ABST ABSTRA RACT CT The Project report of “ CAPITAL STRUCTURE Of ULTRA ULTRA TECH CEMENT”. The research includes study and analysis of current market, identification of
the problem and its features. The work is basically concentrated on perception towards performance, what will be its affect on the market. market. Which factors it should concentrate on and what are the different servicing methods used to improve service uality. The assets of a company can be financed either by increasing the owners claim or the !reditors claim. The owner"s claims increase when the form raises funds by issuing Ordinary #hares or by retaining the earnings, the creditors" claims increase by borrowing .The $arious $arious %eans of financing represents the “financial structure& of an enterprise .The 'inancial #tructure of an enterprise is shown by the left hand side (liabilities plus euity) of The *alance sheet. Traditionally, Traditionally, short+term borrowings are ecluded from the list of %ethods of 'inancing the firm"s capital ependiture, and therefore, the long term claims are #aid to form The capital structure of the enterprise .The ca pital structure is used to represent The Proportionate relationship between debt and euity .-uity includes paid+up share !apital, #hare premium and reserves and surplus. The financing or capital structure decision is a significant managerial decision .t influences The shareholders returns and risk conseuently/ the market value of share may be affected *y the capital structure decision.
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TABLE OF CONTENTS Chapters
1
CONTENTS
PAGE PAGE Numbers
LIST OF TABLES
I
LIST OF FIGURES
II
INTRODUCTION
1
OBJECTIVES & RESEARCH 2
12
METHODOLOGY INDUSTRY & COMPANY 3
21
PROFILES DATA ANALYSIS & 4
29
INTERPRETATION CONCLUSIONS & 5
60
RECOMMENDATIONS
BIBLIOGRAPHY
64
LIST OF TABLES TABLES I Sno
Tabl!
Pa" N#$b%!
)* Eb' L(l! +
TABLE OF CONTENTS Chapters
1
CONTENTS
PAGE PAGE Numbers
LIST OF TABLES
I
LIST OF FIGURES
II
INTRODUCTION
1
OBJECTIVES & RESEARCH 2
12
METHODOLOGY INDUSTRY & COMPANY 3
21
PROFILES DATA ANALYSIS & 4
29
INTERPRETATION CONCLUSIONS & 5
60
RECOMMENDATIONS
BIBLIOGRAPHY
64
LIST OF TABLES TABLES I Sno
Tabl!
Pa" N#$b%!
)* Eb' L(l! +
1
+
E,! anal-!!
ULTRA TECH CEMENT In/#!'%! L'/. T0 F#n/n" M
)
)
*2
*
T%$ Loan!
*1
3
Po!'on o4 o4 Mo Mobl5a'on an an/ D D(lo,$n' o4 o4 F#n/!
*6
LIST OF FIGURES II Sno
F"#%!
Pa" N#$b%!
)3 1
Eb' L(l!
+
E,! anal-!!
)
)
)7 )
T0 4o%$! o4 4#n/!
*
T%$ Loan!
*8
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*
TO ;HOM SOEVER IT MAY CONCERN This is to certify that M%. ARSHAD AHMED bearing 5all Ticket ;o7 *181<12<8+<227 #tudent of =N5a$ In!''#' o4 En"n%n" & T90nolo"-”> D!0$#?0>Nal"on/a.”> O,,. Pol9 G%o#n/> N5a$aba/. has undertaken project work titled
=Ca,'al S%'#9'#%” from <0=<<=61<< to
6>=<6=61<< in partial fulfillment of the reuirement for the award of “%aster of *usiness 3dministration& and submitted the report.
?uring the above training programme the student has been associated with various department and activity contributed to eperimental learning process.
!oordinated issued on 6>+10+61<<
@Ra!0 #$a%. D @Mana"%
:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::: Registered office "B" Wing, 2nd floor, Ahura Centre, Andheri (East), Mumbai 400 09, !ndia, Tel 9#$22$%%9#&'00, ultrate*h*ement*om
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CHAPTER< I INTRODUCTION
DEFINITION:
“ FINANCE is a branch of economic concerned with the resources allocation as well as resources.%anagement,acuisition and investment .#imply financial deals with matters related to money and the market. Fnan9 is often defined simply as the management of money or “funds& management. @
%odern finance, however, is a family of business activity that includes the origination,
marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created for transacting and trading assets, liabilities, and risks. 'inance is conceptualiBed, structured, and regulated by a comple system of power relations within political economies across state and global markets. 'inance is both art (e.g. product development) and science (e.g. measurement), although these activities increasingly converge through the intense technical and institutional focus on measuring and hedging risk+return relationships that underlie shareholder value. ;etworks of financial businesses eist to create, negotiate, market, and trade in evermore+comple financial products and services for their own as well as their clients" accounts. 'inancial performance measures assess the efficiency and profitability of investments, the safety of debtors" claims against assets, and the likelihood that derivative instruments will protect investors against a variety of market risks.
INTRODUCTION 'inancial management is that managerial activity which is concerned with planning and controlling of firms financial resourses. t was branch of economics till 1,and as a seprate discipline,it is of recent origin. #till, it has know uniue body of knowledge of its own,and draws heavily on economic for its theoretical concepts event today. The subject financial management is of immense interest in both academicians and practicing managers. t is of great interest to academicians because the subject is still developing, and there are still certain areas where controversies eit for which no unanimous solutions have been reached as yet.practising managers are interested in this subject because among the most crucial decisions of the firm are those which relate to
8
finance, and an understanding of the theory of financial management provides them with conceptual and analytical insights to make those decisions skillfully. Diven the capital budgeting decision of a firm, it has to decide the way in which the capital projects will be financed. -very time the firm makes an investment decision, it is at the same time making a financing decision also. for eample, a decision to build a new plant or to buy a new machine implies specific way of financing that project.
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 euity) of the balance sheet. Traditionally, short+term borrowings are ecluded from the list of methods of financing the firm"s capital ependiture, and therefore, the long term claims are said to form the capital structure of the enterprise .The capital structure is used to represent the proportionate relationship between debt and euity .-uity includes paid+up share capital, share premium and reserves and surplus. The financing or capital structure decision is a significant managerial decision .t influences the shareholders returns and risk conseuently/ 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.
6
FACTORS AFFECTING THE CAPITAL STRUCTURE : LEVERAGE: The use of fied charges of funds such as preference shares, debentures
•
and term+loans along with euity capital structure is described as financial leverage or trading on. -uity. The term trading on euity is used because for raising debt.
DEBT EUITY R ATIO+'inancial institutions while sanctioning long+term loans
•
insists that companies should generally have a debt Eeuity ratio of 67< for medium and large scale industries and 27< indicates that for every unit of euity the company has, it can raise 6 units of debt. The debt+euity ratio indicates the relative proportions of capital contribution by creditors and shareholders. •
EBIT
taken are •
!ost of capital
•
!ash flow projections of the company
•
#iBe of the company
•
?ilution of control
•
'loatation costs.
FEATURES OF AN OPTIMAL CAPITAL STRUCTURE
3n optimal capital structure should have the following features,
•
PROFITABILITY : + The !ompany should make maimum use of leverages at a minimum cost.
•
FLEIBILITY: + The capital structure should be fleible 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. 7
•
CONTROL: + The capital structure should involve minimum dilution of control of the company.
•
SOLVENCY7 + The use of ecessive debt threatens the solvency of the company. n a high interest rate environment, ndian companies are beginning to realiBe the advantage of low debt.
CAPITAL STRUCTURE AND FIRM VALUE: #ince the objective of financial management is to maimiBe shareholders wealth, the key issue is7 what is the relationship between capital structure and firm valueF 3lternatively, what is the relationship between capital structure and cost of capitalF 4emember that valuation and cost of capital are inversely related. Diven a certain level of earnings, the value of the firm is maimiBed when the cost of capital is minimiBed and vice versa.
There are different views on how capital structure influences value. #ome 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 eual, greater the leverage, greater the value of the firm.
CAPITAL STRUCTURE AND PLANNING :
!apital structure refers to the mi of long+term sources of funds. #uch 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 (!-O) 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 euity shareholders, being the owners of the company and the providers of risk capital (euity) would be concerned about the 12
ways of financing a company"s operations. 5owever, 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 maimiBation (#W%), 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 maimiBing 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+G+vis their market prices of shares. t may be found empirically that there are not significant differences in the share values within a given range. The management of a company may fi its capital structure near the top of this range in order to make maimum use of favorable leverage, subject to other reuirements such as fleibility, solvency, control and norms set by the financial institutions, the security echange *oard of ndia (#-*) and stock echanges.
FEATURES OF AN APPROPRIATE CAPITAL STRUCTURE : < The board of ?irector or the chief financial officer (!-O) 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 decision, are properly analyBed and balanced. The capital structure should be planned generally keeping in view the interest of the euity shareholders and financial reuirements of the company. The euity shareholders being the shareholders of the company and the providers of the risk capital (euity) would be concerned about the ways of financing a company"s operation. 5owever, the interests of the other groups, such as employees, customer, creditors, and government, should also be given reasonable consideration. When the company lay down its objectives in terms of the shareholders wealth maimiBing (#W%), 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 maimiBing the long+term market price per share. Theoretically there may be a precise point of range with in which the market value per 11
share is maimum. n practice for most companies with in an industry there may be a range of appropriate capital structure with in which there would not be great differences in the market value per share. One way to get an idea of this range is to observe the capital structure patterns of companies" $is+a $is their market prices of shares. t 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 maimum use of favorable leverage, subject to other reuirement (#-*) and stock echanges.
