ASTUDYONCAPITALSTRUCTURE

WITHREFERENCETOULTRATECHCEMENTLTD
AProjectreportsubmittedtoJawaharlalNehruTechnologicalUniversity,Hyderabad,

inpartialfulfillmentoftherequirementsfortheawardofthedegreeof
MASTEROFBUSINESSADMINISTRATION

By
K.RAVIKISHORE
Reg.No.10241E0039
UndertheGuidanceof
D.INDIRA
AssociateProfessor

DepartmentofManagementStudies
Gokaraju RangarajuInstituteofEngineering&Technology
(Affiliated to Jawaharlal Technological University,
Hyderabad)Hyderabad
20102012

DECLARATION

Iherebydeclarethattheprojectentitle A STUDY ONCAPITAL STRUCTURE Submittedin

partial fulfillment of the requirements for award of the degree of MBA at Gokaraju
Rangaraju Institute of Engineering and Technology, affiliated to Jawaharlal Nehru
TechnologicalUniversity,Hyderabad,isanauthenticworkandhasnotbeensubmittedto
anyotherUniversity/Instituteforawardofanydegree/diploma.

K.RAVIKISHORE
(10241E0039)
MBA,GRIET
HYDERABAD

ACKNOWLEDGEMENT

FirstlyIwouldliketoexpressourimmensegratitudetowardsourinstitutionGokarajuRangarajuInstituteofEngineering
&Technology,whichcreatedagreatplatformtoattainprofoundtechnicalskillsinthefieldofMBA,therebyfulfillingour
mostcherishedgoal.
IwouldthankallthefinancedepartmentofULTRATECHCEMENTLTD(ADITYABIRLAGROUP).speciallyMr.
RAMAKRISHNA(AsstManagerFinance),andtheemployeesinthefinancedepartmentforguidingmeandhelpingmein
successfulcompletionoftheproject
IamverymuchthankfultoourprofessorMrs.D.INDIRA(InternalGuide)madamforextendinghiscooperationindoing
thisproject.
IamalsothankfultoourprojectcoordinatorMr. S.RavindraCharySir forextendinghiscooperationincompletionof
Project.
Iconveymythankstomybelovedparentsandmyfacultywhohelpedmedirectlyorindirectlyinbringingthisproject
successfully.

K.RAVI
KISHORE(10241E0039)

INDEX
S.No:

CONTENTS

CHAPTER1

PAGENO.
16

INTRODUCTION
ScopeoftheStudy
ObjectivesoftheStudy
MethodologyoftheStudy
LimitationsoftheStudy
CHAPTER2

726
REVIEWOFLITERATURE

CHAPTER3

2756
INDUSTRYPROFILE
COMPANYPROFILE

CHAPTER4

5788
DATAANALYSISANDINTERPRETATION

CHAPTER5

8994
FINDINGS
CONCLUSIONS
SUGGESTION
BIBLIOGRAPHY

CHAPTERI
INTRODUCTION

CAPITALSTRUCTUREDEFINED:
Theassetsofacompanycanbefinancedeitherbyincreasingtheownersclaimorthecreditors
claim.Theownersclaimsincreasewhentheformraisesfundsbyissuingordinarysharesorbyretaining
theearnings,thecreditorsclaimsincreasebyborrowing.Thevariousmeansoffinancingrepresentsthe
financialstructureofanenterprise.Thefinancialstructureofanenterpriseisshownbythelefthand
side(liabilitiesplusequity)ofthebalancesheet.Traditionally,shorttermborrowingsareexcludedfrom
thelistofmethodsoffinancingthefirmscapitalexpenditure,andtherefore,thelongtermclaimsare
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 paidup share capital, share
premiumandreservesandsurplus.

Thefinancingorcapitalstructuredecisionisasignificantmanagerialdecision.Itinfluencesthe
shareholdersreturnsandriskconsequently;themarketvalueofsharemaybeaffectedbythecapitalstructure
decision.Thecompanywillhavetoplanitscapitalstructureinitiallyatthetimeofitspromotion.

NEEDANDIMPORTANCEOFCAPITALSTRUCTURE:

Thevalueofthefirmdependsuponitsexpectedearningsstreamandtherateusedtodiscount
thisstream.Therateusedtodiscountearningsstreamitsthefirmsrequiredrateofreturnorthecostof
capital.Thus,thecapitalstructure decisioncanaffectthevalue ofthe firmeitherby changingthe
expectedearningsofthefirm,butitcanaffecttheresideearningsoftheshareholders.Theeffectof
leverageonthecostofcapitalisnotveryclear.Conflictingopinionshavebeenexpressedonthisissue.
In fact, this issue is one of the most continuous areas in the theory of finance, and perhaps more
theoreticalandempiricalworkhasbeendoneonthissubjectthananyother.

Ifleverageaffectsthecostofcapitalandthevalueofthefirm,anoptimumcapitalstructure
wouldbeobtainedatthatcombinationofdebtandequitythatmaximizesthetotalvalueofthefirmor
minimizes the weighted average cost of capital. The question of the existence of optimum use of
leveragehasbeenputverysuccinctlybyEzraSolomoninthefollowingwords.

Giventhatafirmhascertainstructureofassets,whichoffersnetoperatingearningsofgivensize
andquality,andgivenacertainstructureofratesinthecapitalmarkets,istheresomespecificdegreeof
financialleverageatwhichthemarketvalueofthefirmssecuritieswillbehigherthanatotherdegrees
ofleverage?

Theexistenceofanoptimumcapitalstructureisnotacceptedbyall.Theseexisttwoextreme
viewsandmiddleposition.DavidDurandidentifiedthetwoextremeviewsthenetincomeandnet
operatingapproaches.

SCOPEOFTHESTUDY:
Astudyofthecapitalstructure involvesanexaminationoflongtermaswellasshortterm
sourcesthatacompanytapsinordertomeetitsrequirementsoffinance.Thescopeofthestudyis
confinedtothesourcesthatUltratechcementstappedovertheyearsunderstudyi.e.20072011.

OBJECTIVESOFTHESTUDY:
Theprojectisanattempttoseekaninsightintotheaspectsthatareinvolvedinthecapitalstructuring
andfinancialdecisionsofthecompany.Thisprojectendeavorstoachievethefollowingobjectives.
1. ToStudythecapitalstructureofUltratechcementsthroughEBITEPSanalysis
2. StudyeffectivenessoffinancingdecisiononEPSandEBITofthefirm.
3. ExaminingthefinancingtrendsintheUltratechcements.Fortheperiodof200711.
4. Studydebt/equityratioofUltratechcementsfor200711.

10

RESEARCHMETHODOLOGYANDDATAANALYSIS
DatarelatingtoUltratechcements.Hasbeencollectedthrough
SECONDARYSOURCES:

Publishedannualreportsofthecompanyfortheyear200711.

PRIMARYSOURCES:

DetaileddiscussionswithVicePresident.

DiscussionswiththeFinancemanagerandothermembersoftheFinancedepartment.

DATAANALYSIS
Thecollecteddatahasbeenprocessedusingthetoolsof

Ratioanalysis

Graphicalanalysis

Yearyearanalysis

ThesetoolsaccessintheinterpretationandunderstandingoftheExistingscenariooftheCapitalStructure.

11

LIMITATIONOFEPSASAFINANCINGDECISIONCRITERION
EPSisoneofthemostlywidelyusedmeasuresofthecompanysperformanceinpractice.
Asaresultofthis,inchoosingbetweendebtandequityinpractice,sometimestoomuchattentionispaid
onEPS,whichhowever,hasseriouslimitationsasafinancingdecisioncriterion.

ThemajorshortcomingoftheEPSasafinancingdecisioncriterionisthatitdoesnot
considerrisk;itignoresvariabilityabouttheexpectedvalueofEPS.Thebeliefthatinvestorswouldbe
just concerned with the expected EPS is not well founded. Investors in valuing the shares of the
companyconsiderbothexpectedvalueandvariability.

12

CHAPTERII
REVIEWOFLITERATURE

13

CAPITALSTRUCTUREDEFINED:
Theassetsofacompanycanbefinancedeitherbyincreasingtheownersclaimorthecreditors
claim.Theownersclaimsincreasewhentheformraisesfundsbyissuingordinarysharesorbyretaining
theearnings,thecreditorsclaimsincreasebyborrowing.Thevariousmeansoffinancingrepresentsthe
financialstructureofanenterprise.Thefinancialstructureofanenterpriseisshownbythelefthand
side(liabilitiesplusequity)ofthebalancesheet.Traditionally,shorttermborrowingsareexcludedfrom
thelistofmethodsoffinancingthefirmscapitalexpenditure,andtherefore,thelongtermclaimsare
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 paidup share capital, share
premiumandreservesandsurplus.

Thefinancingorcapitalstructuredecisionisasignificantmanagerialdecision.Itinfluencesthe
shareholdersreturnsandriskconsequently;themarketvalueofsharemaybeaffectedbythecapitalstructure
decision.Thecompanywillhavetoplanitscapitalstructureinitiallyatthetimeofitspromotion.

FACTORSAFFECTINGTHECAPITALSTRUCTURE:

LEVERAGE: Theuseoffixedchargesoffundssuchaspreferenceshares,debenturesandtermloans
alongwithequitycapitalstructureisdescribedasfinancialleverageortradingon.Equity.Theterm
tradingonequityisusedbecauseforraisingdebt.

DEBT /EQUITY RATIOFinancialinstitutionswhilesanctioninglongtermloansinsiststhatcompanies

shouldgenerallyhaveadebtequityratioof2:1formediumandlargescaleindustriesand3:1indicates
thatforeveryunitofequitythecompanyhas,itcanraise2unitsofdebt.Thedebtequityratioindicates
therelativeproportionsofcapitalcontributionbycreditorsandshareholders.
EBITEPS ANALYSISIn our research for an appropriate capital structure we need to understand how
sensitive is EPS (earnings per share) to change inEBIT (earningsbefore interest andtaxes) under
differentfinancingalternatives.
Theotherfactorsthatshouldbeconsideredwheneveracapitalstructuredecisionistakenare

Costofcapital

Cashflowprojectionsofthecompany

Sizeofthecompany

Dilutionofcontrol

Floatationcosts

14

FEATURESOFANOPTIMALCAPITALSTRUCTURE:
Anoptimalcapitalstructureshouldhavethefollowingfeatures,
1.PROFITABILITY:TheCompanyshouldmakemaximumuseofleveragesataminimumcost.
2.FLEXIBILITY:Thecapitalstructureshouldbeflexibletobeabletomeetthechangingconditions.The
companyshouldbeabletoraisefundswhenevertheneedarisesandcostlytocontinuewithparticular
sources.
3.CONTROL:Thecapitalstructureshouldinvolveminimumdilutionofcontrolofthecompany.
4.SOLVENCY:Theuseofexcessivedebtthreatensthesolvencyofthecompany.Inahighinterestrate
environment,Indiancompaniesarebeginningtorealizetheadvantageoflowdebt.
CAPITALSTRUCTUREANDFIRMVALUE:
Sincetheobjectiveoffinancialmanagementistomaximizeshareholderswealth,thekeyissueis:
whatistherelationshipbetweencapitalstructureandfirmvalue?Alternatively,whatistherelationship
betweencapitalstructureandcostofcapital?Rememberthatvaluationandcostofcapitalareinversely
related.Givenacertainlevelofearnings,thevalueofthefirmismaximizedwhenthecostofcapitalis
minimizedandviceversa.
Therearedifferentviews onhowcapitalstructureinfluencesvalue.Somearguethatthereisno
relationshipwhatsoeverbetweencapitalstructureandfirmvalue;otherbelievethatfinancialleverage(i.e.,
theuseofdebtcapital)hasapositiveeffectonfirmvalueuptoapointandnegativeeffectthereafter;still
otherscontendthat,otherthingsbeingequal,greatertheleverage,greaterthevalueofthefirm.

15

CAPITALSTRUCTUREDIAGRAM
TheCapitalStructureDecisionProcess

16

CAPITALSTRUCTUREANDPLANNING:
Capitalstructurereferstothemixoflongtermsourcesoffunds.Suchasdebentures,
longtermdebt, preference share capital including reserves and surplus (i.e., retained earnings) The
boardofdirectorsorthechieffinancialofficer(CEO)ofacompanyshoulddevelopanappropriate
capitalstructure,whicharemostfactorstothecompany.Thiscanbedoneonlywhenallthosefactors
whicharerelevanttothecompanyscapitalstructuredecisionareproperlyanalysedandbalanced.The
capitalstructureshouldbeplannedgenerallykeepinginviewtheinterestsoftheequityshareholders,
beingtheownersofthecompanyandtheprovidersofriskcapital(equity)wouldbeconcernedaboutthe
waysoffinancingacompanysoperations.However,theinterestsofothergroups,suchasemployees,
customers,creditors,societyandgovernment,shouldalsobegivenreasonableconsideration.Whenthe
company lays down its objective in terms of the shareholders wealth maximization (SWM), it is
generallycompatiblewiththeinterestsofothergroups.Thuswhiledevelopinganappropriatecapital
structure for its company,thefinancial managershouldinteralia aim atmaximizingthe longterm
marketpricepershare.Theoretically,theremaybeaprecisepointorrangewithinanindustrytheremay
bearangeofanappropriatecapitalstructurewithinwhichtherewouldnotbegreatdifferencesinthe
marketvaluepershare.Onewaytogetanideaofthisrangeistoobservethecapitalstructurepatternsof
companies visvis their market prices of shares. It may be found empirically that there are not
significantdifferencesinthesharevalueswithinagivenrange.Themanagementofacompanymayfix
itscapitalstructurenearthetopofthisrangeinordertomakemaximumuseoffavorableleverage,
subject to other requirements such as flexibility, solvency, control and norms set by the financial
institutions,thesecurityexchangeBoardofIndia(SEBI)andstockexchanges.

17

FEATURESOFANAPPROPRIATECAPITALSTRUCTURE:

The board of Director or the chief financial officer (CEO) of a company should
developanappropriatecapitalstructure,whichismostadvantageoustothecompany.This
canbedoneonlywhenallthosefactors,whicharerelevanttothecompanyscapitalstructure
decision, are properly analyzed and balanced. The capital structure should be planned
generallykeepinginviewtheinterestoftheequityshareholdersandfinancialrequirementsof
the company. The equity shareholders being the shareholders of the company and the
providers of the risk capital (equity) would be concerned about the ways of financing a
companys operation. However, the interests of the other groups, such as employees,
customer,creditors,andgovernment,shouldalsobegivenreasonableconsideration.When
thecompanylaydownitsobjectivesintermsoftheshareholderswealthmaximizing(SWM),
itisgenerallycompatiblewiththeinterestoftheothergroups.Thus,whiledevelopingan
appropriatecapitalstructureforitcompany,thefinancialmanagershouldinteraliaaimat
maximizingthelongtermmarketpricepershare.Theoreticallytheremaybeaprecisepoint
of range with in which the market value per share is maximum. In practice for most
companieswithinanindustrytheremaybearangeofappropriatecapitalstructurewithin
whichtherewouldnotbegreatdifferencesinthemarketvaluepershare.Onewaytogetan
ideaofthisrangeistoobservethecapitalstructurepatternsofcompaniesVisaVistheir
market prices of shares. It may be found empirically that there is no significance in the
differencesinthesharevaluewithinagivenrange.Themanagementofthecompanymayfit
itscapitalstructurenearthetopofitsrangeinordertomakeofmaximumuseoffavorable
leverage,subjecttootherrequirement(SEBI)andstockexchanges.

