle “ A

STUDY ON ON CAPITAL CAPITAL STRUCTUR STRUCTURE E ”  Submitted

in

partial fulfillment of the requirements for award of the degree of MBA at Gokaraju Rangar Rangaraju aju Instit Institute ute of Engine Engineeri ering ng and Techno Technolog logy, y, affili affiliate ated d to Jawaha Jawaharla rlall Nehru Nehru Technological University, Hyderabad, is an authentic work and has not been submitted to any other University/Institute for award of any degree/diploma.

K.RAVI KISHORE

(10241E0039) MBA, GRIET HYDERABAD

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ACKNOWLEDGEMENT

Firstly I would like to express our immense gratitude towards our institution Gokaraju Rangaraju Institute of Engineering & Technology, which created a great platform to attain profound technical skills in the field of MBA, thereby fulfilling our

most cherished goal. I would thank all the finance department of “ULTRATECH CEMENT LTD( ADITYA BIRLA GROUP) “. specially Mr. RAMA KRISHNA (Asst Manager Finance) , and the employees in the finance department for guiding me and helping me in successful completion of the project I am very much thankful to our professor Mrs. D.INDIRA (Internal Guide)  madam for extending his cooperation in doing this project. I am also thankful thankful to our project coordinato coordinatorr Mr. S. Ravindra Chary Sir   for extending his cooperation in completion of  Project. I convey my thanks to my beloved parents and my faculty who helped me directly or indirectly in bringing this project successfully.

K.RAVI KISHORE (10241E0039)

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INDEX S.No:

CONTENTS

CHAPTER-1

PAGE NO. 1-6

INTRODUCTION Scope of the Study Objectives of the Study Methodology of the Study Limitations of the Study CHAPTER-2

7-26

REVIEW OF LITERATURE CHAPTER-3

27-56

INDUSTRY PROFILE COMPANY PROFILE CHAPTER-4

57-88

DATA ANALYSIS AND INTERPRETATION CHAPTER-5

89-94

FINDINGS CONCLUSIONS SUGGESTION BIBLIOGRAPHY

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CHAPTER-I INTRODUCTION

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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 firm’s 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 proportio proportionate nate relationship relationship between between debt and equity equity .Equity .Equity includes includes paid-up share share capital, capital, share 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.

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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 it’s the firm’s 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 firm’s 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 Ultra tech cements tapped over the years under study i.e. 2007-2011.

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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 Stud Study y the the capit capital al stru structu cture re of of Ultra tech cements through EBIT-EPS analysis

2. Study Study effective effectiveness ness of financi financing ng decision decision on on EPS and and EBIT of the firm. firm.

3. Exami Examinin ning g the fina financi ncing ng trend trendss in the the Ultra tech cements. For the period of 2007- 11.

4. Study Study debt/e debt/equi quity ty ratio ratio of Ultra tech cements for 2007-11.

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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 2007-11.

PRIMARY SOURCES: •

Detailed discussions with Vice-President. Vice-President.

•

Discussions with the Finance manager and other members of the Finance department.

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.

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LIMITATION OF EPS AS A FINANCING-DECISION CRITERION

EPS is one of the mostly widely used measures of the company’s 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 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.

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CHAPTER-II REVIEW OF LITERATURE

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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 firm’s 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 proportio proportionate nate relationship relationship between between debt and equity equity .Equity .Equity includes includes paid-up share share capital, capital, share 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 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

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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 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 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 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.

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CAPITAL STRUCTURE DIAGRAM The Capital Structure Decision Process

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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 company’s 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 company’s 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 shareholder’s 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-à-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 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.

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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 company’s capital structure decisio decision, n, are proper properly ly analyze analyzed d and balance balanced. d. The capita capitall struct structure ure should should be planned planned generally keeping in view the interest of the equity shareholders and financial requirements of  the company company.. The equity equity shareh sharehold olders ers being being the shareh sharehold olders ers of the compan company y and the providers of the risk capital (equity) would be concerned about the ways of financing a company company’s ’s operati operation. on. However However,, the intere interests sts of the other other groups groups,, such such as employe employees, es, 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 rang rangee with with in whic which h the the mark market et value value per per shar sharee is maxi maximu mum. m. In pract practic icee for for most 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.

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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) 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 o ther wise it uses should be avoided. 3) 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 company’s 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 with an exis existi ting ng capi capita tall stru struct ctur uree .The .The comp compan any y needs needs funds funds to fina finance nce its its acti activi viti ties es continuously continuously.. Every time when fund shave to be procured, procured, the financial 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.

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The following are the three most important approaches to decide about a firm’s capital structure.

   

EBIT-EPS approach for analyzing the the impact of debt on EPS. Valuation approach for determining the impact of debt on the shareholder’s value. Cash flow approached for analyzing the firm’s 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 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 owner’s investment. The earnings per share also increase when the preference preference share capital is used to acquire acquire the assets. But the leverage impact is more pronounced in case of debt because 1. The cost of debt is usually usually lower lower than than the cost of performance performance share share capital capital and 2. The inter interest est paire paired d on debt is is tax deduct deductibl ible. e. Because Because of its effect effect on the earnings earnings per share, share, financial financial leverage leverage is an important important consideration consideration in planning planning the capital structure structure of a company. 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 shareholder’s 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 firm’s capital structure management management .He can considered the possible fluctuations in EBIT and examine their impact on EPS under different financial plans of the probability of earning a rate of return on the firm’s assets less than the cost of debt is insignificant, a large

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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 firm’s 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 decidin deciding g about about a firm’s firm’s capital capital struct structure ure .It suffer sufferss from from certai certain n limita limitatio tions ns and doesn’t doesn’t provide unambiguous guide in determining the capital structure of a firm in practice.

RATIO ANALYSIS: -

The The prim primar ary y user user of fina financ ncia iall stat statem ement entss are are eval evalua uati ting ng part part perf perfor orma mance nce and 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  evaluati evaluating ng such such financi financial al statem statement ent is differ different ent form form person person to person person dependi depending ng 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 play thei theirr clai claims ms is best best judg judged ed by mean meanss of a thro through ugh anal analys ysis is of its its l9iq l9iqui uidi dity ty.. The The shareh sharehold olders ers and the potent potential ial investor investorss may be intere intereste sted d in the presen presentt and the future 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 management’s 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 needs of the analyst. Financial F inancial statement analysis is a part of the larger information processing system, which forms the very basis of any “decision “de cision making” process.

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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. analysis. Ratio analysis analysis involves the use of various various methods methods for calculating calculating and interpreti interpreting ng 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 highli highlight ght the deviati deviations ons made made from from those those standa standards rds/no /norms rms.. In other other words, words, ratios 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 unit’s 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 o verall 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 revelations about the causes of variations. variations. Some times large variations variations are due to unreliability of financial data or inaccuracies contained there in therefore before taking any decision the basis of ration analysis, their reliability must be ensured.

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Simila Similarly rly,, while while doing doing the interinter-fir firm m compar compariso ison, n, the variat variation ionss may be due to different different technologies technologies or degree of risk in those units or items to be examined 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 relati relations onship hip variou variouss pairs pairs of items items derived derived form form the financi financial al state statemen ments ts of a busine business. ss. Abso Absolu lute te figur figures es do not conve convey y much much tangi tangibl blee mean meanin ing g and and is not not meani meaningf ngful ul while 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 analyse the long-term solvency or stabil stability ity of a parti particula cularr busine business ss unit. unit. The short short-te -term rm credit creditors ors are interes interested ted in curren currentt 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. Abilit Ability y to repay repay the the princi principal pal when when due, due, and 2. Regu Regular lar payment payment of inte intere rest st,, ther theree are are thus thus two two diff differ eren entt but but mutu mutual ally ly depen dependen dentt and interrelated types of leverage ratio such as:

3. Ratios based on the relationship between borrowed funds and owner’s capital, computed form balance sheet eg: debt-equity ratio, dividend coverage ratio, debt service coverage ratio etc.,

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THE CAPITAL STRUCTURE CONTROVERSY:

The value of the firm depends upon its expected earnings stream stream and the rate used to discount this stream. The rate used to discount earnings stream it’s the firm’s 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 firm’s securities will be higher than at other degrees of leverage?

The existence of an optimum optimum capital structure 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.

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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 leverag e.

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 o f 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 o f 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.

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.

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Capital Structure Matters: 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 increasing the proportion proportion of debt in the capital structure. 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, k c  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. k d
The first first assump assumptio tion n implie impliess that, that, if k e  and k d are are cons consta tant nt incr increas eased ed use use by debt debt by magnifying magnifying the shareholder shareholderss earnings 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. 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 k o 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 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.

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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 firm’s 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.

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

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equivalently the average cost of capital) of the firm. Arguing in a similar vein, Modigliani and Miller, Miller, in a seminal seminal contribution contribution made in 1958, forcefully forcefully advanced advanced the proposition proposition that the cost of capital of a firm is independent of its capital structure.

COST OF CAPITAL AND VALUATION  APPROACH

The The cost cost of a sour source ce of finan finance ce is the the mini minimu mum m retu return rn expec expecte ted d by its 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 preference share capital 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:

One of the features features of a sound sound capita capitall struct structure ure is conser conservat vatism ism 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 firm’s ability to gener generat atee cash cash to meet meet thes thesee fixed fixed char charges ges.. In prac practi tice ce,, the the ques questi tion on of the the optim optimum um (appropriate) debt –equity mix boils down to the fir’s 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.

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The fixed fixed charges charges of a company company includ includee payment payment of intere interest, st, preferenc preferencee 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 (working capital) management is poor. We have examples examples of companies 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

EPS is one of the mostly widely used measures of the company’s 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.

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EPS VARIABILITY AND FINANCIAL RISK: -

The EPS variability resulting form the use of leverage is called financial risk. Financial risk is added with the use of debt because of 

(a) The increased increased variability variability in the shareholders shareholders earnings earnings and (b) (b)

The The thr threa eatt of of ins insol olve venc ncy. y. A fir firm m can can avid avid fina financ ncia iall ris risk k alt altog oget ethe herr if if it it doe doess not not empl employ oy 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 criterion does not consider the long-term long-term perspectives perspectives of financing financing decisions. 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 firm’s 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 alternative financial plans, management should start with the evaluation of the impact of each alternative on near-term EPS. But management’s 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 the long long run run but has an adver adverse se impac impactt in nearnear-te term rm EPS, EPS, and and the the reas reason onss must must be communicated to investors. A careful communication to market will be helpful in reducing the misunderstanding between management and Investors.