A SOUND OR APPROPRIATE CAPITAL STRUCTURE SHOULD HAVE THE FOLLO;ING FEATURES: 1
R ETURN7 the capital structure of the company should be most advantageous, subject to the other considerations/ it should generate maimum returns to the shareholders without adding additional cost to them.
+
R IS 7 the use of ecessive debt threatens the solvency of the company. To the point debt does not add significant risk it should be used other wise it uses should be avoided.
)
FLEIBILITY: the capital structure should be fleibility. t should be possible to the company adopt its capital structure and cost and delay, if warranted by a changed situation. t should also be possible for a company to provide funds whenever needed to finance its profitable activities.
*
CAPACITY: < The capital structure should be determined within the debt capacity of the company and this capacity should not be eceeded. The debt capacity of the company depends on its ability to generate future cash flows. t should have enough cash flows to pay creditors, fied charges and principal sum.
3
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: 1+
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 subseuent financing decision should be made with the a view to achieve the target capital structure .The financial manager has also to deal with an eisting capital structure .The company needs funds to finance its activities continuously. -very time when fund shave to be procured, the financial manager weighs the pros and cons of various sources of finance and selects the most advantageous sources keeping in the view the target capital structure. Thus, the capital structure decision is a continues one and has to be taken whenever a firm needs additional 'inances. The following are the three most important approaches to decide about a firm"s capital structure.
-*T+-P# approach for analyBing the impact of debt on -P#.
$aluation approach for determining the impact of debt on the shareholder"s value.
!ash flow approached for analyBing the firm"s ability to service debt. n addition to these approaches governing the capital structure decisions, many other factors such as control, fleibility, or marketability are also considered in practice.
EBIT
The cost of debt is usually lower than the cost of performance share capital and
1)
()
The interest paired on debt is ta deductible. *ecause of its effect on the earnings per share, financial leverage is an important consideration in planning the capital structure of a company. The companies with high level of the earnings before interest and taes (-*T) can make profitable use of the high degree of leverage to increase return on the shareholder"s euity. One common method of eamining the impact of leverage is to analyBe the relation ship between -P# and various possible levels of -*T under alternative methods of financing. The -*T+-P# analysis is an important tool in the hands of financial manager to get an insight into the firm"s capital structure management .5e can considered the possible fluctuations in -*T and eamine their impact on -P# 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 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 -*T and lower the probability of down word fluctuation, the more beneficial it is to employ debt in the capital structure 5owever, it should be realiBed that the -*T -P# is a first step in deciding about a firm"s capital structure .t suffers from certain limitations and doesn"t provide unambiguous guide in determining the capital structure of a firm in practice.
R ATIO ANALYSIS: <
1*
The primary user of financial statements are evaluating part performance and predicting future performance and both of these are facilitated by comparison. Therefore the focus of financial analysis is always on the crucial information contained in the financial statements. This depends on the objectives and purpose of such analysis. The purpose of evaluating such financial statement is different form person to person depending on its relationship. n other words even though the business unit itself and shareholders, deb enture holders, investors etc. all under take the financial analysis differs. 'or eample, trade creditors may be interested primarily in the liuidity of a firm because the ability of the business unit to play their claims is best judged by means of a through analysis of its l>iuidity. The shareholders and the potential investors may be interested in the present and the future earnings per share, the stability of such earnings and comparison of these earnings with other units in thee industry. #imilarly the debenture holders and financial institutions lending long+term 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 reuired 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 etent and means of any financial analysis vary as per the specific needs of the analyst. 'inancial statement analysis is a part of the larger information processing system, which forms the very basis of any “decision making& process.
The financial analyst always needs certain yardsticks to evaluate the efficiency and performance of business unit. The one of the most freuently used yardsticks is ratio analysis. 4atio analysis involves the use of various methods for calculating and interpreting financial ratios to assess the performance and status of the business unit. t is a tool of financial analysis, which studies the numerical or uantitative 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. n other words, ratios are relative figures reflecting the relationship between variables and enable the analysts to draw conclusions regarding the financial operations. 5owever, 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 13
as regards causes of such deviations from the norms. 'or instance, 3*! Htd. ntroduced 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 66.9 as compared to industry average turnover ratio of <<.6. 5owever 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 etremely low level. This resulted in numerous production held sales and lower profits. n other words, what was initially looking like an etremely efficient inventory management, turned out to be a problem area with the help of ratio analysisF 3s a matter of caution, it must however be added that a single ration or two cannot generally provide that necessary details so as to analyBe the overall performance of the business unit.n order to arrive at the reasonable conclusion regarding overall performance of the business unit, an analysis of the entire group of ratio is reuired.
#ome times large
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. #imilarly, while doing the inter+firm comparison, the variations may be due to different technologies or degree of risk in those units or items to be eamined are in fact the comparable only. t must be mentioned here that if ratios are used to evaluate operating performance, these should eclude etra ordinary items because there are regarded as non+ recurring items that do not reflect normal performance. 4atio analysis is the systematic process of determining and interpreting the numerical relationship various pairs of items derived form the financial statements of a business. 3bsolute figures do not convey much tangible meaning and is not meaningful while comparing the performance of one business with the other. t 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 R ATIOS:
1
!apital structure or leverage ratios are used to analyse the long+term solvency or stability of a particular business unit. The short+term creditors are interested in current financial position and use liuidity 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 firm7+ (i) 3bility to repay the principal when due, and (ii) 4egular payment of interest, there are thus two different but mutually dependent and interrelated types of leverage ratio such as7
(a)
4atios based on the relationship between borrowed funds and
owner"s capital,
computed form balance sheet eg7 debt+euity ratio, dividend coverage ratio, debt service coverage ratio etc.,
NEED FOR STUDY: The value of the firm depends upon its epected earnings stream and the rate used to discount this stream. The rate used to discount earnings stream it"s the firm"s reuired rate of return or the cost of capital. Thus, the capital structure decision can affect the value of the firm either by changing the epected 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. !onflicting opinions have been epressed on this issue. n 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.
f 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 euity that maimiBes the total value of the firm or minimiBes the weighted average cost of capital. The uestion of the eistence of optimum use of leverage has been put very succinctly by -Bra #olomon in the following words.
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Diven that a firm has certain structure of assets, which offers net operating earnings of given siBe and uality, 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 leverageF
The eistence of an optimum capital structure is not accepted by all. These eist two etreme views and middle position. ?avid ?urand identified the two etreme views the net income and net operating approaches.
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CHAPTER < II OBJECTIVES & RESEARCH METHODOLOGY
OBJECTIVES:
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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.
•
To #tudy the capital structure of ULTRATECH CEMENTS through -*T+-P# analysis
•
#tudy effectiveness of financing decision on -P# and -*T of the firm.
•
-amining leverage analysis of ULTRATECH CEMENTS .
•
-amining the financing trends in the ULTRATECH CEMENTS. for the period of 6119+<1.
•
#tudy debt=euity ratio of ULTRATECH CEMENTS for 6119+<1.
SCOPE: 3 study of the capital structure involves an eamination of long term as well as short term sources that a company taps in order to meet its reuirements of finance. The scope of the study is confined to the sources that ULTRATECH CEMENTS tapped over the years under study i.e. 6119+<1
R ESEARCH METHODOLOGY AND DATA ANALYSIS ?ata relating to IHT43T-!5 !-%-;T#. has been collected through
PRIMARY SOURCES: •
?iscussions with the 'inance manager and other members of the 'inance department.
SECONDARY SOURCES: •
Published annual reports of the company for the year 6119+<1. +2
TECHNOLOICAL CHANGE
!ement industry has made tremendous strides in technological up gradation and assimilation of latest technology. 3t present ninety three per cent of the total capacity in the industry is based on modern and environment+friendly dry process technology and only seven per cent of the capacity is based on old wet and semi+dry process technology. There is tremendous scope for waste heat recovery in cement plants and thereby reduction in emission level. One project for co+generation of power utiliBing waste heat in an ndian cement plant is being implemented with Japanese assistance under Dreen 3id Plan. The induction of advanced technology has helped the industry immensely to conserve energy and fuel and to save materials substantially. ndian is also producing different varieties of cement like Ordinary Portland !ement (OP!), Portland PoBBolana !ement (PP!), Portland *last 'urnace #lag !ement (P*'#), Oil Well !ement, 4apid 5ardening Portland !ement, #ulphate 4esisting Portland !ement, White !ement etc. Production of these varieties of cement conform to the *# #pecifications. t is worth mentioning that some cement plants have set up dedicated jetties for promoting bulk transportation and eport.
THE CAPITAL STRUCTURE CONTROVERSY:
The value of the firm depends upon its epected earnings stream and the rate used to discount this stream. The rate used to discount earnings stream it"s the firm"s reuired rate of return or the cost of capital. Thus, the capital structure decision can affect the value of the firm either by changing the epected 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. !onflicting opinions have been epressed on this issue. n 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.
+1
f 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 euity that maimiBes the total value of the firm or minimiBes the weighted average cost of capital. The uestion of the eistence of optimum use of leverage has been put very succinctly by -Bra #olomon in the following words. Diven that a firm has certain structure of assets, which offers net operating earnings of given siBe and uality, 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 leverageF
The eistence of an optimum capital structure is not accepted by all. These eist two etreme views and middle position. ?avid ?urand identified the two etreme views the net income and net operating approaches.