18

SOUNDORAPPROPRIATECAPITALSTRUCTURESHOULDHAVETHEFOLLOWINGFEATURES

1) RETURN:thecapitalstructureofthecompanyshouldbemostadvantageous,subjecttothe
otherconsiderations;itshouldgeneratemaximumreturnstotheshareholderswithoutadding
additionalcosttothem.
2) RISK:theuseofexcessivedebtthreatensthesolvencyofthecompany.Tothepointdebtdoes
notaddsignificantriskitshouldbeusedotherwiseitusesshouldbeavoided.
3) FLEXIBILITY:thecapitalstructureshouldbeflexibility.Itshouldbepossibletothecompany
adoptitscapitalstructureandcostanddelay,ifwarrantedbyachangedsituation.Itshould
alsobepossibleforacompanytoprovidefundswheneverneededtofinanceitsprofitable
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
dependsonitsabilitytogeneratefuturecashflows.Itshouldhaveenoughcashflowstopay
creditors,fixedchargesandprincipalsum.
5) CONTROL: The capital structure should involve minimum risk of loss of control of the
company.Theownerofthecloselyheldcompanysofparticularlyconcernedaboutdilution
ofthecontrol.
APPROACHESTOESTABLISHAPPROPRIATECAPITALSTRUCTURE:
Thecapitalstructurewillbeplannedinitiallywhenacompanyisincorporated.The
initialcapitalstructureshouldbedesignedverycarefully.Themanagementofthecompany
shouldsetatargetcapitalstructureandthesubsequentfinancingdecisionshouldbemade
withtheaviewtoachievethetargetcapitalstructure.Thefinancialmanagerhasalsotodeal
with an existing capital structure .The company needs funds to finance its activities
continuously.Everytimewhenfundshavetobeprocured,thefinancialmanagerweighsthe
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
continuesoneandhastobetakenwheneverafirmneedsadditionalFinances.

19

Thefollowingarethethreemostimportantapproachestodecideaboutafirmscapital
structure.
EBITEPSapproachforanalyzingtheimpactofdebtonEPS.

Valuationapproachfordeterminingtheimpactofdebtontheshareholdersvalue.
Cashflowapproachedforanalyzingthefirmsabilitytoservicedebt.
Inaddition totheseapproaches governing thecapital structure decisions,many other
factorssuchascontrol,flexibility,ormarketabilityarealsoconsideredinpractice.
EBITEPSAPPROACH:
Weshallemphasizesomeofthemainconclusionshere.Theuseoffixedcostsources
offinance,suchasdebtandpreferencesharecapitaltofinancetheassetsofthecompany,is
knowasfinancialleverageortradingonequity.Iftheassetsfinancedwiththeuseofdebt
yieldareturngreaterthanthecostofdebt,theearningspersharealsoincreaseswithoutan
increaseintheownersinvestment.
Theearningspersharealsoincreasewhenthepreferencesharecapitalisusedtoacquirethe
assets.Buttheleverageimpactismorepronouncedincaseofdebtbecause
1. Thecostofdebtisusuallylowerthanthecostofperformancesharecapitaland
2. Theinterestpairedondebtistaxdeductible.
Because of its effect on the earnings per share, financial leverage is an
importantconsiderationinplanningthecapitalstructureofacompany.Thecompanieswith
highleveloftheearningsbeforeinterestandtaxes(EBIT)canmakeprofitableuseofthehigh
degreeofleveragetoincreasereturnontheshareholdersequity.Onecommonmethodof
examiningtheimpactofleverageistoanalyzetherelationshipbetweenEPSandvarious
possiblelevelsofEBITunderalternativemethodsoffinancing.
TheEBITEPSanalysisisanimportanttoolinthehandsoffinancialmanagertogetaninsight
intothefirmscapitalstructuremanagement.HecanconsideredthepossiblefluctuationsinEBIT
andexaminetheirimpactonEPSunderdifferentfinancialplansoftheprobabilityofearninga
rateofreturnonthefirmsassetslessthanthecostofdebtisinsignificant,alarge

20

amountofdebtcanbeusedbythefirmtoincreasetheearningforshare.Thismayhavea
favorableeffectonthemarketvaluepershare.Ontheotherhand,iftheprobabilityofearning
arateofreturnonthefirmsassetslessthanthecostofdebtisveryhigh,thefirmshould
refrainfromemployingdebtcapital.itmay,thus,beconcludedthatthegreaterthelevelof
EBITandlowertheprobabilityofdownwordfluctuation,themorebeneficialitistoemploy
debtinthecapitalstructureHowever,itshouldberealizedthattheEBITEPSisafirststepin
deciding about a firms capital structure .It suffers from certain limitations and doesnt
provideunambiguousguideindeterminingthecapitalstructureofafirminpractice.

RATIOANALYSIS:
The primary user of financial statements are evaluating part performance and
predictingfutureperformanceandbothofthesearefacilitatedbycomparison.Thereforethe
focusoffinancialanalysisisalwaysonthecrucialinformationcontainedinthefinancial
statements.This dependsontheobjectivesandpurposeofsuchanalysis.Thepurposeof
evaluating such financial statement is different form person to person depending on its
relationship.Inotherwordseventhoughthebusinessunititselfandshareholders,debenture
holders,investorsetc.allundertakethefinancialanalysisdiffers.Forexample,tradecreditors
maybeinterestedprimarilyintheliquidityofafirmbecausetheabilityofthebusinessunitto
play their claims is best judged by means of a through analysis of its l9iquidity. The
shareholders and the potential investors may be interested in the present and the future
earningspershare,thestabilityofsuchearningsandcomparisonoftheseearningswithother
unitsintheeindustry.Similarlythedebentureholdersandfinancialinstitutionslendinglong
termloansmaybeconcernedwiththecashflowabilityofthebusinessunittopaybackthe
debtsinthelongrun.Themanagementofbusinessunit,itcontrast,lookstothefinancial
statementsfromvariousangles.Thesestatementsarerequirednotonlyforthemanagements
ownevaluationanddecisionmakingbutalsoforinternalcontrolandoverallperformanceof
thefirm.Thusthescopeextentandmeansofanyfinancialanalysisvaryasperthespecific
needsoftheanalyst.Financialstatementanalysisisapartofthelargerinformationprocessing
system,whichformstheverybasisofanydecisionmakingprocess.

21

Thefinancialanalystalwaysneedscertainyardstickstoevaluatetheefficiency
andperformanceofbusinessunit.Theoneofthemostfrequentlyusedyardsticksisratio
analysis.Ratioanalysisinvolvestheuseofvariousmethodsforcalculatingandinterpreting
financialratiostoassesstheperformanceandstatusofthebusinessunit.

It is a tool of financial analysis, which studies the numerical or quantitative relationship

betweenwithothervariableandsuchratiovalueiscomparedwithstandardornormsinorder
to highlight the deviations made from those standards/norms. In other words, ratios are
relativefiguresreflectingtherelationshipbetweenvariablesandenabletheanalyststodraw
conclusionsregardingthefinancialoperations.
However,itmustbenotedthatratioanalysismerelyhighlightsthepotentialareasof
concernorareasneedingimmediateattentionbutitdoesnotcomeoutwiththeconclusionas
regardscausesofsuchdeviationsfromthenorms.Forinstance,ABCLtd.Introducedthe
conceptofratioanalysisbycalculatingthevarietyofratiosandcomparingthesamewith
normsbasedonindustryaverages.Whilecomparingtheinventoryratiowas22.6ascompared
toindustryaverageturnoverratioof11.2.Howeveroncloserselltinyduetolargevariation
fromthenorms,itwasfoundthatthebusinessunitsinventorylevelduringtheyearwaskept
atextremelylowlevel.Thisresultedinnumerousproductionheldsalesandlowerprofits.In
otherwords,whatwasinitiallylookinglikeanextremelyefficientinventorymanagement,
turnedouttobeaproblemareawiththehelpofratioanalysis?Asamatterofcaution,itmust
howeverbeaddedthatasinglerationortwocannotgenerallyprovidethatnecessarydetails
soastoanalyzetheoverallperformanceofthebusinessunit.

Inordertoarriveatthereasonableconclusionregardingoverallperformanceofthe
businessunit,ananalysisoftheentiregroupofratioisrequired.However,rationanalysis
shouldnotbeconsideredasultimateobjectivetestbutitmaybecarriedfurtherbasedonthe
outcomeandrevelationsaboutthecausesofvariations.Sometimeslargevariationsaredue
tounreliabilityoffinancialdataorinaccuraciescontainedthereinthereforebeforetakingany
decisionthebasisofrationanalysis,theirreliabilitymustbeensured.

22

Similarly, while doing the interfirm comparison, the variations may be due to
differenttechnologiesordegreeofriskinthoseunitsoritemstobeexaminedareinfactthe
comparable only. It must be mentioned here that if ratios are used to evaluate operating
performance,theseshouldexcludeextraordinaryitemsbecausethereareregardedasnon
recurringitemsthatdonotreflectnormalperformance.

Ratioanalysisisthesystematicprocessofdeterminingandinterpretingthenumerical
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
comparingtheperformanceofonebusinesswiththeother.

Itisveryimportantthatthebase(ordenominator)selectedforeachratiois
relevant with the numerator. The two must be such that one is closely connected and is
influencedbytheother
CAPITALSTRUCTURERATIOS

Capital structure or leverage ratios are used to analyse the longterm solvency or
stability of a particular business unit. The shortterm creditors are interested in current
financialpositionanduseliquidityratios.Thelongtermcreditorsworldjudgethesoundness
ofabusinessonthebasisofthelongtermfinancialstrengthmeasuredintermsofitsabilityto
pay the interest regularly as well as repay the installment on due dates. This longterm
solvencycanbejudgedbyusingleverageorstructuralratios.
Therearetwoaspectsofthelongtermsolvencyofafirm:
1. Abilitytorepaytheprincipalwhendue,and
2. Regular payment of interest, there are thus two different but mutually dependent and
interrelatedtypesofleverageratiosuchas:

3.Ratiosbasedontherelationshipbetweenborrowedfundsandownerscapital,computed
formbalancesheeteg:debtequityratio,dividendcoverageratio,debtservicecoverageratio
etc.,

23

THECAPITALSTRUCTURECONTROVERSY:

Thevalueofthefirmdependsuponitsexpectedearningsstreamandtherateusedto
discountthisstream.Therateusedtodiscountearningsstreamitsthefirmsrequiredrateof
returnorthecostofcapital.Thus,thecapitalstructuredecisioncanaffectthevalueofthe
firmeitherbychangingtheexpectedearningsofthefirm,butitcanaffecttheresideearnings
oftheshareholders.Theeffectofleverageonthecostofcapitalisnotveryclear.Conflicting
opinionshavebeenexpressedonthisissue.Infact,thisissueisoneofthemostcontinuous
areasinthetheoryoffinance,andperhapsmoretheoreticalandempiricalworkhasbeendone
onthissubjectthananyother.

Ifleverageaffectsthecostofcapitalandthevalueofthefirm,anoptimumcapital
structurewouldbeobtainedatthatcombinationofdebtandequitythatmaximizesthetotal
valueofthefirmorminimizestheweightedaveragecostofcapital.Thequestionofthe
existenceofoptimumuseofleveragehasbeenputverysuccinctlybyEzraSolomoninthe
followingwords.

Giventhatafirmhascertainstructureofassets,whichoffersnetoperatingearningsof
givensizeandquality,andgivenacertainstructureofratesinthecapitalmarkets,isthere
somespecificdegreeoffinancialleverageatwhichthemarketvalueofthefirmssecurities
willbehigherthanatotherdegreesofleverage?

Theexistenceofanoptimumcapitalstructureisnotacceptedbyall.Theseexisttwo
extremeviewsandmiddleposition.DavidDurandidentifiedthetwoextremeviewsthenet
incomeandnetoperatingapproaches.

24

1.NetIncomeApproach:
Underthenetincomeapproach(NI),thecostofdebtandcostofequityareassumedto
beindependenttothecapitalstructure.Theweightedaveragecostofcapitaldeclinesandthe
totalvalueofthefirmrisewithincreaseduseofleverage.
2.NetOperatingIncomeApproach:

Underthenetoperatingincome(NOI)approach,thecostofequityisassumedto
increase linearly with average. As a result, the weighted average cost of capital remains
constantandthetotalvalueofthefirmalsoremainsconstantasleverageischanged.
3.TraditionalApproach:

Accordingtothisapproach,thecostofcapitaldeclinesandthevalueofthe
firmincreaseswithleverageuptoaprudentdebtlevelandafterreachingtheoptimumpoint,
coveragecausethecostofcapitaltoincreaseandthevalueofthefirmtodecline.

Thus,ifNIapproachisvalid,leverageissignificantvariableandfinancingdecisions
haveanimportanteffectonthevalueofthefirm.Ontheotherhand,iftheNOIapproachis
correctthenthefinancingdecisionsshouldnotbeagreatconcerntothefinancingmanager,as
itdoesnotmatterinthevaluationofthefirm.
ModiglianiandMiller(MM)supporttheNOIapproachbyprovidinglogically
consistentbehavioraljustificationsinitsfavor.Theydenytheexistenceofanoptimumcapital
structurebetweenthetwoextremeviews;wehavethemiddlepositionorintermediateversion
advocatedbythetraditionalwriters.

Thustheseexistsanoptimumcapitalstructureatwhichthecostofcapitalisminimum.The
logicofthisviewisnotverysound.TheMMpositionchangeswhencorporatetaxesare
assumed.Theinteresttaxshieldresultingfromtheuseofdebtaddstothevalueofthefirm.
Thisadvantagereducesthewhenpersonalincometaxesareconsidered.

25

CapitalStructureMatters:TheNetIncomeApproach:
Theessenceofthenetincome(NI)approachisthatthefirmcanincreaseitsvalueor
lowertheoverallcostofcapitalbyincreasingtheproportionofdebtinthecapitalstructure.
Thecrucialassumptionsofthisapproachare:

1.Theuseofdebtdoesnotchangetheriskperceptionofinvestors;asaresult,theequity
capitalizationrate,kc andthedebtcapitalizationrate,k d,remainconstantwithchangesin
leverage.
2.The debt capitalization rate is less than the equity capitalization rate (i.e.
kd<ke)3.Thecorporateincometaxesdonotexist.

The first assumption implies that, if ke and kd are constant increased use by debt by
magnifyingtheshareholdersearningswillresultinhighervalueofthefirmviahighervalue
ofequityconsequentlytheoverallortheweightedaveragecostofcapitalk o,willdecrease.
Theoverallcostofcapitalismeasuredbyequation:(1)

Itisobviousfromequation1that,withconstantannualnetoperatingincome(NOI),the
overallcostofcapitalwoulddecreaseasthevalueofthefirmvincreases.Theoverallcostof
capitalkocanalsobemeasuredby
KO=Ke(KeKd)D/V

AspertheassumptionsoftheNIapproachKeandKdareconstantandKdis
lessthanKe.Therefore,KowilldecreaseasD/Vincreases.Equation2alsoimpliesthatthe
overallcostofcapitalKowillbeequaltoKeiftheformdoesnotemployanydebt(i.e.D/V
=0),andthatKowillapproachKdasD/Vapproachesone.

26

NETOPERATINGINCOMEAPPROACH
Accordingtothemetoperatingincomeapproachtheoverallcapitalizationrateandthecostof
debtremainconstantforalldegreeofleverage.

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

Thecriticalpremiseofthisapproachisthatthemarketcapitalizesthefirmasawhole
atdiscountrate,whichisindependentofthefirmsdebtequityratio.Asaconsequence,the
decisionbetweendebtandequityisirrelevant.Anincreaseintheuseofdebtfundswhichare
apparentlycheaperoroffsetbyanincreaseintheequitycapitalizationrate.Thishappens
becauseequityinvestorsseekhighercompensationastheyareexposedtogreaterriskarising
fromincreaseinthedegreeofleverages.TheyraisethecapitalizationraterE(lowertheprice
earningsratio,asthedegreeofleverageincreases.

Thenetoperatingincomepositionhasbeen\advocatedeloquentlybyDavid
Durand.Hearguedthatthemarketvalueofafirmdependsonitsnetoperatingincomeand
businessrisk.Thechangeinthefinancialleverageemployedbyafirmcannotchangethese
underlyingfactors.Itmerelychangesthedistributionofincomeandriskbetweendebtand
equity,withoutaffectingthetotalincomeandriskwhichinfluencethemarketvalue(or

27

equivalentlytheaveragecostofcapital)ofthefirm.Arguinginasimilarvein,Modiglianiand
Miller,inaseminalcontributionmadein1958,forcefullyadvancedthepropositionthatthe
costofcapitalofafirmisindependentofitscapitalstructure.

COSTOFCAPITALANDVALUATIONAPPROACH
The cost of a source of finance is the minimum return expected by its
suppliers.Theexpectedreturndependsonthedegreeofriskassumedbyinvestors.Ahigh
degreeofriskisassumedbyshareholdersthandebtholders.Inthecaseofdebtholders,the
rateofinterestisfixedandthecompanyislegallyboundtopaydividendseveniftheprofits
aremadebythecompany.Theloanofdebtholdersisreturnedwithinaprescribedperiod,
whileshareholderswillhavetosharetheresidueonlywhenthecompanyiswoundup.