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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:

Shareholder’s 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…

1.

•

Capital Reserve

•

Share Premium Account

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General Reserve

•

Contingency Reserve

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Debentures Redemption Reserve

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Investment Allowance Reserve

•

Profit & Loss Account

The The profi profitt level levels, s, comp compan any y divid dividen end d polic policy y and grow growth th plan planss deter determi mine ned. d. The The amoun amounts ts tran transf sfer erre red d from from P&L P&L A/c A/c to Gene Genera rall Rese Reserv rve. e. Co Cont ntin inge gency ncy Rese Reserv rvee and and Inves Investm tmen entt Allowance Reserve.

2.

The The Inve Invest stme ment nt All Allow owanc ancee Rese Reserv rvee is cre creat ated ed for for repl replace aceme ment nt of long long ter term m leas leased ed asse assets ts and this reserve was removed from books because assets pertaining to such reserves ceased to exist. The account was transferred to investment allowance u tilized.

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Capital structure describes how a corporation has organized its capital—how it obtains the financial resources with which it operates its business. Businesses adopt various capital structures to meet both internal needs for capital and external requirements for returns on shareholders investments. As shown on its balance sheet, a company's capitalization is constructed from three basic blocks: 1.

standa dard rd accoun accounti ting ng defi defini niti tion on,, longlong-te term rm debt debt incl includ udes es  Long-term debt. By stan obligations that are not due to be repaid within the next 12 months. Such debt consists mostly of bonds or similar obligations, including a great variety of notes, capital lease obligations, and mortgage issues. 2. Preferred stock. This represents an equity (ownership) interest in the corporation, but one with claims ahead of the common stock, and normally with no rights to share in the increased worth of a company if it grows.

3.

This repres represent entss the underl underlying ying owners ownership hip.. On the Common Common stockho stockholde lders' rs' equity. equity. This corporation's books, it is made up of: (I) the nominal par or stated value assigned to the shares of outstanding stock; (2) the capital surplus or the amount above par value paid the company whenever it issues stock; and (3) the earned surplus (also called retained earnings), which consists of the portion of earnings a company retains after paying out dividends and similar distributions. Put another way, common stock equity is the net worth after all the liabilities (including long-term debt), as well as any preferred stock, are deducted from the total assets shown on the balance sheet. For investment analysis purposes, security analysts may use the company's market capitalization—the current market price times the number of  common shares outstanding—as a measure of common stock equity. They consider this market-based figure a more realistic valuation.

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CHAPTER-III INDUSTRY&COMPANY PROFILE

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INDUSTRY PROFILE In the most most genera generall sens sensee of the word word,, a cement  is a binder, a substance which sets and hardens independently, and can bind other materials together. The word "cement" traces to the Romans, who used the term "opus caementicium" to describe masonry which resembled concrete and was made from crushed rock with burnt lime as binder. binder. The volcanic ash and pulverized pulverized brick additives additives which were added to the burnt lime to obtain a hydraulic binder were later referred to as cementum, cimentum, c äment and cement. Cements used in construction are characterized as hydraulic or non-hydraulic. The most important use of cement is the production of mortar and concrete—the bonding of  natural or artificial aggregates to form a strong building material which is durable in the face of normal environmental effects. Concrete Concrete should not be confused confused with cement because the term cement  refers   refers only to the dry powder substance used to bind the aggregate materials of concrete. Upon the addition add ition of water and/or additives the cement mixture is referred to as concrete, especially if aggregates have been added. It is uncertain where it was first discovered that a combination of hydrated non-hydraulic lime and a pozzolan produces a hydraulic mixture (see also: Pozzolanic reaction), but concrete made from such mixtures was first used on a large scale by Roman engineers.They used both natural pozzolans (trass or pumice) and artificial pozzolans (ground brick or pottery) in these concret concretes. es. Many Many excell excellent ent example exampless of struct structures ures made made from from these these concret concretes es are still still standing, notably the huge monolithic dome of the Pantheon in Rome and the massive Baths of Caracalla. The vast system of Roman aqueducts also made extensive use of hydraulic cement cement.. The use of struct structura urall concre concrete te disappe disappeare ared d in mediev medieval al Europe, Europe, althoug although h weak  weak  pozzolanic concretes continued to be used as a core fill in stone walls and columns. Modern cement Modern hydraulic cements began to be developed from the start of the Industrial Revolution (around 1800), driven by three main needs: Hydraulic renders for finishing brick buildings in wet climates Hydraulic mortars for masonry construction of harbor works etc, in contact with sea water. Development of strong concretes.

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In Britain particularly, good quality building stone became ever more expensive during a period of rapid growth, and it became a common practice to construct prestige buildings from the new industrial bricks, and to finish them with a stucco to imitate stone. Hydraulic limes were favored for this, but the need for a fast set time encouraged the development of new cements. Most famous was Parker's "Roman cement." This was dev eloped by James Parker in the 1780s, and finally patented in 1796. It was, in fact, nothing like any material used by the Romans, but was a "Natural cement" made by burning septaria - nodules that are found in certain clay deposits, and that contain both clay minerals and calcium carbonate. The burnt nodules were ground to a fine powder. This product, made into a mortar with sand, set in 5– 15 minute minutes. s. The succes successs of "Roman "Roman Cement Cement"" led other other manufa manufactu cturer rerss to develo develop p rival rival products by burning artificial mixtures of clay and cha lk. John Smeaton made an important contribution to the development of cements when he was planning the construction of the third Eddystone Lighthouse (1755-9) in the English Channel. He needed a hydraulic mortar that would set and develop some strength in the twelve hour period between successive high tides. He performed an exhaustive market research on the available hydraulic limes, visiting their production sites, and noted that the "hydraulicity" of  the lime was directly related to the clay content of the limestone from which it was made. Smeaton was a civil engineer by profession, and took the idea no further. Apparently unaware of Smeaton's work, the same principle was identified by Louis Vicat in the first decade of the nineteenth nineteenth century. Vicat went on to devise devise a method of combining combining chalk and clay into an intimate mixture, and, burning this, produced an "artificial cement" in 1817. James Frost,orking in Britain, produced what he called "British cement" in a similar manner around the same time, but did not obtain a patent until 1822. In 1824, Joseph Aspdin patented a similar material, which he called Portland cement, because the render made from it was in color similar to the prestigious Portland stone. All the above products could not compete with lime/pozzolan concretes because of fastsetting (giving insufficient time for placement) and low early strengths (requiring a delay of  many weeks before formwork could be removed). Hydraulic limes, "natural" cements and "artificial" cements all rely upon their belite conten t for strength development. Belite develops strength slowly. Because they were burned at temperatures below 1250 °C, they contained no alite, which is responsible for early strength in modern cements. The first cement to

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consistently contain alite was made by Joseph Aspdin's son William in the early 1840s. This was what we call today "modern" Portland cement. Because of the air of mystery with which William Aspdin surrounded his product, others (e.g. Vicat and I C Johnson) have claimed precedence in this invention, but recent analysis of both his concrete and raw cement have shown that William Aspdin's product made at Northfleet, Kent was a true alite-based cement. However, Aspdin's methods were "rule-of-thumb": Vicat is responsible for establishing the chemical basis of these cements, and Johnson established the importance of sintering the mix in the kiln. William Aspdin's innovation was counter-intuitive for manufacturers of "artificial cements", because they required more lime in the mix (a problem for his father), because they required a much higher kiln temperature (and therefore more fuel) and because the resulting clinker was very hard and rapidly wore down the millstones which were the only available grinding technology of the time. Manufacturing costs were therefore considerably higher, but the product set reasonably slowly and developed strength quickly, thus opening up a market for use in concrete. The use of concrete in construction grew rapidly from 1850 onwards, and was soon the dominant use for cements. Thus Portland cement began its predominant role. it is made from water and sand Types of modern cement Portland cement Cement is made by heating limestone (calcium carbonate), with small quantities of other materials (such as clay) to 1450 °C in a kiln, in a process known as calcination, whereby a molecule of carbon dioxide is liberated from the calcium carbonate to form calcium oxide, or lime, which is then blended with the other materials that have been included in the mix . The resulting hard substance, called 'clinker', is then ground with a small amount of gypsum into a powder to make 'Ordinary Portland Cement', the most commonly used type of cement (often referred to as OPC). Portland cement is a basic ingredient of concrete, mortar and most non-speciality grout. The most common use for Portland cement is in the production of concrete. Concrete is a composite material consisting of aggregate (gravel and sand), cement, and water. As a construction material, concrete can be cast in almost any shape desired, and once hardened, can become a structural (load bearing) element. Portland cement may be gray or white.

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Portland cement blends These are often available as inter-ground mixtures from cement manufacturers, but similar formulations are often also mixed from the ground components co mponents at the concrete mixing plant. 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 resistance increases and heat evolution diminishes. Used as an economic alternative to Portland sulfate-resisting and low-heat cements. Portla Portland nd flyash flyash cement 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 Portland pozzolan cement includes fly ash cement, since fly ash is a pozzolan, but also

includ includes es cement cementss made from from other other natural natural or artifi artificia ciall pozzol pozzolans ans.. In countr countries ies where 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 cemen t 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 entrai entrainer ners, s, retard retarders ers,, waterp waterproo roofer ferss and colori coloring ng agents. agents. They They are formul formulate ated d to yield 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.

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White blended cements may be made using white clinker and white supplementary materials

such as high-purity metakaolin. Colore Colored d cement cementss 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 have the the same same physi physica call chara charact cter eris isti tics cs as norm normal al cement cement but with with 50% less less ceme cement nt particularly due to their increased surface area for the chemical reaction. Even with intensive grinding they can use up to 50% less energy to fabricate than ordinary Portland cements. Non-Portland hydraulic cements Mixtures of ground pozzolan and lime are the cements used by the Pozzolan-lime cements. Mixtures 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. Supersulfated 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, age nts, including sulfate. Calciu Calcium m alumin aluminate ate cement cementss are hydraulic cements made primarily from limestone and

bauxite. The active ingredients are monocalcium aluminate 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 aluminate h ydrates. They are well-adapted 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

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expansi expansive ve cement cements, s, in ultraultra-hig high h early early strengt strength h cements cements,, and in "low-e "low-ener nergy" gy" cement cements. s. 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 tonnes 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 endothermically decarbonated) in the mix. In addition, the lower limestone content and lower fuel consumption leads to a CO 2 emissi emission on around around half half that associat associated ed with with Portland clinker. However, SO2 emissions are usually significantly higher. "Natural" "Natural" Cements Cements correspond to certain cements of the pre-Portland era, produced by

burning argillaceous limestones at moderate temperatures. The level of clay components in the limestone (around 30-35%) is such that large amounts of belite (the low-early strength, high-late strength mineral in Portland cement) are formed without the formation of excessive amounts of free lime. As with any natural material, such cements have highly variable properties. Geopolymer Geopolymer cements cements are made from mixtures of water-soluble alkali metal silicates

and aluminosilicate mineral powders such as fly ash and metakaolin.

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Cement Industry in India Indi Indiaa is the the worl world' d'ss seco second nd larg larges estt prod produc ucer er of ceme cement nt acco accord rdin ing g to the the Ceme Cement nt Manufacturers’ Association. During September 2010, the cement production touched 12.54 million tonnes (MT), while the cement despatches quantity was 12.56 MT during the month. The total cement production during April-September 2010-11 reached 81.54 MT as compared to 77.22 MT over the corresponding period last fiscal. Further, cement despatches also witnessed an upsurge from 76.50 MT during April-September 2009-10 to 81.10 8 1.10 MT during April-September 2010-11. Moreover, the government's continued thrust on infrastructure will help the key building material to maintain an annual growth of 9-10 per cent in 2010, according to India's largest cement company, ACC. In January 2010, rating agency Fitch predicted that the country will add about 50 million tonne cement capacity in 2010, taking the total to around 300 million tonne. Furt Further her,, spea speaki king ng at the the Gree Green n Ceme Cement ntech ech 2010, 2010, a semi seminar nar joint jointly ly orga organi nise sed d by the the Confed Confedera eratio tion n of Indian Indian Indust Industry ry (CII) (CII) and the Cement Cement Manufa Manufactu cturer rer's 's Associ Associati ation on in Hyderabad in May 2010, G Jayaraman, Executive President, Birla Corporation Ltd, said that in 2009, 40 MT of capacity was added and he expects a similar trend to follow this year. New Investments

Cement and gypsum products have received cumulative foreign direct investment (FDI) of  US$ 1,971.79 million between April 2000 and September 2010, according to the Department of Industrial Policy and Promotion (DIPP).

•

Dalmia Bharat Enterprises plans to invest US$ 554.32 million to set up two greenfield cement plants in Karnataka and Meghalaya.

•

Bharathi Cement plans to double its production capacity by the end of the current financial year by expanding its plant in Andhra Pradesh, with an investment of US$ 149.97 million.

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Madr Madras as Ceme Cement ntss Ltd Ltd is plan planni ning ng to inve invest st US$ US$ 178.4 178.4 mill millio ion n to incr increa ease se the the

•

manufacturing capacity of its Ariyalur plant in Tamil Nadu to 4.5 MT from 2 MT by April 2011. My Home Home Indus Industr trie iess Limi Limite ted d (MHI (MHI), ), a 50:5 50:50 0 join jointt vent venture ure (JV) (JV) betwee between n the the

•

Hyderabad-based My Home Group and Ireland's building material major CRH Plc, plans to scale up its cement production capacity from the existing 5 million tonne per annum (mtpa) to 15 mtpa by 2016. The company would undertake this capacity expansion at a cost of US$ 1 billion. •

Shree Cement, plans to invest US$ 97.13 million this year to set up a 1.5 million MT clinker and grinding unit in Rajasthan. Moreover, in June 2010, Shree Cement signed a memorandum of understanding (MoU) with the Karnataka government to invest US$ 423.6 million for setting up a cement unit and a power plant. US$ 317.7 million will be used to set up a cement manufacturing unit with an annual capacity of 3 mtpa while the balance will be for the 100 mega watt power plant.

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Jaiprakash Associates plans to invest US$ 640 million to increase its cement capacity.

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Swiss Swiss ceme cement nt comp compan any y Holc Holcim im plan planss to inves investt US$ US$ 1 bill billio ion n in sett settin ing g up 2-3 2-3 greenfield manufacturing plants in the country in the next five years to serve the rising domestic demand. Holcim is present in the country through ACC and Ambuja Cements and holds around 46 per cent stake in each company. While ACC operates 16 cement plants, Ambuja Cements controls five plants in India. The Aditya Birla group is the largest cementmaking group by capacity in the country and controls Grasim Industries and Ultratech Cement. Government Initiatives

The cement industry is pushing for increased use of cement in highway and road construction. The Ministry of Road Transport and Highways has planned to invest US$ 354 billion in road infrastructure by 2012. Housing, infrastructure projects and the nascent trend of concrete roads would continue to accelerate the consumption of cement. Increased infrastructure spending has been a key focus area. In the Union Budget 2010-11, US$ 37.4 billion has been provided for infrastructure development.

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The government has also increased budgetary budgetary allocation allocation for roads by 13 per cent to US$ 4.3 billion. Gujarat plans to treble its cement production capacity in 3-5 years. Proposals have been invited from cement companies such as ACC, ABG, Ambuja Cement, Emami, Indiabulls, Adani group, Ultratech and L&T and the state hopes to raise its capacity from 20 million tonnes per annum to 70 million tonne. The state will host the biennial Vibrant Gujarat Global Summit in January 2011 and expects to witness investment proposals worth US$ 13.2 billion in the cement sector. Exchange rate used: 1 USD = 45.42 INR (as of December 2010) The cement industry is one of the vital industries for economic development in a country. The total utilization of cement in a year is used as an indicator of economic growth.

Cement is a necessary constituent of infrastructure development and a key raw material for the construction industry, especially in the government’s infrastructure development plans in the context of the nation’s socioeconomic development.

Prior To Independence

The first endeavor to manufacture cement dates back to 1889 when a Calcutta based company endeavored to manufacture cement from Argillaceous (kankar).

But the first endeavor to manufacture manufacture cement in an organized organized way commenced commenced in Madras. Madras. South India Industries Limited began manufacture of Portland ce ment in 1904.But the effort did not succeed and the company had to halt production.

Finally it was in 1914 that the first licensed cement manufacturing unit was set up by India Cement Company Ltd at Porbandar, Gujarat with an available capacity of 10,000 tons and production of 1000 installed. The First World War gave the impetus to the cement industry still in its initial stages. The following decade saw tremendous progress in terms of  manufacturing units, installed capacity and production. This ph ase is also referred to as the

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Nascent Stage of Indian Cement Industry. During During the earlier years, production production of cement exceeded the demand. Society had a biased opinion against the cement manufactured in India, which further led to reduction in demand. The governm government ent interve intervened ned by giving giving protec protectio tion n to the Indust Industry ry and by encoura encouragin ging g cooperation among the manufacturers.

In 1927, the Concrete Association of India was formed with the twin goals of creating a positive awareness among the public of the utility of cement and to propagate cement consumption.

After Independence

The growth rate of cement was slow around the period after independence due to various fact factor orss like like low low pric prices es,, slow slow growt growth h in addit additio iona nall capac capacit ity y and and risi rising ng cost cost.. The The governm government ent interv intervene ened d severa severall times times to boost boost the indust industry, ry, by increa increasin sing g prices prices and providing financial incentives. But it had little impact on the industry.

In 1956, the price and distribution control system was set up to ensure fair prices for both the manufacturers and consumers across the country and to reduce regional imbalances and reach self sufficiency.

Period Of Restriction (1969-1982)

The cement industry in India was severely restrained by the government during this period. Government hold over the industry was through both direct and indirect means. Government intervened directly by exercising authority over production, capacity and distribution of  cement and it intervened indirectly through price p rice control.

In 1977 the government authorized higher prices for cement manufactured by new units or through capacity increase in existing units. But still the growth rate was below par.

In 1979 the government introduced a three tier price system. Prices were different for cement produced in low, medium and high cost plants.

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However the price control did not have the desired effect. Rise in input cost, c ost, reduced profit margins meant the manufacturers could not allocate fund s for increase in capacity.

Partial Control (1982-1989)

To give impetus to the cement industry, the Government of India introduced a quota system in 1982. 1982.A A quot quotaa of 66.6 66.60% 0% was was impo impose sed d for for sale saless to Gove Govern rnme ment nt and sm smal alll real real esta estate te developers. For new units and sick units a lower quota at 50% was effected. The remaining 33.40% was allowed to be sold in the open market.

These changes had a desired effect on the industry. Profitability of the manufacturers increased substantially, but the rising input cost was a cause for concern.

After Liberalization

In 1989 the cement industry was given complete freedom, to gear it up to meet the challenges of free market competition due to the impending policy of liberalization. In 1991 the industry was de licensed.

This resulted in an accelerated growth for the industry and availability of state of the art technology for modernization. Most of the major players invested heavily for capacity expansion.

To maximize the opportunity available in the form of global markets, the industry laid greater focus on exports. The role of the government has been extremely crucial in the growth of the industry. Future Trends

The cement industry is expected to grow steadily in 2009-2010 and increase capacity

•

by another 50 million tons in spite of the recession and decrease in demand from the housing sector.

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The industry experts project the sector to grow by 9 to 10% for the current financial year provided India's GDP grows at 7%.

•

India ranks second in cement production after China.

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The major Indian cement companies are Associated Cement Company Ltd (ACC), Grasim Industries Ltd, Ambuja Cements Ltd, J.K Cement Ltd and Madras Ce ment Ltd.

