CHAPTER-I

INTRODUCTION

CAPITAL STRUCTURE DEFINED:

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

The financing or capital structure decision is a significant managerial decision .It

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

NEED AND IMPORTANCE OF CAPITAL STRUCTURE:

The value of the firm depends upon its expected earnings stream and the rate used
to discount this stream. The rate used to discount earnings stream its the firms required
rate of return or the cost of capital. Thus, the capital structure decision can affect the
value of the firm either by changing the expected earnings of the firm, but it can affect
the 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.
2

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

SCOPE OF THE STUDY:

A study of the capital structure involves an examination of long term as well as
short term sources that a company taps in order to meet its requirements of finance. The
scope of the study is confined to the sources that Ultra tech cements tapped over the
years under study i.e. 2007-2011.

1.1 OBJECTIVES OF THE STUDY:

The project is an attempt to seek an insight into the aspects that are involved in the capital
structuring and financial decisions of the company. This project endeavors to achieve the
following objectives.
1. To Study the capital structure of Ultra tech cements through EBIT-EPS analysis
2. Study effectiveness of financing decision on EPS and EBIT of the firm.
3. Examining leverage analysis of Ultra tech cements.
4. Examining the financing trends in the Ultra tech cements. For the period of 2007- 11.
5. Study debt/equity ratio of Ultra tech cements for 2007-11.

1.2RESEARCH METHODOLOGY AND DATA ANALYSIS

Data relating to Ultra tech cements. Has been collected through
PRIMARY SOURCES:

Published annual reports of the company for the year 2007-11.

SECONDARY

SOURCES:

Detailed discussions with 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.

1.3 LIMITATION OF EPS AS A FINANCING-DECISION

CRITERION
EPS is one of the mostly widely used measures of the companys
performance in practice. As a result of this, in choosing between debt and equity in
practice, sometimes too much attention is paid on EPS, which however, has serious
limitations as a financing-decision criterion.

The major short coming of the EPS as a financing-decision criterion is that

it does not consider risk; it ignores variability about the expected value of EPS. The belief
that investors would be just concerned with the expected EPS is not well founded.

Investors in valuing the shares of the company consider both expected value and
variability.

CHAPTER-II

REVIEW OF LITERATURE

CAPITAL STRUCTURE DEFINED:

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

The financing or capital structure decision is a significant managerial decision .It

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

FACTORS AFFECTING THE CAPITAL STRUCTURE:

LEVERAGE: The use of fixed charges of funds such as preference shares,

debentures and term-loans along with equity capital structure is described as financial
leverage or trading on. Equity. The term trading on equity is used because for raising
debt.

DEBT /EQUITY RATIO-Financial institutions while sanctioning long-term loans

insists that companies should generally have a debt equity ratio of 2:1 for medium and
large scale industries and 3:1 indicates that for every unit of equity the company has, it
can raise 2 units of debt. The debt-equity ratio indicates the relative proportions of capital
contribution by creditors and shareholders.

EBIT-EPS ANALYSIS-In our research for an appropriate capital structure we

need to understand how sensitive is EPS (earnings per share) to change in EBIT (earnings
before interest and taxes) under different financing alternatives.

The other factors that should be considered whenever a capital structure decision
is taken are

Cost of capital

Cash flow projections of the company

Size of the company

Dilution of control

Floatation costs

FEATURES OF AN OPTIMAL CAPITAL STRUCTURE:

An optimal capital structure should have the following features,

1.PROFITABILITY: - The Company should make maximum use of leverages at a

minimum cost.

2.FLEXIBILITY: - The capital structure should be flexible to be able to meet the

changing conditions .The company should be able to raise funds whenever the need arises
and costly to continue with particular sources.

3.CONTROL: - The capital structure should involve minimum dilution of control of the
company.

4.SOLVENCY: - The use of excessive debt threatens the solvency of the company. In a
high interest rate environment, Indian companies are beginning to realize the advantage
of low debt.

CAPITAL STRUCTURE AND FIRM VALUE:

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

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

CAPITAL STRUCTURE DIAGRAM

The Capital Structure Decision Process

EMBED PBrush

CAPITAL STRUCTURE AND PLANNING:

Capital structure refers to the mix of long-term sources of funds. Such as
debentures, long-term debt, preference share capital including reserves and surplus (i.e.,
retained earnings) The board of directors or the chief financial officer (CEO) of a
company should develop an appropriate capital structure, which are most factors to the
company. This can be done only when all those factors which are relevant to the
companys capital structure decision are properly analysed and balanced. The capital
structure should be planned generally keeping in view the interests of the equity
shareholders, being the owners of the company and the providers of risk capital (equity)
would be concerned about the ways of financing a companys operations. However, the
interests of other groups, such as employees, customers, creditors, society and
government, should also be given reasonable consideration. When the company lays
down its objective in terms of the shareholders wealth maximization (SWM), it is
generally compatible with the interests of other groups. Thus while developing an
appropriate capital structure for its company, the financial manager should inter alia aim
at maximizing the long-term market price per share. Theoretically, there may be a precise
point or range within an industry there may be a range of an appropriate capital structure
with in which there would not be great differences in the market value per share. One
way to get an idea of this range is to observe the capital structure patterns of companies
vis--vis their market prices of shares. It may be found empirically that there are not
significant differences in the share values within a given range. The management of a
company may fix its capital structure near the top of this range in order to make
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.
9

10

FEATURES OF AN APPROPRIATE CAPITAL STRUCTURE : -

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

11

A SOUND OR APPROPRIATE CAPITAL STRUCTURE SHOULD HAVE

THE FOLLOWING FEATURES

1)

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

2)

RISK: the use of excessive debt threatens the solvency of the company. To the point debt
does not add significant risk it should be used other wise it uses should be avoided.