Thisleadsonetoconcludethatdebtischeapersourceoffundsthanequity.Thisisgenerally
thecaseevenwhentaxesarenotconsidered.Thetaxdeductibilityofinterestchargesfurther
reducesthecostofdebt.Thepreferencesharecapitalisalsocheaperthanequitycapital,but
notascheapasdebt.Thus,usingthecomponent,orspecific,costofcapitalascriterionfor
financingdecisionsandignoringrisk,afirmwouldalwaysliketoemploydebtsinceitisthe
cheapestsourceoffunds.
CASHFLOWAPPROACH:
One of the features of a sound capital structure is conservatism does not mean
employingnodebtorsmallamountofdebt.Conservatismisrelatedtothefixedcharges
createdbytheuseofdebtorpreferencecapitalinthecapitalstructureandthefirmsabilityto
generate cash to meet these fixed charges. In practice, the question of the optimum
(appropriate)debtequitymixboilsdowntothefirsabilitytoservicedebtwithoutanythreat
ofinsolvencyandoperatinginflexibility.Afirmisconsideredprudentlyfinancedifitisable
toserviceitsfixedchargesunderanyreasonablypredictableadverseconditions.

28

The fixed charges of a company include payment of interest, preference

dividendandprincipal,andtheydependonboththeamountofloansecuritiesandtheterms
ofpayment.Theamountoffixedchargeswillbehighifthecompanyemploysalargeamount
ofdebtorpreferencecapitalwithshorttermmaturity.Wheneveracompanythinksofraising
additionaldebt,itshouldanalyseitsexpectedfuturecashflowstomeetthefixedcharges.Itis
mandatorytopayinterestandreturntheprincipalamountofdebtofacompanynotableto
generateenoughcashtomeetitsfixedobligation,itmayhavetofacefinancialinsolvency.
Thecompaniesexpectinglargerandstablecashinflowsintoemployfixedchargesourcesof
financebythosecompanieswhosecashinflowsareunstableandunpredictable.

Itispossibleforhighgrowth,profitablecompanytosufferfromcashshortageiftheliquidity
(workingcapital)managementispoor.WehaveexamplesofcompanieslikeBHEL,NTPC,
etc.,whosedebtorsareverystickyandtheycontinuouslyfaceliquidityprobleminspiteof
beingprofitabilityservicingdebtisveryburdensomeforthem.

Oneimportantratiowhichshouldbeexaminedatthetimeofplanningthe
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
inflowsgeneratedbythecompany.

LIMITATIONOFEPSASAFINANCINGDECISIONCRITERION

EPSisoneofthemostlywidelyusedmeasuresofthecompanysperformance
inpractice.Asaresultofthis,inchoosingbetweendebtandequityinpractice,sometimestoo
muchattentionispaidonEPS,whichhowever,hasseriouslimitationsasafinancingdecision
criterion.
ThemajorshortcomingoftheEPSasafinancingdecisioncriterionisthatit
doesnotconsiderrisk;itignoresvariabilityabouttheexpectedvalueofEPS.Thebeliefthat
investorswouldbejustconcernedwiththeexpectedEPSisnotwellfounded.Investorsin
valuingthesharesofthecompanyconsiderbothexpectedvalueandvariability.

29

EPSVARIABILITYANDFINANCIALRISK:
TheEPSvariabilityresultingformtheuseofleverageiscalledfinancialrisk.
Financialriskisaddedwiththeuseofdebtbecauseof
(a) Theincreasedvariabilityintheshareholdersearningsand
(b)

Thethreatofinsolvency.Afirmcanavidfinancialriskaltogetherifitdoesnotemploy
anydebtinitscapitalstructure.Butthentheshareholderswillbedeprivedofthebenefitof
thefinancialriskperceivedbytheshareholders,whichdoesnotexceedthebenefitofincrease
EPS.Aswehaveseen,ifacompanyincreaseitsdebtbeyondapointtheexpectedEPSwill
continuetoincreasebutthevalueofthecompanyincreases itsdebtbeyondapoint,the
expectedEPSwillcontinuetoincrease,butthevalueofthecompanywillfallbecauseofthe
greaterexposureofshareholderstofinancialriskintheformoffinancialdistress.TheEPS
criteriondoesnotconsiderthelongtermperspectivesoffinancingdecisions.Itfailstodeal
withtheriskreturntradeoff.Alongtermviewoftheeffectsofthefinancingdecisions,will
leadonetoacriterionofthewealthmaximizationratherthatEPSmaximization.TheEPS
criterionisanimportantperformancemeasurebutnotadecisioncriterion.

Givenlimitations,shouldtheEPScriterionbeignoredinmakingfinancingdecision?
Rememberthatitisanimportantindexofthefirmsperformanceandthatinvestorsrely
heavilyonitfortheirinvestmentdecisions.Investorsdonothaveinformationintheprojected
earningsandcashflowsandbasetheirevaluationandhistoricaldata.Inchoosingbetween
alternativefinancialplans,managementshouldstartwiththeevaluationoftheimpactofeach
alternativeonneartermEPS.Butmanagementsultimatedecisionmakingshouldbeguided
bythebestinterestsofshareholders.

Therefore,alongtermviewoftheeffectofthealternativefinancialplansonthevalueofthe
sharesshouldbetaken,omanagementoptsforafinancialplanwhichwillmaximizevaluein
the long run but has an adverse impact in nearterm EPS, and the reasons must be
communicatedtoinvestors.Acarefulcommunicationtomarketwillbehelpfulinreducing
themisunderstandingbetweenmanagementandInvestors.

30

COMPOSITIONANDOBSERVATION
ThesourcestappedbyULTRATECHCEMENTSIndustriesLtd.Canbeclassifiedinto:

Shareholdersfundsresources

Loanfundresources

SHAREHOLDERFUNDRESOURCES:
Shareholdersfundconsistsofequitycapitalandretainedearnings.
EQUITYCAPITALBUILDUP
1.From1995,theAuthorizedcapitalisRs.450lacsofequitysharesatRs.10each.Theissued
equitycapitalisRS.1622.93lacsatRs.10eachfortheperiod20022009andsubscribedand
paidupcapitalisRs.1622.93lacsatRs.10eachfortheperiodof20042009.
3.Thereisanincreaseof1.38%intheequityfrom20052010.
RETAINEDEARNINGSCOMPOSITION
Thisincludes

1.

CapitalReserve

SharePremiumAccount

GeneralReserve

ContingencyReserve

DebenturesRedemptionReserve

InvestmentAllowanceReserve

Profit&LossAccount

Theprofitlevels,companydividendpolicyandgrowthplansdetermined.Theamounts
transferred from P&L A/c to General Reserve. Contingency Reserve and Investment
AllowanceReserve.

2.

TheInvestmentAllowanceReserveiscreatedforreplacementoflongtermleasedassets
andthisreservewasremovedfrombooksbecauseassetspertainingtosuchreservesceasedto
exist.Theaccountwastransferredtoinvestmentallowanceutilized.

31

Capitalstructuredescribeshowacorporationhasorganizeditscapitalhowitobtainsthe
financialresourceswithwhichitoperatesitsbusiness.Businessesadoptvariouscapital
structurestomeetbothinternalneedsforcapitalandexternalrequirementsforreturnson
shareholdersinvestments.Asshownonitsbalancesheet,acompany'scapitalizationis
constructedfromthreebasicblocks:
1.

Longterm debt. By standard accounting definition, longterm debt includes

obligationsthatarenotduetoberepaidwithinthenext12months.Suchdebtconsistsmostly
ofbondsorsimilarobligations,includingagreatvarietyofnotes,capitalleaseobligations,
andmortgageissues.
2. Preferredstock.Thisrepresentsanequity(ownership)interestinthecorporation,but
onewithclaimsaheadofthecommonstock,andnormallywithnorightstosharein
theincreasedworthofacompanyifitgrows.

3.

Common stockholders' equity. This represents the underlying ownership. On the

corporation'sbooks,itismadeupof:(I)thenominalparorstatedvalueassignedtothe
sharesofoutstandingstock;(2)thecapitalsurplusortheamountaboveparvaluepaidthe
companywheneveritissuesstock;and(3)theearnedsurplus(alsocalledretainedearnings),
whichconsistsoftheportionofearningsacompanyretainsafterpayingoutdividendsand
similardistributions.Putanotherway,commonstockequityisthenetworthafterallthe
liabilities(includinglongtermdebt),aswellasanypreferredstock,aredeductedfromthe
totalassetsshownonthebalancesheet.Forinvestmentanalysispurposes,securityanalysts
mayusethecompany'smarketcapitalizationthecurrentmarketpricetimesthenumberof
common shares outstandingas a measure of common stock equity. They consider this
marketbasedfigureamorerealisticvaluation.

32

CHAPTERIII
INDUSTRY&COMPANYPROFILE

33

INDUSTRYPROFILE
Inthemostgeneralsenseoftheword,a cement isabinder,a
substancewhichsetsandhardensindependently,andcanbindothermaterialstogether.The
word"cement"tracestotheRomans,whousedtheterm"opuscaementicium"todescribe
masonrywhichresembledconcreteandwasmadefromcrushedrockwithburntlimeas
binder.Thevolcanicashandpulverizedbrickadditiveswhichwereaddedtotheburntlime
to obtain a hydraulic binder were later referred to as cementum, cimentum, cment and
cement.Cementsusedinconstructionarecharacterizedashydraulicornonhydraulic.
Themostimportantuseofcementistheproductionofmortarandconcretethebondingof
naturalorartificialaggregatestoformastrongbuildingmaterialwhichisdurableintheface
ofnormalenvironmentaleffects.
Concreteshouldnotbeconfusedwithcementbecausethetermcementrefersonlytothedry
powdersubstanceusedtobindtheaggregatematerialsofconcrete.Upontheadditionofwater
and/oradditivesthecementmixtureisreferredtoasconcrete,especiallyifaggregateshave
beenadded.
Itisuncertainwhereitwasfirstdiscoveredthatacombinationofhydratednonhydrauliclime
andapozzolanproducesahydraulicmixture(seealso:Pozzolanicreaction),butconcrete
madefromsuchmixtureswasfirstusedonalargescalebyRomanengineers.Theyusedboth
naturalpozzolans(trassorpumice)andartificialpozzolans(groundbrickorpottery)inthese
concretes. Many excellent examples of structures made from these concretes are still
standing,notablythehugemonolithicdomeofthePantheoninRomeandthemassiveBaths
ofCaracalla.ThevastsystemofRomanaqueducts alsomadeextensiveuseofhydraulic
cement. The use of structural concrete disappeared in medieval Europe, although weak
pozzolanicconcretescontinuedtobeusedasacorefillinstonewallsandcolumns.
Moderncement
ModernhydrauliccementsbegantobedevelopedfromthestartoftheIndustrialRevolution
(around1800),drivenbythreemainneeds:
Hydraulicrendersforfinishingbrickbuildingsinwetclimates
Hydraulicmortarsformasonryconstructionofharborworksetc,incontactwithseawater.
Developmentofstrongconcretes.

34

InBritainparticularly,goodqualitybuildingstonebecameevermoreexpensiveduringa
periodofrapidgrowth,anditbecameacommonpracticetoconstructprestigebuildingsfrom
thenewindustrialbricks,andtofinishthemwithastuccotoimitatestone.Hydrauliclimes
werefavoredforthis,buttheneedforafastsettimeencouragedthedevelopmentofnew
cements.MostfamouswasParker's"Romancement."ThiswasdevelopedbyJamesParkerin
the1780s,andfinallypatentedin1796.Itwas,infact,nothinglikeanymaterialusedbythe
Romans,butwasa"Naturalcement"madebyburningseptarianodulesthatarefoundin
certainclaydeposits,andthatcontainbothclaymineralsandcalciumcarbonate.Theburnt
nodulesweregroundtoafinepowder.Thisproduct,madeintoamortarwithsand,setin5
15 minutes. The success of "Roman Cement" led other manufacturers to develop rival
productsbyburningartificialmixturesofclayandchalk.
JohnSmeatonmadeanimportantcontributiontothedevelopmentofcementswhenhewas
planningtheconstructionofthethirdEddystoneLighthouse(17559)intheEnglishChannel.
Heneededahydraulicmortarthatwouldsetanddevelopsomestrengthinthetwelvehour
periodbetweensuccessivehightides.Heperformedanexhaustivemarketresearchonthe
availablehydrauliclimes,visitingtheirproductionsites,andnotedthatthe"hydraulicity"of
thelimewasdirectlyrelatedtotheclaycontentofthelimestonefromwhichitwasmade.
Smeaton was a civil engineer by profession, and took the idea no further. Apparently
unawareofSmeaton'swork,thesameprinciplewasidentifiedbyLouisVicatinthefirst
decadeofthenineteenthcentury.Vicatwentontodeviseamethodofcombiningchalkand
clayintoanintimatemixture,and,burningthis,producedan"artificialcement"in1817.
JamesFrost,orkinginBritain,producedwhathecalled"Britishcement"inasimilarmanner
aroundthesametime,butdidnotobtainapatentuntil1822.In1824,JosephAspdinpatented
asimilarmaterial,whichhecalledPortlandcement,becausetherendermadefromitwasin
colorsimilartotheprestigiousPortlandstone.
All the above products could not compete with lime/pozzolan concretes because of fast
setting(givinginsufficienttimeforplacement)andlowearlystrengths(requiringadelayof
manyweeksbeforeformworkcouldberemoved).Hydrauliclimes,"natural"cementsand
"artificial"cementsallrelyupontheirbelitecontentforstrengthdevelopment.Belitedevelops
strengthslowly.Becausetheywereburnedattemperaturesbelow1250C,theycontainedno
alite,whichisresponsibleforearlystrengthinmoderncements.Thefirstcementto

35

consistentlycontainalitewasmadebyJosephAspdin'ssonWilliamintheearly1840s.This
waswhatwecalltoday"modern"Portlandcement.Becauseoftheairofmysterywithwhich
WilliamAspdinsurroundedhisproduct,others(e.g.VicatandICJohnson)haveclaimed
precedenceinthisinvention,butrecentanalysisofbothhisconcreteandrawcementhave
shownthatWilliamAspdin'sproductmadeatNorthfleet,Kentwasatruealitebasedcement.
However,Aspdin'smethodswere"ruleofthumb":Vicatisresponsibleforestablishingthe
chemicalbasisofthesecements,andJohnsonestablishedtheimportanceofsinteringthemix
inthekiln.
WilliamAspdin'sinnovationwascounterintuitiveformanufacturersof"artificialcements",
becausetheyrequiredmorelimeinthemix(aproblemforhisfather),becausetheyrequireda
muchhigherkilntemperature(andthereforemorefuel)andbecausetheresultingclinkerwas
very hard and rapidly wore down the millstones which were the only available grinding
technology of the time. Manufacturing costs were therefore considerably higher, but the
productsetreasonablyslowlyanddevelopedstrengthquickly,thusopeningupamarketfor
useinconcrete.Theuseofconcreteinconstructiongrewrapidlyfrom1850onwards,andwas
soonthedominantuseforcements.ThusPortlandcementbeganitspredominantrole.itis
madefromwaterandsand
Typesofmoderncement
Portlandcement
Cementismadebyheatinglimestone(calciumcarbonate),withsmallquantitiesofother
materials(suchasclay)to1450Cinakiln,inaprocessknownascalcination,wherebya
moleculeofcarbondioxideisliberatedfromthecalciumcarbonatetoformcalciumoxide,or
lime,whichisthenblendedwiththeothermaterialsthathavebeenincludedinthemix.The
resultinghardsubstance,called'clinker',isthengroundwithasmallamountofgypsumintoa
powdertomake'OrdinaryPortlandCement',themostcommonlyusedtypeofcement(often
referredtoasOPC).
Portlandcementisabasicingredientofconcrete,mortarandmostnonspecialitygrout.The
most common use for Portland cement is in the production of concrete. Concrete is a
composite material consisting ofaggregate (gravel and sand),cement, and water. As a
constructionmaterial,concretecanbecastinalmostanyshapedesired,andoncehardened,
canbecomeastructural(loadbearing)element.Portlandcementmaybegrayorwhite.

36

Portlandcementblends
Theseareoftenavailableasintergroundmixturesfromcementmanufacturers,butsimilar
formulationsareoftenalsomixedfromthegroundcomponentsattheconcretemixingplant.
Portlandblastfurnacecementcontainsupto70%groundgranulatedblastfurnaceslag,with
therestPortlandclinkerandalittlegypsum.Allcompositionsproducehighultimatestrength,
butasslagcontentisincreased,earlystrengthisreduced,whilesulfateresistanceincreases
andheatevolutiondiminishes.UsedasaneconomicalternativetoPortlandsulfateresisting
andlowheatcements.
Portlandflyash cement contains upto30%flyash.Theflyashis pozzolanic,sothat
ultimate strength is maintained. Because fly ash addition allows a lower concrete water
content,earlystrengthcanalsobemaintained.Wheregoodqualitycheapflyashisavailable,
thiscanbeaneconomicalternativetoordinaryPortlandcement.
Portlandpozzolancement includesflyashcement,sinceflyashisapozzolan,butalso
includes cements made from other natural or artificial pozzolans. In countries where
volcanicashesareavailable(e.g.Italy,Chile,Mexico,thePhilippines)thesecementsare
oftenthemostcommonforminuse.
Portlandsilicafumecement.Additionofsilicafumecanyieldexceptionallyhighstrengths,
andcementscontaining520%silicafumeareoccasionallyproduced.However,silicafumeis
moreusuallyaddedtoPortlandcementattheconcretemixer.
Masonrycementsareusedforpreparingbricklayingmortarsandstuccos,andmustnotbe
used in concrete. They are usually complex proprietary formulations containing Portland
clinkerandanumberofotheringredientsthatmayincludelimestone,hydratedlime,air
entrainers, retarders, waterproofers and coloring agents. They are formulated to yield
workablemortarsthatallowrapidandconsistentmasonrywork.SubtlevariationsofMasonry
cementintheUSarePlasticCementsandStuccoCements.Thesearedesignedtoproduce
controlledbondwithmasonryblocks.
Expansivecementscontain,inadditiontoPortlandclinker,expansiveclinkers(usually
sulfoaluminateclinkers),andaredesignedtooffsettheeffectsofdryingshrinkagethat
isnormallyencounteredwithhydrauliccements.Thisallowslargefloorslabs(upto60
msquare)tobepreparedwithoutcontractionjoints.

37

Whiteblendedcementsmaybemadeusingwhiteclinkerandwhitesupplementarymaterials
suchashighpuritymetakaolin.
Colored cements areusedfordecorativepurposes.Insomestandards,theadditionof
pigmentstoproduce"coloredPortlandcement"isallowed.Inotherstandards(e.g.ASTM),
pigmentsarenotallowedconstituentsofPortlandcement,andcoloredcementsaresoldas
"blendedhydrauliccements".
Veryfinelygroundcementsaremadefrommixturesofcementwithsandorwithslagor
otherpozzolantypemineralswhichareextremelyfinelygroundtogether.Suchcementscan
have the same physical characteristics as normal cement but with 50% less cement
particularlyduetotheirincreasedsurfaceareaforthechemicalreaction.Evenwithintensive
grindingtheycanuseupto50%lessenergytofabricatethanordinaryPortlandcements.
NonPortlandhydrauliccements
Pozzolanlimecements.Mixturesofgroundpozzolanandlimearethecementsusedbythe
Romans,andaretobefoundinRomanstructuresstillstanding(e.g.thePantheoninRome).
Theydevelopstrengthslowly,buttheirultimatestrengthcanbeveryhigh.Thehydration
productsthatproducestrengthareessentiallythesameasthoseproducedbyPortlandcement.
Slaglimecements.Groundgranulatedblastfurnaceslagisnothydrauliconitsown,butis
"activated"byadditionofalkalis,mosteconomicallyusinglime.Theyaresimilartopozzolan
limecementsintheirproperties.Onlygranulatedslag(i.e.waterquenched,glassyslag)is
effectiveasacementcomponent.
Supersulfatedcements.Thesecontainabout80%groundgranulatedblastfurnaceslag,15%
gypsum or anhydrite and a little Portland clinker or lime as an activator. They produce
strengthbyformationofettringite,withstrengthgrowthsimilartoaslowPortlandcement.
Theyexhibitgoodresistancetoaggressiveagents,includingsulfate.
Calcium aluminate cements are hydraulic cements made primarily from limestone and
bauxite.TheactiveingredientsaremonocalciumaluminateCaAl2O4(CaOAl2O3orCAin
Cementchemistnotation,CCN)andmayeniteCa12Al14O33(12CaO7Al2O3,orC12A7in
CCN).Strengthformsbyhydrationtocalciumaluminatehydrates.Theyarewelladaptedfor
useinrefractory(hightemperatureresistant)concretes,e.g.forfurnacelinings.
Calciumsulfoaluminatecementsaremadefromclinkersthatincludeye'elimite(Ca4(AlO2)6SO4

orC4A3 inCementchemist'snotation)asaprimaryphase.Theyareusedin

38

expansive cements, in ultrahigh early strength cements, and in "lowenergy" cements.

Hydration produces ettringite, and specialized physical properties (such as expansion or
rapidreaction)areobtainedbyadjustmentoftheavailabilityofcalciumandsulfateions.
TheiruseasalowenergyalternativetoPortlandcementhasbeenpioneeredinChina,where
severalmilliontonnesperyearareproduced.Energyrequirementsarelowerbecauseofthe
lowerkilntemperaturesrequiredforreaction,andtheloweramountoflimestone(which
mustbeendothermicallydecarbonated)inthemix.Inaddition,thelowerlimestonecontent
and lower fuel consumption leads to a CO2 emission around half that associated with
Portlandclinker.However,SO2emissionsareusuallysignificantlyhigher.
"Natural"Cements correspondtocertaincementsoftheprePortlandera,producedby
burningargillaceouslimestonesatmoderatetemperatures.Thelevelofclaycomponentsin
thelimestone(around3035%)issuchthatlargeamountsofbelite(thelowearlystrength,
highlatestrengthmineralinPortlandcement)areformedwithouttheformationofexcessive
amounts of free lime. As with any natural material, such cements have highly variable
properties.
Geopolymercements aremadefrommixturesofwatersolublealkalimetalsilicates
andaluminosilicatemineralpowderssuchasflyashandmetakaolin.

39

CementIndustryinIndia
India is the world's second largest producer of cement according to the Cement
ManufacturersAssociation.
DuringSeptember2010,thecementproductiontouched12.54milliontonnes(MT),whilethe
cementdespatchesquantitywas12.56MTduringthemonth.Thetotalcementproduction
during AprilSeptember 201011 reached 81.54 MT as compared to 77.22 MT over the
correspondingperiodlastfiscal.Further,cementdespatchesalsowitnessedanupsurgefrom
76.50MTduringAprilSeptember200910to81.10MTduringAprilSeptember201011.
Moreover, the government's continued thrust on infrastructure will help the key building
materialtomaintainanannualgrowthof910percentin2010,accordingtoIndia'slargest
cementcompany,ACC.
InJanuary2010,ratingagencyFitchpredictedthatthecountrywilladdabout50million
tonnecementcapacityin2010,takingthetotaltoaround300milliontonne.
Further, speaking at the Green Cementech 2010, a seminar jointly organised by the
Confederation of Indian Industry (CII) and the Cement Manufacturer's Association in
HyderabadinMay2010,GJayaraman,ExecutivePresident,BirlaCorporationLtd,saidthat
in2009,40MTofcapacitywasaddedandheexpectsasimilartrendtofollowthisyear.
NewInvestments
Cementandgypsumproductshavereceivedcumulativeforeigndirectinvestment(FDI)of
US$1,971.79millionbetweenApril2000andSeptember2010,accordingtotheDepartment
ofIndustrialPolicyandPromotion(DIPP).

DalmiaBharatEnterprisesplanstoinvestUS$554.32milliontosetuptwogreenfield
cementplantsinKarnatakaandMeghalaya.

BharathiCementplanstodoubleitsproductioncapacitybytheendofthecurrent
financialyearbyexpandingitsplantinAndhraPradesh,withaninvestmentofUS$149.97
million.

40

Madras Cements Ltd is planning to invest US$ 178.4 million to increase the

manufacturingcapacityofitsAriyalurplantinTamilNaduto4.5MTfrom2MTbyApril
2011.

My Home Industries Limited (MHI), a 50:50 joint venture (JV) between the
HyderabadbasedMyHomeGroupandIreland'sbuildingmaterialmajorCRHPlc,plansto
scaleupitscementproductioncapacityfromtheexisting5milliontonneperannum(mtpa)to
15mtpaby2016.ThecompanywouldundertakethiscapacityexpansionatacostofUS$1
billion.

ShreeCement,planstoinvestUS$97.13millionthisyeartosetupa1.5millionMT
clinker and grinding unit in Rajasthan. Moreover, in June 2010, Shree Cement signed a
memorandumofunderstanding(MoU)withtheKarnatakagovernmenttoinvestUS$423.6
millionforsettingupacementunitandapowerplant.US$317.7millionwillbeusedtoset
upacementmanufacturingunitwithanannualcapacityof3mtpawhilethebalancewillbe
forthe100megawattpowerplant.

JaiprakashAssociatesplanstoinvestUS$640milliontoincreaseitscementcapacity.

Swiss cement company Holcim plans to invest US$ 1 billion in setting up 23

greenfield manufacturing plants in the country in the next five years to serve the rising
domesticdemand.HolcimispresentinthecountrythroughACCandAmbujaCementsand
holdsaround46percentstakeineachcompany.WhileACCoperates16cementplants,
AmbujaCementscontrolsfiveplantsinIndia.TheAdityaBirlagroupisthelargestcement
making group by capacity in the country and controls Grasim Industries and Ultratech
Cement.
GovernmentInitiatives
Thecementindustryispushingforincreaseduseofcementinhighwayandroadconstruction.
TheMinistryofRoadTransportandHighwayshasplannedtoinvestUS$354billioninroad
infrastructure by 2012. Housing, infrastructure projects and the nascent trend of concrete
roadswouldcontinuetoacceleratetheconsumptionofcement.
Increasedinfrastructurespendinghasbeenakeyfocusarea.IntheUnionBudget201011,
US$37.4billionhasbeenprovidedforinfrastructuredevelopment.

41

Thegovernmenthasalsoincreasedbudgetaryallocationforroadsby13percenttoUS$4.3
billion.
Gujarat plans to treble its cement production capacity in 35 years. Proposals have been
invitedfromcementcompaniessuchasACC,ABG,AmbujaCement,Emami,Indiabulls,
Adanigroup,UltratechandL&Tandthestatehopestoraiseitscapacityfrom20million
tonnesperannumto70milliontonne.ThestatewillhostthebiennialVibrantGujaratGlobal
SummitinJanuary2011andexpectstowitnessinvestmentproposalsworthUS$13.2billion
inthecementsector.
Exchangerateused:1USD=45.42INR(asofDecember2010)
Thecementindustryisoneofthevitalindustriesforeconomicdevelopmentinacountry.
Thetotalutilizationofcementinayearisusedasanindicatorofeconomicgrowth.

Cementisanecessaryconstituentofinfrastructuredevelopmentandakeyrawmaterialfor
theconstructionindustry,especiallyinthegovernmentsinfrastructuredevelopmentplansin
thecontextofthenationssocioeconomicdevelopment.
PriorToIndependence
Thefirstendeavortomanufacturecementdatesbackto1889whenaCalcuttabasedcompany
endeavoredtomanufacturecementfromArgillaceous(kankar).

ButthefirstendeavortomanufacturecementinanorganizedwaycommencedinMadras.
SouthIndiaIndustriesLimitedbeganmanufactureofPortlandcementin1904.Buttheeffort
didnotsucceedandthecompanyhadtohaltproduction.

Finallyitwasin1914thatthefirstlicensedcementmanufacturingunitwassetupbyIndia
CementCompanyLtdatPorbandar,Gujaratwithanavailablecapacityof10,000tonsand
productionof1000installed.TheFirstWorldWargavetheimpetustothecementindustry
still in its initial stages. The following decade saw tremendous progress in terms of
manufacturingunits,installedcapacityandproduction.Thisphaseisalsoreferredtoasthe

42

NascentStageofIndianCementIndustry.
Duringtheearlieryears,productionofcementexceededthedemand.Societyhadabiased
opinionagainstthecementmanufacturedinIndia,whichfurtherledtoreductionindemand.
The government intervened by giving protection to the Industry and by encouraging
cooperationamongthemanufacturers.

In1927,theConcreteAssociationofIndiawasformedwiththetwingoalsofcreating
apositiveawarenessamongthepublicoftheutilityofcementandtopropagatecement
consumption.
AfterIndependence
Thegrowthrateofcementwasslowaroundtheperiodafterindependenceduetovarious
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
providingfinancialincentives.Butithadlittleimpactontheindustry.

In1956,thepriceanddistributioncontrolsystemwassetuptoensurefairpricesforboththe
manufacturersandconsumersacrossthecountryandtoreduceregionalimbalancesandreach
selfsufficiency.
PeriodOfRestriction(19691982)
ThecementindustryinIndiawasseverelyrestrainedbythegovernmentduringthisperiod.
Governmentholdovertheindustrywasthroughbothdirectandindirectmeans.Government
intervened directlybyexercisingauthority overproduction, capacityand distribution of
cementanditintervenedindirectlythroughpricecontrol.

In1977thegovernmentauthorizedhigherpricesforcementmanufacturedbynewunitsor
throughcapacityincreaseinexistingunits.Butstillthegrowthratewasbelowpar.

In1979thegovernmentintroducedathreetierpricesystem.Pricesweredifferentforcement
producedinlow,mediumandhighcostplants.

43

Howeverthepricecontroldidnothavethedesiredeffect.Riseininputcost,reducedprofit
marginsmeantthemanufacturerscouldnotallocatefundsforincreaseincapacity.
PartialControl(19821989)
Togiveimpetustothecementindustry,theGovernmentofIndiaintroducedaquotasystemin
1982.A quota of 66.60% was imposed for sales to Government and small real estate
developers.Fornewunitsandsickunitsalowerquotaat50%waseffected.Theremaining
33.40%wasallowedtobesoldintheopenmarket.

Thesechangeshadadesiredeffectontheindustry.Profitabilityofthemanufacturers
increasedsubstantially,buttherisinginputcostwasacauseforconcern.
AfterLiberalization
In1989thecementindustrywasgivencompletefreedom,togearituptomeetthechallenges
offreemarketcompetitionduetotheimpendingpolicyofliberalization.In1991theindustry
wasdelicensed.

Thisresultedinanacceleratedgrowthfortheindustryandavailabilityofstateoftheart
technologyformodernization.Mostofthemajorplayersinvestedheavilyforcapacity
expansion.

To maximize the opportunity available in the form of global markets, the industry laid
greater focus on exports. The role of the government has been extremely crucial in the
growthoftheindustry.
FutureTrends
Thecementindustryisexpectedtogrowsteadilyin20092010andincreasecapacity

byanother50milliontonsinspiteoftherecessionanddecreaseindemandfromthehousing
sector.

44

Theindustryexpertsprojectthesectortogrowby9to10%forthecurrentfinancial
yearprovidedIndia'sGDPgrowsat7%.

IndiarankssecondincementproductionafterChina.

ThemajorIndiancementcompaniesareAssociatedCementCompanyLtd(ACC),
GrasimIndustriesLtd,AmbujaCementsLtd,J.KCementLtdandMadrasCementLtd.

Themajorplayershaveallmadeinvestmentstoincreasetheproductioncapacityinthe
pastfewmonths,heraldingapositiveoutlookfortheindustry.