•

The major players have all made investments to increase the production capacity in the past few months, heralding a positive outlook for the industry.

•

The housing sector accounts for 50% of the demand for cement and this trend is expected to continue in the near future. An increased outflow in infrastructure sector, by the government as well as private builders, has raised a significant demand of cement in India. It is the key raw material in construction industry. Also, it has highly influenced those bigger companies to participate in the growing sector. At least 125 plants set up by the big companies in India with about 300 other small scale cement manufacturers, manufacturers, to fulfill the growing demand of cement. Being one of the vital industries, the cement industry contributes to the nation's socioeconomic development. The sum total utilization of cement in a year indicates the country's economic growth. Ceme Cement nt plant plant was firs firstt set set up in Calc Calcut utta ta,, in 1889. 1889. At that that time time,, the the ceme cement nt used used to manufacture from Argillaceous. In 1904, the first organized set up to manufacture cement was commenced in Madras, which was named South India Industries Limited. Again in 1914, another cement manufacturing unit was set up in Porbandar, Gujarat, but this time it was licensed. In the early years of that era, the demand for the cement tremendously exceeded but only after few years, the industry faced a severe downfall. To overcome from this the worsening situation, the Concrete Association of India was founded in 1927. The organization has two prime goals, one was to create awareness about utility of cement and another was to encourage cement utilization. Even after the independence, the growth of the cement industry was too gradual. In the year 1956, a Distribution Control System was established with an objective to provide Indian manufacturers and consumers self sufficiency. Indian government then introduced a quota 45

system to provide an impetus to this industry, in which 66% of the sales was imposed to government or small real estate developers. After the implementation of quota, the cement industry tasted a sudden growth and profitability in India. In 1991, the government delicensed the cement industry. The growth of the industry accelerated forthwith and majority of  the industrialists invested heavily in the industry with the awarded freedom. The industry started focusing on export also to double the opportunity available for it in global markets. Today, the cement manufacturers manufacturers in India have transform transformed ed into leading Indian exporters of  cement across the world. The demand of cement in year 2009-2010 is expected to increase by 50 million tons despite of  the recession and decline in demand dema nd of housing sector. Against India's GDP growth of 7%, 7 %, the experts have estimated the cement sector to grow by 9 to 10 % in the current financial year. Major Indian cement manufacturers and exporters have all made huge investments in the last few months to increase their production capability. This heralds an optimistic outlook for cement industry. The housing sector in India accounts for 50 % of the cement's demand. And the demand is expected to continue. With the constant effort made by cement manufacturers and exporters, India has become the second largest cement producer in the world. Madras Cement Cement Ltd., Ltd., Associ Associate ated d Cement Cement Company Company Ltd (ACC), (ACC), Ambuja Ambuja Cement Cementss Ltd, Ltd, Grasim Grasim Industries Ltd, and J.K Cement Ltd. are among few renowned names of the major Indian cement companies.

46

COMPANY PROFILE

47

COMPANY PROFILE ULTRATECH CEMENT:

UltraTech Cement Limited has an annual capacity of 18.2 million tonnes. It manufactures and market marketss Ordina Ordinary ry Portla Portland nd Cement Cement,, Portla Portland nd Blast Blast Furnac Furnacee Slag Slag Cement Cement and Portla Portland nd Pozzalana Cement. It also manufactures ready mix concrete (RMC). UltraTech Cement Limited has five integrated plants, six grinding units and three terminals — two in India and one in Sri Lanka. UltraT UltraTech ech Cement Cement is the countr country’s y’s larges largestt exporte exporterr of cement cement clinker clinker.. The export export markets span countries around the Indian Ocean, Africa, Europe and the Middle East. UltraTech’s subsidiaries are Dakshin Cement Limited and UltraTech Ceylinco (P) Limited. The roots of the Aditya Birla Group date back to the 19th century in the picturesque picturesque town of  Pilani, set amidst the Rajasthan desert. It was here that Seth Shiv Narayan Birla started trading in cotton, laying the foundation for the House of Birlas. Through India's arduous times of the 1850s, the Birla business expanded rapidly. In the early part of the 20th century, our Group's founding father, Ghanshyamdas Birla, set up industries in critical sectors such as textiles and fibre, aluminium, cement and chemicals. As a close confidante of Mahatma Gandhi, he played an active role in the Indian freedom struggle. He represented India at the first and second round-table conference in London, along with Gandhiji. It was at "Birla House" in Delhi that the luminaries of the Indian freedom struggle often met to plot the downfall of the British Raj. Ghanshyamdas Birla found no contradiction in pursuing business goals with the dedication of  a saint, saint, emergi emerging ng as one of the foremo foremost st indust industria rialis lists ts of pre-in pre-indepe dependen ndence ce India. India. The principles by which he lived were soaked up by his grandson, Aditya Vikram Birla, our Group's legendary leader.

48

Aditya Vikram Birla: putting India on the world map

A formidable force in Indian industry, Mr. Aditya Birla dared to dream of setting up a global business empire at the age of 24. 24 . He was the first to put Indian business on the world map, as far back as 1969, long before globalisation became a buzzword in India. In the then vibrant and free market South East Asian countries, he ventured to set up worldclass production bases. He had foreseen the winds of change and staked the future of his business on a competitive, free market driven economy order. He put Indian business on the globe, 22 years before economic liberalisation was formally introduced by the former Prime Minister, Mr. Narasimha Rao and the former Union Finance Minister, Dr. Manmohan Singh. Singh. He set up 19 compani companies es outsid outsidee India, India, in Thaila Thailand, nd, Malays Malaysia, ia, Indones Indonesia, ia, the Philippines and Egypt. Interestingly, for Mr. Aditya Birla, globalisation meant more than just geographic reach. He believed that a business could be global even whilst being based in India. Therefore, back in his home-territory, he drove single-mindedly to put together the building blocks to make our Indian business a global force. Under his stewardship, his companies rose to be the world's largest producer of viscose staple fibre, the largest refiner of palm oil, the third largest producer of insulators and the sixth largest producer of carbon black. In India, they attained the status of the largest single producer of viscose filament yarn, apart from being a producer of cement, grey cement and rayon grade pulp. The Group is also the largest producer of aluminium in the private sector, the lowest first cost producers in the world and the only producer of linen in the textile industry in India. At the time of his untimely demise, the Group's revenues crossed Rs.8,000 crore globally, with with asse assets ts of over over Rs.9 Rs.9,00 ,000 0 cror crore, e, comp compri risi sing ng of 55 bench benchma mark rk qual qualit ity y plant plants, s, an employee strength of 75,000 and a shareholder community of 600,000. Most importantly, his companies earned respect and admiration of the people, as one of  India's finest business houses, and the first Indian International Group globally. Through this outstanding record of enterprise, he helped create enormous wealth for the nation, and respect

49

for Indian entrepreneurship in South East Asia. In his time, his success was unmatched by any other industrialist in India. That India attains respectable rank among the developed nations, was a dream he forever cherished. He was proud of India and took equal pride in being an Indian. Under the leadership of our Chairman, Mr. Kumar Mangalam Birla, the Group has sustained and established a leadership position in its key businesses through continuous value-creation. Spearheaded by Grasim, Hindalco, Aditya Birla Nuvo, Indo Gulf Fertilisers and companies in Thailand, Malaysia, Indonesia, the Philippines and Egypt, the Aditya Birla Group is a leader in a swathe of products — viscose staple fibre, aluminium, cement, copper, carbon black, palm oil, insulators, garments. And with successful forays into financial services, telecom, software and BPO, the Group is today one of Asia's most diversified business groups. Board of Directors :

Mr. Kumar Mangalam Birla, Chairman

:

Mrs. Rajashree Birla

:

Mr. R. C. Bhargava

:

Mr. G. M. Dave

:

Mr. N. J. Jhaveri

:

Mr. S. B. Mathur

:

Mr. V. T. Moorthy

:

Mr. O. P. Puranmalka

:

Mr. S. Rajgopal

:

Mr. D. D. Rathi

:

Mr. S. Misra, Managing Director

50

Executive President & Chief Financial Officer :: Mr. K. C. Birla

Chief Manufacturing Officer :: R.K. Shah

Chief Marketing Officer :: Mr. O. P. Puranmalka

Company Secretary :: Mr. S. K. Chatterjee

Our vision "To actively contribute to the social and economic development of the communities in which we operate. In so doing, build a better, sustainable way of life for the weaker sections of society and raise the country's human development index."  — Mrs. Rajashree Birla, Chairperson,

The Aditya Birla Centre for Community Initiatives and Rural DevelopmentAwards won Year

Award

2010-2011

Subh Karan Sarawagi Environment Award

2010-2011

Business Wo World FI FICCI-SEDF CS CSR Aw Award

201 0

Greentech Environment Excellence Gold Award

201 0

IMC Ramkrishna Bajaj National Quality Award

201 0

Asian CSR Award

2009-2010

National Aw Award fo for Pr Prevention of of Po Pollution

200909-201 2010

Rajiv Ga Gandh ndhi En Envir vironment Award fo for Cl Clean Te Technolo ology

2009-2010

State Level Environment Award (Plant)

51

Making a difference

Before Corporate Social Responsibility found a place in corporate lexion, it was already textured into our Group's value systems. As early as the 1940s, our founding father Shri G.D Birla espoused the trusteeship concept of management. Simply stated, this entails that the wealth that one generates and holds is to be held as in a trust for our multiple stakeholders. With regard to CSR, this means investing part of our profits beyond business, for the larger good of society. While carrying forward this philosophy, his grandson, Aditya Birla weaved in the concept of  'sustainable livelihood', which transcended cheque book philanthropy. In his view, it was unwise to keep on giving endlessly. Instead, he felt that channelising resources to ensure that people have the wherewithal to make both ends meet would be more productive. He would say, "Give a hungry man fish for a day, he will eat it and the next day, he would be hungry again. Instead if you taught him how to fish, he would be able to feed himself and his family for a lifetime." Taking these practices forward, our chairman Mr. Kumar Mangalam Birla institutionalised the concept of triple bottom line accountability represented by economic success, environmental responsibility and social commitment. In a holistic way thus, the interests of all the stakeholders have been textured into our Group's fabric. The footprint of our social work today straddles over 3,700 villages, reaching out to more than 7 million people annually. Our community work is a way of telling the people among whom we operate that We Care. Our strategy

Our projects are carried out under the aegis of the "Aditya Birla Centre for Community Initiatives and Rural Development", led by Mrs. Rajashree Birla. The Centre provides the strategic strategic direction, direction, and the thrust thrust areas for our work ensuring performance performance management as well.

