Professional Documents
Culture Documents
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Ref.No.: FM0011
Ambuja Cements:
Weighted Average Cost of Capital
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Good evening all of you said Dr Martin, professor of Finance, to the first year MBA students
standing in the corridor leading towards the campus library of Alien Business School, Mumbai. For a
few seconds, the corridor echoed with the voices of the students wishing their professor. Dr. Martin
is one of the favourite faculty in the college and each and every student likes his friendly nature.
Professor, would you like to join us in the discussion on the basic concepts of finance to prepare
ourselves for the upcoming finance class, asked Atul. Oh, really! Thats great, replied Dr Martin.
By the way, which concept are you trying to understand? asked Dr. Martin. Cost of capital, said
Ashwani. Ok, fine. We will discuss it in the conference room, said Dr. Martin. Five minutes later,
around 10 students and the professor were sitting in the conference room next to the campus library
and were discussing the concept of cost of capital.
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Professor, are cost of capital and cost of equity the same? asked Harsh. It depends on the
structure of capital. If the capital is financed only through equity, then the cost of equity would be
equal to the cost of capital. Otherwise not, said Dr. Martin. It means a firm can finance capital
through other sources too? asked Gopal. Yes...would any one of you like to answer his question,
asked Dr. Martin, giving a chance to the fellow students to answer. Yes Professor, Shall I? said
Ankita, taking the initiative. Great. Go ahead, said Dr Martin. Other sources of financing capital
are debentures, term loans, and preference capital, said Ankita. Good. Apart from these, a few
others are rights issue, private placement, Global Depository Receipts issue, internal accruals and
last but not the least, bought out deals, added Dr. Martin. All the students were delighted and their
curiosity increased to some extent. However, Puneet, who always thinks ahead, asked, Professor,
when firms use different sources to finance the capital, how do they estimate cost of capital?
This case study was written by Manish Agarwal (Faculty Associate) and D. Satish (Professor of Finance), IBS, Hyderabad. It is
intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management
situation. The case was compiled from published sources.
2009, IBSCDC
No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the
permission of the copyright owner.
Choosing a Company
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In such case, firms use Weighted Average Cost of Capital (WACC), replied Dr. Martin. Sir,
what is WACC? Please explain to us, asked all the students simultaneously. Sure, why not? WACC
is the expected average cost of serving the existing capital, You can get it by multiplying the cost of
each source with its weight in capital and adding up the former results, replied Dr. Martin to all. He
further added, WACC uses market value of each source to find out the weight of a particular
source in capital. Sir, where can we use this? asked Harsh. Good question, said Dr. Martin. It
is an appropriate discount rate to find out present value of future cash flows. It is also used in capital
budgeting analysis and firm valuation.
Setting Parameters
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We will do an exercise to get a better understanding of WACC, said Dr. Martin. We will
take up real time data of some company and find out its WACC. Which company, Sir? asked
Ankita. Any suggestions, said Dr. Martin throwing it open for the students to select a company.
Sir, shall we take Reliance? asked Puneet. No Sir, that is too complex as it is a conglomerate
company. We have to take some company which is into one industry only, said Harsh. Yes, to
start with, take a company which has exposure in one or two industries only, Dr. Martin replied.
Then we will take Ambuja Cements. It is an Index company and has exposure to cement
industry only, said Alok, who was quiet until now. OK, then Ambuja Cements Limited (ACL)
(Annexure I) is final, said Dr. Martin.
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Before you start, I would like to set some parameters. Use Capital Assets Pricing Model (CAPM)
to estimate the cost of capital, for market return take 10 years monthly returns of index (Annexure
II), use 10 years Indian government bond yield which was around 6.83% as on December 31 st 2008
as risk free rate and use 3 years monthly return of ACL for beta calculation (Annexure III), said
Dr. Martin. Sir, for cost of debt, which cost should we take pre-tax or post-tax? asked Atul.
Ofcourse, post-tax replied Dr. Martin. He further added, Now, are you all ready to calculate
WACC for ACL? Yes Professor, we are. Thanks a lot, replied all the students together.
Annexure I
Company Details: Ambuja Cements Limited
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ACL is one of the most cost efficient cement companies in India. It is a part of Switzerland-based
Holcim Group, one of the leading cement suppliers in the world with a total capacity of 194.4 million
tonnes at the end of Calendar Year (CY) 2008.
The company was established by Narotam Satyanarayan Sekhsaria (Sekhsaria), a businessman from
Gujarat (Western India). Sekhsaria started Ambuja Cements Private Limited (ACPL) in 1981. The
company went for public issue in 1983. The company grew rapidly from just 0.7 million tonnes per
annum (mtpa) capacity in 1982 to 22 mtpa capacity by the end of CY08.
Financial Performance
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The company reported 9.5% growth in sales (net to excise duty) in CY08, which increased to INR
62,617.9 million in CY08 from 57,186.0 million in CY07. However, the companys Profit Before Tax
(PBT) decreased by 29.8% from INR 27,893.6 million in CY07 to INR 19,576.4 million in CY08,
mainly due to substantial increase in manufacturing and other expenses (22.2%). Even downward
movement in interest expenses (57.7% from INR 770.9 million in CY07 to INR 326.0 million in
CY08) was not able to was not able to stop PBT to shrink into red zone. Persuaded by the decline in
profit, the company provided only INR 5,679.3 million as taxes in CY08, which is 39.8% lower than
the provisions made in CY07. Ultimately, the net profit plunged by 24.7%, from INR 18,461.1 million
in CY07 to 13,897.1 million in CY08.