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 companys of particularly concerned about dilution of
the control.

APPROACHES TO ESTABLISH APPROPRIATE CAPITAL STRUCTURE:

The capital structure will be planned initially when a company is incorporated .The
initial capital structure should be designed very carefully. The management of the company
should set a target capital structure and the subsequent financing decision should be made with
the a view to achieve the target capital structure .The financial manager has also to deal with an
existing capital structure .The company needs funds to finance its activities continuously. Every
time when fund shave to be procured, the financial manager weighs the pros and cons of various
12

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.
The following are the three most important approaches to decide about a firms capital
structure.

EBIT-EPS approach for analyzing the impact of debt on EPS.

Valuation approach for determining the impact of debt on the shareholders value.

Cash flow approached for analyzing the firms ability to service debt.
In addition to these approaches governing the capital structure decisions, many other factors
such as control, flexibility, or marketability are also considered in practice.

EBIT-EPS APPROACH:
We shall emphasize some of the main conclusions here .The use of fixed cost sources of
finance, such as debt and preference share capital to finance the assets of the company, is know
as financial leverage or trading on equity. If the assets financed with the use of debt yield a
return greater than the cost of debt, the earnings per share also increases without an increase in
the owners investment.
The earnings per share also increase when the preference share capital is used to acquire the
assets. But the leverage impact is more pronounced in case of debt because
1. The cost of debt is usually lower than the cost of performance share capital and
2. The interest paired on debt is tax deductible.
Because of its effect on the earnings per share, financial leverage is an
important consideration in planning the capital structure of a company. The companies with
high level of the earnings before interest and taxes (EBIT) can make profitable use of the high
degree of leverage to increase return on the shareholders equity. One common method of

13

examining the impact of leverage is to analyze the relationship between EPS and various
possible levels of EBIT under alternative methods of financing.
The EBIT-EPS analysis is an important tool in the hands of financial manager to get an insight
into the firms capital structure management .He can considered the possible fluctuations in
EBIT and examine their impact on EPS under different financial plans of the probability of
earning a rate of return on the firms assets less than the cost of debt is insignificant, a large
amount of debt can be used by the firm to increase the earning for share. This may have a
favorable effect on the market value per share. On the other hand, if the probability of earning a
rate of return on the firms assets less than the cost of debt is very high, the firm should refrain
from employing debt capital .it may, thus, be concluded that the greater the level of EBIT and
lower the probability of down word fluctuation, the more beneficial it is to employ debt in the
capital structure However, it should be realized that the EBIT EPS is a first step in deciding
about a firms capital structure .It suffers from certain limitations and doesnt provide
unambiguous guide in determining the capital structure of a firm in practice.

RATIO ANALYSIS: The primary user of financial statements are evaluating part performance and
predicting future performance and both of these are facilitated by comparison. Therefore the
focus of financial analysis is always on the crucial information contained in the financial
statements. This depends on the objectives and purpose of such analysis. The purpose of
evaluating such financial statement is different form person to person depending on its
relationship. In other words even though the business unit itself and shareholders, debenture
holders, investors etc. all under take the financial analysis differs. For example, trade creditors
may be interested primarily in the liquidity of a firm because the ability of the business unit to
play their claims is best judged by means of a through analysis of its l9iquidity. The
shareholders and the potential investors may be interested in the present and the future
earnings per share, the stability of such earnings and comparison of these earnings with other
units in thee industry. Similarly the debenture holders and financial institutions lending long14

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

15

In order to arrive at the reasonable conclusion regarding overall performance of the

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

CAPITAL STRUCTURE RATIOS

Capital structure or leverage ratios are used to analyse the long-term solvency or
stability of a particular business unit. The short-term creditors are interested in current
financial position and use liquidity ratios. The long-term creditors world judge the soundness
of a business on the basis of the long-term financial strength measured in terms of its ability to
pay the interest regularly as well as repay the installment on due dates. This long-term
solvency can be judged by using leverage or structural ratios.

16

There are two aspects of the long-term solvency of a firm:1. Ability to repay the principal when due, and
2. Regular payment of interest, there are thus two different but mutually dependent and
interrelated types of leverage ratio such as:

THE CAPITAL STRUCTURE CONTROVERSY:

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

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

17

1. Net Income Approach:

Under the net income approach (NI), the cost of debt and cost of equity are assumed to
be independent to the capital structure. The weighted average cost of capital declines and the
total value of the firm rise with increased use of leverage.