52

Our focus is on the all-round development of the communities around our plants located most mostly ly in dist distant ant rura rurall area areass and trib tribal al belt belts. s. All All our our Group Group comp compani anies es —- Gras Grasim im,, Hindalco, Aditya Birla Nuvo, Indo Gulf and UltraTech have Rural Development Cells which are the implementation bodies. Projects are planned after a participatory need assessment of the communities around the plants. Each project has a one-year and a three-year rolling plan, with milestones and measurable targets. The objective is to phase out our presence over a period of time and hand over the reins of further development to the people. This also enables us to widen our reach. Along Along with with intern internal al perfor performan mance ce assess assessmen mentt mechani mechanisms sms,, our projec projects ts are audited audited by reputed external agencies, who measure it on qualitative and quantitative parameters, helping us gauge the effectiveness and providing excellent inputs. Our partners partners in development development are government government bodies, district district authorities authorities,, village village panchayats panchayats and the end beneficiaries -- the villagers. The Government has, in their 5-year plans, special funds earmarked for human development and we recourse to many of these. At the same time, we network and collaborate with like-minded bilateral and unilateral agencies to share ideas, draw from each other's experiences, and ensure that efforts are not duplicated. At anot another her leve level, l, this this prov provid ides es a plat platfo form rm for for advoc advocac acy. y. Some Some of the the agenc agencie iess we have have collaborated with are UNFPA, SIFSA, CARE India, Habitat for Humanity International, Unicef and the World Bank. Our focus areas

Our rural development activities span five key areas and our single-minded goal here is to help build model villages that can stand on their own feet. Our focus areas are healthcare, education, sustainable livelihood, infrastructure and espousing social causes. The name “Aditya Birla” evokes all that is positive in business and in life. It exemplifies integrity, quality, performance, perfection and above all character.

53

Our Our logo logo is the the symb symbol olic ic refl reflec ecti tion on of thes thesee trai traits ts.. It is the the cornerstone of our corporate identity. It helps us leverage the unique Aditya Birla brand and endows us with a distinctive visual image.

Depicted in vibrant, earthy colours, it is very arresting and shows the sun rising over two circles. An inner circle symbolising the internal universe of the Aditya Birla Group, an outer circle symbolising the external un iverse, and a dynamic meeting of rays converging and diverging between the two.

Through its wide usage, we create a consistent, impact-oriented Group image. This undoubtedly enhances our profile among our internal and external stakeholders.

Our corporate logo thus serves as an umbrella for our Group. It signals the common values and beliefs that guide our behaviour in all our entrepreneurial activities. It embeds a sense of  pride, unity and belonging in all of our 130,000 colleagues spanning 25 countries and 30 nationalities across the globe. Our logo is our best calling card that opens the gateway to the world.

Group companies :

Grasim Industries Ltd.

:

Hindalco Industries Ltd.

:

Aditya Birla Nuvo Ltd.

:

UltraTech Cement Ltd.

Indian companies :: Aditya Birla Minacs IT Services Ltd.

54

:

Aditya Birla Minacs Worldwide Limited

:

Essel Mining & Industries Ltd

:

Idea Cellular Ltd.

:

Aditya Birla Insulators

:

Aditya Birla Retail Limited

:

Aditya Birla Chemicals (India) Limited

International companies Thailand :

Thai Rayon

:

Indo Thai Synthetics

:

Thai Acrylic Fibre

:

Thai Carbon Black

:

Aditya Birla Chemicals (Thailand) Ltd.

:

Thai Peroxide

Philippines :

Indo Phil Group of companies

:

Pan Century Surfactants Inc.

Indonesia :

PT Indo Bharat Rayon

:

PT Elegant Textile Industry

:

PT Sunrise Bumi Textiles

:

PT Indo Liberty Textiles

:

PT Indo Raya Kimia

Egypt :

Alexandria Carbon Black Company S.A.E

:

Alexandria Fiber Company S.A.E

55

China :

Liaoning Birla Carbon

:

Birla Jingwei Fibres Company Limited

:

Aditya Birla Grasun Chemicals (Fangchenggang) Ltd.

Canada :: A.V. Group Australia :: Aditya Birla Minerals Ltd. Laos :: Birla Laos Pulp & Plantations Company Limited North and South America, Europe and Asia :: Novelis Inc. Singapore :: Swiss Singapore Overseas Enterprises Pte Ltd. (SSOE) Joint ventures :

Birla Sun Life Insurance Company

:

Birla Sun Life Asset Management Company

:

Aditya Birla Money Mart Limited

:

Tanfac Industries Limited

UltraTech is India's largest exporter of cement clinker. The company's production facilities are spread across eleven integrated plants, one white cement plant, one clinkerisation plant in UAE, fifteen grinding units, and five terminals — four in India and one in Sri Lanka. Most of the plants have ISO 9001, ISO 14001 and OHSAS 18001 certification. In addition, two plants have received ISO 27001 certification and four have received SA 8000 certification. The process is currently underway for the remaining plants. The company exports over 2.5 million tonnes per annum, which is about 30 per cent of the country's total exports. The export market

56

comprises of countries around the Indian Ocean, Africa, Europe and the Middle East. Export is a thrust area in the company's strategy for growth. UltraTech's products include Ordinary Portland cement, Portland Pozzolana cement and Portland blast furnace slag cement. •

Ordinary Portland cement

•

Portland blast furnace slag cement

•

Portland Pozzolana cement

•

Cement to European and Sri Lankan norms Ordinary Portland cement

Ordi Ordina nary ry port portla land nd ceme cement nt is the the most most comm common only ly used used ceme cement nt for for a wide wide rang rangee of  applications. These applications cover dry-lean mixes, general-purpose ready-mixes, and even high strength pre-cast and pre-stressed concrete.

Portland blast furnace slag cement

Portland blast-furnace slag cement contains up to 70 per cent of finely ground, granulated blast-furnace slag, a nonmetallic product consisting essentially of silicates and aluminosilicates of calcium. Slag brings with it the advantage of the energy invested in the slag making. Grinding slag for cement replacement takes only 25 per cent of the energy needed to manufacture portland cement. Using slag cement to replace a portion of portland cement in a concrete mixture is a useful method to make concrete better and more consistent. Portland blas blastt-fu furn rnac acee slag slag ceme cement nt has has a ligh lighte terr colo colour ur,, bett better er concr concret etee work workab abil ilit ity, y, easi easier er finish finishabi abilit lity, y, higher higher compre compressi ssive ve and flexur flexural al strengt strength, h, lower lower permea permeabil bility ity,, improv improved ed resistance to aggressive chemicals and more consistent plastic and hardened consistency.

Portland Pozzolana cement

Portland pozzolana cement is ordinary portland cement blended with pozzolanic materials (power-station fly ash, burnt clays, ash from burnt plant material or silicious earths), either together or separately. Portland clinker is ground with gypsum and pozzolanic materials which, though they do not have cementing properties in themselves, combine chemically with

57

portland cement in the presence of water to form extra strong cementing material which resists resists wet cracking, thermal cracking and has a high degree of cohesion cohesion and workabilit workability y in concrete and mortar. "As "As a Grou Group p we have have alwa always ys opera operate ted d and and cont contin inue ue to operat operatee our our busin business esses es as Trustees with a deep rooted obligation to synergise growth with responsibility."   — Mr Kumar Mangalam Birla, Chairman, Aditya Birla Group

The cement industry relies heavily on natural resources to fuel its operations. As these dwindle, the imperative is clear — alternative sources of energy have to be sought out o ut and the use use of exist existin ing g reso resour urce cess has has to be reduc reduced ed,, or elim elimin inat ated ed alto altoget gethe her. r. Only Only then then can can sustainable business be carried out, and a corporate can truly say it is contributing to the preservation of the environment. UltraTech takes its responsibility to conserve the environment very seriously, and its ecofriendly approach is evident across all spheres of its operations. Its major thrust has been to identify alternatives to achieve set objectives and thereby reduce its carbon footprint. These are done through: :

Waste management

:

Energy management

:

Water conservation

:

Biodiversity management

:

Afforestation

:

Reduction in emissions

Importantl Importantly, y, UltraTech has set a target of 2.96 per cent reduction in CO2 emission intensity, at a rate of 0.5 per cent annually, up to 2015-16, with 2009-10 as the baseline year. This will also include CO2  emissions from the recently acquired ETA Star Cement and upcoming projects.

58

Our strategy

Our projects are carried out under the aegis of the "Aditya Birla Centre for Community Initiatives and Rural Development", led by Mrs. Rajashree Birla. The Centre provides the strategic strategic direction, direction, and the thrust thrust areas for our work ensuring performance performance management as well.

Our focus is on the all-round development of the communities around our plants located most mostly ly in dist distant ant rura rurall area areass and trib tribal al belt belts. s. All All our our Group Group comp compani anies es —- Gras Grasim im,, Hindalco, Aditya Birla Nuvo and UltraTech have Rural Development Cells which are the implementation bodies. Projects are planned after a participatory need assessment of the communities around the plants. Each project has a one-year and a three-year rolling plan, with milestones and measurable targets. The objective is to phase out our presence over a period of time and hand over the reins of further development to the people. This also enables us to widen our reach. Along Along with with intern internal al perfor performan mance ce assess assessmen mentt mechani mechanisms sms,, our projec projects ts are audited audited by reputed external agencies, who measure it on qualitative and quantitative parameters, helping us gauge the effectiveness and providing excellent inputs. Our partners partners in development development are government government bodies, district district authorities authorities,, village village panchayats panchayats and the end beneficiaries — the villagers. The Government has, in their 5-year plans, special funds earmarked for human development and we recourse to many of these. At the same time, we network and collaborate with like-minded bilateral and unilateral agencies to share ideas, draw from each other's experiences, and ensure that efforts are not duplicated. At anot another her leve level, l, this this prov provid ides es a plat platfo form rm for for advoc advocac acy. y. Some Some of the the agenc agencie iess we have have collaborated with are UNFPA, SIFSA, CARE India, Habitat for Humanity International, Unicef and the World Bank. Our vision

"To actively contribute to the social and economic development of the communities in

59

which we operate. In so doing, build a better, sustainable way of life for the weaker sections of society and raise the country's human development index."

