c p Sankhla Cost of Capital

A

PROJECT REPORT

ON

“COST OF CAPITAL”

IN

IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE

AWARD OF THE DEGREE OF

“MASTER OF BUSINESS ADMINSTRATION”

SUBMITTED TO SUBMITTED BY

FMS CHETAN PRAKESH SANKHLA

1

M.A.I.E.T. MBA SEM -III

Certificate of Approval

The following Summer Internship Report titled "Cost of Capital" is hereby approved as a

certified study in management carried out and presented in a manner satisfactory to

warrant its acceptance as a prerequisite for the award of Master of Business

Administration for which it has been submitted. It is understood that by this approval the

undersigned do not necessarily endorse or approve any statement made, opinion expressed

or conclusion drawn therein but approve the Summer Internship Report only for the

purpose it is submitted.

Summer Internship Report Examination Committee for evaluation of Summer Internship Report

Organizational Guide

: Signature………………………….

: Name: Mr. N. C Jain

: Designation: Assist. Vice President, Finance

: Address: Bangur Nagar, post box no -33, Beawar

305901, Rajasthan, INDIA

: Email: [email protected]

2

Acknowledgement

At the outset, I offer my sincere thanks to SHREE CEMENTS LTD. for giving me an opportunity to work on the project titled, “Cost of Capital”.

It’s a moral responsibility of each individual to acknowledge the help of each individual

who has made your journey smoother for you. First of all I would like to express my

gratitude to Mr. N.C. Jain (Assist. Vice President, Finance) who despite his tight schedule

spared time for discussions and informed about basic groundwork and direction without

whose support, this report would not have been possible. I appreciate him of giving me an

option of selecting such a wonderful project. The learning has been immense for me from

this project.

I am thankful to all employees at Shree Cement Ltd. for providing me all the information

and help I required for completion of this project. I am highly grateful to the management

at Shree Cement for giving me this opportunity to work on a dream project and in the

process harness myself with the huge learning on all aspects.

I would like to give credit to all sources form where I have drawn material for this project.

Last but not the least, I am grateful to my institute Mahairshi arvind institute of

engineering& technology jaipur which provided me this opportunity to interact with this

organization and understand the intricacies of the corporate world.

Chetan prakesh sankhla

3

CONTENTS

4

5

Sr. No. Particulars Page No.

1 Preface 6

2 History of Company 7-10

3 The industry profile 11-36

Cement-types

The Cement Industry Structure

Characteristic of Cement Industry

Major Demand Drivers

Major Players in Cement Industry

Cement Manufacturing

Business and Managerial Challenges

Risk and Return of Cement Companies

4 Organization profile of Shree Cement Limited 37-45

The Company’s Vision & Mission

Marketing

Product & Policies

5 Need of the study 46-47

6 Objective of study 48-49

7 Scope of study 50-51

8 Concept of “Cost of Capital” 52-78

Classification of “Cost of Capital”

Computation of specific Costs

Cost of Equity

Cost of Debts

Capital Structure

Analysis of Capital Structure

Prefece

About three decade ago, the scope of financial management was confined to the raising of

funds, whenever needed and little significance used to be attached to financial decision-

making and problem solving. As a consequence, the traditional finance texts were

structured around this theme and contained description of the instruments and institutions

of raising funds and of the major events, such as promotion, reorganization, Readjustment,

merger, consolidation etc. When funds were raised. In the mid fifties, the emphasis shifted

to the judicious utilization of funds. The modern thinking in financial management accords

a far greater importance to management decision-making and policy. Today, financial

management donot perform the passive role of scorekeepers of financial data and

information, and arranging funds, whenever directed to do so. Rather, they occupy the key

position in top management areas and play a dynamic role in solving complex management

problems. They are now responsible for the fortune of the enterprises and are involved in

the most vital management decision of allocation of capital. It is their duty to insure the

funds are raised most economically and used in the most efficient and effective manner.

Because of this change in emphasis, the descriptive treatment of the subject of financial

management is being replaced by growing analytical content and sound theoretical

underpinnings.

CHETAN PRAKESH SANKHLA

7

History of Company

8

History of Company

1979 - The Company was incorporated on 25th October, at Jaipur. The Company was promoted by members of the Bangur family and others.Shree Digvijay Cement Co. Ltd., Graphite India, Ltd. and Fort Gloster Industries, Ltd. took active part in the promotion of the Company. The Company manufacture's cement & cement products. To reduce fuel and power consumption, the Company adopted the latest dry process, four stage preheater precalcination technology of clinkerisation and air swept roller mill grinding system for raw material and coal grinding. The Company entered into agreement with F.L. Smidth & Co. A/s Copenhagen, a designer and manufacture of cement plants, its associates F.L. Smidth & Cia. Espanola S.A., Madrid and with Larsen & Toubro Ltd., Mumbai for the supply of plant equipment andservices for the proposed project. 1984 - 70 No. of equity shares subscribed for by the signatories to the Memorandum of Association. In Oct./Nov. 1,53,99,930 No. of equity shares issued of which1,06,99,930 shares reserved for firm allotment as follows:

(i) 48,00,000 shares to Shree Digvijay Cement Co. Ltd.;(ii) 11,00,000 shares each to Graphite India, Ltd. and Fort Gloster Industries, Ltd. (iii) 36,99,930 shares to Directors, their friends etc. including upto 25,00,000 shares to NRIswith repatriation rights. The balance 47,00,000 shares offered to the public of which 18,80,000 shares offered for allotment on preferential basis to Non-Residents. 1985 - Commercial production commenced from 1st May. 1986 - A diesel generating set of 13.6 MW was installed for captive power generation. 1987 - 46,00,000 shares issued to financial institutions in conversion of loans. 1991 - Production of clinker and cement declined due to a major shut down of the plant for implementation of modernisation/renovation/modification work. The Company undertook to set up a new cement plant of 0.6 million TPA capacity in Rajasthan 7,96,000 No. of Equity shares issued to financial institution in conversion of loan.1992 - 36,00,000 shares allotted to FLT Ltd. a wholly owned subsidiary of P.L. Smith & Co. Denmark under financial collaboration agreement.1993 The Company undertook a scheme of implementing second stage of its licensed capacity to increase its capacity to 3300 tonnes per day The Company issued 21975 - 16% each with equity warrants and these will beconverted as per institutional guidelines.2,40,021 shares issued in pursuance of scheme of Amalgamation. 1994 - The Company issued 10,00,000-16% Secured Redeemable NCD of Rs 100 each on private placement basis.A scheme of amalgamation of an existing leasing and finance Company with the Company was

9

prepared for undertaking leasing activities and other financial services on largescale.

M/s. Mannakrishna Investment, Ltd. is a subsidiary of the Company. 1995 - The Company undertook the implementation of new unit of 124 MT capacity per annum named Raj Cement. 43,95,000 No. of Equity shares on surrender of detachable optional share warrants attached with 16% unsubscribed non-Convertible Debentures of 100 each.1996 - The Company commissioned its second cement plant - Raj Cement with a capacity of 12.4 lakh tonnes per annum in Beawar. 58,06,204 rights shares issued (prem. Rs 10 per share) in the prop. 1:5. 1998 - Shree Cement, the Calcutta-based PD-BG Bangur group company, has decided to issue preference shares aggregating Rs 15 crore to mobilise long-term funds. Shree Cement's expansion in capacity by 12.4 lakh tonnes at the new unit in Reawar, has made it a leading cement manufacturer in North India.

- ICRA has downgraded the rating of the NCD programme of Shree Cement Ltd (SCL) from LAA to LA. The Rs 372-crore 1.25 million tonne cement plant near Ajmer was commissioned during the year after considerable delay due to an explosion in the electro-static precipitator. Shree Cements has an installed capacity to produce up to two million tonnes of cement per annum in Rajasthan and has an equity capital of about Rs. 34 crores. 1999 - The company has been awarded the first prize for energy conservation in 1998 in the cement sector. SCL, belonging to the house of Bangurs, is one of the largest cement manufacturers in North India, having the installed capacity of 2 million tonnes. Its plants are located in Rajasthan. The new plant was set up at Beawar with the capacity of 1.24 million tpa in Rajasthan.

●-Unit I and Unit II of the company receives National Award for 'Best Electrical EnergyPerformance' and 'Best Thermal Energy Performance' in the Cement Industry for the year

●Decides to change the Accounting year to April - March each year and accordingly the current year is only for nine months. Appoints Mr M K Singhi as the Executive Director of Shree Cements. In pursuance to the IDBI, company approve for early

10

redemption of privately placed under noted cummulative redeemable preference shares.Change in Management Structure: Mr B G Bangur re-appointed as executive chairman and Shri H M Bangur re-appointed as the Managing Director for a period of five years.

●Members approve for the delisting of its shares from 4 stock exchanges of Jaipur,Kolkota, Delhi and Chennai exchanges. Confers the Runner up National Safety Award by the Ministry of Labour,GOI, in recognition of outstanding performance in Industrial Safety achieving longest accident free period. Receives permission for delisting of shares from Delhi Stock Exchange. The company has been conferred National Award for Excellence in Energy Management

● instituted by the Confederation of Indian Industry (CII) and Sohrabji Godrej Green Business Centre Delisting of equity shares from Madras Stock Exchange Association Ltd

●Company conferred 'BEST PRODUCITY AWARD-2003' by the Rajasthan stateProductivity Council in recognition of productivity measures and productivity improvements achieved Rajasthan Chamber of Commerce & Industries, Jaipur presents 'RCCI Excellence Award' to Shree Cement Ltd in recognition of Overall Best Corporate Governance Practices and Disclosures in Annual Report among all companies having registered office in Rajasthan. Delist from The Calcutta Stock Exchange Association Ltd (CSE).

●Shree Cement Ltd has appointed Shri. Amitabha Ghosh as Director of the Company

11

The

Cement

Industry

PROFILE

12

The Cement Industry PROFILE

The Indian Cement industry dates back to 1914, with first unit were set-up at Porbandar with a

capacity of 1000 tones. Currently The Indian cement industry with a total capacity of about 170

m tones (excluding mini plants) in FY07-08, has surpassed developed nations like USA and

Japan and has emerged as the second largest market after China. Although consolidation has

taken place in the Indian cement industry with the top five players controlling almost 50% of the

capacity, the remaining 50% of the capacity remains pretty fragmented.

Per capita consumption has increased from 28 kg in 1980-81 to 115 kg in 2005. In relative terms,

India’s average consumption is still low and the process of catching up with international

averages will drive future growth. Infrastructure spending (particularly on roads, ports and

airports), a spurt in housing construction and expansion in corporate production facilities is likely

to spur growth in this area.

South-East Asia and the Middle East are potential export markets. Low cost technology and

extensive restructuring have made some of the Indian cement companies the most efficient

across global majors. Despite some consolidation, the industry remains somewhat fragmented

and merger and acquisition possibilities are strong. Investment norms including guidelines for

foreign direct investment (FDI) are investor-friendly. All these factors present a strong case for

investing in the Indian market.

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Types of Cement

Cements are of two basic types- gray cement and white cement. Grey cement is used only for

construction purposes while white cement can be put to a variety of uses. It is used for mosaic

and terrazzo flooring and certain cements paints. It is used as a primer for paints besides has a

variety of architectural uses. The cost of white cement is approximately three times that of gray

cement. White cement is more expensive because its production cost is more and excise duty on

white cement is also higher. Shree cement does not manufacture white cement at present.

Pozzolona used in the manufacture of Portland cement is burnt clay of flyash generated at

thermal power plants. PPC is hydraulic cement. PPC differs from OPC on a number of counts.

Pozzolona during manufacturing consumes lot of hydration heat and forms ‘cementious gel’.

Reduced heat of hydration leads to lesser shrinkage cracks. An additional gel formation leads to

lesser pores in concrete or mortar. It also minimizes problem of leaching and efflorescence.

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GREY WHITE

Portland Pozzolona Cement

(PPC)

Ordinary Portland cement

The Cement Industry Structure

Presently the total installed capacity of Indian Cement Industry is more than 175 mn tones per

annum, with a production around 168 mn tones. The whole cement industry can be divided into

Major cement plants and Mini cement plants.

Major Cement Plants: Plants : 140

Typical installed capacity

Per plant : Above 1.5 mntpa

Total installed capacity : 170 mntpa

Production 07-08: 161 mntpa

All India reach through multiple plants

Export to Bangladesh, Nepal, Sri Lanka, UAE and Mauritius

Strong marketing network, tie-ups with customers, contractors

Wide spread distribution network.

Sales primarily through the dealer channel

Mini Cement Plants: Nearly 300 plants & Located in Gujarat, Rajasthan, MP mainly

Typical capacity < 200 tpd

Installed capacity around 9 mn. Tones

Production around : 6.2 mn tones

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Mini plants were meant to tap scattered limestone reserves. However most set up in AP

Most use vertical kiln technology

Production cost / tonne - Rs. 1,000 to 1,400

Presence of these plants limited to the state

Infrastructural facilities not the best

REGIONAL DIVISION

The Indian cement industry has to be reviewed in terms of five regions:-

North – Punjab, Delhi, Haryana, Himachal Pradesh, Rajasthan, Chandigarh, J&K and Uttaran-

chal

West – Maharashtra and Gujarat

South – Tamil Nadu, Andhra Pradesh, Karnataka, Kerala, Pondicherry, Andaman & Nicobar and

Goa

East – Bihar, Orissa, West Bengal, Assam, