A STUDY ON

CAPITAL STRUCTURE
WITH REFERNCE TO
ULTRATECH CEMENTS, HYDERABA

A project report submitted to

JAWAHARLAL NEHRU TECHNOLOGICAL UNIVERSITY

KAKINADA
In partial fulfillment of the requirements
For the Award of the Degree of
MASTER OF BUSINESS ADMINISTRATION
Submitted by

M.RESHMA RANI, MBA.

(REGD. NO: 17H41E0032)

Under the esteemed guidance of

Mr. Y. V. V. SATYA NARAYANA, M.B.A

Assistant Professor

Department of Management Studies

DEPARTMENT OF MANAGEMENT STUDIES

BONAM VENKATA CHALAMAYYA INSTITUTE OF TECHNOLOGY AND SCIENCE

(Affiliated to JNTU, KAKINADA)

Batlapalem, Amalapuram

(2017-2019)

1
 BONAM VENKATA CHALAMAYYA INSTITUTE OF TECHNOLOGY AND SCIENCE

BATLAPALEM, AMALAPURAM-533 201

DEPARTMENT OF MANAGEMENT STUDIES

CERTIFICATE

This is to certify that the project report titled “A STUDY ON CAPITAL

STRUCTURE WITH REFERNCE TO ULTRATECH CEMENTS,
HYDERABAD” is a bonafied work of M.RESHMA RANI (Regd
No.17H41E0032) submitted in partial fulfillment of requirements for the award
of Degree of MASTER OF BUSINESS ADMINISTRATION of Jawaharlal
Nehru Technological University, Kakinada during the year 2017-2019.

Mr. Y. V. V. SATYANARAYANA
Project Guide
Department of Management Studies

2
 BONAM VENKATA CHALAMAYYA INSTITUTE OF TECHNOLOGY AND

SCIENCE

BATLAPALEM, AMALAPURAM-533 201

DEPARTMENT OF MANAGEMENT STUDIES

CERTIFICATE

This is to certify that the project report titled “A STUDY ON CAPITAL

STRUCTURE WITH REFERNCE TO ULTRATECH CEMENTS,
HYDERABAD” is a bonafied work of M. RESHMA RANI (Regd.
No.17H41E0032) submitted in partial fulfillment of requirements for the award of
Degree of MASTER OF BUSINESS ADMINISTRATION of Jawaharlal Nehru
Technological University, Kakinada during the year 2017-2019.

Signature of the Project External Examiner......................................

Signature of the Head of the Department..........................................

3
 DECLARATION

I, M. RESHMA RANI, hereby declare that the project work entitled “A STUDY ON

CAPITAL STRUCTURE WITH REFERNCE TO ULTRATECH CEMENTS,

HYDERABAD’’ has been submitted to Jawaharlal Nehru Technological University-

Kakinada, in partial fulfillment for the Award of the Degree of Master of Business

Administration under the esteemed guidance of, Mr. Y.V.V. STAYA NARAYANA, M.B.A.

Assistant Professor. I further declare that this project report has not been submitted to any

other University or Institution for any purpose and not published any time earlier.

Place:

Date: (M.RESHMA RANI)

4
 ACKNOWLEDGEMENT

It gives me a great pleasure to extend my thanks and gratitude to those who guided and
instructed me in completion of this project.

I would like to express my sincere gratitude to Dr. G.M.V Prasad, B.E., M.Tech.,
Ph.D., FIETE, FIE, MIEEE., MSEMCE, MISTE Principal, BVCITS, Amalapuram for
giving me opportunity to work on this Project.

I am grateful to Mr. A. S NARAYANA, M.B.A, M.Com, M.Phil (Ph.D). Head -

Department of Management Studies, for his kind encouragement.

I would like to express my sincere gratitude to the faculty guide

Mr. Y.V.V.STAYANARAYANA Assistant Professor, Department of Management

Studies, BVCITS, Amalapuram for his care and directing me towards completion of my
project.

I would like to express my sincere gratitude to the company guide Mr.N.C.SHEKAR

(Dy. Finance Manager) for his valuable support and guidance during the entire project.

M.RESHMA RANI

5
 CONTENTS

CHAPTER-I

Introduction

Scope of study

Need for the study

Objectives of the study

Methodology of the study

CHAPTER-II

Industry profile

CHAPTER-III

Company profile

CHAPTER-IV

Theoretical framework

CHAPTER-V

Data Analysis and Interpretation

CHAPTER-VI

Findings, conclusions, suggestions, annexures

6
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 firm raises funds by issuing

ordinary shares or by retaining the earnings, the creditors’ claims increase by borrowing. The

various means of financing represents the “financial structure” of an enterprise .The financial

structure of an enterprise is shown by the left hand side (liabilities plus equity) of the balance

sheet. Traditionally, short-term borrowings are excluded from the list of methods of financing

the firm’s capital expenditure, and therefore, the long term claims are said to form the capital

structure of the enterprise. The capital structure is used to represent the 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.

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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 Ultratech Cements tapped over the years under

study i.e. 2012-2016.

8
NEED FOR THE STUDY

The value of the firm depends upon its expected earnings stream and the rate used to

discount this stream. The rate used to discount earnings stream it’s the firm’s required rate of

return or the cost of capital. Thus, the capital structure decision can affect the value of the firm

either by changing the expected earnings of the firm, but it can affect the reside earnings of

the shareholders. The effect of leverage on the cost of capital is not very clear. Conflicting

opinions have been expressed on this issue. In fact, this issue is one of the most continuous

areas in the theory of finance, and perhaps more theoretical and empirical work has been done

on this subject than any other.

If leverage affects the cost of capital and the value of the firm, an optimum capital

structure would be obtained at that combination of debt and equity that maximizes the total

value of the firm or minimizes the weighted average cost of capital. The question of the

existence of optimum use of leverage has been put very succinctly by Ezra Solomon in the

following words.

Given that a firm has certain structure of assets, which offers net operating earnings of

given size and quality, and given a certain structure of rates in the capital markets, is there

some specific degree of financial leverage at which the market value of the firm’s securities

will be higher than at other degrees of leverage?

The existence of an optimum capital structure is not accepted by all. These exist two

extreme views and middle position. David Durand identified the two extreme views the net

income and net operating approaches.