 — Mrs. Rajashree Birla, Chairperson,

The Aditya Birla Centre for Community Initiatives and Rural Development Making a difference

Before Corporate Social Responsibility found a place in corporate lexicon, it was already textured into our Group's value systems. As early as the 1940s, our founding father Shri G.D Birla espoused the trusteeship concept of management. Simply stated, this entails that the wealth that one generates and holds is to be held as in a trust for our multiple stakeholders. With regard to CSR, this means investing part of our profits beyond business, for the larger good of society. While carrying forward this philosophy, our legendary leader, Mr. Aditya Birla, weaved in the concept of 'sustainable livelihood', which transcended cheque book philanthropy. In his view, it was unwise to keep on giving endlessly. Instead, he felt that channelising resources to ensure that people have the wherewithal to make both ends meet would be more productive. He would say, "Give a hungry man fish for a day, he will eat it and the next day, he would be hungry again. Instead if you taught him how to fish, he would be able to feed himself and his family for a lifetime." Taking these practices forward, our chairman Mr. Kumar Mangalam Birla institutionalised the concept of triple bottom line accountability represented by economic success, environmental responsibility and social commitment. In a holistic way thus, the interests of all the stakeholders have been textured into our Group's fabric. The footprint of our social work today spans 2,500 villages in India, reaching out to seven million people annually. Our community work is a way of telling the people among whom we operate that We Care.

60

PRODUCT PROFILE ULTRA TECH CEMENTS manufactures and distributes its own main product lines of  cement .We aim to optimize production across all of our markets, providing a complete solution for customer's needs at the lowest possible cost, an approach we call strategic integration of activities. Cement is made from a mixture of 80 percent limestone and 20 percent clay. These are crushed and ground to provide the "raw meal”, a pale, flour-like powder. Heated to around 1450° C (2642°  F) in rotating kilns, the “meal” undergoes complex chemical changes and is transformed into clinker. Fine-grinding the clinker together with a small quantity of gypsum produces cement. Adding other constituents at this stage produces cements for specialized uses. QUALITY Six strong benefits that make 43, 53 Grade, Super fine, Premium and Shakti the ideal cement

•

Higher compressive strength.

•

Better soundness.

•

Lesser consumption of cement for M-20 Concrete Grade and above.

•

Faster de shuttering of formwork. Reduced construction time with a superior and wide range of cement catering to every

•

conceivable conceivable building need, ULTRA TECH CEMENTS is a formidable formidable player in the cement market. Here just a few reasons why ULTRA TECH CEMENTS chosen by millions of India. •

Ideal raw material

•

Low lime and magnesia content and high proportion of silicates.

•

Greater fineness.

61

CHAPTER-IV DATA ANALYSIS

62

a. RETURN ON ASSETS In this case profits are related to assets as follows

Return on assets =

Net profit after tax

Total assets Rs: Crors Particulars

2007

ROA = PAT 9 6 2 .8 5 TOTAL ASSETS 4174.40 2 3 .0 6 5 5 9

2008

2009

2010

2011

1782.77 2575.14 3531 3531.6 .64 4 4133 4133.6 .60 0 6087.50 6674.58 6673.44   16264.27 29.28575 38.5813   52.92083 52.92083 25.41522 25.41522

b). RETURN ON CAPITAL EMPLOYED

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 Total capital employed (Total capital employed = Fixed assets + Current assets–Current liabilities) liabilities)

particulars PAT Total Capital Emp ROC

2007

2008

2009

2010

2011

962.85 204.99

1782.77 25.33

2575.14 118.89

3531.64 173.30

4133.60 304.80

4.697058

7 0. 3 8 1 7 6

2 1 .6 5 9 8 5

2 0 .3 7 8 7 7

1 3 .5 6 1 6 8

63

YEAR 2006-2007 Performance of company (Amount in Rs. CR’S)

Gross Revenue

4 9 3 9 .4 4

Total Expenditure

3 7 7 3 .2 5

Profit (Loss) before tax

1 1 6 6 .1 9

Profit after tax

7 8 2 .2 8

Earnings per share Rs.

1 .6 9

Dividend ratio

10%

YEAR 2007-2008 PERFORMANCE OF COMPANY (AMOUNT IN RS.’ CR’S ) Gross Revenue

5 6 3 6 .1 2

Total Expenditure

4 1 4 2 .4 8

Profit (Loss) before tax

1 5 0 7 .0 1

Profit after tax

1 0 0 7 .6 1

Earnings per share Rs.

0 .6 4

Dividend ratio

5%

 EAR 2008-2009 Y 

PERFORMANCE OF COMPANY (AMOUNT IN RS.’ CR’S S)

Gross Revenue

6 5 7 5 .4 0

Total Expenditure

5 2 1 3. 9 4

Profit (Loss) before tax

1 3 6 1 .4 6

Profit after tax

977.02

Earnings per share Rs.

0 .6 4

Dividend ratio

5%

 EAR 2009-2010 Y 

PERFORMANCE OF COMPANY (AMOUNT IN RS. CR’S)

Gross Revenue

7 1 6 9 .4 3

Total Expenditure

5 5 8 5. 2 9

Profit (Loss) before tax

1 5 8 8 .1 6

Profit after tax

1 0 9 3. 2 4

Earnings per share Rs.

1 .5 5

Dividend ratio

10 %

64

 EAR 2010-2011 Y 

PERFORMANCE OF COMPANY (AMOUNT IN RS.CR’S)

Gross Revenue

1 3 5 5 8 .4 2

Total Expenditure

1 1 7 8 2 .7 4

Profit (Loss) before tax

1 7 8 6 .1 9

Profit after tax

1 4 0 4. 2 3

Earnings per share Rs.

2 .1 0

Dividend ratio

15 %

PERFORMANCE ANALYSIS OF 2006-2007

There has been an increase of over 20% sales when compared to cost year, which resulted in Gross Profit of Rs.4939.44 Crs as against around 3697.54 crs in last year. Because of decrease in Non-Operating expenses to the time of the Net profit has increased. It stood at current year against previous year because of redemption of debenture and cost reduction. A dividend of Rs.162 lacs was declared during the year at 10% on equity.

PERFORMANCE ANALYSIS OF 2007-2008

1.The production and Sales has increased by 23% 2.Cement turn over has increased by 6% as against fall in Sales realization by 15% last year. 3.Cement Boards Division has contributed 18% more than the previous year to the PBDIT. 4.Perform Division realization has increased by 4% even the Turn over have came down to 845 lacs from 1189lacs in last year. 5.The profit After Tax has came down from 1007.61 crs to 782.28 crs in Current year because of slope in Cement Industry. 6.The Interest Interest cost has come down by 24% due to reduction in Interest rates rates by Commercial Commercial Banks & Public Deposits.

65

PERFORMANCE ANALYSIS OF 2008-2009

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 and with with the the perfo perform rmanc ancee of pref prefab ab Divi Divisi sion on the the Gros Grosss Prof Profit it gap has narr narrow owed ed and and contributing to the EBIT. The Gross Profit has increased considerably from 6575.40 crs in Last year to 5636.12 crs in Current year. The interest payment has increased by 423 crs in the Current year and the Profit before Tax at 1361.46 crs when compared to 1507.01 crs in Last year. The Net profit also increased from 977.02 977.0 2 in Last year in Current year. The Director has recommended a 7.5% Dividend and in Last year it was at 5%.

PERFORMANCE ANALYSIS OF 2009-2010

In 2009-10 the company has performed performed well in all decisions because of high demand and realizations. The Gross Profit Increased considerably and the interest payments have Increased at about 7169.43 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 UCO bank to the tune of Rs.5585.29 crs and losing of loan funds borrowed from Vijaya Bank and Canara Bank factors, which can tribute to increase in the Profit before Tax to the tune of Rs.1588.16 crs the company declared a dividend of 10% on its equity to its shareholders when compared to 7.5% 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

66

PERFORMANCE ANALYSIS OF 2010-2011

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 ears. By FY 2011 the domestic consumption is expected to grow to 199 million Tons from 136 million Tons consumption FY2010. During the year 2010-11 your company’s Gross sales increased.

Net sales increased by about 39% to Rs.1404.23 crs from Rs.1093.24 crs in FY 2010-11. Improved sales from all the tree divisions particularly from prefab division contributed for increased turnover.

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EBIT LEVELS

Particulars

Earnings Before Interest & Tax Change % Change

 

2007

2008

2009

2010

2011

1166.19

1507.01

1361. 361.46 46

158 1588.16 8.16

178 1786.1 6.19

126.54 477.39 294.2 234.99 374.53 9.21 9.2159 5979 79 3.15 3.1567 6769 69 4.62 4.6276 7668 68 6.75 6.7584 8415 15 4.76 4.7691 9151 51

DEGREE OF FINANCIAL LEVERAGE:

The higher the quotient, the greater the leverage. In Ultra Tech Industries case it is increasing because of decrease in EBIT levels to 2010-2011.

The EBIT level is in a decreasing dec reasing trend because of drastic decline in prices p rices in Cement Industry during above period.

In the year 2010 and 2011 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.

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 INTERPRETAT  INTERPRETATION  ION 

The EBIT level in 2006 is at 1166.19 crs and is decreasing every year till 2008. Because of  slump in the Cement Industry less realization. The EBIT levels in 2009 again started growing and reached to 1507.01 crs and in 2010 were at 1588.56 crs and in 2011 were at 861.16, 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.