1.NET INCOME APPROACH: Inder the net income approach (;), the cost of debt and cost of euity are assumed to be independent to the capital structure. The weighted average cost of capital declines and the total value of the firm rise with increased use of leverage.
+. NET OPERATING INCOME APPROACH:
Inder the net operating income (;O) approach, the cost of euity is assumed to increase linearly with average. 3s a result, the weighted average cost of capital remains constant and the total value of the firm also remains constant as leverage is changed.
). TRADITIONAL APPROACH:
++
3ccording 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 ; 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 ;O approach is correct then the financing decisions should not be a great concern to the financing manager, as it does not matter in the valuation of the firm. %odigliani and %iller (%%) support the ;O approach by providing logically consistent behavioral justifications in its favor. They deny the eistence of an optimum capital structure between the two etreme views/ we have the middle position or intermediate version advocated by the traditional writers. Thus these eists an optimum capital structure at which the cost of capital is minimum. The logic of this view is not very sound. The %% position changes when corporate taes are assumed. The interest ta shield resulting from the use of debt adds to the value of the firm. This advantage reduces the when personal income taes are considered.
CAPITAL STRUCTURE MATTERS: THE NET INCOME APPROACH:
The essence of the net income (;) approach is that the firm can increase its value or lower the overall cost of capital by increasing the proportion of debt in the capital structure. The crucial assumptions of this approach are7
<)
The use of debt does not change the risk perception of investors/ as a result, the euity capitaliBation rate, k c and the debt capitaliBation rate, k d, remain constant with changes in leverage.
6)
The debt capitaliBation rate is less than the euity capitaliBation rate (i.e. k dKk e)
2)
The corporate income taes do not eist. The first assumption implies that, if k e and k d are constant
increased use by debt by
magnifying the shareholders earnings will result in higher value of the firm via higher value +)
of euity conseuently the overall or the weighted average cost of capital k o, will decrease. The overall cost of capital is measured by euation7 (<)
t is obvious from euation < that, with constant annual net operating income (;O), 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 L O M L e + (L e + L d) ?=$ 3s per the assumptions of the ; approach L e and L d are constant and L d is less than L e. Therefore, L o will decrease as ?=$ increases. -uation 6 also implies that the overall cost of capital L o will be eual to L e if the form does not employ any debt (i.e. ?=$ M1), and that L o will approach L d as ?=$ approaches one.
NET OPERATING INCOME APPROACH: 3ccording to the met operating income approach the overall capitaliBation rate and the cost of debt remain constant for all degree of leverage.
r 3 and r ? are constant for all degree of leverage. Diven this, the cost of euity can be epressed as.
The critical premise of this approach is that the market capitaliBes the firm as a whole at discount rate, which is independent of the firm"s debt+euity ratio. 3s a conseuence, the decision between debt and euity is irrelevant. 3n increase in the use of debt funds which are Napparently cheaper" or offset by an increase in the euity capitaliBation rate. This happens because euity investors seek higher compensation as they are eposed to greater risk arising from increase in the degree of leverages. They raise the capitaliBation rate r- (lower the price earnings ratio, as the degree of leverage increases.
+*
The net operating income position has been advocated elouently by ?avid ?urand. 5e 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. t merely changes the distribution of income and risk between debt and euity, without affecting the total income and risk which influence the market value (or euivalently the average cost of capital) of the firm. 3rguing in a similar vein, %odigliani and %iller, in a seminal contribution made in <> 0C, forcefully advanced the proposition that the cost of capital of a firm is independent of its capital structure.
COST OF CAPITAL AND VALUATION APPROACH: The cost of a source of finance is the minimum return epected by its suppliers. The epected return depends on the degree of risk assumed by investors. 3 high degree of risk is assumed by shareholders than debt+holders. n the case of debt+holders, the rate of interest is fied 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 euity. This is generally the case even when taes are not considered. The ta deductibility of interest charges further reduces the cost of debt. The preference share capital is also cheaper than euity 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.
+3
CASH FLO; APPROACH: One of the features of a sound capital structure is conservatism does not mean employing no debt or small amount of debt. !onservatism is related to the fied charges created by the use of debt or preference capital in the capital structure and the firm"s ability to generate cash to meet these fied charges. n practice, the uestion of the optimum (appropriate) debt Eeuity mi boils down to the fir"s ability to service debt without any threat of insolvency and operating infleibility. 3 firm is considered prudently financed if it is able to service its fied charges under any reasonably predictable adverse conditions.
The fied charges of a company include payment of interest, preference dividend and principal, and they depend on both the amount of loan securities and the terms of payment. The amount of fied 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 epected future cash flows to meet the fied charges. t is mandatory to pay interest and return the principal amount of debt of a company not able to generate enough cash to meet its fied obligation, it may have to face financial insolvency. The companies epecting larger and stable cash inflows in to employ fied charge sources of finance by those companies whose cash inflows are unstable and unpredictable. t is possible for high growth, profitable company to suffer from cash shortage if the liuidity (working capital) management is poor. We have eamples of companies like *5-H, ;TP!, etc., whose debtors are very sticky and they continuously face liuidity problem in spite of being profitability servicing debt is very burdensome for them.
One important ratio which should be eamined at the time of planning the capital structure is the ration of net cash inflows to fied changes (debt saving ratio). t indicates the number of times the fied financial obligation are covered by the net cash inflows generated by the company.
EPS VARIABILITY AND FINANCIAL R IS 7 +
+
The -P# variability resulting form the use of leverage is called financial risk. 'inancial risk is added with the use of debt because of
(a) The increased variability in the shareholders earnings and (b) The threat of insolvency. 3 firm can avid financial risk altogether if it does not employ any debt in its capital structure. *ut then the shareholders will be deprived of the benefit of the financial risk perceived by the shareholders, which does not eceed the benefit of increase -P#. 3s we have seen, if a company increase its debt beyond a point the epected -P# will continue to increase but the value of the company increases its debt beyond a point, the epected -P# will continue to increase, but the value of the company will fall because of the greater eposure of shareholders to financial risk in the form of financial distress. The -P# criterion does not consider the long+term perspectives of financing decisions. t fails to deal with the risk return trade+off. 3 long term view of the effects of the financing decisions, will lead one to a criterion of the wealth maimiBation rather that -P# maimiBation. The -P# criterion is an important performance measure but not a decision criterion.
Diven limitations, should the -P# criterion be ignored in making financing decisionF 4emember that it is an important inde of the firm"s performance and that investors rely heavily on it for their investment decisions. nvestors do not have information in the projected earnings and cash flows and base their evaluation and historical data. n choosing between alternative financial plans, management should start with the evaluation of the impact of each alternative on near+term -P#. *ut 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 maimiBe value in the long run but has an adverse impact in near+term -P#, and the reasons must be communicated to investors. 3 careful communication to market will be helpful in reducing the misunderstanding between management and nvestors.
+8
DATA ANALYSIS: The collected data has been processed using the tools of •
4atio analysis
•
Draphical analysis
•
ear+year analysis
These tools access in the interpretation and understanding of the -isting scenario of the !apital #tructure.
LIMITATION: -P# is one of the mostly widely used measures of the company"s performance in practice. 3s a result of this, in choosing between debt and euity in practice, sometimes too much attention is paid on -P#, which however, has serious limitations as a financing+decision criterion.
The major short coming of the -P# as a financing+decision criterion is that it does not consider risk/ it ignores variability about the epected value of -P#. The belief that investors would be just concerned with the epected -P# is not well founded. nvestors in valuing the shares of the company consider both epected value and variability.
+6
CHAPTER III INDUSTRTY & COMPANY PROFILE
CEMENT INDUSTRY INTRODUCTION
+7
!ement is a key infrastructure industry. t has been decontrolled from price and distribution n C> and delicensed on 60th July <>><.
5owever, the
performance of the industry and prices of cement are monitored regularly.
The
constraints faced by the industry are reviewed in the nfrastructure coordination committee meetings held in the cabinet secretariat under the chairmanship of secretary (coordination).
ts performance is also reviewed by the cabinet committee n
infrastructure.
CAPACITY AND PRODUCTION7 ndia is the second largest producer of cement in the world after china. The cement ndustry comprises of <6C large cement plants with an installed capacity of <8C.6C million tones and more than 211 mini cement plant with an estimated capacity of <<.<1 million tones per annum. The cement corporation of ndia, which is central public sector undertaking, has <1 units. There are <1 large cement plants owned by various state Dovernments. The total installed capacity in the country as a whole is <0>.2C million tones. 3ctual cement production in 611Q+1Q was <<9.20 million tones as against a production of <19.>1 million tones in 6119+19, registering a growth rate of C.C8R. Leeping in view the trend of growth of the industry in previous years, a production Target of <69 million tones has fied for the year 611C+1C. ?uring the period 3pril+June 611C, a production (provisional) was 2<.21 million tones.
The
industry has achieved a growth rate of 8.C9 per cent during this period.
EPORTS: 3part from meeting the entire domestic demand, the industry is also eporting cement and clinker. The eport of cement during 6119+19 and 611C+1C was 0.<8
)2
million tones and 9.>6 million tones respectively. -port during 3pril+%ay, 611C was <.20 million tones. %ajor eporters were Dujarat 3mbuja !ements Htd. and HST Htd.