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OBJECTIVES OF THE STUDY:

The project is an attempt to seek an insight into the aspects that are involved in the capital

structuring and financial decisions of the company. This project endeavors to achieve the

following objectives.

 To Study the capital structure of Ultratech Cements through EBIT-EPS analysis

 Identifying effectiveness of financing decision on EPS and EBIT of the firm.

 Examining the financing trends in the Ultratech cements. For the period of 2011-15.

 Identifying debt/equity ratio of Ultratech Cements for 2011-15.

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METHODOLOGY

Data relating to Ultratech Cements. Has been collected through

SECONDARY SOURCES:

 Published annual reports of the company for the year 2012-16.

PRIMARY SOURCES:

 Discussions with the Finance manager and other members of the Finance

department.

DATA ANALYSIS

The collected data has been processed using the tools of

 Ratio analysis

 Graphical analysis

 Year-year analysis

These tools access in the interpretation and understanding of the Existing scenario of the

Capital Structure.

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 CHAPTER-II

INDUSTRY PROFILE

12
INDUSTRY PROFILE

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, cäment and cement. Cements

used in construction are characterized as hydraulic or non-hydraulic.

The most important use of cement is the production of mortar and

concrete—the bonding of natural or artificial aggregates to form a strong building material

which is durable in the face of normal environmental effects.

Concrete 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.
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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 smortars for masonry construction of harbor works etc, in contact with

sea water.

 Development of strong concretes.

Cement Industry in India

India is the world's second largest producer of cement according to the Cement

Manufacturers’ Association.

During September 2014, 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 2015-12 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 2011-10 to 81.10 MT during April-

September 2014-11.

Moreover, the government's continued thrust on infrastructure will help the key

building material to maintain an annual growth of 9-10 per cent in 2014, according to India's

largest cement company, ACC.

In January 2014, rating agency Fitch predicted that the country will add about 50

million tonne cement capacity in 2014, taking the total to around 300 million tonne.

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 Further, speaking at the Green Cementech 2014, a seminar jointly organised by the

Confederation of Indian Industry (CII) and the Cement Manufacturer's Association in

Hyderabad in May 2014, G Jayaraman, Executive President, Birla Corporation Ltd, said that

in 2011, 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 2014, 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 2014.

 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 2014, Shree Cement signed

a memorandum of understanding (MoU) with the Karnataka government to invest

15
 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 have a plan 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 Ultratech

Groupgroup is the largest cement-making group by capacity in the country and

controls Grasim Industries and UltratechCement.

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 2014. 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

2014-11, 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

16
invited from cement companies such as ACC, ABG, Ambuja Cement, Emami, Indiabulls,

Adani group, Ultratechand 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 2014 and expects to witness investment proposals worth US$ 13.2 billion

in the cement sector.

Exchange rate used: 1 USD = 45.42 INR (as of December 2014)

The cement industry is one of the vital industries for economic development in a

country. The total utilization of cement in a year is used as an indicator of economic growth.

Cement is a necessary constituent of infrastructure development and a key raw

material for the construction industry, especially in the government’s infrastructure

development plans in the context of the nation’s socioeconomic development.

Prior To Independence

The first endeavor to manufacture cement dates back to 1889 when a Calcutta based

company endeavored to manufacture cement from Argillaceous (kankar).

But the first endeavor to manufacture 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
17
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.

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.

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 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

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.

19
 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 2011-2014 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.

 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

20
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 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 awarded freedom. The industry

started focusing on export also to double the opportunity available for it in global markets.

Today, the cement manufacturers in India have transformed into leading Indian exporters of

cement across the world.

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 The demand of cement in year 2011-2014 is expected to increase by 50 million tons despite

of the recession and decline in demand of housing sector. Against India's GDP growth of 7%,

the experts have estimated the cement sector to grow by 9 to 10 % in the current financial

year. Major Indian cement manufacturers and exporters have all made huge investments in the

last few months to increase their production capability. This heralds an optimistic outlook for

cement industry. The housing sector in India accounts for 50 % of the cement's demand. And

the demand is expected to continue. With the constant effort made by cement manufacturers

and exporters, India has become the second largest cement producer in the world. Madras

Cement Ltd., Associated Cement Company Ltd (ACC), Ambuja Cements Ltd, Grasim

Industries Ltd, and J.K Cement Ltd. are among few renowned names of the major Indian

cement companies.

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 CHAPTER-III

COMPANY PROFILE

23
 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 country’s largest exporter of cement clinker. The

export markets span countries around the Indian Ocean, Africa, Europe and the Middle

East.

UltraTech’s subsidiaries are Dakshin Cement Limited and UltraTech Ceylinco (P)

Limited.

The roots of the Aditya Birla Group date back to the 19th century in the

picturesque town of Pilani, set amidst the Rajasthan desert. It was here that Seth Shiv Narayan

Birla started trading in cotton, laying the foundation for the House of Birlas.

Through India's arduous times of the 1850s, the Birla business expanded rapidly.

In the early part of the 20th century, our Group's founding father, Ghanshyamdas Birla, set

up industries in critical sectors such as textiles and fibre, aluminium, cement and chemicals.

As a close confidante of Mahatma Gandhi, he played an active role in the Indian freedom

struggle. He represented India at the first and second round-table conference in London,

along with Gandhiji. It was at "Birla House" in Delhi that the luminaries of the Indian

freedom struggle often met to plot the downfall of the British Raj.
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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 world-class 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

25
sector, the lowest first cost producers in the world and the only producer of linen in the textile

industry in India.

At the time of his untimely demise, the Group's revenues crossed Rs.8,000 crore

globally, with 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.

26
Vision statement of Ultratech cement

"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."

Achievements:

2010-2011: Subh Karan Sarawagi Environment Award

2010-2011: Business World FICCI-SEDF CSR Award

2010: Greentech Environment Excellence Gold Award

2010: IMC Ramakrishna Bajaj National Quality Award

2010: Asian CSR Award

2009-2010: National Award Of Prevention Of Pollution

2009-2010: Rajiv Gandhi Environment Award For Clean Technology

2009-2010: State level Environment Award(plant).

27
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.

Strategy of Ultratech Cements

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.