The housingsectoraccounts for50%ofthe demand forcement andthis trendis

expectedtocontinueinthenearfuture.
Anincreasedoutflowininfrastructuresector,bythegovernmentaswellasprivatebuilders,
hasraisedasignificantdemandofcementinIndia.Itisthekeyrawmaterialinconstruction
industry.Also,ithashighlyinfluencedthosebiggercompaniestoparticipateinthegrowing
sector.Atleast125plantssetupbythebigcompaniesinIndiawithabout300othersmall
scalecementmanufacturers,tofulfillthegrowingdemandofcement.Beingoneofthevital
industries,thecementindustrycontributestothenation'ssocioeconomicdevelopment.The
sumtotalutilizationofcementinayearindicatesthecountry'seconomicgrowth.
Cement plant was first set up in Calcutta, in 1889. At that time, the cement used to
manufacturefromArgillaceous.In1904,thefirstorganizedsetuptomanufacturecementwas
commencedinMadras,whichwasnamedSouthIndiaIndustriesLimited.Againin1914,
anothercementmanufacturingunitwassetupinPorbandar,Gujarat,butthistimeitwas
licensed.Intheearlyyearsofthatera,thedemandforthecementtremendouslyexceededbut
only after few years, the industry faced a severe downfall. To overcome from this the
worseningsituation,theConcreteAssociationofIndiawasfoundedin1927.Theorganization
hastwoprimegoals,onewastocreateawarenessaboututilityofcementandanotherwasto
encouragecementutilization.
Evenaftertheindependence,thegrowthofthecementindustrywastoogradual.Intheyear
1956, a Distribution Control System was established with an objective to provide Indian
manufacturersandconsumersselfsufficiency.Indiangovernmentthenintroducedaquota
45

systemtoprovideanimpetustothisindustry,inwhich66%ofthesaleswasimposedto
governmentorsmallrealestatedevelopers.Aftertheimplementationofquota,thecement
industry tasted a sudden growth and profitability in India. In 1991, the government de
licensedthecementindustry.Thegrowthoftheindustryacceleratedforthwithandmajorityof
theindustrialistsinvestedheavilyintheindustrywiththeawardedfreedom.Theindustry
startedfocusingonexportalsotodoubletheopportunityavailableforitinglobalmarkets.
Today,thecementmanufacturersinIndiahavetransformedintoleadingIndianexportersof
cementacrosstheworld.
Thedemandofcementinyear20092010isexpectedtoincreaseby50milliontonsdespiteof
therecessionanddeclineindemandofhousingsector.AgainstIndia'sGDPgrowthof7%,the
expertshaveestimatedthecementsectortogrowby9to10%inthecurrentfinancialyear.
MajorIndiancementmanufacturersandexportershaveallmadehugeinvestmentsinthelast
fewmonthstoincreasetheirproductioncapability.Thisheraldsanoptimisticoutlookfor
cementindustry.ThehousingsectorinIndiaaccountsfor50%ofthecement'sdemand.And
thedemandisexpectedtocontinue.Withtheconstanteffortmadebycementmanufacturers
andexporters,Indiahasbecomethesecondlargestcementproducerintheworld.Madras
Cement Ltd., Associated Cement Company Ltd (ACC), Ambuja Cements Ltd, Grasim
IndustriesLtd,andJ.KCementLtd.areamongfewrenownednamesofthemajorIndian
cementcompanies.

46

COMPANYPROFILE

47

COMPANYPROFILE
ULTRATECHCEMENT:

UltraTechCementLimitedhasanannualcapacityof18.2milliontonnes.Itmanufacturesand
markets Ordinary Portland Cement, Portland Blast Furnace Slag Cement and Portland
PozzalanaCement.Italsomanufacturesreadymixconcrete(RMC).
UltraTechCementLimitedhasfiveintegratedplants,sixgrindingunitsandthreeterminals
twoinIndiaandoneinSriLanka.
UltraTech Cement is the countrys largest exporter of cement clinker. The export
marketsspancountriesaroundtheIndianOcean,Africa,EuropeandtheMiddleEast.
UltraTechssubsidiariesareDakshinCementLimitedandUltraTechCeylinco(P)Limited.
TherootsoftheAdityaBirlaGroupdatebacktothe19thcenturyinthepicturesquetownof
Pilani,setamidsttheRajasthandesert.ItwasherethatSethShivNarayanBirlastartedtrading
incotton,layingthefoundationfortheHouseofBirlas.
ThroughIndia'sarduoustimesofthe1850s,theBirlabusinessexpandedrapidly.Intheearly
partofthe20thcentury,ourGroup'sfoundingfather,GhanshyamdasBirla,setupindustries
incriticalsectorssuchastextilesandfibre,aluminium,cementandchemicals.Asaclose
confidanteofMahatmaGandhi,heplayedanactiveroleintheIndianfreedomstruggle.He
represented India at the first and second roundtable conference in London, along with
Gandhiji.Itwasat"BirlaHouse"inDelhithattheluminariesoftheIndianfreedomstruggle
oftenmettoplotthedownfalloftheBritishRaj.
GhanshyamdasBirlafoundnocontradictioninpursuingbusinessgoalswiththededicationof
a saint, emerging as one of the foremost industrialists of preindependence India. The
principlesbywhichhelivedweresoakedupbyhisgrandson,AdityaVikramBirla,our
Group'slegendaryleader.

48

AdityaVikramBirla:puttingIndiaontheworldmap
AformidableforceinIndianindustry,Mr.AdityaBirladaredtodreamofsettingupaglobal
businessempireattheageof24.HewasthefirsttoputIndianbusinessontheworldmap,as
farbackas1969,longbeforeglobalisationbecameabuzzwordinIndia.
InthethenvibrantandfreemarketSouthEastAsiancountries,heventuredtosetupworld
classproductionbases.Hehadforeseenthewindsofchangeandstakedthefutureofhis
businessonacompetitive,freemarketdriveneconomyorder.HeputIndianbusinessonthe
globe,22yearsbeforeeconomicliberalisationwasformallyintroducedbytheformerPrime
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
PhilippinesandEgypt.
Interestingly,forMr.AdityaBirla,globalisationmeantmorethanjustgeographicreach.He
believedthatabusinesscouldbeglobalevenwhilstbeingbasedinIndia.Therefore,backin
hishometerritory,hedrovesinglemindedlytoputtogetherthebuildingblockstomakeour
Indianbusinessaglobalforce.
Underhisstewardship,hiscompaniesrosetobetheworld'slargestproducerofviscosestaple
fibre,thelargestrefinerofpalmoil,thethirdlargestproducerofinsulatorsandthesixth
largest producer of carbon black. In India, they attained the status of the largest single
producerofviscosefilamentyarn,apartfrombeingaproducerofcement,greycementand
rayongradepulp.TheGroupisalsothelargestproducerofaluminiumintheprivatesector,
thelowestfirstcostproducersintheworldandtheonlyproduceroflineninthetextile
industryinIndia.
Atthetimeofhisuntimelydemise,theGroup'srevenuescrossedRs.8,000croreglobally,
with assets of over Rs.9,000 crore, comprising of 55 benchmark quality plants, an
employeestrengthof75,000andashareholdercommunityof600,000.
Mostimportantly,hiscompanies earnedrespectandadmirationofthepeople,as oneof
India'sfinestbusinesshouses,andthefirstIndianInternationalGroupglobally.Throughthis
outstandingrecordofenterprise,hehelpedcreateenormouswealthforthenation,andrespect

49

forIndianentrepreneurshipinSouthEastAsia.Inhistime,hissuccesswasunmatchedbyany
otherindustrialistinIndia.
ThatIndiaattainsrespectablerankamongthedevelopednations,wasadreamheforever
cherished.HewasproudofIndiaandtookequalprideinbeinganIndian.
UndertheleadershipofourChairman,Mr.KumarMangalamBirla,theGrouphassustained
andestablishedaleadershippositioninitskeybusinessesthroughcontinuousvaluecreation.
SpearheadedbyGrasim,Hindalco,AdityaBirlaNuvo,IndoGulfFertilisersandcompaniesin
Thailand,Malaysia,Indonesia,thePhilippinesandEgypt,theAdityaBirlaGroupisaleader
inaswatheofproductsviscosestaplefibre,aluminium,cement,copper,carbonblack,
palmoil,insulators,garments.Andwithsuccessfulforaysintofinancialservices,telecom,
softwareandBPO,theGroupistodayoneofAsia'smostdiversifiedbusinessgroups.
BoardofDirectors
:

Mr.KumarMangalamBirla,Chairman

Mrs.RajashreeBirla

Mr.R.C.Bhargava

Mr.G.M.Dave

Mr.N.J.Jhaveri

Mr.S.B.Mathur

Mr.V.T.Moorthy

Mr.O.P.Puranmalka

Mr.S.Rajgopal

Mr.D.D.Rathi

Mr.S.Misra,ManagingDirector

50

ExecutivePresident&ChiefFinancialOfficer
::Mr.K.C.Birla

ChiefManufacturingOfficer
::R.K.Shah

ChiefMarketingOfficer
::Mr.O.P.Puranmalka

CompanySecretary
::Mr.S.K.Chatterjee
Ourvision
"Toactivelycontributetothesocialandeconomicdevelopmentofthecommunitiesin
whichweoperate.Insodoing,buildabetter,sustainablewayoflifefortheweaker
sectionsofsocietyandraisethecountry'shumandevelopmentindex."
Mrs.RajashreeBirla,Chairperson,
TheAdityaBirlaCentreforCommunityInitiativesandRuralDevelopmentAwardswon
Year

Award

20102011

SubhKaranSarawagiEnvironmentAward

20102011

BusinessWorldFICCISEDFCSRAward

2010

GreentechEnvironmentExcellenceGoldAward

2010

IMCRamkrishnaBajajNationalQualityAward

2010

AsianCSRAward

20092010

NationalAwardforPreventionofPollution

20092010

RajivGandhiEnvironmentAwardforCleanTechnology

20092010

StateLevelEnvironmentAward(Plant)

51

Makingadifference
BeforeCorporateSocialResponsibilityfoundaplaceincorporatelexion,itwasalready
texturedintoourGroup'svaluesystems.Asearlyasthe1940s,ourfoundingfatherShriG.D
Birlaespousedthetrusteeshipconceptofmanagement.Simplystated,thisentailsthatthe
wealththatonegeneratesandholdsistobeheldasinatrustforourmultiplestakeholders.
WithregardtoCSR,thismeansinvestingpartofourprofitsbeyondbusiness,forthelarger
goodofsociety.
Whilecarryingforwardthisphilosophy,hisgrandson,AdityaBirlaweavedintheconceptof
'sustainablelivelihood',whichtranscendedchequebookphilanthropy.Inhisview,itwas
unwisetokeepongivingendlessly.Instead,hefeltthatchannelisingresourcestoensurethat
peoplehavethewherewithaltomakebothendsmeetwouldbemoreproductive.Hewould
say,"Giveahungrymanfishforaday,hewilleatitandthenextday,hewouldbehungry
again.Insteadifyoutaughthimhowtofish,hewouldbeabletofeedhimselfandhisfamily
foralifetime."
Takingthesepracticesforward,ourchairman
Mr.KumarMangalamBirlainstitutionalisedtheconceptoftriplebottomlineaccountability
representedbyeconomicsuccess,environmentalresponsibilityandsocialcommitment.Ina
holisticwaythus,theinterestsofallthestakeholdershavebeentexturedintoourGroup's
fabric.
Thefootprintofoursocialworktodaystraddlesover3,700villages,reachingouttomorethan
7millionpeopleannually.Ourcommunityworkisawayoftellingthepeopleamongwhom
weoperatethatWeCare.
Ourstrategy
Ourprojectsarecarriedoutundertheaegisofthe"AdityaBirlaCentreforCommunity
InitiativesandRuralDevelopment",ledbyMrs.RajashreeBirla.TheCentreprovidesthe
strategicdirection,andthethrustareasforourworkensuringperformancemanagement
aswell.

52

Ourfocusisontheallrounddevelopmentofthecommunitiesaroundourplantslocated
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
whicharetheimplementationbodies.
Projectsareplannedafteraparticipatoryneedassessmentofthecommunitiesaroundthe
plants. Each project has a oneyear and a threeyear rolling plan, with milestones and
measurabletargets.Theobjectiveistophaseoutourpresenceoveraperiodoftimeandhand
overthereinsoffurtherdevelopmenttothepeople.Thisalsoenablesustowidenourreach.
Along with internal performance assessment mechanisms, our projects are audited by
reputedexternalagencies,whomeasureitonqualitativeandquantitativeparameters,helping
usgaugetheeffectivenessandprovidingexcellentinputs.
Ourpartnersindevelopmentaregovernmentbodies,districtauthorities,villagepanchayats
andtheendbeneficiariesthevillagers.TheGovernmenthas,intheir5yearplans,special
fundsearmarkedforhumandevelopmentandwerecoursetomanyofthese.Atthesame
time,wenetworkandcollaboratewithlikemindedbilateralandunilateralagenciestoshare
ideas,draw from each other's experiences, and ensurethat 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,
UnicefandtheWorldBank.
Ourfocusareas
Ourruraldevelopmentactivitiesspanfivekeyareasandoursinglemindedgoalhereisto
helpbuildmodelvillagesthatcanstandontheirownfeet.Ourfocusareasarehealthcare,
education,sustainablelivelihood,infrastructureandespousingsocialcauses.
ThenameAdityaBirlaevokesallthatispositiveinbusinessandinlife.Itexemplifies
integrity,quality,performance,perfectionandaboveallcharacter.

53

Our logo is the symbolic reflection of these traits. It is the

cornerstoneofourcorporateidentity.Ithelpsusleveragetheunique
AdityaBirlabrandandendowsuswithadistinctivevisualimage.
Depictedinvibrant,earthycolours,itisveryarrestingandshowsthe
sunrisingovertwocircles.AninnercirclesymbolisingtheinternaluniverseoftheAditya
BirlaGroup,anoutercirclesymbolisingtheexternaluniverse,andadynamicmeetingofrays
converginganddivergingbetweenthetwo.

Throughitswideusage,wecreateaconsistent,impactorientedGroupimage.This
undoubtedlyenhancesourprofileamongourinternalandexternalstakeholders.

OurcorporatelogothusservesasanumbrellaforourGroup.Itsignalsthecommonvalues
andbeliefsthatguideourbehaviourinallourentrepreneurialactivities.Itembedsasenseof
pride,unityandbelonginginallofour130,000colleaguesspanning25countriesand30
nationalitiesacrosstheglobe.Ourlogoisourbestcallingcardthatopensthegatewaytothe
world.

Groupcompanies
:

GrasimIndustriesLtd.

HindalcoIndustriesLtd.

AdityaBirlaNuvoLtd.

UltraTechCementLtd.

Indiancompanies
::AdityaBirlaMinacsITServicesLtd.

54

AdityaBirlaMinacsWorldwideLimited

EsselMining&IndustriesLtd

IdeaCellularLtd.

AdityaBirlaInsulators

AdityaBirlaRetailLimited

AdityaBirlaChemicals(India)Limited

Internationalcompanies
Thailand
:

ThaiRayon

IndoThaiSynthetics

ThaiAcrylicFibre

ThaiCarbonBlack

AdityaBirlaChemicals(Thailand)Ltd.

ThaiPeroxide

Philippines
:

IndoPhilGroupofcompanies

PanCenturySurfactantsInc.

Indonesia
:

PTIndoBharatRayon

PTElegantTextileIndustry

PTSunriseBumiTextiles

PTIndoLibertyTextiles

PTIndoRayaKimia

Egypt
:

AlexandriaCarbonBlackCompanyS.A.E

AlexandriaFiberCompanyS.A.E

55

China
:

LiaoningBirlaCarbon

BirlaJingweiFibresCompanyLimited

AdityaBirlaGrasunChemicals(Fangchenggang)Ltd.

Canada
::A.V.Group
Australia
::AdityaBirlaMineralsLtd.
Laos
::BirlaLaosPulp&PlantationsCompanyLimited
NorthandSouthAmerica,EuropeandAsia
::NovelisInc.
Singapore
::SwissSingaporeOverseasEnterprisesPteLtd.(SSOE)
Jointventures
:

BirlaSunLifeInsuranceCompany

BirlaSunLifeAssetManagementCompany

AdityaBirlaMoneyMartLimited

TanfacIndustriesLimited

UltraTechisIndia'slargestexporterofcementclinker.Thecompany'sproductionfacilitiesare
spreadacrosselevenintegratedplants,onewhitecementplant,oneclinkerisationplantinUAE,
fifteengrindingunits,andfiveterminalsfourinIndiaandoneinSriLanka.Mostoftheplants
haveISO9001,ISO14001andOHSAS18001certification.Inaddition,twoplantshavereceived
ISO27001certificationandfourhavereceivedSA8000certification.Theprocessiscurrently
underwayfortheremainingplants.Thecompanyexportsover2.5milliontonnesperannum,
whichisabout30percentofthecountry'stotalexports.Theexportmarket

56

comprisesofcountriesaroundtheIndianOcean,Africa,EuropeandtheMiddleEast.Export
isathrustareainthecompany'sstrategyforgrowth.
UltraTech'sproductsincludeOrdinaryPortlandcement,PortlandPozzolanacementand
Portlandblastfurnaceslagcement.

OrdinaryPortlandcement

Portlandblastfurnaceslagcement

PortlandPozzolanacement

CementtoEuropeanandSriLankannorms
OrdinaryPortlandcement
Ordinary portland cement is the most commonly used cement for a wide range of
applications.Theseapplicationscoverdryleanmixes,generalpurposereadymixes,andeven
highstrengthprecastandprestressedconcrete.
Portlandblastfurnaceslagcement
Portlandblastfurnaceslagcementcontainsupto70percentoffinelyground,granulated
blastfurnace slag, a nonmetallic product consisting essentially of silicates and alumino
silicatesofcalcium.Slagbringswithittheadvantageoftheenergyinvestedintheslag
making.Grindingslagforcementreplacementtakesonly25percentoftheenergyneededto
manufactureportlandcement.Usingslagcementtoreplaceaportionofportlandcementina
concretemixtureisausefulmethodtomakeconcretebetterandmoreconsistent.Portland
blastfurnace slag cement has a lighter colour, better concrete workability, easier
finishability, higher compressive and flexural strength, lower permeability, improved
resistancetoaggressivechemicalsandmoreconsistentplasticandhardenedconsistency.
PortlandPozzolanacement
Portlandpozzolanacementisordinaryportlandcementblendedwithpozzolanicmaterials
(powerstationflyash,burntclays,ashfromburntplantmaterialorsiliciousearths),either
together or separately. Portland clinker is ground with gypsum and pozzolanic materials
which,thoughtheydonothavecementingpropertiesinthemselves,combinechemicallywith

57

portlandcementinthepresenceofwatertoformextrastrongcementingmaterialwhich
resistswetcracking,thermalcrackingandhasahighdegreeofcohesionandworkability
inconcreteandmortar.
"As a Group we have always operated and continue to operate our businesses as
Trusteeswithadeeprootedobligationtosynergisegrowthwithresponsibility."
MrKumarMangalamBirla,Chairman,AdityaBirlaGroup
The cement industry relies heavily on natural resources to fuel its operations. As these
dwindle,theimperativeisclearalternativesourcesofenergyhavetobesoughtoutandthe
use of existing resources has to be reduced, or eliminated altogether. Only then can
sustainablebusinessbecarriedout,andacorporatecantrulysayitiscontributingtothe
preservationoftheenvironment.
UltraTechtakesitsresponsibilitytoconservetheenvironmentveryseriously,anditseco
friendlyapproachisevidentacrossallspheresofitsoperations.Itsmajorthrusthasbeento
identifyalternativestoachievesetobjectivesandtherebyreduceitscarbonfootprint.These
aredonethrough:
:

Wastemanagement

Energymanagement

Waterconservation

Biodiversitymanagement

Afforestation

Reductioninemissions

Importantly,UltraTechhassetatargetof2.96percentreductioninCO 2emissionintensity,
atarateof0.5percentannually,upto201516,with200910asthebaselineyear.Thiswill
also include CO2 emissions from the recently acquired ETA Star Cement and upcoming
projects.

58

Ourstrategy
Ourprojectsarecarriedoutundertheaegisofthe"AdityaBirlaCentreforCommunity
InitiativesandRuralDevelopment",ledbyMrs.RajashreeBirla.TheCentreprovidesthe
strategicdirection,andthethrustareasforourworkensuringperformancemanagement
aswell.

Ourfocusisontheallrounddevelopmentofthecommunitiesaroundourplantslocated
mostly in distant rural areas and tribal belts. All our Group companies Grasim,
Hindalco,AdityaBirlaNuvoandUltraTechhaveRuralDevelopmentCellswhicharethe
implementationbodies.
Projectsareplannedafteraparticipatoryneedassessmentofthecommunitiesaroundthe
plants. Each project has a oneyear and a threeyear rolling plan, with milestones and
measurabletargets.Theobjectiveistophaseoutourpresenceoveraperiodoftimeandhand
overthereinsoffurtherdevelopmenttothepeople.Thisalsoenablesustowidenourreach.
Along with internal performance assessment mechanisms, our projects are audited by
reputedexternalagencies,whomeasureitonqualitativeandquantitativeparameters,helping
usgaugetheeffectivenessandprovidingexcellentinputs.
Ourpartnersindevelopmentaregovernmentbodies,districtauthorities,villagepanchayats
andtheendbeneficiariesthevillagers.TheGovernmenthas,intheir5yearplans,special
fundsearmarkedforhumandevelopmentandwerecoursetomanyofthese.Atthesame
time,wenetworkandcollaboratewithlikemindedbilateralandunilateralagenciestoshare
ideas,draw from each other's experiences, and ensurethat 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,
UnicefandtheWorldBank.
Ourvision
"Toactivelycontributetothesocialandeconomicdevelopmentofthecommunitiesin

59

whichweoperate.Insodoing,buildabetter,sustainablewayoflifefortheweaker
sectionsofsocietyandraisethecountry'shumandevelopmentindex."
Mrs.RajashreeBirla,Chairperson,
TheAdityaBirlaCentreforCommunityInitiativesandRuralDevelopment
Makingadifference
BeforeCorporateSocialResponsibilityfoundaplaceincorporatelexicon,itwasalready
texturedintoourGroup'svaluesystems.Asearlyasthe1940s,ourfoundingfatherShriG.D
Birlaespousedthetrusteeshipconceptofmanagement.Simplystated,thisentailsthatthe
wealththatonegeneratesandholdsistobeheldasinatrustforourmultiplestakeholders.
WithregardtoCSR,thismeansinvestingpartofourprofitsbeyondbusiness,forthelarger
goodofsociety.
Whilecarryingforwardthisphilosophy,ourlegendaryleader,Mr.AdityaBirla,weavedinthe
conceptof'sustainablelivelihood',whichtranscendedchequebookphilanthropy.Inhisview,
itwasunwisetokeepongivingendlessly.Instead,hefeltthatchannelisingresources to
ensurethatpeoplehavethewherewithaltomakebothendsmeetwouldbemoreproductive.
Hewouldsay,"Giveahungrymanfishforaday,hewilleatitandthenextday,hewouldbe
hungryagain.Insteadifyoutaughthimhowtofish,hewouldbeabletofeedhimselfandhis
familyforalifetime."
Takingthesepracticesforward,ourchairman
Mr.KumarMangalamBirlainstitutionalisedtheconceptoftriplebottomlineaccountability
representedbyeconomicsuccess,environmentalresponsibilityandsocialcommitment.Ina
holisticwaythus,theinterestsofallthestakeholdershavebeentexturedintoourGroup's
fabric.
Thefootprintofoursocialworktodayspans2,500villagesinIndia,reachingouttoseven
millionpeopleannually.Ourcommunityworkisawayoftellingthepeopleamongwhomwe
operatethatWeCare.

60

PRODUCTPROFILE
ULTRATECHCEMENTSmanufacturesanddistributesitsownmainproductlinesof
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
integrationofactivities.
Cementismadefromamixtureof80percentlimestoneand20percentclay.Theseare
crushedandgroundtoprovidethe"rawmeal,apale,flourlikepowder.Heatedtoaround
1450C(2642F)inrotatingkilns,themealundergoescomplexchemicalchangesandis
transformedintoclinker.Finegrindingtheclinkertogetherwithasmallquantityofgypsum
producescement.Addingotherconstituentsatthisstageproducescementsforspecialized
uses.
QUALITY
Sixstrongbenefitsthatmake43,53Grade,Superfine,PremiumandShaktithe
idealcement

Highercompressivestrength.

Bettersoundness.

LesserconsumptionofcementforM20ConcreteGradeandabove.

Fasterdeshutteringofformwork.

Reducedconstructiontimewithasuperiorandwiderangeofcementcateringtoevery
conceivablebuildingneed,ULTRATECHCEMENTSisaformidableplayerinthe
cementmarket.

HerejustafewreasonswhyULTRATECHCEMENTSchosenbymillionsofIndia.
Idealrawmaterial
Lowlimeandmagnesiacontentandhighproportionofsilicates.
Greaterfineness.

61

CHAPTERIV
DATAANALYSIS

62

a. RETURNONASSETS
Inthiscaseprofitsarerelatedtoassetsasfollows
Returnonassets=

Netprofitaftertax
Totalassets
Rs:Crors

Particulars

2007

ROA=
PAT
962.85
TOTALASSETS 4174.40
23.06559

2008

2009

2010

2011

1782.77 2575.14 3531.64 4133.60

6087.50 6674.58 6673.44 16264.27
29.28575 38.5813 52.92083 25.41522

b).RETURNONCAPITALEMPLOYED
Herereturniscomparedtothetotalcapitalemployed.Acomparisonofthisratiowiththatof
otherunitsintheindustrywillindicatehowefficientlythefundsofthebusinesshavebeen
employed.Thehighertheratiothemoreefficientistheuseofcapitalemployed.
Returnoncapitalemployed=Netprofitaftertaxes&Interest
Totalcapitalemployed
(Totalcapitalemployed=Fixedassets+CurrentassetsCurrentliabilities)
particulars
PAT
TotalCapitalEmp
ROC

2007

2008

2009

2010

2011

962.85
204.99

1782.77
25.33

2575.14
118.89

3531.64
173.30

4133.60
304.80

21.65985

20.37877

13.56168

4.697058 70.38176

63

YEAR20062007
Performanceofcompany(AmountinRs.CRS)
GrossRevenue

4939.44

TotalExpenditure

3773.25

Profit(Loss)beforetax

1166.19

Profitaftertax

782.28

EarningspershareRs.

1.69

Dividendratio

10%

YEAR20072008
PERFORMANCEOFCOMPANY(AMOUNTINRS.CRS)
GrossRevenue

5636.12

TotalExpenditure

4142.48

Profit(Loss)beforetax

1507.01

Profitaftertax

1007.61

EarningspershareRs.

0.64

Dividendratio

5%

YEAR20082009
PERFORMANCEOFCOMPANY(AMOUNTINRS.CRSS)
GrossRevenue

6575.40

TotalExpenditure

5213.94

Profit(Loss)beforetax

1361.46

Profitaftertax

977.02

EarningspershareRs.

0.64

Dividendratio

5%

YEAR20092010
PERFORMANCEOFCOMPANY(AMOUNTINRS.CRS)
GrossRevenue

7169.43

TotalExpenditure

5585.29

Profit(Loss)beforetax

1588.16

Profitaftertax

1093.24

EarningspershareRs.

1.55

Dividendratio

10%

64

YEAR20102011
PERFORMANCEOFCOMPANY(AMOUNTINRS.CRS)
GrossRevenue

13558.42

TotalExpenditure

11782.74

Profit(Loss)beforetax

1786.19

Profitaftertax

1404.23

EarningspershareRs.

2.10

Dividendratio

15%

PERFORMANCEANALYSISOF20062007
There has been an increase of over 20% sales when compared to cost year, which
resultedinGrossProfitofRs.4939.44Crsasagainstaround3697.54crsinlastyear.Because
ofdecreaseinNonOperatingexpensestothetimeoftheNetprofithasincreased.Itstoodat
currentyearagainstpreviousyearbecauseofredemptionofdebentureandcostreduction.A
dividendofRs.162lacswasdeclaredduringtheyearat10%onequity.
PERFORMANCEANALYSISOF20072008
1.TheproductionandSaleshasincreasedby23%
2.Cementturnoverhasincreasedby6%asagainstfallinSalesrealizationby15%lastyear.
3.CementBoardsDivisionhascontributed18%morethanthepreviousyeartothePBDIT.
4.PerformDivisionrealizationhasincreasedby4%eventheTurnoverhavecamedownto
845lacsfrom1189lacsinlastyear.
5.TheprofitAfterTaxhascamedownfrom1007.61crsto782.28crsinCurrentyearbecause
ofslopeinCementIndustry.
6.TheInterestcosthascomedownby24%duetoreductioninInterestratesbyCommercial
Banks&PublicDeposits.

65

PERFORMANCEANALYSISOF20082009
TheCementIndustryhasasuccessfulyearbecauseofGovt.policiessuchas
infrastructureDevelopmentaRuralhousing.TherehasbeenasmallreductioninGrossSales
and with the performance of prefab Division the Gross Profit gap has narrowed and
contributingtotheEBIT.TheGrossProfithasincreasedconsiderablyfrom6575.40crsin
Lastyearto5636.12crsinCurrentyear.Theinterestpaymenthasincreasedby423crsinthe
CurrentyearandtheProfitbeforeTaxat1361.46crswhencomparedto1507.01crsinLast
year.TheNetprofitalsoincreasedfrom977.02inLastyearinCurrentyear.
TheDirectorhasrecommendeda7.5%DividendandinLastyearitwasat5%.

PERFORMANCEANALYSISOF20092010

In200910thecompanyhasperformedwellinalldecisionsbecauseofhighdemand
and realizations. The Gross Profit Increased considerably and the interest payments have
Increasedatabout7169.43becauseofloanstakenfromthebankatalesserrateofinterestand
paymentofloanfundsforwhichthecompanyispayinghigherrateofinterest.Intheprevious
year,thecashcreditgrantedbyUCObanktothetuneofRs.5585.29crsandlosingofloan
fundsborrowedfromVijayaBankandCanaraBankfactors,whichcantributetoincreasein
theProfitbeforeTaxtothetuneofRs.1588.16crsthecompanydeclaredadividendof10%
onitsequitytoitsshareholderswhencomparedto7.5%inthepreviousyear.TheEPSofthe
companyalsoincreasedconsiderablywhichinvestorsincomingperiod.Thecompanyhas
takenupaplantexpansionprogramduringtheyeartoincreasetheproductionactivityandto
meettheincreaseinthedemand

66

PERFORMANCEANALYSISOF20102011
Companyisoperatingin3segments,outofwhichcementcontributes about55%of
turnoverwhiletheBoardsandprefabsegmentscontributeabout45%.Hugeinvestmentinthe
industrialsectoroverthenext3yearsisexpectedtoleadtohighercementofftakeonthe
back of strong GDP growth across the country. It is expected that the domestic cement
consumptionwouldgrowataCAGRof8%forthenext5ears.ByFY2011thedomestic
consumptionisexpectedtogrowto199millionTonsfrom136millionTonsconsumption
FY2010.Duringtheyear201011yourcompanysGrosssalesincreased.

Netsalesincreasedbyabout39%toRs.1404.23crsfromRs.1093.24crsinFY201011.
Improvedsalesfromallthetreedivisionsparticularlyfromprefabdivisioncontributedfor
increasedturnover.

67

EBITLEVELS
Particulars
EarningsBefore
Interest&Tax

2007

2008

2009

2010

2011

1166.19

1507.01

1361.46

1588.16

1786.19

Change
%Change

126.54
477.39
294.2
234.99
374.53
9.215979 3.156769 4.627668 6.758415 4.769151

DEGREEOFFINANCIALLEVERAGE:

Thehigherthequotient,thegreatertheleverage.InUltraTechIndustriescaseitis
increasingbecauseofdecreaseinEBITlevelsto20102011.

TheEBITlevelisinadecreasingtrendbecauseofdrasticdeclineinpricesinCement
Industryduringaboveperiod.

Intheyear2010and2011theEBITlevelhasincreasedsubstantiallybecauseofRaiseinn
Cement prices because of demand and the policies of Govt. such as rural housing and
irrigationprojecttakenup.

68

INTERPRETATION
TheEBITlevelin2006isat1166.19crsandisdecreasingeveryyeartill2008.Becauseof
slumpintheCementIndustrylessrealization.TheEBITlevelsin2009againstartedgrowing
andreachedto1507.01crsandin2010wereat1588.56crsandin2011wereat861.16,
becauseofthesalepriceincreaseperbagandincreaseindemand.Theinfrastructureprogram
takenupbytheA.P.Govt.inthefieldsofruralhousingirrigationprojectscreateddemand
andwholeCementIndustriesaremakingprofits.