COMPOSITION AND OBSERVATION: The sources tapped by I34 !-%-;T ndustries Htd. !an be classified into7 •
#hareholders funds resources
•
Hoan fund resources.
•
SHAREHOLDER FUND R ESOURCES:
#hareholder"s fund consists of euity capital and retained earnings.
EUITY CAPITAL BUILD
'rom <>>0, the 3uthorised capital is 4s.801 lacs of euity shares at 4s.<1 each. The issued euity capital is 4#.<966.>2 lacs at 4s.<1 each for the period 6118+61<< and subscribed and paid+up capital is 4s. <966.>2 lacs at 4s.<1 each for the period of 6119+ 61<<.
6.
n 6119+61<
2.
There is an increase of <.2CR in the euity from 6119+61<<.
R ETAINED EARNINGS COMPOSITION:
This includesU
)1
•
!apital 4eserve
•
#hare Premium 3ccount
•
Deneral 4eserve
•
!ontingency 4eserve
•
?ebentures 4edemption 4eserve
•
nvestment 3llowance 4eserve
•
Profit S Hoss 3ccount
<.
The profit levels, company dividend policy and growth plans determined. The amounts transferred from PSH 3=c to Deneral 4eserve. !ontingency 4eserve and nvestment 3llowance 4eserve.
6.
The nvestment 3llowance 4eserve is created for replacement of long term leased assets and this reserve was removed from books because assets pertaining to such reserves ceased to eist. The account was transferred to investment allowance utiliBed.
COMPANY PROFILE
)+
IltraTech !ement Himited has an annual capacity of
IltraTech !ement is the country"s largest eporter of cement clinker. The eport markets span countries around the ndian Ocean, 3frica, -urope and the %iddle -ast.
IltraTech"s subsidiaries are ?akshin !ement Himited and IltraTech !eylinco (P) Himited.
D'al! o4 Ul'%aT90! ,%o/#9'on 9a,a9'! Lo9a'on o4 #n'! A Co$,o!' ,lan'!
Ca,a9'-
Tadipatri (3ndhra Pradesh) 5irmi (!hhattisgarh) Jafrabad (Dujarat) Lovaya (Dujarat) 3warpur (%aharashtra) B G%n/n" #n'!
%agdalla(Dujarat) Dinigera (Larnataka) 4atnagiri (%aharashtra) Jharsuguda (Orissa) 3rakkonam (Tamil ;adu) ?urgapur (West *engal) C B#l? '%$nal!
;avi %umbai (%aharashtra) %angalore (Larnataka) !olombo (#ri Hanka) 3s part of the eighth biggest cement manufacturer in the world, IltraTech !ement has five integrated plants, five grinding units as well as three terminals of its own (one overseas, in !olombo, #ri Hanka). These facilities gradually came up o ver the years, as indicated below7 +211
))
:: ;armada !ement !ompany Himited amalgamated with IltraTech pursuant to a #cheme
of 3malgamation being approved by the *oard for ndustrial S 'inancial 4econstruction (*'4) in terms of the provision of #ick ndustrial !ompanies 3ct (#pecial Provisions) +227 :: !ompletion of the implementation process to demerge the cement business of HST and
completion of open offer by Drasim, with the latter acuiring controlling stake in the newly formed company IltraTech +22 :: The board of Harsen S Toubro Htd (HST) decides to demerge its cement business into a
separate cement company (!em!o). Drasim decides to acuire an C.0 per cent euity stake from HST and then make an open offer for 21 per cent of the euity of !em!o, to acuire management control of the company.
+22) :: The Drasim *oard approves an open offer for purchase of up to 61 per cent of the euity
shares of Harsen S Toubro Htd (HST), in accordance with the provisions and guidelines issued by the #ecurities S -change *oard of ndia (#-*) 4egulations, <>>Q. :: Drasim increases its stake in HST to <8.<0 per cent :: 3rakkonam grinding unit +22+ :: Drasim acuires <1 per cent stake in HST. #ubseuently increases stake to <0.2 per cent by October 6112 :: ?urgapur grinding unit 1776<+221 :: *ulk cement terminals at %angalore, ;avi %umbai and !olombo +222 :: ;armada !ement !ompany Himited acuired :: 4atnagiri !ement Works 1776 :: Dujarat !ement Works Plant :: 3ndhra Pradesh !ement Works 177 :: Dujarat !ement Works Plant 177* :: 5irmi !ement Works )*
177) :: Jharsuguda grinding unit 1768 :: 3warpur !ement Works Plant 176) :: 3warpur !ement Works Plant
Boa%/ o4 D%9'o%! :: %r. Lumar %angalam *irla, !hairman :: %rs. 4ajashree *irla :: %r. 4. !. *hargava :: %r. D. %. ?ave :: %r. ;. J. Jhaveri :: %r. #. *. %athur :: %r. $. T. %oorthy :: %r. O. P. Puranmalka :: %r. #. 4ajgopal :: %r. ?. ?. 4athi :: %r. #. %isra, %anaging ?irector
E9#'( P%!/n' & C04 Fnan9al O449% :: %r. L. !. *irla
C04 Man#4a9'#%n" O449% :: 4.L. #hah
C04 Ma%?'n" O449%
::
%r. O. P. Puranmalka
Co$,an- S9%'a%-
::
%r. #. L. !hatterjee
IltraTech is ndias largest eporter of cement clinker. The companys production facilities are spread across five integrated plants, five grinding units, and three terminals V two in ndia and one in #ri Hanka. 3ll the plants have #O >11< certification, and all but one have #O <811< certification. While two of the plants have already received O5#3#
)3
products include Ordinary Portland cement, Portland PoBBolana cement and Portland blast furnace slag cement.
•
O%/na%- Po%'lan/ 9$n' Ordinary portland cement is the most commonly used cement for a wide range of applications. These applications cover dry+lean mies, general+purpose ready+mies, and even high strength pre+cast and pre+stressed concrete.
•
Po%'lan/ bla!' 4#%na9 !la" 9$n' Portland blast+furnace slag cement contains up to Q1 per cent of finely ground, granulated blast+furnace slag, a nonmetallic product consisting essentially of silicates and alumino+silicates of calcium. #lag brings with it the advantage of the energy invested in the slag making. Drinding slag for cement replacement takes only 60 per cent of the energy needed to manufacture portland cement. Ising slag cement to replace a portion of portland cement in a concrete miture is a useful method to make concrete better and more consistent. Portland blast+furnace slag cement has a lighter colour, better concrete workability, easier finishability, higher compressive and fleural strength, lower permeability, improved resistance to aggressive chemicals and more consistent plastic and hardened consistency.
•
Po%'lan/ Po55olana 9$n' Portland poBBolana cement is ordinary portland cement blended with poBBolanic materials (power+station fly ash, burnt clays, ash from burnt plant material or silicious earths), either together or separately. Portland clinker is ground with gypsum and poBBolanic materials which, though they do not have cementing properties in themselves, combine chemically with portland cement in the presence of water to form etra strong cementing material which resists wet cracking, thermal cracking and has a high degree of cohesion and workability in concrete and mortar.
)
)8
CHAPTER IV DATA ATA ANALYSI ANALYSIS S & INTERPRETATION
R ETURN ETURN ON ASSETS7 n this case profits are related to assets as follows 4etu 4eturrn on ass assets ets M
;et ;et pr profi ofit af after ter ta ta Total assets
Particulars
+A -
.A/ .A/ //A1 AE/
2006
2007
2008
2009
2010
2011
290&&
2&4
#04#2
#2'&
22#9
40&'
'9#%# 3.08
'%2## 1.21
'9' 1.43
92''% 2.72
#0#&2 4
90444# 3.21
)6
b. R ETURN ETURN ON CAPITAL EMPLOYED: 5ere return is compared to the total capital employed. 3 comparison of this ratio with that of other units in the industry will indicate how efficiently the funds of the business have been employed. The higher the ratio the more efficient is the use of capital employed. employed. 4eturn on capital employed
;et profit after taes S nterest Total capital capita l employed (Total (Total capital employed M 'ied assets X !urrent assetsE!urrent liabilities) particulars
4O!- M P3T P3T Total Total !apital -mp >>>8.16
M
2006 2007 2008 2009 2010 6>1.QQ 6Q8.0 <18.<6 <6C.0Q 606.<> 281.QC Q<<<.81
Q<<6.><
*.26
).63
9C6Q.>Q 1.3+
9>>2.>2 1.6)
2011
Q1Q>.61 ).3
).*2
YEAR +223<+22 +223<+22 P%4o%$an9 o4 9o$,an- @A$o#n' n R!.222! G%o!! R(n# Profit (Hoss) before ta -arnings per share 4s.
QQ2><> 210QQ <.Q>
Total -penditure Profit after ta ?ividend ratio
Q82286 6>1QQ <1R
YEAR +22<+228 +22<+228 P%4o%$an9 o4 9o$,an- @A$o#n' n R!.222! G%o!! R(n# Profit (Hoss) before ta -arnings per share 4s.
Q86611 216Q> <.9>
Total -penditure Profit after ta ?ividend ratio
Q<<>6< 6Q801 <1R
YEAR +228<+226 +228<+226
PERFORMANCE OF COMPANY (A (AMOUNT IN RS.000S) Gross Ree!"e 726774 Total Expenditure Proft Proft (Loss) (Loss) beore beore 11218 Proft ater tax tax Earnins pe p er s! s!are 0"64 #i$idend ratio
715556 10412 5%
)7
&s"
Y EAR 200#$2009 PERFORMANCE OF COMPANY (AMOUNT Gross Ree!"e Proft (Loss) beore tax Earnins per s!are &s"
726774 11218 0"64
IN RS.%000S)
Total Expenditure Proft ater tax #i$idend ratio
715556 10412 5%
Y EAR 2009$2010 PERFORMANCE OF COMPANY (AMOUNT IN RS.%000S) Gross Ree!"e Proft (Loss) beore tax Earnins per s!are &s"
'241 51802 1"55
Total Expenditure Proft ater tax #i$idend ratio
872511 2521' 10%
Y EAR 2010$2011 PERFORMANCE OF COMPANY (AMOUNT IN RS.%000S) Gross Ree!"e Proft (Loss) beore tax Earnins per s!are &s"
127524 Total Expenditure 711 Proft ater tax 2"10 #i$idend ratio
120680 4078 15%
PERFORMANCE ANALYSIS OF +223<+22 There has been an increase of over 60R sales, where compared to previous year there by contributing to increase in Dross Profit which increases over 80R because of increase in sales and decrease in cost of sales which in due to reduction in royalty for mining and other overheads reduction. n this year the company"s operating profit is around <90 lacs as compared to a heavy loss of over 290 lacs in previous year cost reduction also contributed to the alone. 3 dividend of 4s.
*2
PERFORMANCE ANALYSIS OF +22<+228 There has been an increase of over 61R sales when compared to cost year, which resulted in Dross Profit of 4s.<2Q0 lacs as against around <211 lacs in last year. *ecause of decrease in ;on+Operating epenses to the time of <21 lacs the ;et profit has increased. t stood at 6>2 lacs in current year against <90 lacs in previous year because of redemption of debenture and cost reduction. 3 dividend of 4s.<96 lacs was declared during the year at <1R on euity.
PERFORMANCE ANALYSIS OF +228<+226
<.
The production and #ales has increased by 62R
6.
!ement turn over has increased by 9R as against fall in #ales realiBation by <0R last year.
2.
!ement *oards ?ivision has contributed
8.
Perform ?ivision realiBation has increased by 8R even the Turn over have came down to C80 lacs from <lacs in last year.
0.
The profit 3fter Ta has came down from 216 lacs to <<6lacs in !urrent year because of slope in !ement ndustry.
9.
The nterest cost has come down by 68R due to reduction in nterest rates by !ommercial *anks S Public ?eposits.
PERFORMANCE ANALYSIS OF +226<+227
The !ement ndustry has a successful year because of Dovt. policies such as infrastructure ?evelopment a 4ural housing. There has been a small reduction in Dross #ales and with the performance of prefab ?ivision the Dross Profit gap has narrowed and contributing to the -*T. The Dross Profit has increased considerably from <1<8 lacs in
*1
Hast year to <60> lacs in !urrent year. The interest payment has increased by <8 lacs in the !urrent year and the Profit before Ta at 22< lacs when compared to <<6 lacs in Hast year.
The ;et profit also increased from <18 lacs in Hast year to <6C.0Q lacs in !urrent year.
The ?irector has recommended a Q.0R ?ividend and in Hast year it was at 0R.
PERFORMANCE ANALYSIS OF +227<+212
n 6119+"10 the company has performed well in all decisions because of high demand and realiBations. The Dross Profit ncreased considerably and the interest payments have decreased at about <81 lacs 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. n the previous year, the cash credit granted by I!O bank to the tune of 4s.0>8 lacs and losing of loan funds borrowed from $ijaya *ank and !anara *ank factors, which can tribute to increase in the Profit before Ta to the tune of 4s.<>1 lacs the company declared a dividend of <1R on its euity to its shareholders when compared to Q.0R in the previous year. The -P# of the company also increased considerably which investors in coming period. The company has taken up a plant epansion program during the year to increase the production activity and to meet the increase in the demand.
PERFORMANCE ANALYSIS OF +212<+211
!ompany is operating in 2 segments, out of which cement contributes about 00R of turnover while the *oards and prefab segments contribute about 80R. 5uge investment in the industrial sector over the net 2 years is epected to lead to higher cement off Etake on the back of strong D?P growth across the country. t is epected that the domestic cement consumption would grow at a !3D4 of CR for the net 0 ears. *y ' 6119 the domestic consumption is epected to grow to <>> million Tons from <29 million Tons consumption *+
'611>. ?uring the year 61<1+<1 your company"s Dross sales increased by about 2CR to 4s.<6Q1C Hacks from 4s.>668 Hacks in '
611>+1>. ;et sales increased by about 2>R to
4s.<122Q Hacks from 4s.Q88C Hacks in ' 611>+1>. mproved sales from all the tree divisions particularly from prefab division contributed for increased turnover.
EBIT LEVELS Particulars
2006
2007
2008
2009
2010
2011
<1>9.<0
>9>.9<
9
C12
C9<.<9
<620.9>
!hange
+
<69.08
8QQ.2>
6>8.6
628.>>
2Q8.02
R !hange
+
<<.01R
82.00R
69.C2R
6<.88R
003
-arnings *efore nterest S Ta
DEGREE OF FINANCIAL LEVERAGE:
The higher the uotient of ?-H, the greater the leverage. n ;!H ndustries case it is increasing because of decrease in -*T levels from 6110+6119, to 61<1+ 61<<. The -*T level is in a decreasing trend because of drastic decline in prices in !ement ndustry during above period.
n the year 61<1 and 61<< the -*T level has increased substantially because of 4aise inn !ement prices because of demand and the policies of Dovt. such as rural housing and irrigation project taken up.
*)
EBIT LEEL! #400 #200 #000 T I '00 B%00 E 400 200 0 200% 200& 200' 2009 20#0 20## "E#R!
INTERPRETATION The -*T level in 6119 is at <1>9.<0 lacs and is decreasing every year till 611C. *ecause of slump in the !ement ndustry less realisation. The -*T levels in 611> again started growing and reached to C16.89 lacs and in 61<1 were at C9<.<9 lakhs and in 61<< were at C9<.<9, because of the sale price increase per bag and increase in demand. The infrastructure program taken up by the 3.P. Dovt. in the field s of rural housing irrigation projects created demand and whole !ement ndustries are making profits
PERFORMANCE E PS ANALYSIS
Particulars Profit 3fter Ta Hess7 Preference ?ividend 3mount of -uity share holder ;o. O' euity share of 4s.<1=+ each EPS
2006 6>1QQ111
2007 6Q80111
2008 <18<611<
2009 2109>111
2010 26C19111
2011 281QC111
+
+
+
+
+
+
6>1QQ111
6Q801111
<18<611<
<6C0Q111
606<>111
409#
<9628C60 1.87
<9628C60 1.7
<9628C60 2.*
<9628C60 2.87
<9628C60 1.33
#%24'2 2.1
**
EP! LEEL! 2 2 !# P E
# 0 0 200%
200&
200'
2009
20#0
20##
"E#R!
INTERPRETATION The P3T is in an increasing trend from 611C+611> because of increase in sale prices and also decreases in the cost of manufacturing. n 61<1 and 61<< even the cost of manufacturing has increased by 0R because of higher sales volume P3T has increased considerably, which leads to higher -P#, which is at >.29 in 61<<.
EBIT EPS CHART One convenient and useful way showing the relationship between -*T and -P# for the alternative financial plans is to prepare the -*T+-P# chart. The chart is easy to prepare since for any given level of financial leverage, -P# is linearly related to -*T. 3s noted earlier, the formula for calculating -P# is -P# M (-*T + ;T) (< E T) ;
M
(-*T + ;T) (< E T) ;
*3
We assume that the level of debt, the cost of debt and the ta rate are constant. Therefore in euation, the terms (<+T)=; and ;T (Mi?) are constant7 -P# will increase if -*T increases and fall if -*T declines. !an also be written as follows
Inder the assumption made, the first part of is a constant and can be represented by an -*T is a random variable since it can assume a value more or less than epected. The term (< E T)=; are also a constant and can be shown as b. Thus, the -P#, formula can be written as7 -P# M a X b-*T !learly indicates that -P# is a linear function of -*T.
FINANCING DECISION: inan*in strate+ or,s a -e+ ele,ent or t!e s,oot! runnin o an+ orani.ation /!ere o/ as a rare *o,,odit+ !as to be obtained at t!e opti,u, *ost and put into t!e /!eels o business at t!e ri!t ti,e and i not it /ould lead intensel+ to t!e s!ut do/n o t!e business"
inan*in strateies basi*all+ *onsists o t!e ollo/in *o,ponents
•
3obili.ation
•
ostin
•
Ti,in$ailabilit+
•
usiness interests
T!ereore
t!e
strate+
is
to
al/a+s
-eep
su*ient
a$ailabilit+ o fnan*e at t!e opti,u, *ost at t!e ri!t ti,e to prote*t t!e business interest o t!e *o,pan+"
*
STRATEGIES IN FINANCE MO&I'IATION T!ere are ,an+ options or t!e und raisin prora, o an+ *o,pan+ and it is 9uite pertinent to note t!at t!ese options /ill !a$e to be e$aluated b+ t!e fnan*e ,anaer ,ainl+ in ter,s o
•
ost o unds
•
3ode o repa+,ent Ti,in and ti,e la in$ol$ed in ,obili.ation
•
•
ssets se*urit+
•
:to*- options
•
ournand;s in ter,s o parti*ipati$e ,anae,ent and
•
also be split
into
:e*uriti.ed
resour*es= and
non>se*urities
resour*es" :e*uriti.ed resour*es are t!ose /!o instru,ent o title *an be traded in t!e ,one+ ,ar-et and non>se*urities resour*es and t!ose /!i*! *annot be traded in t!e ,ar-et
*8
THE FORMS OF FUNDS MOBILIKATION IS ILLUSTRATED BY A CHART:
FUNDING MI < SOURCES
OW;-4# 'I;?