28
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.

Focus areas of Ultratech Cements

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.

29
 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.

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.

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.

30
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
alumino-silicates 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 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 routed obligation to synergize growth with responsibility."

— Mr. Kumar Mangalam Birla, Chairman, Aditya Birla Group

31
 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 eco-friendly approach is evident across all spheres of its operations. Its major thrust has
been to identify alternatives to achieve set objectives and thereby reduce its carbon footprint.
These are done through:

 Waste management
 Energy management
 Water conservation
 Biodiversity management
 Afforestation
 Reduction in emissions

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.

PRODUCT PROFILE

Ultra Tech cements manufactures and distributes its own main product lines of
cement .We aim to optimize production across all of our markets, providing a complete solution
for customer's needs at the lowest possible cost, an approach we call strategic integration of
activities.

Cement is made from a mixture of 80 percent limestone and 20 percent clay.

These are crushed and ground to provide the "raw meal”, a pale, flour-like powder. Heated to
around 1450° C (2642° F) in rotating kilns, the “meal” undergoes complex chemical changes and

32
is transformed into clinker. Fine-grinding the clinker together with a small quantity of gypsum
produces cement. Adding other constituents at this stage produces cements for specialized uses.

QUALITY

Six strong benefits that make 43, 53 Grade, Super fine, Premium and Shakti the
ideal cement

 Higher compressive strength.

 Better soundness.
 Lesser consumption of cement for M-20 Concrete Grade and above.
 Faster de shuttering of formwork.
 Reduced construction time with a superior and wide range of cement catering to every
conceivable building need, Ultra Tech cements is a formidable player in the cement
market.

Here just a few reasons why Ultra Tech cements chosen by millions of India.

 Ideal raw material

 Low lime and magnesia content and high proportion of silicates.
 Greater fineness.

33
34
 CHAPTER-IV

THEORETICAL FRAMEWORK

35
CAPITAL STRUCTURE DEFINED:

Capital structure refers to the mix of source from where the long-term funds
required in a business may be raised. It refers to the proportion of debt, preference capital and
equity capital.

Capital structure refers to the combination of debt and equity which a

company uses to finance its long-term operations. It is the permanent financing of the company
representing long-term sources of capital i.e. owner’s equity and long-term debts, but excludes
current liabilities.

One of the basic objectives of financial management is to maximize the

value of wealth of the firm. Capital structure is optimum when the firm has a combination of
equity and debt so that the wealth of a firm is Maximum. At thus level, cost of capital is
minimum and market price per share is maximum.

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

36
The other factors that should be considered whenever a capital structure decision is taken are:

 Cost of capital
 Risk
 Control
 Objective of finance manager
 Government policy
 Tax consideration
 Period of finance
 Size of the company
 Purpose of financing
 Cash flow ability of the company

FEATURES OF AN OPTIMAL CAPITAL STRUCTURE:

An optimal capital structure should have the following features,

 Optimum capital structure is also referred as appropriate capital structure and sound
capital structure.
 Capacity of a firm
 Possible use of leverage
 Flexible and avoid business risk
 Minimize the cost of financing and maximize earing per share.

37
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 some approaches which explain the relationship between capital structure and firm
value:

 Debt-equity mix
 Cost of each components of capital
 Impact of leverage
 Overall cost of capital
 Value of firm

Objective:

The objective of the firm is to choose debt-equity mix such that the overall cost of
capital i.e WACC or ko is minimized and the value of the firm is maximized.

38
CAPITAL STRUCTURE DIAGRAM

The Capital Structure Decision Process

39
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 (CFO) of a company should
develop an appropriate capital structure, which are most factors to the company. This can be
done only when all those factors which are relevant to the company’s capital structure decision
are properly analyzed and balanced.

The capital structure should be planned generally keeping in view the interests of
the equity shareholders, being the owners of the company and the providers of risk capital
(equity) would be concerned about the ways of financing a company’s operations. However, the
interests of other groups, such as employees, customers, creditors, society and government,
should also be given reasonable consideration. When the company lays down its objective in
terms of the shareholder’s wealth maximization (SWM), it is generally compatible with the
interests of other groups.

The 3 major considerations in capital structure planning are

 Risk
 Cost
 Control

40
 These differ from various components of capital i.e. own funds and loan funds.

Type Risk cost control

Low risk-no question Most expensive Dilution of control
of repayment of because dividend since the capital base
Equity capital capital except when expectations of might be expanded
the company is under shareholders are and new
liquidation. Hence higher than interest shareholders/public
best from risk point of rates. Also dividends are involved.
view are not tax deductible.
Risk is slightly higher Slightly cheaper than No dilution of control
when compared to equity but higher than since voting rights are
equity capital because interest on loan funds. restricted to
Preference capital principal is redeemed further, preference preference
after a certain period dividend is not tax shareholders.
even if dividend deductible.
payment is based on
profits.
Risk is high since Comparatively No dilution of control
capital should be cheaper since but some financial
Loan funds repaid as per prevailing interest institutions may insist
agreement and interest rates are considered on nomination of their
should be paid only to the extent of representatives in the
irrespective of profits. after tax impact. board of directors.

FEATURES OF AN APPROPRIATE CAPITAL STRUCTURE: -

The board of Director or the chief financial officer (CEO) of a company should
develop an appropriate capital structure, which is most advantageous to the company. This can
be done only when all those factors, which are relevant to the company’s capital structure

41
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 company’s 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.

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

42
 depends on its ability to generate future cash flows. It should have enough cash flows to
pay creditors, fixed charges and principal sum.
5. CONTROL: The capital structure should involve minimum risk of loss of control of the
company. The owner of the closely held company’s of particularly concerned about
dilution of the control.

APPROACHES TO ESTABLISH APPROPRIATE CAPITAL STRUCTURE:

The capital structure will be planned initially when a company is incorporated. The
initial capital structure should be designed very carefully. The management of the company
should set a target capital structure and the subsequent financing decision should be made
with the a view to achieve the target capital structure. The financial manager has also to deal
with 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 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 firm’s capital structure.

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

 Valuation approach for determining the impact of debt on the shareholder’s value.
 Cash flow approached for analyzing the firm’s ability to service debt.