At the end of CY08, the company had INR 3,045.2 million of shareholders capital (divided into
1,522.6 million shares of INR 2 each) and INR 2,886.7 million of loan funds.
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Compiled by the author from Ambuja Cements Limited: Annual Report, 2008, http://www.gujaratambuja.com/GujAmbu-ar08-full.pdf
Annexure II
10-year Sensex Closing Price
BSE Sensex Closing
Year
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Year
3,224.36
March-2000
5,001.28
February-1998
3,622.22
April-2000
4,657.55
March-1998
3,892.75
May-2000
4,433.61
April-1998
4,006.81
June-2000
4,748.77
May-1998
3,686.39
July-2000
4,279.86
June-1998
3,250.69
August-2000
4,477.31
July-1998
3,211.31
September-2000
4,090.38
2,933.85
October-2000
3,711.02
3,102.29
November-2000
3,997.99
2,812.49
December-2000
3,972.12
2,810.66
January-2001
4,326.72
3,055.41
February-2001
4,247.04
3,315.57
March-2001
3,604.38
3,399.63
April-2001
3,519.16
3,739.96
May-2001
3,631.91
3,325.69
June-2001
3,456.78
3,963.56
July-2001
3,329.28
4,140.73
August-2001
3,244.95
4,542.34
September-2001
4,898.21
October-2001
2,989.35
September-1999
4,764.42
November-2001
3,287.56
October-1999
4,444.56
December-2001
3,262.33
November-1999
4,622.21
January-2002
3,311.03
December-1999
5,005.82
February-2002
3,562.31
January-2000
5,205.29
March-2002
3,469.35
February-2000
5,446.98
April-2002
3,338.16
August-1998
September-1998
October-1998
November-1998
December-1998
January-1999
February-1999
March-1999
April-1999
May-1999
June-1999
July-1999
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January-1998
Do
August-1999
2,811.6
Contd...
Year
June-2002
3,244.7
July-2002
September-2004
5,583.61
October-2004
5,672.27
2,987.65
November-2004
6,234.29
August-2002
3,181.23
December-2004
6,602.69
September-2002
2,991.36
January-2005
6,555.94
October-2002
2,949.32
February-2005
6,713.86
November-2002
3,228.82
March-2005
6,492.82
December-2002
3,377.28
April-2005
6,154.44
January-2003
3,250.38
May-2005
6,715.11
February-2003
March-2003
April-2003
May-2003
June-2003
July-2003
August-2003
September-2003
October-2003
November-2003
December-2003
January-2004
Do
February-2004
March-2004
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3,125.73
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May-2002
Year
3,283.66
June-2005
7,193.85
3,048.72
July-2005
7,635.42
2,959.79
August-2005
7,805.43
3,180.75
September-2005
8,634.48
3,607.13
October-2005
7,892.32
3,792.61
November-2005
8,788.81
4,244.73
December-2005
9,397.93
4,453.24
January-2006
9,919.89
4,906.87
February-2006
10,370.24
5,044.82
March-2006
11,279.96
5,838.96
April-2006
12,042.56
5,695.67
May-2006
10,398.61
5,667.51
June-2006
10,609.25
5,590.6
July-2006
10,743.88
April-2004
5,655.09
August-2006
11,699.05
May-2004
4,759.62
September-2006
12,454.42
June-2004
4,795.46
October-2006
July-2004
5,170.32
November-2006
13,696.31
August-2004
5,192.08
December-2006
13,786.91
12,961.9
Contd...
Year
Year
14,090.92
January-2008
17,648.71
February-2007
12,938.09
February-2008
17,578.72
March-2007
13,072.1
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January-2007
March-2008
15,644.44
April-2007
13,872.37
April-2008
17,287.31
May-2007
14,544.46
May-2008
16,415.57
June-2007
14,650.51
June-2008
13,461.6
July-2007
15,550.99
July-2008
14,355.75
August-2007
15,318.6
August-2008
14,564.53
September-2007
17,291.1
September-2008
12,860.43
November-2007
December-2007
19,837.99
October-2008
9,788.06
19,363.19
November-2008
9,092.72
20,286.99
December-2008
9,647.31
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October-2007
Compiled by the author from Centre for Monitoring Indian Economy (CMIE) Prowess Database.
Annexure III
Three Years Share Price Data of Ambuja Cements
Month-Year
Stock Price
January-2006
88.50
February-2006
88.20
103.25
April-2006
124.05
May-2006
92.90
June-2006
99.50
July-2006
104.70
August-2006
112.35
September-2006
116.85
Do
March-2006
Contd...
117.25
November-2006
144.15
December-2006
141.30
January-2007
February-2007
March-2007
April-2007
May-2007
June-2007
July-2007
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August-2007
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October-2006
137.15
115.95
106.70
117.95
113.15
124.55
131.50
133.45
143.80
October-2007
144.65
November-2007
150.00
December-2007
146.90
January-2008
119.60
February-2008
120.95
March-2008
121.05
April-2008
113.90
May-2008
95.20
June-2008
75.70
July-2008
81.20
August-2008
80.20
September-2008
78.40
October-2008
60.95
November-2008
52.30
December-2008
69.70
Do
September-2007
Compiled by the author from Centre for Monitoring Indian Economy (CMIE) Prowess Database.