2. Net Operating Income Approach:

Under the net operating income (NOI) approach, the cost of equity is assumed to
increase linearly with average. As a result, the weighted average cost of capital remains
constant and the total value of the firm also remains constant as leverage is changed.

3. Traditional Approach:
According to this approach, the cost of capital declines and the value of the
firm increases with leverage up to a prudent debt level and after reaching the optimum point,
coverage cause the cost of capital to increase and the value of the firm to decline.
Thus, if NI approach is valid, leverage is significant variable and financing decisions
have an important effect on the value of the firm. On the other hand, if the NOI approach is
correct then the financing decisions should not be a great concern to the financing manager, as
it does not matter in the valuation of the firm.
Modigliani and Miller (MM) support the NOI approach by providing logically
consistent behavioral justifications in its favor. They deny the existence of an optimum capital
structure between the two extreme views; we have the middle position or intermediate version
advocated by the traditional writers.
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.

18

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

increased use by debt by

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

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

19

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.

NET OPERATING INCOME APPROACH

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

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

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

20

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

COST OF CAPITAL AND VALUATION APPROACH

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

21

CASH FLOW APPROACH:

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

LIMITATION OF EPS AS A FINANCING-DECISION CRITERION

22

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

EPS VARIABILITY AND FINANCIAL RISK: The EPS variability resulting form the use of leverage is called financial risk.
Financial risk is added with the use of debt because of
(a) The increased variability in the shareholders earnings and
(b) The threat of insolvency. A firm can avid financial risk altogether if it does not
employ any debt in its capital structure. But then the shareholders will be deprived of the
benefit of the financial risk perceived by the shareholders, which does not exceed the benefit
of increase EPS. As we have seen, if a company increase its debt beyond a point the expected
EPS will continue to increase but the value of the company increases its debt beyond a point,
the expected EPS will continue to increase, but the value of the company will fall because of
the greater exposure of shareholders to financial risk in the form of financial distress. The
EPS criterion does not consider the long-term perspectives of financing decisions. It fails to
deal with the risk return trade-off. A long term view of the effects of the financing decisions,
will lead one to a criterion of the wealth maximization rather that EPS maximization. The
EPS criterion is an important performance measure but not a decision criterion.
Given limitations, should the EPS criterion be ignored in making financing decision?
Remember that it is an important index of the firms performance and that investors rely
heavily on it for their investment decisions. Investors do not have information in the projected
23

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 managements ultimate decision making should be guided
by the best interests of shareholders.
Therefore, a long-term view of the effect of the alternative financial plans on the value of the
shares should be taken, o management opts for a financial plan which will maximize value in
the long run but has an adverse impact in near-term EPS, and the reasons must be
communicated to investors. A careful communication to market will be helpful in reducing the
misunderstanding between management and Investors.

COMPOSITION AND OBSERVATION

The sources tapped by ULTRA TECH CEMENTS Industries Ltd. Can be classified into:

Shareholders funds resources

Loan fund resources

SHAREHOLDER FUND RESOURCES:

Shareholders fund consists of equity capital and retained earnings.

EQUITY CAPITAL BUILD-UP

1.From 1995, the Authorized capital is Rs.450 lacs of equity shares at Rs.10 each. The issued
equity capital is RS.1622.93 lacs at Rs.10 each for the period 2002-2009 and subscribed and
paid-up capital is Rs. 1622.93 lacs at Rs.10 each for the period of 2004-2009.
3.There is an increase of 1.38% in the equity from 2005-2010.

RETAINED EARNINGS COMPOSITION

This includes

Capital Reserve

Share Premium Account

General Reserve

Contingency Reserve

24

Debentures Redemption Reserve

Investment Allowance Reserve

Profit & Loss Account

1.

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

2.

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

Capital structure describes how a corporation has organized its capitalhow 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. Long-term debt. By standard accounting definition, long-term debt includes
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. Common stockholders' equity. This represents the underlying ownership. On the
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

25

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
capitalizationthe current market price times the number of common shares .

CHAPTER III

3.1INDUSTRY
&
3.2 COMPANY PROFILE

26

COMPANY PROFILE
ULTRATECH CEMENT:
UltraTech Cement Limited has an annual capacity of 18.2 million tonnes. It manufactures and
markets Ordinary Portland Cement, Portland Blast Furnace Slag Cement and Portland
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.
UltraTech Cement is the countrys largest exporter of cement clinker. The export markets span
countries around the Indian Ocean, Africa, Europe and the Middle East.
UltraTechs 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 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
27

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, emerging as one of the foremost industrialists of pre-independence India. The
principles by which he lived were soaked up by his grandson, Aditya Vikram Birla, our
Group's legendary leader.

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. 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.
He set up 19 companies outside India, in Thailand, Malaysia, Indonesia, 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.

28

At the time of his untimely demise, the Group's revenues crossed Rs.8,000 crore globally,
with assets of over Rs.9,000 crore, comprising of 55 benchmark quality plants, 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
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.

29

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 direction, and the thrust areas for our work ensuring performance management as
well.