In addition to these approaches governing the capital structure decisions, many other
factors such as control, flexibility, or marketability are also considered in practice.

EBIT-EPS APPROACH:

We shall emphasize some of the main conclusions here .The use of fixed cost
sources of finance, such as debt and preference share capital to finance the assets of the
company, is know as financial leverage or trading on equity. If the assets financed with the
use of debt yield a return greater than the cost of debt, the earnings per share also increases
without an increase in the owner’s investment.

43
 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 shareholder’s equity. One common method of examining the
impact of leverage is to analyze the relationship between EPS and various possible levels of
EBIT under alternative methods of financing.

The EBIT-EPS analysis is an important tool in the hands of financial manager to

get an insight into the firm’s capital structure management .He can considered the possible
fluctuations in EBIT and examine their impact on EPS under different financial plans of the
probability of earning a rate of return on the firm’s assets less than the cost of debt is
insignificant, a large amount of debt can be used by the firm to increase the earning for share.
This may have a favorable effect on the market value per share. On the other hand, if the
probability of earning a rate of return on the firm’s assets less than the cost of debt is very high,
the firm should refrain from employing debt capital .it may, thus, be concluded that the greater
the level of EBIT and lower the probability of down word fluctuation, the more beneficial it is to
employ debt in the capital structure However, it should be realized that the EBIT EPS is a first
step in deciding about a firm’s capital structure .It suffers from certain limitations and doesn’t
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.

44
 The term financial ratio can be explained by defining how it is calculated and what the
objective of this calculation is:

 Relationship expressed in mathematical terms, between two individual figures or

group of figures, connected with each other in some logical manner, and selected
from financial statement of the concern
 Objective for financial ratios is that all stakeholders can draw conclusions about
the, performance, strengths and weaknesses of a form, and can take decisions in
relation to the firm.

The ratio analysis is based on the fact that a single accounting figure by itself may
not communicate any meaningful information but an expressed as a relative to some other figure
it may definitely provide some significant information.

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.

45
There are two aspects of the long-term solvency of a firm:-

 Ability to repay the principal when due, and

 Regular payment of interest, there are thus two different but mutually dependent and
interrelated types of leverage ratio such as:
 Ratios based on the relationship between borrowed funds and owner’s capital, computed
form balance sheet eg: debt-equity ratio, dividend coverage ratio, debt service coverage
ratio etc.,

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 it’s the firm’s required rate of
return or the cost of capital. Thus, the capital structure decision can affect the value of the firm
either by changing the expected earnings of the firm, but it can affect the reside earnings of the
shareholders. The effect of leverage on the cost of capital is not very clear. Conflicting opinions
have been expressed on this issue. In fact, this issue is one of the most continuous areas in the
theory of finance, and perhaps more theoretical and empirical work has been done on this subject
than any other.

If leverage affects the cost of capital and the value of the firm, an optimum capital
structure would be obtained at that combination of debt and equity that maximizes the total value
of the firm or minimizes the weighted average cost of capital. The question of the existence of
optimum use of leverage has been put very succinctly by Ezra Solomon in the following words.

Given that a firm has certain structure of assets, which offers net operating earnings
of given size and quality, and given a certain structure of rates in the capital markets, is there
some specific degree of financial leverage at which the market value of the firm’s securities will
be higher than at other degrees of leverage?

The existence of an optimum capital structure is not accepted by all. These exist two

46
extreme views and middle position. David Durand identified the two extreme views the net
income and net operating approaches.

1. Net Income Approach:

 According to this approach, the cost of debt capital and the cost of equity capital
remain unchanged when debt equity ratio or leverage ratio changes.
 It means the average cost of capital would decline as the debt equity ratio
increases.
 This happens because when debt equity ratio increases, the cost of debt receives
higher weight in the calculation of average cost of capital and debt is cheaper
source of finance when compare to equity.
2. Net Operating Income Approach:
 The net operating income approach believes that, leverage has no effect at all on
the overall cost of capital and the value of the firm.
 Hence every capital structure is optimal.
 According to this approach, the overall capitalization rate and the cost of debt
remain constant for all degrees of leverage.

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.

Arguments of traditional approach are

 Change in risk perceptions

 Debt -equity mix versus cost
 Set-off effect
 Subsequent risk effect
 Optimal capital structure

47
4.Modigliani and Miller Approach:

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.

Assumptions:

 Perfect capital market

 Homogeneous risk class
 No taxes
 Same expectations
 100% payout ratio

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.

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

48
by the use of debt or preference capital in the capital structure and the firm’s ability to generate
cash to meet these fixed charges. In practice, the question of the optimum (appropriate) debt –
equity mix boils down to the firm’s ability to service debt without any threat of insolvency and
operating inflexibility. A firm is considered prudently financed if it is able to service its fixed
charges under any reasonably predictable adverse conditions.

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

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

49
 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 firm’s performance and that investors
rely heavily on it for their investment decisions. Investors do not have information in the
projected earnings and cash flows and base their evaluation and historical data. In choosing
between alternative financial plans, management should start with the evaluation of the impact of
each alternative on near-term EPS. But management’s ultimate decision making should be
guided by the best interests of shareholders.

50
 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 Ultratech Cements Industries Ltd. Can be classified into:

• Shareholders’ funds resources

• Loan fund resources

SHAREHOLDER FUND RESOURCES:

Shareholder’s fund consists of equity capital and retained earnings.

EQUITY CAPITAL BUILD-UP

1. From 1995, the Authorized capital is Rs.450 lacs of equity shares at Rs.10 each. The
issued equity capital is RS.1622.93 lacs at Rs.10 each for the period 2002-2011 and subscribed
and paid-up capital is Rs. 1622.93 lacs at Rs.10 each for the period of 2004-2011.

2. There is an increase of 1.38% in the equity from 2007-2014

RETAINED EARNINGS COMPOSITION

This includes…

• Capital Reserve

• Share Premium Account

• General Reserve

• Contingency Reserve

• Debentures Redemption Reserve

51
• 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 capital—how it

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

1. 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

52
(2) the capital surplus or the amount above par value paid the company whenever it
issues stock and

(3) the earned surplus (also called retained earnings), which consists of the portion of
earnings a company retains after paying out dividends and similar distributions. Put
another way, common stock equity is the net worth after all the liabilities (including long-
term debt), as well as any preferred stock, are deducted from the total assets shown on the
balance sheet.