*O44OW-?
'I;?
-YIT 4-T3;-? !O;$-;TO;3H !3PT3H -34;;D#
P4-'-4-;!-
!O;$-;TO;3H
!3PT3H
#OI4!-#
;O;+
#OI4!-#
';3;!3H
#IPPH-4#
!4-?T ;#TTITO; *3;L
#5O4T T-4% *3;L
*O44OW;D# !3#5 !4-?T PI4!53#-
54?-*-;TI4-#
'Z-? ?-PO#T# !?
ULTRA TECH CEMENT I NDUSTRIES LTD. THE FUNDING MI
Pa%'9#la%!
+223<2
+22<28
+228<26
+226<27
+227<12
2010$11
So#%9 o4 4#n/! *6
S0a% 0ol/%! 4#n/!
a) #hare capital
<966.>2
<966.>2
<966.>2
<966.>2
<966.>2
2#&99&
b) 4eserves and surplus
<016.CQ
Q>9.8C
C>1.6<
CC<.89
>8C.0>
9&%
+ )1+3.6
QQC.96 )176.2)
QCQ.>> ))21.1)
+ +32*.)7
+ +381.3+
+ 3117.62
<2Q6.02
<8<2.
<<9Q.C6
40#2'
66>>.<9
60CC.66
6<9<.>0
6818.22
0
#940&
TOTAL @B
*2+*.2
)72.83
)383.1+
)38+.13
)*73.1
%969.3%
TOTAL @AB
813*.6
8136.86
68.+*
283.7+
28.1)
4&2
44%&
4'
4#22
42'
9086.97 4
%2'
2
'&'
&%2
%%9
c)?eferred ta TOTAL @A Loan F#n/!
a) #ecured Hoans b) Insecured Hoans
3 of in total CE 3 of 1oan 5und in total CE
INTERPRETATION •
The shareholder fund is at 2<60.C constitutes 82.Q6R in total !.- and loan funds constitute 09.6CR in 6110+19. The 'unding %i on an average for 9 years will be 80R of shareholders 'und and 00R of Hoan 'unds there by the company is trying to maintain a good 'unding %i. The leverage or trading on euity is also good because the company affectively utiliBing the Hoan 'unds in the !apital #tructure. #o that it leads to higher profit increase of -P# in 6119 at 1.Q> to 611> <.00
TERM LOANS
+223<+22 Pa%'9#la%!
R!. @n La?0!
TERM LOANS
*7
?*
1.11
'!
1.11 1.11
HIRE PURCHASE LOANS
T$# Hakshmi !redit Htd
1.11
1.11
5aritha 'inance Htd
1.11
1.11
'unded interest
1.11
1.11
;on !onvertible ?ebentures
<16Q.>C
CASH CREDIT Pa%'9#la%!
R!. @n La?0!
Dlobal Trust *ank LOANS TERM
98<.22
$ijaya ?* *ank
00.0> 1.11
'!
1.11
9>9.>6 <,Q68.>1 1.11
UNSECURED LOANS HIRE PURCHASE LOANS
?eposits from public T$# Hakshmi !redit Htd
1.11
Q6Q.Q9 1.11
Hease =5ire purchases 5aritha 'inance Htd
1.11
1.28 1.11
'#T Hoan from Dovt. of 3P 'unded interest
1.11
1.11 1.11
?eferred sales ta ?ebentures loan ;on !onvertible
<.91 9QQ.Q0
?eposits from stockiest S others
<,099.6<
nter corporate deposits CASH CREDIT
2.60
TOTAL Dlobal Trust *ank
92C.6<
$ijaya *ank
09.0Q
+>+77.1
9>8.QC <,2Q6.02 UNSECURED LOANS
TERM +22<
?eposits from public
916.<0
Hease =5ire purchases
8.98
'#T Hoan from Dovt. of 3P
1.11
?eferred sales ta loan
1.11
?eposits from stockiest S others
nter corporate deposits
01.11
Others
61<.18 TOTAL
LOANS +228
+366 ++
32
TERM LOANS +228<+226 Pa%'9#la%!
R!. @n La?0!
TERM LOANS
ndian 4enewable -nergy
600.11
31
development agency ltd. ;on convertible debentures
01>.9<
HIRE PURCHASE LOANS
T$# Hakshmi !redit Htd
1.11
1.11
5aritha 'inance Htd
1.11
1.11
'unded interest
1.11
1.11
CASH CREDIT
Dlobal Trust *ank
0C2.8<
$ijaya *ank
90.<0 98C.09 <,8<2.
UNSECURED LOANS
?eposits from public
911.08
Hease =5ire purchases
6<.60
!anara *ank factors ltd.
<11.1>
?eferred sales ta loan
1.11
?eposits from stockiest S others nter corporate deposits
<,62>.16 1.11
Others
61<.18 TOTAL
+11.7*
TERM LOANS +226<+227 Pa%'9#la%!
R!. @n La?0!
TERM LOANS
ndian 4enewable -nergy development agency ltd.
61Q.11
3+
;on convertible debentures
1.11
HIRE PURCHASE LOANS
T$# Hakshmi !redit Htd
1.11
1.11
5aritha 'inance Htd
1.11
1.11
'unded interest
1.11
1.11
CASH CREDIT
Dlobal Trust *ank
96Q.<1
$ijaya *ank
!anara *ank 'actors
<0C.>C
>91.61 <<9Q.61
UNSECURED LOANS
?eposits from public
0>6.2<
?eposits from stockiest S others
<911.9C
Hease=5ire purchase
<1.21
Others
61<.18 TOTAL
)381.3)
TERM LOANS +227<+212 Pa%'9#la%!
R!. @n La?0!
TERM LOANS
3)
ndian 4enewable -nergy development agency ltd.
QQ>.
;on convertible debentures
1.11
HIRE PURCHASE LOANS
T$# Hakshmi !redit Htd
1.11
1.11
5aritha 'inance Htd
1.11
1.11
'unded interest
1.11
1.11
CASH CREDIT
Oriental *ank of !ommerce
8<1.<0
I!O *ank
0>8.28
!anara *ank 'actors
1.11
<118.8> <<9Q.61
UNSECURED LOANS
?eposits from public
2>>.9>
?eposits from stockiest S others
<102.C2
Hease=5ire purchase
0Q.2>
Others
61<.18
TOTAL
)*73.*
3*
TERM LOANS +212<+211 Pa%'9#la%!
R!. @n La?0!
TERM LOANS
ndian 4enewable -nergy development agency ltd.
6026.<8
;on convertible debentures
1.11
HIRE PURCHASE LOANS
T$# Hakshmi !redit Htd
1.11
1.11
5aritha 'inance Htd
1.11
1.11
'unded interest
1.11
1.11
CASH CREDIT
Oriental *ank of !ommerce
09<.26
I!O *ank
219.08
!anara *ank 'actors IT *ank Htd
812.89 6<<.C6
<8C2.<8 81<0.6C
UNSECURED LOANS nterest free from sales ta deferment loan
<96.81
?eposits from public
9<9.CQ
?eposits from stockiest S others
><>.69
Hease=5ire purchase
08.60
Others
61<.6>
TOTAL
377.)3
33
TER&! L'#(! &,00000 %,00000 ,00000 4,00000 ,00000 2,00000 #,00000 000 200%
200&
. R s ( I L # ) * !
200'
2009
20#0
20##
"E#R!
INTERPRETATION The ;on+convertible debentures are being redeemed from 6119 and 611Q financial year onwards and were completely repaid by 61<1+61<<. The cash credit assistance was provided by Dlobal Trust *ank and $ijaya *ank to the tune of 4s.9>9 lacs and !anara bank factors to the tune 4s.<0C lacs was completely repaid by taking cash credit facility from Oriental *ank of !ommerce and I!O *ank to the tune of 4s.<111 lacs. The company is paying of deposits from public every year.
?eposits from public were stood at Q6Q.Q9 lacs in 6110+6119 and in 61<1+61<< it came down to 2>>.9> lacs. The 4?3 has granted 4s.600 lacs term loan for installation of energy saving euipment and the loan was again increased to QQ>.
3
Y EAR 2005$ 2006
Pos*+*o! o, -o*/*+*o! ! ee/o-e!+ o, ,"!s (A-o"!+ *! Rs.000s) Total liabilities So"res o, ,"!s Paid u *apital :e*ured Loans A/*+*o! o, ,"!s Aet fxed assets Aet *urrent assets **u,ulated losses
714'86
Total assets
714'86
1622'
150287
1724'6
&eser$es ? surplus @nse*ured loans
22''16
522854 18200'
Bn$est,ents 3is*" Expenditure
6278 846
Y EAR 2006 $ 200 Pos*+*o! o, Mo*/*+*o! ! ee/o-e!+ o, ,"!s (A-o"!+ *! RS. 000s)
Total liabilities So"res o, ,"!s Paid u *apital :e*ured Loans A/*+*o! o, ,"!s Aet fxed assets Aet *urrent assets **u,ulated losses
715878
Total assets
715878
1622'
7'648
1725
&eser$es ? surplus @nse*ured loans
258822
554677 1508'1
Bn$est,ents 3is*" Expenditure
572 4587
38
YEAR +228 +226 Po!'on o4 Mobl5a'on an/ D(lo,$n' o4 4#n/! @A$o#n' n RS. 222!
Total liabilities So#%9! o4 4#n/! Paid u capital
9CQ968
Total assets
9CQ968
<966>2
#ecured Hoans A,,l9a'on o4 4#n/! ;et fied assets ;et current assets 3ccumulated losses
<8<2
4eserves S surplus ?eferred ta Insecured loans
C>16< QCQ>> 6<9<>8
nvestments %isc. -penditure
01<> 8C6Q
0
'inancial leverage results from the presence of fied financial charges in the firm income stream. These fied charges don"t vary with -*T availability post payment balances belong to euity holders.
'inancial leverage is concerned with the effect of charges in the -*T on the earnings available to shareholders.
YEAR +226<+227 Po!'on o4 Mobl5a'on an/ D(lo,$n' o4 4#n/! @A$o#n' n RS. 222!
Total liabilities So#%9! o4 4#n/! Paid u capital
Q12660
Total assets
Q12660
<966>2
#ecured Hoans A,,l9a'on o4 4#n/! ;et fied assets ;et current assets 3ccumulated losses
<<9Q61
4eserves S surplus ?eferred ta Insecured loans
CC<89 QCQ>> 681822
nvestments %isc. -penditure
<1111 8C6Q
8QQ>2< 6<<896 ;il
36
YEAR +227< +212 Po!'on o4 Mobl5a'on an/ D(lo,$n' o4 4#n/! @A$o#n' n RS. 222!
Total liabilities So#%9! o4 4#n/! Paid u capital #ecured Hoans A,,l9a'on o4 4#n/! ;et fied assets ;et current assets 3ccumulated losses
>6C2C9 Total assets
>6C2C9
<966.>2 4eserves S surplus ?eferred ta
>8C0> <18<.>2 0
8C<<11 nvestments 6<2C61 %isc. -penditure ;il
<2111 6>C9
YEAR +212 +211
Po!'on o4 Mobl5a'on an/ D(lo,$n' o4 4#n/! @A$o#n' n RS. 222!
Total liabilities So#%9! o4 4#n/! Paid u capital
<1
Total assets
<1
<962.8C
#ecured Hoans A,,l9a'on o4 4#n/! ;et fied assets ;et current assets 3ccumulated losses
81<0.6C
4eserves S surplus ?eferred ta Insecured loans
>2Q90 <1C9.62 <>081Q
nvestments %isc. -penditure
<2111 8><1
Q100.CC 6>2C.66 ;il
37
FINANCIAL LEVERAGE
INTRODUCTION: Heverage, a very general concept, represents influence or power. n financial analysis leverage represents the influence of a financial variable over same other related financial variable. 'inancial 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 categoriBed into7
•
Those, which carry a fied finance charge.
•
Those, which do not carry a fied 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 fied rate of interest which is a contractual obligation for the company ecept in the case of preference shares. The euity holders are entitled to the remainder of operating profits if any. 'inancial leverage results from presence of fied financial charges in eh firm"s income stream. These fied charges don"t vary with -*T or operating profits. They have to be paid regardless of -*T availability. Past payment balances belong to euity holders.
'inancial leverage is concerned with the effect of changes the -*T on the earnings available to shareholders.
2
DEFINITION: 'inancial leverage is the ability of the firm to use fied financial charges to magnify the effects of changes in -*T on -P# i.e., financial leverage involves the use of funds obtained at fied cost in the hope of increasing the return to shareholder.
The favorable leverage occurs when the 'irm earns more on the assets purchase with the funds than the fied costs of their use. The adverse business conditions, this fied charge could be a burden and pulled down the companies wealth
MEANING OF FINANCIAL LEVERAGE: 3s stated earlier a company can finance its investments by debt=euity. The company may also use preference capital. The rate of interest on debt is fied, 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 fied, but preference dividend are paid when company earns profits. The ordinary shareholders are entitled to the residual income. That is, earnings after interest and taes belong to them. The rate of euity dividend is not fied and depends on the dividend policy of a company.
The use of the fied charges, sources of funds such as debt and preference capital along with owners" euity in the capital structure, is described as “financial leverages& or “gearing& or “trading& or “euity&. The use of a term trading on euity is derived from the fact that it is the owners euity that is used as a basis to raise debt, that is, the euity 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 euity"s.
1
FINANCIAL LEVERAGE AND THE SHAREHOLDERS R IS
'inancial leverage magnifies the shareholders earnings we also find that the variability of -*T causes -P# to fluctuate within wider ranges with debt in the capital structure that is with more debt -P# raises and falls faster than the rise and fall in -*T. Thus financial leverage not only magnifies -P# but also increases its variability. The variability of -*T and -Ps distinguish between two types of risk+ operating risk and financial risk. The distinction between operating and financial risk was long ago recogniBed by %arshall in the following words.
OPERATING R IS : < Operating risk can be defined as the variability of -*T (or return on total assets). The environment internal and eternal in which a firm operates determines the variability of -*T. #o long as the environment is given to the firm, operating risk is an unavoidable risk. 3 firm is better placed to face such risk if it can predict it with a fair degree of accuracy.
THE VARIABILITY OF EBIT HAS T;O COMPONENTS <.
$ariability of sales
6.
$ariability of epenses
1. VARIABILITY OF SALES:
The variability of sales revenue is in fact a major determinant of operating risk. #ales of a company may fluctuate because of three reasons. 'irst the changes in general economic conditions may affect the level of business activity. *usiness cycle is an economic phenomenon, which affects sales of all companies. #econd certain events affect sales of company belongings to a particular industry for eample 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.
+. VARIABILITY OF EPENSES: <
Diven the variability of sales the variability of -*T is further affected by the composition of fied and variable epenses. 5igher the proportion of fied epenses relative to variable epenses, higher the degree of operating leverage. The operating leverage affects -*T. 5igh operating leverage leads to faster increase in -*T when sales are rising. n bad times when sales are falling high operating leverage becomes a nuisance/ -*T declines at a greater rate than fall in sales. Operating leverage causes wide fluctuations in -*T with varying sales. Operating epenses may also vary on account of changes in input prices and may also contribute to the variability of -*T.
FINANCIAL R IS : <
'or a given degree of variability of -*T the variability of -P# and 4O- increases with more financial leverage. The variability of -P# caused by the use of financial leverage is called “financial risk&. 'irms eposed to same degree of operating risk can differ with respect to financial risk when they finance their assets differently. 3 totally euity financed firm will have no financial risk. *ut when debt is used the firm adds financial risk. 'inancial 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 are7
)
<)
?ebt ratio7 the ratio of debt to total capital, i.e.,
Where, ? is value of debt, # is value of euity and $ is value of total capital ? and # may be measured in terms of book value or market value. The book value of euity is called not worth. 6)
1
?ebt+euity ratio7 The ratio of debt to euity, i.e.,
nterest coverage7 the ration of net operating income charges, i.e.,
(or -*T) to interest
The first two measures of financial leverage can be epressed 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. *ut, it is difficult to get reliable information on market values in practice. The market values of securities fluctuate uite freuently. There is no difference between the first two measures of financial leverage in operational terms. They are related to each other in the following manner.
These relationships indicate that both these measures of financial leverage will rank companies in the same order. 5owever, the first measure (i.e., ?=$) is more specific as its value ranges between Beros to one. The value of the second measure (i.e., ?=#) may vary from Bero to any large number. The debt+euity 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+euity ratio is compared. The company will be considered risky if its debt+ euity ratio eceeds the industry+standard. 'inancial institutions and banks in ndia also focus on debt+euity ratio in their lending decisions. *
The first two measures of financial leverage are also measures of capital gearing. They are static in nature as they show the borrowing position of the company at a point of time. These measures thus fail to reflect the level of financial risk, which inherent in the possible failure of the company to pay interest repay debt. The third measure of financial leverage, commonly known as coverage ratio, indicates the capacity of the company to meet fied financial charges. The reciprocal of interest coverage that is interest divided by -*T is a measure of the firm"s incoming gearing. 3gain 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. 'irst, to determine the company"s ability to meet fied financial obligations, it is the cash flow information, which is relevant, not the reported earnings. ?uring recessional economic conditions, there can be wide disparity between the earnings and the net cash flows generated from operations. #econd, 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 liuidity than of leverage.
FINANCIAL LEVERAGE AND THE SHARE HOLDER S R ETURN: 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 fied 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 generaliBed by assets financed by the fied charges funds and cost of these funds is distributed to the shareholders, the earnings per share (-P#) or return on euity increase. 5owever, -P# or 4O- will fall if the company obtains the fied charges funds at a cost higher than the rate of return on the firm"s assets. t should, there fore, be clear that -P#, 4O- and 4O are the important figures for analyBing the impact of financial leverage.