30

Our focus is on the all-round development of the communities around our plants located
mostly in distant rural areas and tribal belts. All our Group companies - Grasim, 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 with internal performance assessment mechanisms, our projects are audited by reputed
external agencies, who measure it on qualitative and quantitative parameters, helping us
gauge the effectiveness and providing excellent inputs.
Our partners in development are government bodies, district authorities, village 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 another
level, this provides a platform for advocacy. Some of the agencies we 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.
Our logo is the symbolic reflection of these traits. It is the
cornerstone of our corporate identity. It helps us leverage the unique
Aditya Birla brand and endows us with a distinctive visual image.
31

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 universe, 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.
:: 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

32

:: 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
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

33

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
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

Ordinary portland cement is the most commonly used cement for a wide range 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
blast-furnace slag cement has a lighter colour, better concrete workability, easier finishability,
higher compressive and flexural strength, lower permeability, improved resistance to
34

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
portland cement in the presence of water to form extra strong cementing material which
resists wet cracking, thermal cracking and has a high degree of cohesion and workability in
concrete and mortar.
"As a Group we have always operated and continue to operate our businesses 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 and the
use of existing resources has to be reduced, or eliminated altogether. Only then 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
35

::
::
::
::

Water conservation
Biodiversity management
Afforestation
Reduction in emissions

Importantly, 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.

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 direction, and the thrust areas for our work ensuring performance management as
well.
Our focus is on the all-round development of the communities around our plants located
mostly in distant rural areas and tribal belts. All our Group companies - Grasim, 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 with internal performance assessment mechanisms, our projects are audited by reputed
external agencies, who measure it on qualitative and quantitative parameters, helping us
gauge the effectiveness and providing excellent inputs.
Our partners in development are government bodies, district authorities, village 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,
36

draw from each other's experiences, and ensure that efforts are not duplicated. At another
level, this provides a platform for advocacy. Some of the agencies we 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
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

INDUSTRY PROFILE
37

In the most general sense of the 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. The volcanic ash and pulverized brick additives which were added to the burnt lime to
obtain a hydraulic binder were later referred to as cementum, cimentum, cment 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 concretethe bonding of
natural or artificial aggregates to form a strong building material which is durable in the face
of normal environmental effects.
Concrete should not be confused with cement because the term cement refers only to the dry
powder substance used to bind the aggregate materials of concrete. Upon the addition 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
concretes. Many excellent examples of structures made from these concretes are 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.
The use of structural concrete disappeared in medieval Europe, although 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.

38

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 developed 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 515
minutes. The success of "Roman Cement" led other manufacturers to develop rival products
by burning artificial mixtures of clay and chalk.
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 century. Vicat went on to devise a method of 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 content 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
39

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 1450C 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.
40

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 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.
Portland flyash cement contains up to 30% fly ash. The fly ash is pozzolanic, so that
ultimate strength is maintained. Because fly ash addition allows a lower concrete water
content, early strength can also be maintained. Where good quality cheap fly ash is available,
this can be an economic alternative to ordinary Portland cement.
Portland pozzolan cement includes fly ash cement, since fly ash is a pozzolan, but also
includes cements made from other natural or artificial pozzolans. In countries where volcanic
ashes are available (e.g. Italy, Chile, Mexico, the Philippines) these cements are often the
most common form in use.
Portland silica fume cement. Addition of silica fume can yield exceptionally high strengths,
and cements containing 5-20% silica fume are occasionally produced. However, silica fume is
more usually added to Portland cement at the concrete mixer.
Masonry cements are used for preparing bricklaying mortars and stuccos, and must not be
used in concrete. They are usually complex proprietary formulations containing Portland
clinker and a number of other ingredients that may include limestone, hydrated lime, air
entrainers, retarders, waterproofers and coloring agents. They are formulated to yield
workable mortars that allow rapid and consistent masonry work. Subtle variations of Masonry
cement in the US are Plastic Cements and Stucco Cements. These are designed to produce
controlled bond with masonry blocks.
Expansive cements contain, in addition to Portland clinker, expansive clinkers (usually
sulfoaluminate clinkers), and are designed to offset the effects of drying shrinkage that is
normally encountered with hydraulic cements. This allows large floor slabs (up to 60 m
square) to be prepared without contraction joints.

41

White blended cements may be made using white clinker and white supplementary materials
such as high-purity metakaolin.
Colored cements are used for decorative purposes. In some standards, the addition of
pigments to produce "colored Portland cement" is allowed. In other standards (e.g. ASTM),
pigments are not allowed constituents of Portland cement, and colored cements are sold as
"blended hydraulic cements".
Very finely ground cements are made from mixtures of cement with sand or with slag or
other pozzolan type minerals which are extremely finely ground together. Such cements can
have the same physical characteristics as normal cement but with 50% less cement
particularly due to their increased surface area for the chemical reaction. Even with intensive
grinding they can use up to 50% less energy to fabricate than ordinary Portland cements.
Non-Portland hydraulic cements
Pozzolan-lime cements. Mixtures of ground pozzolan and lime are the cements used by the
Romans, and are to be found in Roman structures still standing (e.g. the Pantheon in Rome).
They develop strength slowly, but their ultimate strength can be very high. The hydration
products that produce strength are essentially the same as those produced by Portland cement.
Slag-lime cements. Ground granulated blast furnace slag is not hydraulic on its own, but is
"activated" by addition of alkalis, most economically using lime. They are similar to pozzolan
lime cements in their properties. Only granulated slag (i.e. water-quenched, glassy slag) is
effective as a cement component.
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, including sulfate.
Calcium aluminate cements 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 hydrates. 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

42

expansive cements, in ultra-high early strength cements, and in "low-energy" cements.