69

PERFORMANCE

EPSANALYSIS
Particulars
ProfitAfterTax
Less:Preference
Dividend
AmountofEquityshare
Holder
No.OFequityshareof
Rs.10/each
EPS

2007
962.85

2008
1782.77

2009
2575.14

2010
3531.64

2011
4133.60

1763.78

2696.99

3602.10

4608.65

10666.04

16234825
1.69

16234825
0.64

16234825
0.79

16234825
1.55

16234825
2.1

EPS LEVELS
2.5
2
1.5

EPS

1
0.5
0
2006

2007

2008

2009

2010

YEARS

INTERPRETATION
ThePATisinanincreasingtrendfrom20082009becauseofincreaseinsalepricesandalso
decreasesinthecostofmanufacturing.In2010and2011eventhecostofmanufacturinghas
increasedby5%becauseofhighersalesvolumePAThasincreasedconsiderably,whichleads
tohigherEPS,whichisat9.36in2011

70

EBITEPSCHART
OneconvenientandusefulwayshowingtherelationshipbetweenEBITand
EPSforthealternativefinancialplansistopreparetheEBITEPSchart.Thechartiseasyto
preparesinceforanygivenleveloffinancialleverage,EPSislinearlyrelatedtoEBIT.As
notedearlier,theformulaforcalculatingEPSis
EPS=(EBITINT)(1T)

=(EBITINT)(1T)

Weassumethatthelevelofdebt,thecostofdebtandthetaxrateareconstant.Thereforein
equation,theterms(1T)/NandINT(=iD)areconstant:EPSwillincreaseifEBITincreases
andfallifEBITdeclines.Canalsobewrittenasfollows

Undertheassumptionmade,thefirstpartofisaconstantandcanberepresentedbyanEBIT
isarandomvariablesinceitcanassumeavaluemoreorlessthanexpected.Theterm(1
T)/Narealsoaconstantandcanbeshownasb.Thus,theEPS,formulacanbewrittenas:
EPS=a+bEBIT
ClearlyindicatesthatEPSisalinearfunctionofEBIT.

71

FINANCINGDECISION
Financingstrategyformsakeyelementforthesmoothrunningofanyorganization
whereflow,asararecommodity,hastobeobtainedattheoptimumcostandputintothe
wheelsofbusinessattherighttimeandifnot,itwouldleadintenselytotheshutdownofthe
business.
Financingstrategiesbasicallyconsistsofthefollowingcomponents:

Mobilization

Costing

Timing/Availability

Businessinterests

Therefore,thestrategyistoalwayskeepsufficientavailabilityoffinanceatthe
optimumcostattherighttimetoprotectthebusinessinterestofthecompany.
STRATEGIESINFINANCEMOBILIZATION
Therearemanyoptionsforthefundraisingprogramofanycompanyanditisquitepertinent
tonotethattheseoptionswillhavetobeevaluatedbythefinancemanagermainlyintermsof:

72

Costoffunds

Modeofrepayment

Timingandtimelaginvolvedinmobilization

Assetssecurity

Stockoptions

Cournandsintermsofparticipativemanagementand

Othertermsandconditions.

Strategiesoffinancemobilizationcanbethroughtwosectors,thatis,ownersresourcesand
thedebtresources.Eachoftheabovecategorycanalsobesplitinto:Securitizedresources;
andnonsecuritiesresources.Securitizedresourcesarethosewhoinstrumentoftitlecanbe
tradedinthemoneymarketandnonsecuritiesresourcesandthose,whichcannotbetradedin
themarket

73

THEFORMSOFFUNDSMOBILIZATIONISILLUSTRATEDBYACHART :

FUNDINGMIXSOURCES

OWNERSFUND

EQUITY
CAPITAL

RETAINED
EARNINGS

BORROWEDFUND

PREFERENCE
CAPITAL

CONVENTIONAL

NONCONVENTIONAL

SOURCES

SOURCES

FINANCIAL

SUPPLIERSCREDIT

INSTITUTION

SHORTTERM

BANK

BANKBORROWINGS

CASHCREDIT

HIREPURCHASE

DEBENTURES
FIXEDDEPOSITS
ICD

74

ULTRATECHCEMENTSINDUSTRIESLTD.THEFUNDINGMIX

Particulars

200607

200708

200809

200910

201011

1763.78

2696.99

3602.10

4608.65

10666.04

b)Reservesandsurplus 1639.78

2571.73

3475.93

4482.17

10387.22

560.26
3963.82

542.35
5811.07

722.93
7800.96

830.73
9921.55

1730.05
22783.31

a)SecuredLoans

1151.25

982.66

1175.80

854.19

2789.76

b)UnsecuredLoans

427.38

757.84

965.83

750.33

1354.84

1578.63

1740.5

2141.63

1604.52

4144.6

7551.57
48

9942.59
41.22

11526.07 26927.91
42.38
34.3

52

58.78

57.62

Sourceoffunds
Shareholdersfunds
a)Sharecapital

c)Deferredtax
TOTAL(A)
LoanFunds

TOTAL(B)

TOTAL(A+B)
5542.45
%ofSHintotalC.E
44.67
%ofLoanFundintotal
C.E
55.33

65.69

INTERPRETATION
Theshareholderfundisat3125.8constitutes44.67%intotalC.Eandloanfundsconstitute
55.33%in200606.TheFundingMixonanaveragefor6yearswillbe45%ofshareholders
Fundand55%ofLoanFundstherebythecompanyistryingtomaintainagoodFundingMix.
Theleverageortradingonequityisalsogoodbecausethecompanyaffectivelyutilizingthe
LoanFundsintheCapitalStructure.SothatitleadstohigherprofitincreaseofEPSin2007
at0.79to20101.55

TERMLOANS

75

20062007
Particulars

Rs.(inLakhs)

TERMLOANS
IDBI

0.00

IFCI

0.00
0.00

HIREPURCHASELOANS
TVSLakshmiCreditLtd

0.00

0.00

HarithaFinanceLtd

0.00

0.00

Fundedinterest

0.00

0.00

NonConvertibleDebentures

677.75

CASHCREDIT
GlobalTrustBank

638.21

VijayaBank

56.57
694.78
1,372.53

UNSECUREDLOANS
Depositsfrompublic

602.15

Lease/Hirepurchases

4.64

IFSTLoanfromGovt.ofAP

0.00

Deferredsalestaxloan

0.00

Depositsfromstockiest&others

1730.39

Intercorporatedeposits

50.00

Others

201.04

TOTAL

2588.22

76

TERMLOANS
20072008

Particulars

Rs.(inLakhs)

TERMLOANS
IndianRenewableEnergy
developmentagencyltd.
Nonconvertibledebentures

255.00
509.61

HIREPURCHASELOANS
TVSLakshmiCreditLtd

0.00

0.00

HarithaFinanceLtd

0.00

0.00

Fundedinterest

0.00

0.00

CASHCREDIT
GlobalTrustBank

583.41

VijayaBank

65.15
648.56
1,413.17

UNSECUREDLOANS
Depositsfrompublic

600.54

Lease/Hirepurchases

21.25

CanaraBankfactorsltd.

100.09

Deferredsalestaxloan

0.00

Depositsfromstockiest&others

1,239.02

Intercorporatedeposits

0.00

Others

201.04

TOTAL

2161.94

77

TERMLOANS
20082009
Particulars

Rs.(inLakhs)

TERMLOANS
IndianRenewableEnergy
developmentagencyltd.
Nonconvertibledebentures

207.00
0.00

HIREPURCHASELOANS
TVSLakshmiCreditLtd

0.00

0.00

HarithaFinanceLtd

0.00

0.00

Fundedinterest

0.00

0.00

CASHCREDIT
GlobalTrustBank

627.10

VijayaBank

174.12

CanaraBankFactors

158.98 960.20
1167.20

UNSECUREDLOANS
Depositsfrompublic

592.31

Depositsfromstockiest&others

1600.68

Lease/Hirepurchase

10.30

Others

201.04

TOTAL

3571.53

78

TERMLOANS
20092010
Particulars
TERMLOANS

Rs.(inLakhs)

IndianRenewableEnergy
developmentagencyltd.
Nonconvertibledebentures

779.17
0.00

HIREPURCHASELOANS
TVSLakshmiCreditLtd

0.00

0.00

HarithaFinanceLtd

0.00

0.00

Fundedinterest

0.00

0.00

CASHCREDIT
OrientalBankofCommerce

410.15

UCOBank

594.34

CanaraBankFactors

0.00

1004.49
1167.20

UNSECUREDLOANS
Depositsfrompublic

399.69

Depositsfromstockiest&others

1053.83

Lease/Hirepurchase

57.39

Others

201.04

TOTAL

3495.64

79

TERMLOANS
20102011
Particulars

Rs.(inLakhs)

TERMLOANS
IndianRenewableEnergy
developmentagencyltd.

2532.14

Nonconvertibledebentures

0.00

HIREPURCHASELOANS
TVSLakshmiCreditLtd

0.00

0.00

HarithaFinanceLtd

0.00

0.00

Fundedinterest

0.00

0.00

CASHCREDIT
OrientalBankofCommerce

561.32

UCOBank

306.54

CanaraBankFactors
UTIBankLtd

403.46
211.82

1483.14
4015.28

UNSECUREDLOANS
Interestfreefromsalestax
defermentloan
Depositsfrompublic

162.40

Depositsfromstockiest&others

919.26

Lease/Hirepurchase

54.25

Others

201.29

TOTAL

5969.35

616.87

80

TERMS LOANS
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
2007

2008

2009

2010

2011

YEARS
INTERPRETATION
The Nonconvertible debentures are being redeemed from 2006 and 2007 financial year
onwardsandwerecompletelyrepaidby20102011.Thecashcreditassistancewasprovided
byGlobalTrustBankandVijayaBanktothetuneofRs.696lacsandCanarabankfactorsto
thetuneRs.158lacswascompletelyrepaidbytakingcashcreditfacilityfromOrientalBank
ofCommerceandUCOBanktothetuneofRs.1000lacs.Thecompanyispayingofdeposits
frompubliceveryyear.
Depositsfrompublicwerestoodat727.76lacsin20062007andin20102011it
camedownto399.69lacs.TheIRIDAhasgrantedRs.255lacstermloanforinstallationof
energysavingequipmentandtheloanwasagainincreasedto779.17lacsin20102011.

81

YEAR20062007
Position of Mobilization and Development of
funds(AmountinRS.crs)
Totalliabilities
Sourcesoffunds
Paiducapital
SecuredLoans
Applicationoffunds
Netfixedassets
Netcurrentassets
Accumulatedlosses

3902.67

Totalassets

3902.67

124.49
1151.25

Reserves&surplus
Unsecuredloans

1639.29
427.38

3214.23
204.99

Investments
Misc.Expenditure

483.45

YEAR20072008
Position of Mobilization and Development of
funds(AmountinRS.crs)
Totalliabilities
Sourcesoffunds
Paiducapital

4979.84

Totalassets

4979.84

124.49

SecuredLoans
Applicationoffunds
Netfixedassets
Netcurrentassets
Accumulatedlosses

982.66

Reserves&surplus
Deferredtax
Unsecuredloans

2571.73
542.35
757.84

Investments
Misc.Expenditure

170.90

4783.61
25.33
Nil

Financialleverageresultsfromthepresenceoffixedfinancialchargesinthe
firmincomestream.ThesefixedchargesdontvarywithEBITavailabilitypostpayment
balancesbelongtoequityholders.

FinancialleverageisconcernedwiththeeffectofchargesintheEBITonthe
earningsavailabletoshareholders.

82

YEAR20082009
PositionofMobilizationandDevelopmentoffunds
(AmountinRS.crs)
Totalliabilities
Sourcesoffunds
Paiducapital

6466.66

Totalassets

6466.66

124.49

SecuredLoans
Applicationoffunds
Netfixedassets
Netcurrentassets
Accumulatedlosses

1175.80

Reserves&surplus
Deferredtax
Unsecuredloans

3475.93
722.93
965.83

Investments
Misc.Expenditure

1034.80

5312.97
118.89
Nil

YEAR20092010
PositionofMobilizationandDevelopmentoffunds(AmountinRS.crs)
Totalliabilities
Sourcesoffunds
Paiducapital

7043.90

Totalassets

7043.90

124.49

SecuredLoans
Applicationoffunds
Netfixedassets
Netcurrentassets
Accumulatedlosses

854.19

Reserves&surplus
Deferredtax
Unsecuredloans

4482.17
830.73
750.33

Investments
Misc.Expenditure

1669.55

5201.05
173.30
Nil

YEAR20102011
PositionofMobilizationandDevelopmentoffunds
(AmountinRS.crs)
Totalliabilities
Sourcesoffunds
Paiducapital

16540.69

Totalassets

16540.69

274.04

SecuredLoans
Applicationoffunds
Netfixedassets
Netcurrentassets
Accumulatedlosses

2789.76

Reserves&surplus
Deferredtax
Unsecuredloans

10387.22
1730.05
1354.84

Investments
Misc.Expenditure

3730.32

12505.57
304.80
Nil

83

FINANCIALLEVERAGE
INTRODUCTION:
Leverage,averygeneralconcept,representsinfluenceorpower.Infinancial
analysis leverage represents the influence of a financial variable over same other related
financialvariable.
Financialleverageisrelatedtothefinancingactivitiesofafirm.Thesourcesfromwhich
fundscanberaisedbyafirm,fromtheviewpointofthecostcanbecategorizedinto:

Those,whichcarryafixedfinancecharge.

Those,whichdonotcarryafixedcharge.

Thesourcesoffundsinthefirstcategoryconsistsofvarioustypesoflongterm
debtincludingloans,bonds,debentures,preferenceshareetc.,theselongtermdebtscarrya
fixedrateofinterestwhichisacontractualobligationforthecompanyexceptinthecaseof
preferenceshares.Theequityholdersareentitledtotheremainderofoperatingprofitsifany.
Financialleverageresultsfrompresenceoffixedfinancialchargesinehfirmsincome
stream.ThesefixedchargesdontvarywithEBIToroperatingprofits.Theyhavetobepaid
regardlessofEBITavailability.Pastpaymentbalancesbelongtoequityholders.

FinancialleverageisconcernedwiththeeffectofchangesItheEBITonthe
earningsavailabletoshareholders.

84

DEFINITION:
Financialleverageistheabilityofthefirmtousefixedfinancialchargesto
magnifytheeffectsofchangesinEBITonEPSi.e.,financialleverageinvolvestheuseof
fundsobtainedatfixedcostinthehopeofincreasingthereturntoshareholder.
The favorable leverage occurs when the Firm earns more on the assets
purchasewiththefundsthanthefixedcostsoftheiruse.Theadversebusinessconditions,this
fixedchargecouldbeaburdenandpulleddownthecompanieswealth
MEANINGOFFINANCIALLEVERAGE:
Asstatedearlieracompanycanfinanceitsinvestmentsbydebt/equity.The
companymayalsousepreferencecapital.Therateofinterestondebtisfixed,irrespectiveof
thecompanysrateofreturnonassets.Thecompanyhasalegalbandingtopayintereston
debt.Therateofpreferencedividendisalsofixed,butpreferencedividendarepaidwhen
companyearnsprofits.Theordinaryshareholdersareentitledtotheresidualincome.Thatis,
earningsafterinterestandtaxesbelongtothem.Therateofequitydividendisnotfixedand
dependsonthedividendpolicyofacompany.

Theuseofthefixedcharges,sourcesoffundssuchasdebtandpreference
capitalalongwithownersequityinthecapitalstructure,isdescribedasfinancialleverages
orgearingortradingorequity.Theuseofatermtradingonequityisderivedfromthe
factthatitistheownersequitythatisusedasabasistoraisedebt,thatis,theequitythatis
tradeduponthesupplierofthedebthaslimitedparticipationinthecompaniesprofitand
therefore,hewillinsistsonprotectioninearningsandprotectioninvaluesrepresentedby
ownersequitys

85

FINANCIALLEVERAGEANDTHESHAREHOLDERSRISK

Financialleveragemagnifiestheshareholdersearningswealsofindthatthevariability
ofEBITcausesEPStofluctuatewithinwiderrangeswithdebtinthecapitalstructurethatis
withmoredebtEPSraisesandfalls fasterthantheriseandfallinEBIT.Thusfinancial
leveragenotonlymagnifiesEPSbutalsoincreasesitsvariability.