3
COMBINED EFFECT OF OPERATING AND FINANCIAL LEVERAGES:
Operating and financial leverages together cause wide fluctuations in -P# for a given change in sales. f 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 -P#. 3 company with cyclical sales will have a fluctuating -P#/ but the swings in -P# 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 -P# associated with a given change in sales. The degree of combined leverage (?!H) is given by the following euation7
et another way of epressing the degree of combined leverage is as follows7
#ince Y (#+$) is contribution and Y (#+$)+'+;T is the profit after interest but before taes, -uation 6 can also be written as follows7
R ATIO ANALYSIS: < The primary user of financial statements are evaluating part performance and predicting future performance and both of these are facilitated by comparison. Therefore the focus of financial analysis is always on the crucial information contained in the financial statements. This depends on the objectives and purpose of such analysis. The purpose of evaluating such financial statement is different form person to person depending on its relationship. n other words even though the business unit itself and shareholders, deb enture holders, investors etc. all under take the financial analysis differs. 'or eample, trade
creditors may be interested primarily in the liuidity of a firm because the ability of the business unit to play their claims is best judged by means of a through analysis of its l>iuidity. The shareholders and the potential investors may be interested in the present and the future earnings per share, the stability of such earnings and comparison of these earnings with other units in thee industry. #imilarly the debenture holders and financial institutions lending long+term 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 reuired 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 etent and means of any financial analysis vary as per the specific needs of the analyst. 'inancial statement analysis is a part of the larger information processing system, which forms the very basis of any “decision making& process.
The financial analyst always needs certain yardsticks to evaluate the efficiency and performance of business unit. The one of the most freuently used yardsticks is ratio analysis. 4atio analysis involves the use of various methods for calculating and interpreting financial ratios to assess the performance and status of the business unit. t is a tool of financial analysis, which studies the numerical or uantitative 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. n other words, ratios are relative figures reflecting the relationship between variables and enable the analysts to draw conclusions regarding the financial operations.
5owever, 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. 'or instance, 3*! Htd. ntroduced 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 66.9 as compared to industry average turnover ratio of <<.6. 5owever 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 etremely low level. This resulted in numerous production held sales 8
and lower profits. n other words, what was initially looking like an etremely efficient inventory management, turned out to be a problem area with the help of ratio analysisF 3s a matter of caution, it must however be added that a single ration or two cannot generally provide that necessary details so as to analyBe the overall performance of the business unit.
n order to arrive at the reasonable conclusion regarding overall performance of the business unit, an analysis of the entire group of ratio is reuired. 5owever, ration analysis should not be considered as ultimate objective test but it may be carried further based on the outcome and revelations about the causes of variations. #ometimes large variations are due to unreliability of financial data or inaccuracies contained therein therefore before taking any decision the basis of ration analysis, their reliability must be ensured. #imilarly, while doing the inter+firm comparison, the variations may be due to different technologies or degree of risk in those units or items to be eamined are in fact the comparable only. t must be mentioned here that if ratios are used to evaluate operating performance, these should eclude etra ordinary items because there are regarded as non+recurring items that do not reflect normal performance.
4atio analysis is the systematic process of determining and interpreting the numerical relationship various pairs of items derived from the financial statements of a business. 3bsolute figures do not convey much tangible meaning and is not meaningful while comparing the performance of one business with the other.
6
FINDINGS: <. #ales in 611C+611> is at Q69Q.Q8 and in 611>+61<< <6Q06.82 lakhs those in a decreasing trend to the etent of 61R every year. On the other hand manufacturing epenses are at CQ60.<< lakhs from 611>+61<1. There has been significant increase in cost of production during 611>+61<1 because of increase in 4oyalty.
6.The interest charges were 8>6.6< in 611> and 20Q.1Qin 61<1 and 066.09 respectively shows that the company redeemed fied interest bearing funds from time to time out of profit from 611C+611>.?ebantures were partly redeemed with the help of debenture redemption reserve and other references.
2. The P3T (Profit after Ta) in 61<1+61<< is at 281.QC lakhs. The P3T has increased in prices in whole !ement industry during the
above period. The profit has increased almost
<0R during the period 611C+61<<.
8. ?ebentures were redeemed by transfers to ?.4.4. in 611>+61<1.
0. 3 steady transfer for dividend during 611C+611> from PSH appropriation but in 611C there is no adeuate dividend euity #hareholders.
9. The share capital of the company remained in charge during the three+year period because of no public issues made by the company.
Q. The secured loans have decreased consistently from 611C+611> and slight increase in 61<<.
C. The ensured loans have increased from 61<1+61<<. 3ll the secured and an insecure loan obtained by the company to optimiBe the leverage financially has some set books. *ecause of non+payment of dividends to share holders. *ecause of less profit made during the period
7
CHAPTER V CONCLUSIONS & RECOMMENDATIONS
82
CONCLUSIONS
<)
#ales in 611C+611> are at 7267"74 and in 611>+61<< 12752"4 lakhs those in a decreasing trend to the etent of 61R every year. On the other hand manufacturing epenses are at 8725"11 lakhs from 611>+61<1. There has been significant increase in cost of production during 611>+61<1 because of increase in 4oyalty.
6)
The interest charges were 8>6.6< in 611> and 20Q.1Qin 61<1 and 066.09 respectively shows that the company redeemed fied interest bearing funds from time to time out of profit from 611C+611>.?ebantures were partly redeemed with the help of debenture redemption reserve and other references.
2)
The P3T (Profit 3fter Ta) in 61<1+61<< is at 40"78 lakhs. The P3T has increased in prices in whole !ement industry during the
above period. The profit has increased almost
<0R during the period 611C+61<<.
8)
?ebentures were redeemed by transfers to ?.4.4. in 611>+61<1.
0)
3 steady transfer for dividend during 611C+611> from PSH appropriation but in 611C there is no adeuate dividend euity #hareholders.
9)
The share capital of the company remained in charge during the three+year period because of no public issues made by the company.
Q)
The secured loans have decreased consistently from 611C+611> and slight increase in 61<<.
C)
The unsured loans have increased from 61<1+61<<. 3ll the secured and an insecure loan obtained by the company to optimiBe the leverage financially has some set books. *ecause
81
of non+payment of dividends to share holders. *ecause of less profit made during the period.
>)
The reserves of the company steadily increase from 611C to 61<<. *ecause of less transfer in PSH appropriation 3=! and transfer to differed Ta. Thus marginaliBing the euity interest net worth of the company.
<1)
The current ratio of the company in 611C+1> is at 6.1C and in 611>+<1 at <.>C and in 61<1+<< at <.>0, which is as per the norms of the manufacturing ndustry. The current 4atio shows that the company"s liuidity or short+term solvency is in a better position to pay off the current liabilities as and when payable.
The uick ratio is also increased considerably during the period.
8+
RECOMMENDATIONS
'or the development of the cement industry NWorking Droup on cement ndustry" was constituted by the planning commission for the formulation of Z 'ive ear Plan. The working Droup has projected a growth rate of <1R for the cement industry during the plan period and has projected creation of additional capacity of 81+ 96 million tones mainly through epansion of eisting plants. The working Droup has identified following thrust areas for improving demand for cement/
'urther push to housing development programmes/
Promotion of concrete 5ighways and roads/ and
Ise of ready+mi concrete in large infrastructure project.
'urther, in order to improve global competitiveness of the ndian !ement ndustry, the ?epartment of ndustrial policy S promotion commissioned a study on the global competitiveness of the ndian industry through an organiBation of international repute, viB. LP%D !onsultancy Pvt. Htd. The report submitted by the organiBation has made several recommendations for making the ndian !ement ndustry more competitive in the international market. The recommendations are under consideration.
8)
SUGGESTIONS
<.The company has to maintain the optimal capital structure and leverage so that in coming years it can contribute to the wealth of the shareholders.
6.The mining loyalty contracts should be revised so that it will decrease the direct in the production
2.The company has to eercise control over its out side purchases and overheads which have effect on the profitability of the company.
8.3s the interest rates in pubic 'inancial institutions are in a decreasing trend after globaliBation the company going on searching for loan funds at a less rate of interest as in the case of I!O *ank. 0.-fficiency and competency in managing the affairs of the company should be maintained. 9. The reserves of the company steadily increase from 611C to 61<<. *ecause of less transfer in PSH appropriation 3=! and transfer to differed Ta. Thus marginaliBing the euity interest net worth of the company.
Q. The current ratio of the company in 611C+1> is at 6.1C and in 611>+<1 at <.>C and in 61<1+<< at <.>0, which is as per the norms of the manufacturing ndustry. The current 4atio shows that the company"s liuidity or short+term solvency is in a better position to pay off the current liabilities as and when payable.
C.The uick ratio is also increased considerably during the period.
8*
REFERENCE SECTION
BIBILIOGRAPHY
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AUTHOR
YEAR
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PUBLISHER
EDITION
1.
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V!on Boo?!
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E/'on
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Ta'a MC
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Mana"$n'
G%a Hll
E/'on
#$a%
Mana"$n' +.
MY
177+
0an> P Jan ).
DP SN
N Dl0 +22*
Ma0!0
Fnan9al
S#l'an C0an/
Nn'0
Mana"$n'
& Son!
E/'on
Fnan9al
Ta'a
Fo%'0
Mana"$n'
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E/'on
a% *.
P%a!anna C0an/%a
+228
N Dl0
World Wide Web
7 7
nclindustries.com www.ultratech.com
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