Hydration produces ettringite, and specialized physical properties (such as expansion or rapid
reaction) are obtained by adjustment of the availability of calcium and sulfate ions. Their use
as a low-energy alternative to Portland cement has been pioneered in China, where several
million 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 CO2 emission around half that associated with Portland clinker.
However, SO2 emissions are usually significantly higher.
"Natural" 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 cements are made from mixtures of water-soluble alkali metal silicates and
aluminosilicate mineral powders such as fly ash and metakaolin.

Cement Industry in India

India is the world's second largest producer of cement according to the Cement
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 MT during April-September 2010-11.

43

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.
Further, speaking at the Green Cementech 2010, a seminar jointly organised by the
Confederation of Indian Industry (CII) and the Cement Manufacturer's Association 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.

Madras Cements Ltd is planning to invest US$ 178.4 million to increase the
manufacturing capacity of its Ariyalur plant in Tamil Nadu to 4.5 MT from 2 MT by
April 2011.

My Home Industries Limited (MHI), a 50:50 joint venture (JV) between 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
44

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.

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

Swiss cement company Holcim plans to invest US$ 1 billion in setting up 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 cement-making 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.
The government has also increased budgetary 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.

45

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 governments infrastructure development plans in
the context of the nations 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 cement in an organized way commenced in Madras.
South India Industries Limited began manufacture of Portland cement 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 phase is also referred to as the
Nascent Stage of Indian Cement Industry.
During the earlier years, 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 government intervened by giving protection to the Industry and by encouraging
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.
46

After Independence
The growth rate of cement was slow around the period after independence due to various
factors like low prices, slow growth in additional capacity and rising cost. The government
intervened several times to boost the industry, by increasing 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 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.
However the price control did not have the desired effect. Rise in input cost, reduced profit
margins meant the manufacturers could not allocate funds 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.A quota of 66.60% was imposed for sales to Government and small real estate
developers. For new units and sick units a lower quota at 50% was effected. The remaining

47

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.

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.

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

48

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, 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.
Cement plant was first set up in Calcutta, in 1889. At that time, the cement 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
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 arded freedom. The
industry started focusing on export also to double the opportunity government de-licensed the
cement industry. The growth of the industry accelerated forthwith and majority of the
industrialists invested heavily in the industry with the awavailable for it in global markets.
Today, the cement manufacturers in India have transformed into leading Indian exporters of
cement across the world.
49

CHAPTER-IV
4.1 DATA ANALYSIS AND INTERPRETATION

50

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
ROA =
PAT
TOTAL ASSETS

2007

2008

2009

2010

2011

962.85
1782.77 2575.14 3531.64 4133.60
4174.40
6087.50 6674.58 6673.44 16264.27
23.06559 29.28575 38.5813 52.92083 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 assetsCurrent liabilities)

particulars
PAT
Total Capital Emp
ROC

2007
962.85
204.99
4.697058

2008
1782.77
25.33
70.38176

2009
2575.14
118.89
21.65985

2010
3531.64
173.30
20.37877

2011
4133.60
304.80
13.56168

YEAR 2006-2007
51

Performance of company (Amount in Rs. CRS)

Gross Revenue
Profit (Loss) before tax
Earnings per share Rs.

4939.44
1166.19
1.69

Total Expenditure
Profit after tax
Dividend ratio

3773.25
782.28
10%

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.

YEAR 2007-2008
PERFORMANCE OF COMPANY (AMOUNT IN RS. CRS )
Gross Revenue
Profit (Loss) before tax
Earnings per share Rs.

5636.12
1507.01
0.64

Total Expenditure
Profit after tax
Dividend ratio

4142.48
1007.61
5%

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.

YEAR 2008-2009
PERFORMANCE OF COMPANY (AMOUNT IN RS. CRS S)

52

Gross Revenue
Profit (Loss) before tax
Earnings per share Rs.

6575.40
1361.46
0.64

Total Expenditure
Profit after tax
Dividend ratio

5213.94
977.02
5%

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 with the performance of prefab Division the Gross Profit gap has narrowed 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 in Last year in Current year.
The Director has recommended a 7.5% Dividend and in Last year it was at 5%.

YEAR 2009-2010
PERFORMANCE OF COMPANY (AMOUNT IN RS. CRS)

Gross Revenue
Profit (Loss) before tax
Earnings per share Rs.

7169.43
1588.16
1.55

Total Expenditure
Profit after tax
Dividend ratio

5585.29
1093.24
10%

PERFORMANCE ANALYSIS OF 2009-2010

In 2009-10 the company has performed well in all decisions because of high demand
and realizations. The Gross Profit Increased considerably and the interest payments have
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
53

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

YEAR 2010-2011
PERFORMANCE OF COMPANY (AMOUNT IN RS.CRS)
Gross Revenue
Profit (Loss) before tax
Earnings per share Rs.