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PERFORMANCE PS ANALYSIS   E PS

Particulars

Profit After Tax Less: Preference Dividend Amount of Equity share Holder No. OF equity share of  Rs.10/- each EPS

2007 962.85

2008 1782.77

2009 2575.14

2010 3531.64

2011 4133.60

-

-

-

-

-

1763.78

2696.99

3602.10

4608.65

10666.04

1623 16234 4825 825 1.69

1623 162348 482 25 0.64

16234 1623482 825 5 0.79

1623 623482 4825 1.55

16234 162348 825 2.1

EPSLEVEL S

2 . 5

2 1 . 5 EPS

1

0 . 5 0 2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

YEARS

INTERPRETATION

The PAT is in an increasing trend from 2008-2009 because of increase in sale prices and also decreases in the cost of manufacturing. In 2010 and 2011 even 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 9.36 in 2011

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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 = (EBI (EBIT T - INT INT) (1 – T)

= (EBI EBIT - INT) NT) (1 – T)

N

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.

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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 shut down 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 b usiness 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:

72

•

Cost of funds

•

Mode of repayment

•

Timing and time lag involved in mobilization

•

Assets security

•

Stock options

•

Cournand’s in terms of participative management and

•

Other terms and conditions.

Strategies of finance mobilization can be through two sectors, that is, owner’s 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

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THE FORMS OF FUNDS MOBILIZATION IS ILLUSTRATED BY A CHART :

FUNDING MIX - SOURCES

OWNERS FUND

EQUITY CAPITAL

RETAINED EARNINGS

BORROWED FUND

PREFERENCE

CONVENTIONAL

CAPITAL

SOURCES

NON- CONVENTIONAL

SOURCES

FINANCIAL

SUPPLIERS CREDIT

INSTITUTION

SHORT TERM

BANK

BANK BORROWINGS

CASH CREDIT

HIRE PURCHASE

DEBENTURES FIXED DEPOSITS ICD

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ULTRA TECH CEMENTS INDUSTRIES LTD. THE FUNDING MIX

2006-07

2007-08

2008-09

2009-10

2010-11

1763.78

2696.99   3602.10

4 6 0 8. 6 5

10666.04

2 5 7 1. 7 3

3475.93

4 4 8 2 .1 7

1 0 3 8 7. 2 2

5 6 0. 2 6 3963.82

542.35   722.93 5811.07 7800.96

830.73 9921.55

1 7 3 0 .0 5 22783.31

a) Secured Lo Loans

1 1 5 1. 2 5

9 8 2. 6 6

1 1 7 5 .8 0

8 5 4 .1 9

2 7 8 9 .7 6

b) Unsecured Loans

4 2 7 .3 8

7 5 7 .8 4

9 6 5 .8 3

7 5 0 .3 3

1 3 5 4 .8 4

TOTAL (B)

1578.63

1740.5

2141.63

1604.52

4144.6

TOTAL (A+B)

5542.45

7551.57

9942.59

11526.07

26927.91

48

4 1 .2 2

4 2 .3 8

3 4. 3

52

5 8 .7 8

5 7 .6 2

6 5 .6 9

Particulars Source of funds Share holders’ funds

a) Share capital

b) Reserves and surplus 1639.78 c)Deferred tax TOTAL (A) Loan Funds

% of S H in total C.E 4 4 .6 7 % of Loan Fund in total C.E 55.33 INTERPRETATION

The shareholder fund is at 3125.8 constitutes 44.67% in total C.E and loan funds constitute 55.33% in 2006-06. The Funding Mix on an average for 6 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 trading on equity is also good because the company company affectively affectively utilizing utilizing the Loan Funds in the Capital Structure. So that it leads to higher profit increase of EPS in 2007 at 0.79 to 2010 1.55

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TERM LOANS

2006-2007 Particulars

Rs. (in Lakhs)

TERM LOANS

IDBI

 

0.00

IFCI

 

0.00

0.00 HIRE PURCHASE LOANS

TVS Lakshmi Credit Ltd

0.00   0.00

 

Haritha Finance Ltd

0.00   0.00

 

Funded interest

0.00   0.00

 

Non Convertible Debentures

 

677.75

CASH CREDIT

Global Trust Bank  Vijaya Bank 

 

638.21

 

56.57 694.78 1,372.53

UNSECURED LOANS

Deposits from public

 

602.15

Lease /Hire purchases

 

4.64

IFST Loan from Govt. of AP

 

Deferred sales tax loan

 

Deposits from stockiest & others

0.00  

Inter corporate deposits Others

0.00

   

1730.39 50.00 201.04

TOTAL

2588.22

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TERM LOANS 2007-2008

Particulars

Rs. (in Lakhs)

TERM LOANS

Indian Renewable Energy development agency ltd. Non convertible debentures

255.00  

509.61

HIRE PURCHASE LOANS

TVS Lakshmi Credit Ltd

0.00

0.00

Haritha Finance Ltd

0.00

0.00

Funded interest

0.00

0.00

CASH CREDIT

Global Trust Bank  Vijaya Bank 

 

583.41

 

65.15 648.56 1,413.17

UNSECURED LOANS

Deposits from public

 

600.54

Lease /Hire purchases

 

21.25

Canara Bank factors ltd.

 

Deferred sales tax loan

 

Deposits from stockiest & others

0.00  

Inter corporate deposits Others

100.09

   

1,239.02 0.00 201.04

TOTAL

2161.94

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TERM LOANS 2008-2009 Particulars

Rs. (in Lakhs)

TERM LOANS

Indian Renewable Energy development agency ltd. Non convertible debentures

207.00  

0.00

HIRE PURCHASE LOANS

TVS Lakshmi Credit Ltd

0.00   0.00

Haritha Finance Ltd

0.00   0.00

Funded interest

0.00   0.00

CASH CREDIT

Global Trust Bank  Vijaya Bank 

 

627.10

 

174.12

Canara Bank Factors

158.98 158.98 960.20 960.20 1167.20

UNSECURED LOANS

Deposits from public

 

Deposits from stockiest & others Lease/Hire purchase Others

592.31  

   

1600.68 10.30 201.04

TOTAL

3571.53

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TERM LOANS 2009-2010 Particulars TERM LOANS

Rs. (in Lakhs)

Indian Renewable Energy development agency ltd. Non convertible debentures

779.17  

0.00

HIRE PURCHASE LOANS

TVS Lakshmi Credit Ltd

0.00

0.00

Haritha Finance Ltd

0.00

0.00

Funded interest

0.00

0.00

CASH CREDIT

Oriental Bank of Commerce UCO Bank 

 

410.15

 

594.34

Canara Bank Factors

0.00

1004.49 1167.20

UNSECURED LOANS

Deposits from public

 

Deposits from stockiest & others Lease/Hire purchase Others

399.69  

   

1053.83 57.39 201.04 3495.64

TOTAL

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TERM LOANS 2010-2011 Particulars

Rs. (in Lakhs)

TERM LOANS

Indian Renewable Energy development agency ltd.

2532.14

Non convertible debentures

 

0.00

TVS Lakshmi Credit Ltd

0.00

0.00

Haritha Finance Ltd

0.00

0.00

Funded interest

0.00

0.00

HIRE PURCHASE LOANS

CASH CREDIT

Oriental Bank of Commerce UCO Bank 

 

561.32

 

306.54

Canara Bank Factors UTI Bank Ltd

 

403.46 21 211. 1.82 82

14 1483 83.1 .14 4 4015.28

UNSECURED LOANS

Interest free from sales tax deferment loan

162.40

Deposits from public

 

Deposits from stockiest & others Lease/Hire purchase Others

616.87  

   

919.26 54.25 201.29 5969.35

TOTAL

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T ERMSL OANS

7 , 0 0 0 . 0 0 6 , 0 0 0 . 0 0 5 , 0 0 0 . 0 0 RS. I NL AKHS

4 , 0 0 0 . 0 0 3 , 0 0 0 . 0 0 2 , 0 0 0 . 0 0 1 , 0 0 0 . 0 0 0 . 0 0 2 0 0 7

2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1

YEARS

INTERPRETATION

The Non-convertible debentures are being redeemed from 2006 and 2007 financial year onwards and were completely repaid by 2010-2011. The cash credit assistance was provided by Global Trust Bank and Vijaya Bank to the tune of Rs.696 lacs and Canara bank factors to the tune Rs.158 lacs was completely repaid by taking cash credit facility from Oriental Bank  of Commerce and UCO Bank to the tune of Rs.1000 lacs. The company is paying of deposits from public every year. Deposits from public were stood at 727.76 lacs in 2006-2007 and in 2010-2011 it came down to 399.69 lacs. The IRIDA has granted Rs.255 lacs term loan for installation of  energy saving equipment and the loan was again increased to 779.17 lacs in 2010-2011.

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YEAR 2006 - 2007 Posi Positi tion on of Mobi Mobili lizat zatio ion n and Devel Develop opme ment nt of  funds (Amount in RS. crs)

Total liabilities Sources of funds Paid u capital Secured Loans Application of funds Net fixed assets Net current assets Accumulated losses

3 9 0 2. 6 7

Total assets

3 9 0 2 .6 7

1 2 4 .4 9 1 1 5 1 .2 5

Reserves & surplus Unsecured loans

1 6 3 9 .2 9 4 2 7. 3 8

3 2 1 4. 2 3 2 0 4 .9 9

Investments Misc. Expenditure

4 8 3. 4 5 ---

YEAR 2007 – 2008 Posi Positi tion on of Mobi Mobili lizat zatio ion n and and Devel Developm opmen entt of  funds (Amount in RS. crs)

Total liabilities Sources of funds Paid u capital

4 9 7 9 .8 4

Total assets

4 9 7 9 .8 4

124.49

Secured Loans Application of funds Net fixed assets Net current assets Accumulated losses

9 8 2 .6 6

Reserves & surplus Deferred tax Unsecured loans

2 5 7 1 .7 3 5 4 2. 3 5 7 5 7 .8 4

Investments Misc. Expenditure

1 7 0. 9 0 ---

4 7 8 3 .6 1 25.33 Nil

Financial leverage results from the presence of fixed financial charges in the firm income stream. These fixed charges don’t vary with EBIT availability post payment balances belong to equity holders.

Financial leverage is concerned with the effect of charges in the EBIT on the earnings available to shareholders.

82

YEAR 2008-2009 Position of Mobilization and Development of funds (Amount in RS. crs)

Total liabilities Sources of funds Paid u capital

 

Secured Loans   Application of funds Net fixed assets   Net current assets Accumulated losses

6466.66

Total assets

6 4 6 6. 6 6

1 2 4. 4 9

Reserves & surplus Deferred tax Unsecured loans

3 4 7 5 .9 3 7 2 2 .9 3 9 6 5 .8 3

Investments Misc. Expenditure

1 0 3 4 .8 0 ---

1175.80 5312.97 1 1 8. 8 9 Nil

YEAR 2009- 2010 Position of Mobilization Mobilization and Development of funds (Amount in RS. crs)

Total liabilities Sources of funds Paid u capital

7 0 4 3 .9 0

Total assets

7 0 4 3 .9 0

1 2 4 .4 9

Secured Loans Application of funds Net fixed assets Net current assets Accumulated lo losses

854.19

Reserves & surplus Deferred tax Unsecured loans

4 4 8 2 .1 7 8 3 0 .7 3 7 5 0 .3 3

Investments Misc. Expenditure

1 6 6 9 .5 5 ---

5 2 0 1 .0 5 1 7 3. 3 0 Nil

YEAR 2010 – 2011 Position of Mobilization and Development of funds (Amount in RS. crs)

Total liabilities Sources of funds Paid u capital

1 6 5 4 0 .6 9

Total assets

1 6 5 4 0 .6 9

274.04

Secured Loans Application of funds Net fixed assets Net current assets Accumulated losses

2 7 8 9. 7 6

Reserves & surplus Deferred tax Unsecured loans

1 0 3 8 7 .2 2 1 7 3 0. 0 5 1 3 5 4. 8 4

Investments Misc. Expenditure

3 7 3 0. 3 2 ----

1 2 5 0 5 .5 7 3 0 4. 8 0 Nil

83

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 interest which is a contractual obligation obligation for the company 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 firm’s income stream. These fixed charges don’t 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.

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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 The favor favorabl ablee leve levera rage ge occu occurs rs when when the the Firm Firm earn earnss more more on the the asse assets ts 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 company’s 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 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 equity’s

85

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 variab variabili ility ty of EBIT EBIT and EPs distin distingui guish sh betwee between n two types of riskriskoperating 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 v ariability 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.

86

THE VARIABILITY  OF EBIT HAS TWO COMPONENTS

1. Vari Variabi abili lity ty of sale saless 2. Vari Variabi abili lity ty of of expen expense sess

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 company’s sales.

87

2. VARIABILITY OF EXPENSES: -

Given Given the variabil variability ity of sales sales the variabi variabilit lity y of EBIT EBIT is furthe furtherr affect affected ed by the composition of fixed and variable expenses. Higher the proportion of fixed expenses relative to variable variable expenses, higher the degree of operating operating leverage. The operating 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. 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.

88

2.Debt-equity ratio: The ratio of debt to equity, i.e.,

3.Inte 3.Interes restt cove coverage rage:: the the rati ration on of of net net operat operating ing income income

(or EBIT) EBIT) to intere interest st charges charges,, i.e. 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 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 There is no diff differ erenc encee betwe between en the the firs firstt two two meas measur ures es of fina financi ncial al lever leverage age 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 company’s 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.

89

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 capacity of the company to meet fixed financial charges. charges. The reciprocal reciprocal of interest interest coverage that is interest divided by EBIT is a measure of the firm’s incoming gearing. Again by comparing the company’s coverage ratio with an accepted industry standard, the investors, can get an idea of financial risk .how ever, this measure suffers from certain limitations. First, to determine the company’s ability to meet fixed financial obligations, it is the cash flow inform informati ation, on, which which is relevan relevant, t, not the report reported ed earnin earnings. gs. During During recess recession ional al economi economicc 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 short-term liquidity than of leverage.

FINANCIAL LEVERAGE AND THE SHARE HOLDER’S RETURN:

The primary motive of a company in using financial leverage is to magnify the shareholder’s 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 firm’s 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 firm’s assets. It should, there fore, be clear that EPS, ROE and ROI are the important figures for analyzing the impact of financial leverage.

90

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:

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:

91

RATIO ANALYSIS: -

The The prim primar ary y user user of fina financ ncia iall stat statem ement entss are are eval evalua uati ting ng part part perf perfor orma mance nce and 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  evaluati evaluating ng such such financi financial al statem statement ent is differ different ent form form person person to person person dependi depending ng 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 play thei theirr clai claims ms is best best judg judged ed by mean meanss of a thro through ugh anal analys ysis is of its its l9iq l9iqui uidi dity ty.. The The shareh sharehold olders ers and the potent potential ial investor investorss may be intere intereste sted d in the presen presentt and the future 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 management’s 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 needs of the analyst. Financial F inancial statement analysis is a part of the larger information processing system, which forms the very basis of any “decision “de cision making” process.

The The finan financi cial al anal analys ystt alwa always ys needs needs cert certai ain n yard yardst stic icks ks to eval evaluat uatee the the effi effici cien ency cy and and performance of business unit. The one of the most frequently used yardsticks is ratio analysis. Ratio analysis analysis involves involves the use of various various methods methods for calculating calculating and interpreting 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.

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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 unit’s 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 o verall performance of the business unit.

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CHAPTER-V FINDINGS CONCLUSIONS SUGGESTION BIBLIOGRAPHY

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FINDINGS

1. There has been been a small reducti reduction on in Gross Gross Sales and and with the perform performance ance of prefab prefab Division 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. 2. Perform Perform Division Division realizati realization on has increased increased by 8% even even the Turnover Turnover has come to to 641.80 Cr from 400.09 Cr in last year. 3. The profit profit After After Tax has came came 313.92 313.92 Cr to 214.82Cr 214.82Cr in Curren Currentt year because because of slope slope in Cement Industry. 4. The PAT is in in an increasing increasing trend trend from 2008-2009 2008-2009 because because of increase increase in sale sale prices prices and also decreases decreases in the cost of manufacturi manufacturing. ng. In 2010 and 2011even 2011even the cost of manufacturi manufacturing ng has increased by 5% because of higher sales volume PAT has increased considerably, which leads to higher EPS, which is at 83.80 in 2010. 5. The EBIT EBIT level in 2007 2007 is at 400.09 400.09 Cr and is increas increasing ing every every year year till 2010. 2010. Because Because of  slump in the Cement Industry less realization. The EBIT levels in 2010 again started growing and reached to 648.29 Cr and in 2010 were at 648.29 Cr and in 2011 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. 6. The EPS of the the company also also increased increased considerab considerably ly which investo investors rs in coming coming period. 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 7. Because of of decrease decrease in Non-Oper Non-Operating ating expenses expenses to to the time time of 214.82 Cr Cr the Net profit 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.

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CONCLUSIONS

1)

Sale Saless in 2008 2008-2 -200 009 9 is at 7267 7267.7 .74 4 and in in 20102010-20 2011 11 1275 12752. 2.43 43 crs crs thos thosee in a decre decreas asin ing g trend to the extent of 20% every year. On the other hand manufacturing expenses are at 8725.11 from 2009-2010. There has been significant increase in cost of production during 2008-2009 because of increase in Royalty.

2)

The The inter interes estt charg charges es were were 492. 492.21 21 in 2009 2009 and and 357.0 357.07i 7in n 2010 2010 and 522. 522.56 56 resp respec ecti tive vely ly shows that the company redeemed fixed interest bearing funds from time to time out of profit from 2008-2009.Debantures were partly redeemed with the help of debenture redemption reserve and other references.

3) The PAT (Profit (Profit After Tax) Tax) in 2010-2011 2010-2011 is at at 340.78. The The PAT has increas increased ed in prices prices in whole Cement industry during the the above period. The profit has increased almost almost 15% during the period 2009-2010.

4) Debentures Debentures were were redeemed redeemed by transfers transfers to to D.R.R. in 2009-2010. 2009-2010.

5)

A stea steady dy tra trans nsfe ferr for for divi divide dend nd duri during ng 2008 2008-2 -200 009 9 from from P&L P&L app appro ropr pria iati tion on but but in in 2008 2008 there is no adequate dividend equity Shareholders.

6)

The shar sharee capi capittal of the the comp compan any y rema remaiined ned in char charge ge duri during ng the the three hree-y -yea earr peri period od because of no public issues made by the company.

7)

The The secu secure red d loan loanss have have decr decreas eased ed cons consis iste tent ntly ly fro from m 2008 2008-2 -2010 010 and sli sligh ghtt incr increa ease se in 2011.

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RECOMMENDATIONS ON CEMENT INDUSTRY

For the development of the cement industry ‘Working Group on cement Industry’ was constituted constituted by the planning commission commission for the formulation 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 Depart Departmen mentt of Indust Industria riall policy policy & promot promotion ion commis commissio sioned ned a study study on the global 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.

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SUGGESTIONS:

1. The company company has to maintain maintain the optimal optimal capital capital struct structure ure and leverage leverage so that in coming coming years it can contribute to the wealth of the shareholders.

2. The The mini mining ng loya loyalt lty y cont contra ract ctss shou should ld be revi revise sed d so that that it will will decre decreas asee the the direc directt in the production

3. The company company has to exercise exercise control control over its outside outside purchas purchases es and overheads overheads which which have effect on the profitability of the company.

4. As the interest interest rates rates in pubic pubic Financial Financial institutio institutions ns are in a decreasing decreasing trend trend after globaliza globalization tion the company going on searching for loan funds at a less rate of interest as in the case of UCO Bank.

5. Efficiency Efficiency and and competency competency in managing managing the affairs affairs of of the company company should should be maintained. maintained.

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BIBLIOGRAPHY

1)

Financial Management

:

Khan & Jain

2)

Financial Management

:

I.M. Pandey

3)

Financial Management

:

Prasanna Chandra

4)

News Papers

:

Financial Express Economic Times

5)

Websites

: www.google.com www.ultratech.com www.capiatalindia.com

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