53
 CHAPTER-V

DATA ANALYSIS AND INTERPRETATION

54
Balance Sheet of UltraTech Cement ------------------- in Rs. Cr. -------------------

Mar 16 Mar 15 Mar 15 Mar 14 Mar 13

12 mths 12 mths 12 mths 12 mths 12 mths

EQUITIES AND LIABILITIES

SHAREHOLDER'S FUNDS

Equity Share Capital 274.43 274.40 274.40 274.24 274.18

Total Share Capital 274.43 274.40 274.40 274.24 274.18

Reserves and Surplus 20,461.66 18,583.28 18,583.28 16,823.27 14,960.64

Total Reserves and Surplus 20,461.66 18,583.28 18,583.28 16,823.27 14,960.64

Total Shareholders Funds 20,736.09 18,857.68 18,857.68 17,097.51 15,234.82

NON-CURRENT LIABILITIES

Long Term Borrowings 2,490.84 4,613.75 4,613.75 4,493.58 3,893.92

Deferred Tax Liabilities [Net] 3,227.37 2,792.01 2,792.01 2,295.83 1,905.92

Other Long Term Liabilities 7.98 1.34 1.34 2.30 1.81

Long Term Provisions 180.77 163.36 163.36 137.94 134.02

Total Non-Current Liabilities 5,906.96 7,570.46 7,570.46 6,929.65 5,935.67

CURRENT LIABILITIES

55
Short Term Borrowings 2,339.07 1,898.08 1,898.08 379.20 568.76

Trade Payables 1,613.57 2,738.97 2,738.97 2,424.22 2,173.14

Other Current Liabilities 6,310.49 3,010.11 3,010.11 2,088.41 2,561.30

Short Term Provisions 945.90 1,139.65 1,139.65 835.02 935.18

Total Current Liabilities 11,209.03 8,786.81 8,786.81 5,726.85 6,238.38

Total Capital And Liabilities 37,852.08 35,214.95 35,214.95 29,754.01 27,408.87

ASSETS

NON-CURRENT ASSETS

Tangible Assets 22,434.71 20,878.66 20,878.66 15,780.92 13,074.00

Intangible Assets 98.00 68.80 68.80 90.92 48.36

Capital Work-In-Progress 1,414.48 2,068.85 2,068.85 2,038.44 3,505.31

Intangible Assets Under Development 1.08 4.84 4.84 3.19 0.06

Fixed Assets 23,948.27 23,021.15 23,021.15 17,913.47 16,627.73

Non-Current Investments 3,080.51 2,685.77 2,685.77 1,662.33 1,981.77

Long Term Loans And Advances 1,617.84 1,595.61 1,595.61 1,180.54 983.17

Other Non-Current Assets 14.46 0.00 0.00 0.00 0.00

Total Non-Current Assets 28,661.08 27,302.53 27,302.53 20,756.34 19,592.67

CURRENT ASSETS

Current Investments 2,027.61 2,522.98 2,522.98 3,729.34 3,126.95

56
Inventories 2,426.09 2,751.41 2,751.41 2,368.36 2,350.47

Trade Receivables 1,414.89 1,203.19 1,203.19 1,281.02 1,017.24

Cash And Cash Equivalents 2,235.20 213.94 213.94 277.50 142.66

Short Term Loans And Advances 1,058.14 1,204.91 1,204.91 1,326.19 1,173.22

OtherCurrentAssets 29.07 15.99 15.99 15.26 5.66

Total Current Assets 9,191.00 7,912.42 7,912.42 8,997.67 7,816.20

Total Assets 37,852.08 35,214.95 35,214.95 29,754.01 27,408.87

OTHER ADDITIONAL INFORMATION

CONTINGENT LIABILITIES,
COMMITMENTS

Contingent Liabilities 5,016.25 7,736.73 6,678.79 6,374.70 5,034.32

CIF VALUE OF IMPORTS

Raw Materials 365.09 337.54 337.54 428.57 256.76

Stores, Spares And Loose Tools 128.37 140.59 140.59 120.43 155.33

Trade/Other Goods 763.72 0.00 0.00 0.00 0.00

Capital Goods 80.20 170.26 170.26 48.96 383.90

EXPENDITURE IN FOREIGN EXCHANGE

Expenditure In Foreign Currency 195.20 171.44 171.44 115.79 94.40

REMITTANCES IN FOREIGN CURRENCIES

FOR DIVIDENDS

57
Dividend Remittance In Foreign
1.36 1.36 1.36 1.36 1.21
Currency

EARNINGS IN FOREIGN EXCHANGE

FOB Value Of Goods 302.78 301.38 301.38 287.44 313.55

Other Earnings 61.92 54.50 54.50 52.28 46.43

BONUS DETAILS

Bonus Equity Share Capital - - - - -

NON-CURRENT INVESTMENTS

Non-Current Investments Quoted

308.35 81.57 81.57 75.26 80.35
Market Value
Non-Current Investments Unquoted
2,780.71 2,609.31 2,609.31 1,585.87 1,905.31
Book Value

CURRENT INVESTMENTS

Current Investments Quoted Market

10.36 26.18 26.18 - -
Value
Current Investments Unquoted Book
2,017.37 2,496.80 2,496.80 3,729.34 3,126.95
Value

58
UltraTech Cement
Key Financial Ratios

Mar '16 Mar '15 Mar '14 Mar '13 Mar '12

Investment Valuation Ratios

Face Value 10.00 10.00 10.00 10.00 10.00

Dividend Per Share 9.50 9.00 9.00 9.00 8.00

Operating Profit Per Share (Rs) 168.21 152.88 139.22 170.53 151.33

Net Operating Profit Per Share

878.45 835.85 739.49 736.01 668.20
(Rs)

Free Reserves Per Share (Rs) -- -- -- -- --

Bonus in Equity Capital -- -- -- -- --

Profitability Ratios

Operating Profit Margin(%) 19.14 18.29 18.82 23.16 22.64

Profit Before Interest And Tax

13.66 13.13 13.41 18.20 17.36
Margin(%)