13558.42
1786.19
2.10

Total Expenditure
Profit after tax
Dividend ratio

11782.74
1404.23
15%

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
54

consumption is expected to grow to 199 million Tons from 136 million Tons consumption
FY2010. During the year 2010-11 your companys 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.

EBIT LEVELS
Particulars
Earnings Before
Interest & Tax

2007

2008

2009

2010

2011

1166.19

1507.01

1361.46

1588.16

1786.19

Change
% Change

126.54
477.39
294.2
234.99
374.53
9.215979 3.156769 4.627668 6.758415 4.769151

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 trend because of drastic decline in prices in Cement
Industry during above period.

55

INTERPRETATION
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.

PERFORMANCE
EPS ANALYSIS
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

16234825
1.69

16234825
0.64

16234825
0.79

16234825
1.55

16234825
2.1

56

EPS LEVELS
2.5

EPS

2
1.5
1
0.5
0
2006

2007

2008

2009

2010

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

EBIT EPS CHART

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

(EBIT - INT) (1 T)
N

57

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.

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 interest of the company.
58

STRATEGIES IN FINANCE MOBILIZATION

There are many options for the fund raising program of any company and it is quite pertinent
to note that these options will have to be evaluated by the finance manager mainly in terms of:

Cost of funds

Mode of repayment

Timing and time lag involved in mobilization

Assets security

Stock options

Cournands in terms of participative management and

Other terms and conditions.

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

THE FORMS OF FUNDS MOBILIZATION IS ILLUSTRATED BY A CHART:

FUNDING MIX - SOURCES

OWNERS FUND

BORROWED FUND
59

EQUITY
CAPITAL

RETAINED
EARNINGS

PREFERENCE
CAPITAL

CONVENTIONAL

NON- CONVENTIONAL

SOURCES

SOURCES

FINANCIAL

SUPPLIERS CREDIT

INSTITUTION

SHORT TERM

BANK

BANK BORROWINGS

CASH CREDIT

HIRE PURCHASE

DEBENTURES
FIXED DEPOSITS
ICD

ULTRA TECH CEMENTS INDUSTRIES LTD. THE FUNDING

MIX

Particulars

2006-07

2007-08

2008-09

2009-10

1763.78

2696.99

3602.10

4608.65

2010-11

Source of funds
Share holders funds
a) Share capital

10666.04
60

b) Reserves and surplus

1639.78

2571.73

3475.93

4482.17

10387.22

c)Deferred tax
TOTAL (A)

560.26
3963.82

542.35
5811.07

722.93
7800.96

830.73
9921.55

1730.05
22783.31

1151.25

982.66

1175.80

854.19

2789.76

427.38

757.84

965.83

750.33

1354.84

TOTAL (B)

1578.63

1740.5

2141.63

1604.52

4144.6

TOTAL (A+B)
% of S H in total C.E
% of Loan Fund in total
C.E

5542.45
44.67

7551.57
48

9942.59 11526.07
41.22
42.38

26927.91
34.3

55.33

52

Loan Funds
a) Secured Loans
b) Unsecured Loans

58.78

57.62

65.69

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 on equity is also good because the company affectively utilizing
the Loan Funds in the Capital Structure. So that it leads to higher profit increase of EPS in
2007 at 0.79 to 2010 1.55

61

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

638.21

Vijaya Bank

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

0.00

Deferred sales tax loan

0.00

Deposits from stockiest & others

1730.39

Inter corporate deposits

50.00

Others

201.04
TOTAL

2588.22

62

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

583.41

Vijaya Bank

65.15
648.56
1,413.17

UNSECURED LOANS
Deposits from public

600.54

Lease /Hire purchases

21.25

Canara Bank factors ltd.

100.09

Deferred sales tax loan

0.00

Deposits from stockiest & others

Inter corporate deposits
Others

1,239.02
0.00
201.04

TOTAL

2161.94

63

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

627.10

Vijaya Bank

174.12

Canara Bank Factors

158.98

960.20
1167.20

UNSECURED LOANS
Deposits from public

592.31

Deposits from stockiest & others

1600.68

Lease/Hire purchase

10.30

Others

201.04
TOTAL

3571.53

64

TERM LOANS
2009-2010
Particulars

Rs. (in Lakhs)

TERM LOANS
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

410.15

UCO Bank

594.34

Canara Bank Factors

0.00

1004.49
1167.20

UNSECURED LOANS
Deposits from public

399.69

Deposits from stockiest & others

1053.83

Lease/Hire purchase

57.39

Others

201.04

TOTAL

3495.64

65

TERM LOANS
2010-2011
Particulars

Rs. (in Lakhs)

TERM LOANS
Indian Renewable Energy
development agency ltd.
Non convertible debentures

2532.14
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

561.32

UCO Bank
Canara Bank Factors
UTI Bank Ltd

306.54
403.46
211.82

1483.14
4015.28

UNSECURED LOANS
Interest free from sales tax
deferment loan
Deposits from public

162.40

Deposits from stockiest & others

919.26

Lease/Hire purchase

54.25

Others

201.29

TOTAL

5969.35

616.87

66

TERMS LOANS

Rs. IN LAKHS

7,000.00
6,000.00
5,000.00
4,000.00
3,000.00
2,000.00
1,000.00
0.00
2007

2008

2009

2010

2011

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.