The variability of EBIT and EPs distinguish between two types of risk
operatingriskandfinancialrisk.Thedistinctionbetweenoperatingandfinancialriskwas
longagorecognizedbyMarshallinthefollowingwords.

OPERATINGRISK:

OperatingriskcanbedefinedasthevariabilityofEBIT(orreturnontotalassets).The
environmentinternalandexternalinwhichafirmoperatesdeterminesthevariabilityofEBIT.
Solongastheenvironmentisgiventothefirm,operatingriskisanunavoidablerisk.Afirm
isbetterplacedtofacesuchriskifitcanpredictitwithafairdegreeofaccuracy.

86

THEVARIABILITYOFEBITHASTWOCOMPONENTS
1. Variabilityofsales
2. Variabilityofexpenses

1. VARIABILITYOFSALES:

Thevariabilityofsalesrevenueisinfactamajordeterminantofoperatingrisk.
Sales ofacompany mayfluctuate because ofthreereasons.Firstthe changes in general
economicconditionsmayaffectthelevelofbusinessactivity.Businesscycleisaneconomic
phenomenon, which affects sales of all companies. Second certain events affect sales of
companybelongingstoaparticularindustryforexamplethegeneraleconomicconditionmay
begoodbutaparticularindustrymaybehitbyrecession,otherfactors mayincludethe
availabilityofrawmaterials,technologicalchanges,actionofcompetitors,industrialrelations,
shiftsinconsumerpreferencesandsoon.Thirdsalesmayalsobeaffectedbythefactors,
whichareinternaltothecompany.Thechangeinmanagementtheproductmarketdecisionof
thecompanyanditsinvestmentpolicyorstrikeinthecompanyhasagreatinfluenceonthe
companyssales.

87

2.VARIABILITYOFEXPENSES:
Given the variability of sales the variability of EBIT is further affected by the
compositionoffixedandvariableexpenses.Highertheproportionoffixedexpensesrelative
tovariableexpenses,higherthedegreeofoperatingleverage.Theoperatingleverageaffects
EBIT.HighoperatingleverageleadstofasterincreaseinEBITwhensalesarerising.Inbad
timeswhensalesarefallinghighoperatingleveragebecomesanuisance;EBITdeclinesata
greater rate than fall in sales. Operating leverage causes wide fluctuations in EBIT with
varyingsales.Operatingexpensesmayalsovaryonaccountofchangesininputpricesand
mayalsocontributetothevariabilityofEBIT.
FINANCIALRISK:
ForagivendegreeofvariabilityofEBITthevariabilityofEPSandROEincreases
withmorefinancialleverage.ThevariabilityofEPScausedbytheuseoffinancialleverageis
calledfinancialrisk.Firmsexposedtosamedegreeofoperatingriskcandifferwithrespect
tofinancialriskwhentheyfinancetheirassetsdifferently.Atotallyequityfinancedfirmwill
havenofinancialrisk.Butwhendebtisusedthefirmaddsfinancialrisk.Financialriskisthis
avoidableriskifthefirmdecidesnottouseanydebtinitscapitalstructure.

MEASURESOFFINANCIALLEVERAGE:

Themostcommonlyusedmeasuredoffinancialleverageare:
1.Debtratio:theratioofdebttototalcapital,i.e.,

Where,Disvalueofdebt,SisvalueofequityandVisvalueoftotalcapitalD
andSmaybemeasuredintermsofbookvalueormarketvalue.Thebookvalueofequityis
callednotworth.

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2.Debtequityratio:Theratioofdebttoequity,i.e.,

3.Interestcoverage:therationofnetoperatingincome

(orEBIT)tointerestcharges,i.e.,

Thefirsttwomeasuresoffinancialleveragecanbeexpressedintermsofbookor
market values. The market value to financial leverage is the erotically more appropriate
becausemarketvaluesreflectthecurrentaltitudeofinvestors.But,itisdifficulttogetreliable
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
operationalterms.Theyarerelatedtoeachotherinthefollowingmanner.

Theserelationshipsindicatethatboththesemeasuresoffinancialleveragewillrank
companiesinthesameorder.However,thefirstmeasure(i.e.,D/V)ismorespecificasits
valuerangesbetweenzerostoone.Thevalueofthesecondmeasure(i.e.,D/S)mayvaryfrom
zerotoanylargenumber.Thedebtequityratio,asameasureoffinancialleverage,ismore
popularinpractice.Thereisusuallyanacceptedindustrystandardtowhichthecompanys
debtequityratioiscompared.Thecompanywillbeconsideredriskyifitsdebtequityratio
exceedstheindustrystandard.FinancialinstitutionsandbanksinIndiaalsofocusondebt
equityratiointheirlendingdecisions.

Thefirsttwomeasuresoffinancialleveragearealsomeasuresofcapitalgearing.They
arestaticinnatureastheyshowtheborrowingpositionofthecompanyatapointoftime.

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Thesemeasuresthusfailtoreflecttheleveloffinancialrisk,whichinherentinthepossible
failureofthecompanytopayinterestrepaydebt.

Thethirdmeasureoffinancialleverage,commonlyknownascoverageratio,indicatesthe
capacityofthecompanytomeetfixedfinancialcharges.Thereciprocalofinterestcoverage
that is interest divided by EBIT is a measure of the firms incoming gearing. Again by
comparingthecompanyscoverageratiowithanacceptedindustrystandard,theinvestors,
cangetanideaoffinancialrisk.however,thismeasuresuffersfromcertainlimitations.First,
todeterminethecompanysabilitytomeetfixedfinancialobligations,itisthecashflow
information, which is relevant, not the reported earnings. During recessional economic
conditions,therecanbewidedisparitybetweentheearningsandthenetcashflowsgenerated
fromoperations.Second,thisratio,whencalculatedonpastearnings,doesnotprovideany
guideregardingthefutureriskynessofthecompany.Third,itisonlyameasureofshortterm
liquiditythanofleverage.

FINANCIALLEVERAGEANDTHESHAREHOLDERSRETURN:

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

shareholdersreturnunderfavorableeconomicconditions.Theroleoffinancialleveragein
magnifyingthereturnoftheshareholdersisbasedunderassumptionthatthefixedcharges
funds(suchastheloanfromfinancialinstitutionsandothersourcesordebentures)canbe
obtainedatacostlowerthanthefirmsrateofreturnonnetassets.Thus,whenthedifference
betweentheearningsgeneralizedbyassetsfinancedbythefixedchargesfundsandcostof
thesefundsisdistributedtotheshareholders,theearningspershare(EPS)orreturnonequity
increase.However,EPSorROEwillfallifthecompanyobtainsthefixedchargesfundsata
costhigherthantherateofreturnonthefirmsassets.Itshould,therefore,beclearthatEPS,
ROEandROIaretheimportantfiguresforanalyzingtheimpactoffinancialleverage.

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COMBINEDEFFECTOFOPERATINGANDFINANCIALLEVERAGES
OperatingandfinancialleveragestogethercausewidefluctuationsinEPSfora
givenchangeinsales.Ifacompanyemploysahighlevelofoperatingandfinancialleverage,
evenasmallchangeinthelevelofsaleswillhavedramaticeffectonEPS.Acompanywith
cyclicalsaleswillhaveafluctuatingEPS;buttheswingsinEPSwillbemorepronouncedif
thecompanyalsousesahighamountofoperatingandfinancialleverage.

Thedegreeofoperatingandfinancialleveragecanbecombinedtoseethe
effect of total leverage on EPS associated with a given change in sales. The degree of
combinedleverage(DCL)isgivenbythefollowingequation:

Yetanotherwayofexpressingthedegreeofcombinedleverageisasfollows:

SinceQ(SV)iscontributionandQ(SV)FINTistheprofitafterinterestbut
beforetaxes,Equation2canalsobewrittenasfollows:

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RATIOANALYSIS:
The primary user of financial statements are evaluating part performance and
predictingfutureperformanceandbothofthesearefacilitatedbycomparison.Thereforethe
focusoffinancialanalysisisalwaysonthecrucialinformationcontainedinthefinancial
statements.This dependsontheobjectivesandpurposeofsuchanalysis.Thepurposeof
evaluating such financial statement is different form person to person depending on its
relationship.Inotherwordseventhoughthebusinessunititselfandshareholders,debenture
holders,investorsetc.allundertakethefinancialanalysisdiffers.Forexample,tradecreditors
maybeinterestedprimarilyintheliquidityofafirmbecausetheabilityofthebusinessunitto
play their claims is best judged by means of a through analysis of its l9iquidity. The
shareholders and the potential investors may be interested in the present and the future
earningspershare,thestabilityofsuchearningsandcomparisonoftheseearningswithother
unitsintheindustry.Similarlythedebentureholdersandfinancialinstitutionslendinglong
termloansmaybeconcernedwiththecashflowabilityofthebusinessunittopaybackthe
debtsinthelongrun.Themanagementofbusinessunit,itcontrast,lookstothefinancial
statementsfromvariousangles.Thesestatementsarerequirednotonlyforthemanagements
ownevaluationanddecisionmakingbutalsoforinternalcontrolandoverallperformanceof
thefirm.Thusthescopeextentandmeansofanyfinancialanalysisvaryasperthespecific
needsoftheanalyst.Financialstatementanalysisisapartofthelargerinformationprocessing
system,whichformstheverybasisofanydecisionmakingprocess.

The financial analyst always needs certain yardsticks to evaluate the efficiency and
performanceofbusinessunit.Theoneofthemostfrequentlyusedyardsticksisratioanalysis.
Ratioanalysisinvolvestheuseofvariousmethodsforcalculatingandinterpretingfinancial
ratiostoassesstheperformanceandstatusofthe
businessunit.Itisatooloffinancialanalysis,whichstudiesthenumericalorquantitative
relationshipbetweenwithothervariableandsuchratiovalueiscomparedwithstandardor
normsinordertohighlightthedeviationsmadefromthosestandards/norms.Inotherwords,
ratiosarerelativefiguresreflectingtherelationshipbetweenvariablesandenabletheanalysts
todrawconclusionsregardingthefinancialoperations.

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However,itmustbenotedthatratioanalysismerelyhighlightsthepotentialareasof
concernorareasneedingimmediateattentionbutitdoesnotcomeoutwiththeconclusionas
regardscausesofsuchdeviationsfromthenorms.Forinstance,ABCLtd.Introducedthe
conceptofratioanalysisbycalculatingthevarietyofratiosandcomparingthesamewith
normsbasedonindustryaverages.Whilecomparingtheinventoryratiowas22.6ascompared
toindustryaverageturnoverratioof11.2.Howeveroncloserselltinyduetolargevariation
fromthenorms,itwasfoundthatthebusinessunitsinventorylevelduringtheyearwaskept
atextremelylowlevel.Thisresultedinnumerousproductionheldsalesandlowerprofits.In
otherwords,whatwasinitiallylookinglikeanextremelyefficientinventorymanagement,
turnedouttobeaproblemareawiththehelpofratioanalysis?Asamatterofcaution,itmust
howeverbeaddedthatasinglerationortwocannotgenerallyprovidethatnecessarydetails
soastoanalyzetheoverallperformanceofthebusinessunit.

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CHAPTERV
FINDINGS
CONCLUSIONS
SUGGESTION
BIBLIOGRAPHY

94

FINDINGS
1. TherehasbeenasmallreductioninGrossSalesandwiththeperformanceofprefabDivision
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
paymenthasincreasedby51CrintheCurrentyearandtheProfitbeforeTaxat520.99when
comparedto641.80crinLastyear.
2. PerformDivisionrealizationhasincreasedby8%eventheTurnoverhascometo641.80Cr
from400.09Crinlastyear.
3. TheprofitAfterTaxhascame313.92Crto214.82CrinCurrentyearbecauseofslopein
CementIndustry.
4. ThePATisinanincreasingtrendfrom20082009becauseofincreaseinsalepricesandalso
decreasesinthecostofmanufacturing.In2010and2011eventhecostofmanufacturinghas
increasedby5%becauseofhighersalesvolumePAThasincreasedconsiderably,whichleads
tohigherEPS,whichisat83.80in2010.
5. TheEBITlevelin2007isat400.09Crandisincreasingeveryyeartill2010.Becauseof
slumpintheCementIndustrylessrealization.TheEBITlevelsin2010againstartedgrowing
andreachedto648.29Crandin2010wereat648.29Crandin2011wereat120.24,because
ofthesalepriceincreaseperbagandincreaseindemand.Theinfrastructureprogramtakenup
bytheA.P.Govt.inthefieldsofruralhousingirrigationprojectscreateddemandandwhole
CementIndustriesaremakingprofits.
6. TheEPSofthecompanyalsoincreasedconsiderablywhichinvestorsincomingperiod.
Thecompanyhastakenupaplantexpansionprogramduringtheyeartoincreasethe
productionactivityandtomeettheincreaseinthedemand
7. BecauseofdecreaseinNonOperatingexpensestothetimeof214.82CrtheNetprofithas
increased.Itstoodatincurrentyearincreasebecauseofredemptionofdebentureandcost
reduction.AdividendofRs.45.74Crasdeclaredduringtheyearat7.85%onequity.

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CONCLUSIONS

1)

Salesin20082009isat7267.74andin2010201112752.43crsthoseinadecreasing
trendtotheextentof20%everyyear.Ontheotherhandmanufacturingexpensesareat
8725.11from20092010.Therehasbeensignificantincreaseincostofproductionduring
20082009becauseofincreaseinRoyalty.

2)

Theinterestchargeswere492.21in2009and357.07in2010and522.56respectively
showsthatthecompanyredeemedfixedinterestbearingfundsfromtimetotimeoutofprofit
from 20082009.Debantures were partly redeemed with the help ofdebenture redemption
reserveandotherreferences.
3) ThePAT(ProfitAfterTax)in20102011isat340.78.ThePAThasincreasedinpricesin
wholeCementindustryduringtheaboveperiod.Theprofithasincreasedalmost15%during
theperiod20092010.
4) DebentureswereredeemedbytransferstoD.R.R.in20092010.

5)

Asteadytransferfordividendduring20082009fromP&Lappropriationbutin2008
thereisnoadequatedividendequityShareholders.

6)

The share capital of the company remained in charge during the threeyear period
becauseofnopublicissuesmadebythecompany.

7)

Thesecuredloanshavedecreasedconsistentlyfrom20082010andslightincrease
in2011.

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RECOMMENDATIONSONCEMENTINDUSTRY
ForthedevelopmentofthecementindustryWorkingGrouponcementIndustry
wasconstitutedbytheplanningcommissionfortheformulationofFiveYearPlan.The
workingGrouphasprojectedagrowthrateof10%forthecementindustryduringthe
plan period and has projected creation of additional capacity of 4062 million tones
mainlythroughexpansionofexistingplants.TheworkingGrouphasidentifiedfollowing
thrustareasforimprovingdemandforcement;

Furtherpushtohousingdevelopmentprogrammers;
PromotionofconcreteHighwaysandroads;and
Useofreadymixconcreteinlargeinfrastructureproject.

Further,inordertoimproveglobalcompetitivenessoftheIndianCementIndustry,the
Department of Industrial policy & promotion commissioned a study on the global
competitivenessoftheIndianindustrythroughanorganizationofinternationalrepute,
viz..Thereportsubmittedbytheorganizationhasmadeseveralrecommendationsfor
makingtheIndianCementIndustrymorecompetitiveintheinternationalmarket.The
recommendationsareunderconsideration.

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SUGGESTIONS:

1. Thecompanyhastomaintaintheoptimalcapitalstructureandleveragesothatincoming
yearsitcancontributetothewealthoftheshareholders.

2. The mining loyalty contracts should be revised so that it will decrease the direct in the
production

3. Thecompanyhastoexercisecontroloveritsoutsidepurchasesandoverheadswhichhave
effectontheprofitabilityofthecompany.

4. AstheinterestratesinpubicFinancialinstitutionsareinadecreasingtrendafterglobalization
thecompanygoingonsearchingforloanfundsatalessrateofinterestasinthecaseofUCO
Bank.
5. Efficiencyandcompetencyinmanagingtheaffairsofthecompanyshouldbemaintained.

98

BIBLIOGRAPHY
1)

FinancialManagement

Khan&Jain

2)

FinancialManagement

I.M.Pandey

3)

FinancialManagement

PrasannaChandra

4)

NewsPapers

FinancialExpress
EconomicTimes

5)

Websites

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

99