Gross Profit Margin(%) 13.80 13.34 13.63 18.48 17.71

Cash Profit Margin(%) 14.22 13.50 15.51 17.57 17.92

Adjusted Cash Margin(%) 14.22 13.50 15.51 17.57 17.92

Net Profit Margin(%) 9.02 8.78 10.57 13.15 13.35

59
Adjusted Net Profit Margin(%) 8.93 8.64 10.40 12.96 13.09

Return On Capital Employed(%) 13.93 13.53 14.08 20.48 21.69

Return On Net Worth(%) 10.48 10.68 12.54 17.43 19.02

Adjusted Return on Net

10.48 10.68 12.54 17.43 19.02
Worth(%)
Return on Assets Excluding
755.60 687.22 623.45 555.65 469.22
Revaluations
Return on Assets Including
755.60 687.22 623.45 555.65 469.22
Revaluations

Return on Long Term Funds(%) 15.33 14.62 14.33 21.09 21.90

Liquidity And Solvency Ratios

Current Ratio 0.59 0.59 0.76 0.66 0.86

Quick Ratio 0.52 0.43 0.52 0.43 0.57

Debt Equity Ratio 0.23 0.35 0.28 0.29 0.30

Long Term Debt Equity Ratio 0.12 0.24 0.26 0.26 0.28

Debt Coverage Ratios

Interest Cover 7.05 6.27 9.70 19.24 16.16

Total Debt to Owners Fund 0.23 0.35 0.28 0.29 0.30

Financial Charges Coverage

9.60 8.34 12.99 23.75 20.19
Ratio
Financial Charges Coverage
7.85 6.75 11.02 18.17 15.96
Ratio Post Tax

60
Management Efficiency Ratios

Inventory Turnover Ratio 11.27 9.45 9.71 9.73 10.11

Debtors Turnover Ratio 18.42 18.47 17.65 22.63 26.77

Investments Turnover Ratio 11.27 9.45 9.71 9.73 10.11

Fixed Assets Turnover Ratio 0.70 0.72 0.81 0.95 0.97

Total Assets Turnover Ratio 0.95 0.91 0.93 1.03 1.10

Asset Turnover Ratio 0.95 0.97 0.97 1.11 1.22

Average Raw Material Holding -- -- -- -- --

Average Finished Goods Held -- -- -- -- --

Number of Days In Working

-4.64 -1.31 17.01 -2.48 21.46
Capital

Profit & Loss Account Ratios

Material Cost Composition 22.24 21.91 22.15 20.83 19.66

Imported Composition of Raw

12.46 12.02 13.81 10.76 8.22
Materials Consumed
Selling Distribution Cost
-- -- -- -- --
Composition
Expenses as Composition of
1.51 1.55 1.67 1.78 2.27
Total Sales

61
Cash Flow Indicator Ratios
Dividend Payout Ratio Net
11.98 12.26 11.50 9.29 8.96
Profit
Dividend Payout Ratio Cash
7.52 7.84 7.72 6.85 6.54
Profit

Earning Retention Ratio 88.02 87.74 88.50 90.71 91.04

Cash Earning Retention Ratio 92.48 92.16 92.28 93.15 93.46

AdjustedCash Flow Times 1.39 2.07 1.52 1.24 1.14

UltraTech Cement
Profit & Loss account ------------------- in Rs. Cr. -------------------
Mar 16 Mar 15 Mar 15 Mar 14 Mar 13

12 mths 12 mths 12 mths 12 mths 12 mths

INCOME

Revenue From Operations 27,073.8 25,719.1 25,719.1 22,803.1 22,704.9

[Gross] 8 7 7 3 8
Less: Excise/Sevice Tax/Other
3,232.85 3,062.69 3,062.69 2,725.25 2,682.02
Levies
Revenue From Operations 23,841.0 22,656.4 22,656.4 20,077.8 20,022.9
[Net] 3 8 8 8 6

Other Operating Revenues 266.33 279.69 279.69 201.92 157.00

24,107.3 22,936.1 22,936.1 20,279.8 20,179.9

Total Operating Revenues
6 7 7 0 6

62
Other Income 235.16 371.78 371.78 329.04 305.00

24,342.5 23,307.9 23,307.9 20,608.8 20,484.9

Total Revenue
2 5 5 4 6

EXPENSES

Cost Of Materials Consumed 3,553.71 3,280.62 3,280.62 2,910.95 2,792.12

Purchase Of Stock-In Trade 439.68 389.52 389.52 309.37 235.71

Changes In Inventories Of
-12.31 -110.06 -110.06 106.98 -118.19
FG,WIP And Stock-In Trade

Employee Benefit Expenses 1,341.52 1,218.29 1,218.29 1,014.63 968.35

Finance Costs 505.29 547.45 547.45 319.17 209.71

Depreciation And Amortisation

1,289.03 1,133.11 1,133.11 1,052.26 945.37
Expenses
14,204.9 14,004.5 14,004.5 12,152.3 11,671.4
Other Expenses
9 3 3 9 8
Less: Amounts Transfer To
36.35 41.76 41.76 32.42 44.99
Capital Accounts
21,285.5 20,421.7 20,421.7 17,833.3 16,659.5
Total Expenses
6 0 0 3 6

Mar 16 Mar 15 Mar 15 Mar 14 Mar 13

12 mths 12 mths 12 mths 12 mths 12 mths

Profit/Loss Before Exceptional,

3,056.96 2,886.25 2,886.25 2,775.51 3,825.40
ExtraOrdinary Items And Tax

63
Profit/Loss Before Tax 3,056.96 2,886.25 2,886.25 2,775.51 3,825.40

Tax Expenses-Continued Operations

Current Tax 623.41 498.38 498.38 558.82 1,005.65

Less: MAT Credit Entitlement 176.86 489.29 489.29 222.13 0.00

Deferred Tax 435.36 862.43 862.43 389.91 168.15

Tax For Earlier Years 0.40 0.00 0.00 -95.56 -3.83

Total Tax Expenses 882.31 871.52 871.52 631.04 1,169.97

Profit/Loss After Tax And

2,174.65 2,014.73 2,014.73 2,144.47 2,655.43
Before ExtraOrdinary Items
Profit/Loss From Continuing
2,174.65 2,014.73 2,014.73 2,144.47 2,655.43
Operations