67

YEAR 2006 - 2007

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

3902.67

Total assets

3902.67

124.49
1151.25

Reserves & surplus

Unsecured loans

1639.29
427.38

3214.23
204.99

Investments
Misc. Expenditure

483.45
---

YEAR 2007 2008

Position of Mobilization and Development of funds
(Amount in RS. crs)
Total liabilities
Sources of funds
Paid u capital

4979.84

Total assets

4979.84

124.49

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

982.66

Reserves & surplus

Deferred tax
Unsecured loans

2571.73
542.35
757.84

Investments
Misc. Expenditure

170.90
---

4783.61
25.33
Nil

Financial leverage results from the presence of fixed financial charges in the
firm income stream. These fixed charges dont 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.

68

YEAR 2008-2009
Position of Mobilization and Development of funds
(Amount in RS. crs)
Total liabilities
Sources of funds
Paid u capital

6466.66

Total assets

6466.66

124.49

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

1175.80

Reserves & surplus

Deferred tax
Unsecured loans

3475.93
722.93
965.83

Investments
Misc. Expenditure

1034.80
---

5312.97
118.89
Nil

YEAR 2009- 2010

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

7043.90 Total assets

124.49 Reserves & surplus
Deferred tax
854.19 Unsecured loans
5201.05 Investments
173.30 Misc. Expenditure
Nil

7043.90
4482.17
830.73
750.33
1669.55
---

69

YEAR 2010 2011

Position of Mobilization and Development of funds
(Amount in RS. crs)
Total liabilities
Sources of funds
Paid u capital

16540.69

Total assets

16540.69

274.04

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

2789.76

Reserves & surplus

Deferred tax
Unsecured loans

10387.22
1730.05
1354.84

Investments
Misc. Expenditure

3730.32
----

12505.57
304.80
Nil

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

70

fixed rate of interest which is a contractual obligation for the company except in the case of
preference shares. The equity holders are entitled to the remainder of operating profits if any.
Financial leverage results from presence of fixed financial charges in eh firms income
stream. These fixed charges dont vary with EBIT or operating profits. They have to be paid
regardless of EBIT availability. Past payment balances belong to equity holders.
Financial leverage is concerned with the effect of changes I the EBIT on the
earnings available to shareholders.

DEFINITION:
Financial leverage is the ability of the firm to use fixed financial charges to
magnify the effects of changes in EBIT on EPS i.e., financial leverage involves the use of
funds obtained at fixed cost in the hope of increasing the return to shareholder.
The favorable leverage occurs when the Firm earns more on the assets
purchase with the funds than the fixed costs of their use. The adverse business conditions, this
fixed charge could be a burden and pulled down the companies wealth

MEANING OF FINANCIAL LEVERAGE:

As stated earlier a company can finance its investments by debt/equity. The
company may also use preference capital. The rate of interest on debt is fixed, irrespective of
the companys rate of return on assets. The company has a legal banding to pay interest on
debt .The rate of preference dividend is also fixed, but preference dividend are paid when
company earns profits. The ordinary shareholders are entitled to the residual income. That is,
earnings after interest and taxes belong to them. The rate of equity dividend is not fixed and
depends on the dividend policy of a company.
The use of the fixed charges, sources of funds such as debt and preference
capital along with owners equity in the capital structure, is described as financial leverages
or gearing or trading or equity. The use of a term trading on equity is derived from the
fact that it is the owners equity that is used as a basis to raise debt, that is, the equity that is
71

traded upon the supplier of the debt has limited participation in the companies profit and
therefore, he will insists on protection in earnings and protection in values represented by
owners equitys

FINANCIAL LEVERAGE AND THE SHAREHOLDERS RISK

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

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

OPERATING RISK: -

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

72

THE VARIABILITY OF EBIT HAS TWO COMPONEN

1.

Variability of sales

2.

Variability of expenses

1. VARIABILITY OF SALES:
The variability of sales revenue is in fact a major determinant of operating risk.
Sales of a company may fluctuate because of three reasons. First the changes in general
economic conditions may affect the level of business activity. Business cycle is an economic
phenomenon, which affects sales of all companies. Second certain events affect sales of
company belongings to a particular industry for example the general economic condition may
be good but a particular industry may be hit by recession, other factors may include the
availability of raw materials, technological changes, action of competitors, industrial
relations, shifts in consumer preferences and so on. Third sales may also be affected by the
factors, which are internal to the company. The change in management the product market
decision of the company and its investment policy or strike in the company has a great
influence on the companys sales.

2. VARIABILITY OF EXPENSES: Given the variability of sales the variability of EBIT is further affected by the
composition of fixed and variable expenses. Higher the proportion of fixed expenses relative
to variable expenses, higher the degree of operating leverage. The operating leverage affects
EBIT. High operating leverage leads to faster increase in EBIT when sales are rising. In bad
times when sales are falling high operating leverage becomes a nuisance; EBIT declines at a
greater rate than fall in sales. Operating leverage causes wide fluctuations in EBIT with

73

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

3.Interest coverage: the ration of net operating income

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

74

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 is no difference between the first two measures of financial leverage in

operational terms. They are related to each other in the following manner.

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

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

75

The third measure of financial leverage, commonly known as coverage ratio, indicates the
capacity of the company to meet fixed financial charges. The reciprocal of interest coverage
that is interest divided by EBIT is a measure of the firms incoming gearing. Again by
comparing the companys coverage ratio with an accepted industry standard, the investors,
can get an idea of financial risk .how ever, this measure suffers from certain limitations. First,
to determine the companys ability to meet fixed financial obligations, it is the cash flow
information, which is relevant, not the reported earnings. During recessional economic
conditions, there can be wide disparity between the earnings and the net cash flows generated
from operations. Second, this ratio, when calculated on past earnings, does not provide any
guide regarding the future risky ness of the company. Third, it is only a measure of short-term
liquidity than of leverage.

FINANCIAL LEVERAGE AND THE SHARE HOLDERS RETURN:

The primary motive of a company in using financial leverage is to magnify the

shareholders return under favorable economic conditions. The role of financial leverage in
magnifying the return of the shareholders is based under assumption that the fixed charges
funds (such as the loan from financial institutions and other sources or debentures) can be
obtained at a cost lower than the firms rate of return on net assets. Thus, when the difference
between the earnings generalized by assets financed by the fixed charges funds and cost of
these funds is distributed to the shareholders, the earnings per share (EPS) or return on equity
increase. However, EPS or ROE will fall if the company obtains the fixed charges funds at a
cost higher than the rate of return on the firms assets. It should, there fore, be clear that EPS,
ROE and ROI are the important figures for analyzing the impact of financial leverage.

76

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:

77

CHAPTER-V
5.1 FINDINGS
5.2 CONCLUSIONS
5.3 SUGGESTION
5.4 BIBLIOGRAPHY

78

5.1 FINDINGS
1. There has been a small reduction in Gross Sales and with the performance of
prefab Division the Gross Profit gap has narrowed and contributing to the
EBIT. The Gross Profit has increased considerably from 520.99 Cr in Last year
to 641.80 Cr in year. The interest payment has increased by 51 Cr in the
Current year and the Profit before Tax at 520.99 when compared to 641.80 cr
in Last year.
2. Perform Division realization has increased by 8% even the Turnover has come to 641.80 Cr
from 400.09 Cr in last year.
3. The profit After Tax has came 313.92 Cr to 214.82Cr in Current year because of slope in
Cement Industry.
4. 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 2011even the cost of manufacturing
has increased by 5% because of higher sales volume PAT has increased considerably, which
leads to higher EPS, which is at 83.80 in 2010.
5. The EBIT level in 2007 is at 400.09 Cr and is increasing every year till 2010. 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 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
7. Because of decrease in Non-Operating expenses to the time of 214.82 Cr the Net profit has
increased. It stood at in current year increase because of redemption of debenture and cost
reduction. A dividend of Rs.45.74 Cr as declared during the year at 7.85% on equity.
79

5.2 CONCLUSIONS

1)

Sales in 2008-2009 is at 7267.74 and in 2010-2011 12752.43 crs those in a decreasing

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 interest charges were 492.21 in 2009 and 357.07in 2010 and 522.56 respectively
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 After Tax) in 2010-2011 is at 340.78. The PAT has increased in prices in
whole Cement industry during the above period. The profit has increased almost 15% during
the period 2009-2010.

4)

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

5)

A steady transfer for dividend during 2008-2009 from P&L appropriation but in 2008
there is no adequate dividend equity Shareholders.

6)

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

7)

The secured loans have decreased consistently from 2008-2010 and slight increase in
2011.
80

5.3 RECOMMENDATIONS ON CEMENT INDUSTRY

For the development of the cement industry Working Group on cement Industry
was constituted by the planning commission for the formulation of Five Year Plan. The
working Group has projected a growth rate of 10% for the cement industry during the
plan period and has projected creation of additional capacity of 40-62 million tones
mainly through expansion of existing plants.

The working Group has identified

following thrust areas for improving demand for cement;

Further push to housing development programmers;

Promotion of concrete Highways and roads; and

Use of ready-mix concrete in large infrastructure project.

Further, in order to improve global competitiveness of the Indian Cement Industry, the
Department of Industrial policy & promotion commissioned a study on the global
competitiveness of the Indian industry through an organization of international repute,
viz.. The report submitted by the organization has made several recommendations for
making the Indian Cement Industry more competitive in the international market. The
recommendations are under consideration.

81

5.4 SUGGESTIONS:

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

82

5.5 BIBLIOGRAPHY
1)

Financial Management

Khan & Jain

2)

Financial Management

I.M. Pandey

3)

Financial Management

Prasanna Chandra

4)

News Papers

Financial Express
Economic Times

83