Profit/Loss For The Period 2,174.65 2,014.73 2,014.73 2,144.47 2,655.43

Mar 16 Mar 15 Mar 15 Mar 14 Mar 13

12 mths 12 mths 12 mths 12 mths 12 mths

OTHER ADDITIONAL
INFORMATION

EARNINGS PER SHARE

Basic EPS (Rs.) 79.25 73.00 73.44 78.21 96.87

Diluted EPS (Rs.) 79.20 73.00 73.39 78.18 96.85

64
VALUE OF IMPORTED AND
INDIGENIOUS RAW MATERIALS

Imported Raw Materials 442.93 394.58 394.58 402.29 300.52

Indigenous Raw Materials 3,110.78 2,886.04 2,886.04 2,508.66 2,491.60

STORES, SPARES AND LOOSE

TOOLS

Imported Stores And Spares 114.53 135.58 135.58 119.63 109.91

Indigenous Stores And Spares 596.21 623.67 623.67 570.67 607.37

DIVIDEND AND DIVIDEND

PERCENTAGE

Equity Share Dividend 260.71 247.09 247.09 246.82 246.70

Tax On Dividend 49.19 50.28 50.28 41.95 42.00

Equity Dividend Rate (%)

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

65
 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.

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

• Cournand’s in terms of participative management and

• Other terms and conditions.

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

66
THE FORMS OF FUNDS MOBILIZATION IS ILLUSTRATED BY A CHART:

FUNDING MIX-SOURCES

OWNERS FUNDS
BORROWED FUNDS

EQUITY RETAINED PREFERENCE

CAPITAL EARNINGS CONVENTIONAL NON-CONVENTIONAL
CAPITAL
SOURCES SOURCES

SUPPLIERS CREDIT
FINANCIAL INSTITUTION SHORT TERM BANK
BORROWINGS
BANK
HIRE PURCHASE
CASH CREDIT
DEBENTURES
FIXED DEPOSITS

67
Ultratech CEMENTS INDUSTRIES LTD. THE FUNDING MIX

Particulars 2012-13 20123-14 2014-15 2015-16 2016-17

Source of funds

Share holders’ funds

a) Share capital 1763.78 2696.99 3602.10 4608.65 10666.04

b) Reserves and surplus 1639.78 2571.73 3475.93 4482.17 10387.22

c)Deferred tax 560.26 542.35 722.93 830.73 1730.05

TOTAL (A) 3963.82 5811.07 7800.96 9921.55 22783.31

Loan Funds

a) Secured Loans 1151.25 982.66 1175.80 854.19 2789.76

b) Unsecured Loans 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) 5542.45 7551.57 9942.59 11526.07 26927.91

% of S H in total C.E 44.67 48 41.22 42.38 34.3

% of Loan Fund in total

C.E 55.33 52 58.78 57.62 65.69

INTERPRETATION

In total capital employed shareholder funds contribute 44,67% (i.e.)3125.8 whereas loan fund
contributes 55.33% in 2014-15.the fund mix for the past 5 years will be 45%&55% even though
company is trying to make better fund mix. Company is maintaining better trading on equity by
properly utilizing loan funds, so it leads to increase in EPS from 2013-17(i.e.) o.79&1.5

68
 TERM LOANS 2012-2013

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
IFST Loan from Govt. of AP 0.00
Deferred sales tax loan 0.00
Deposits from stockiest & 1730.39
others
Inter corporate deposits 50.00
Others 201.04
TOTAL 2588.22

69
 TERM LOANS 2013-2014

TERM LOANS
Indian Renewable Energy 255.00
development agency ltd.

Non-convertible debentures 509.61

HIRE PURCHASE LOANS
Funded interest 0.00 0.00
CASH CREDIT
Global Trust Bank 583.41
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 1,239.02

Inter corporate deposits 0.00

Others 201.04

TOTAL 2161.94

70
 TERM LOANS 2014-2015

Particulars Rs. (in Lakhs)

TERM LOANS

Indian Renewable Energy 207.00

development agency ltd.

Non convertible debentures 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

71
 TERM LOANS 2015-2016

Particulars Rs. (in

Lakhs)
TERM LOANS

Indian Renewable Energy 779.17

development agency ltd.

Non-convertible debentures 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 410.1

5
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

72
 TERM LOANS
2016-2017
Particulars Rs. (in Lakhs)
TERM LOANS
Indian Renewable Energy 2532.14
development agency ltd.

Non convertible debentures 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 306.54

Canara Bank Factors 403.46

UTI Bank Ltd 211.82 1483.14
4015.28

UNSECURED LOANS
Interest free from sales tax 162.40
deferment loan

Deposits from public 616.87

Deposits from stockiest & others 919.26

Lease/Hire purchase 54.25

Others 201.29

TOTAL 5969.35

73
 7,000.00

6,000.00

5,000.00

RS. IN LAKHS

4,000.00

3,000.00

2,000.00

1,000.00

0.00

2013 2014 2015 2016 2017

YEARS

Fig: TERM LOANS

INTERPRETATION

Non-convertable debentures are being redeemed from 2015 and 2016 financial year
onwards and were completely repaid by 2016-2017. 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.

74
 Deposits from public were stood at 727.76 lacs in 2015-2016 and in 2016-2017 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 2016-2017.

YEAR 2013 - 2017

Position of Mobilization and Development of funds

(Amount in RS. crs)

Total liabilities 3902.67 Total assets 3902.67

Sources of funds

Paid up capital 124.49 Reserves & surplus 1639.29

Secured Loans 1151.25 Unsecured loans 427.38

Application of funds

Net fixed assets 3214.23 Investments 483.45

Net current assets 204.99 Misc. Expenditure ---

Accumulated losses

75
 YEAR 2013 - 2017

Position of Mobilization and Development of funds

(Amount in RS. crs)

Total liabilities 4979.84 Total assets 4979.84

Sources of funds

Paid u capital 124.49 Reserves & surplus 2571.73

Deferred tax 542.35

Secured Loans 982.66 Unsecured loans 757.84

Application of funds

Net fixed assets 4783.61 Investments 170.90

Net current assets 25.33 Misc. Expenditure ---

Accumulated losses Nil

76
 YEAR 2013-2014

Position of Mobilization and Development of funds

(Amount in RS. crs)

Total liabilities 6466.66 Total assets 6466.66

Sources of funds

Paid up capital 124.49 Reserves & surplus 3475.93

Deferred tax 722.93

Secured Loans 1175.80 Unsecured loans 965.83

Application of funds

Net fixed assets 5312.97 Investments 1034.80

Net current assets 118.89 Misc. Expenditure ---

Accumulated losses Nil

77
 YEAR 2015- 2016

Position of Mobilization and Development of funds (Amount in RS. crs)

Total liabilities 7043.90 Total assets 7043.90

Sources of funds

Paid u capital 124.49 Reserves & surplus 4482.17

Deferred tax 830.73

Secured Loans 854.19 Unsecured loans 750.33

Application of funds

Net fixed assets 5201.05 Investments 1669.55

Net current assets 173.30 Misc. Expenditure ---

Accumulated losses Nil

78
 YEAR 2016 – 2017

Position of Mobilization and Development of funds

(Amount in RS. crs)

Total liabilities 16540.69 Total assets 16540.69

Sources of funds

Paid up capital 274.04 Reserves & surplus 10387.22

Deferred tax 1730.05

Secured Loans 2789.76 Unsecured loans 1354.84

Application of funds

Net fixed assets 12505.57 Investments 3730.32

Net current assets 304.80 Misc. Expenditure ----

Accumulated losses Nil

79
 FINANCIAL LEVERAGE

INTRODUCTION:

Leverage, a very general concept, represents influence or power. In financial

analysis leverage represents the influence of a financial variable over same other related
financial variable.

Financial leverage is related to the financing activities of a firm. The sources

from which funds can be raised by a firm, from the viewpoint of the cost can be categorized
into:

• Those, which carry a fixed finance charge.

• Those, which do not carry a fixed charge.

The sources of funds in the first category consists of various types of long term
debt including loans, bonds, debentures, preference share etc., these long-term debts carry a
fixed rate of interest 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 firm’s

income stream. These fixed charges don’t vary with EBIT or operating profits. They have to be
paid regardless of EBIT availability. Past payment balances belong to equity holders.

Financial leverage is concerned with the effect of changes I the EBIT on the
earnings available to shareholder

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

80
with the funds than the fixed costs of their use. The adverse business conditions, this fixed
charge could be a burden and pulled down the companies wealth

MEANING OF FINANCIAL LEVERAGE:

As stated earlier a company can finance its investments by debt/equity. The

company may also use preference capital. The rate of interest on debt is fixed, irrespective of the
company’s rate of return on assets. The company has a legal banding to pay interest on debt .The
rate of preference dividend is also fixed, but preference dividend are paid when company earns
profits. The ordinary shareholders are entitled to the residual income. That is, earnings after
interest and taxes belong to them. The rate of equity dividend is not fixed and depends on the
dividend policy of a company.

The use of the fixed charges, sources of funds such as debt and preference
capital along with owners’ equity in the capital structure, is described as “financial leverages” or
“gearing” or “trading” or “equity”. The use of a term trading on equity is derived from the fact
that it is the owners equity that is used as a basis to raise debt, that is, the equity that is traded
upon the supplier of the debt has limited participation in the companies profit and therefore, he
will insists on protection in earnings and protection in values represented by owners equity’s

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 risk-operating
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

81
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

THE VARIABILITY OF EBIT HAS TWO COMPONENTS

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 company’s 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 varying sales. Operating expenses may also vary on
account of changes in input prices and may also contribute to the variability of EBIT.

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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.,

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 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 company’s debt-equity ratio
is compared. The company will be considered risky if its debt-equity ratio exceeds the industry-
standard. Financial institutions and banks in India also focus on debt-equity ratio in their lending
decisions.

The first two measures of financial leverage are also measures of capital gearing. They
are static in nature as they show the borrowing position of the company at a point of time.

These measures thus fail to reflect the level of financial risk, which inherent in the
possible failure of the company to pay interest repay debt.

The third measure of financial leverage, commonly known as coverage ratio,

indicates the capacity of the company to meet fixed financial charges. The reciprocal of interest
coverage that is interest divided by EBIT is a measure of the firm’s incoming gearing. Again by
comparing the company’s coverage ratio with an accepted industry standard, the investors, can
get an idea of financial risk .how ever, this measure suffers from certain limitations. First, to
determine the company’s ability to meet fixed financial obligations, it is the cash flow

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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 HOLDER’S RETURN:

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

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

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:

Degree of combined leverage = % change in eps/%change in sales (or)

= Contribution/EBT

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 CHAPTER-V

FINDINGS

CONCLUSIONS

SUGGESTIONS

ANNEXURES

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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 2013-2014 because of increase in sale prices and also
decreases in the cost of manufacturing. In 2016 and 2017 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 83.80 in 2016.

5.The EBIT level in 2009 is at 400.09 Cr and is increasing every year till 2016. Because of
slump in the Cement Industry less realization. The EBIT levels in 2016 again started growing
and reached to 648.29 Cr and in 2014 were at 648.29 Cr and in 2016 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.

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CONCLUSIONS

1) Sales in 2013-2014 is at 7267.74 and in 2014-2015 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 2013-2017. There has been significant increase in cost of production during 2013-2014
because of increase in Royalty.

2) The interest charges were 492.21 in 2013 and 357.07in 2014 and 522.56 respectively shows
that the company redeemed fixed interest bearing funds from time to time out of profit from
2013-2014.Debantures were partly redeemed with the help of debenture redemption reserve
and other references.

3) The PAT (Profit After Tax) in 2016-2017 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 2013-2017.

4) Debentures were redeemed by transfers to D.R.R. in 2013-2017.

5) A steady transfer for dividend during 2013-2014 from P&L appropriation but in 2012
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 2013-2017 and slight increase in
2016.

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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.

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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.

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BIBILIOGRAPHY

1) Financial Management : Khan & Jain

2) Financial Management : I.M. Pandey

3) Financial Management : Prasanna Chandra

4) News Papers : Financial Express

Economic Times

5) Websites :

www.google.com

www.Ultratech.com

www.capiatalindia.com

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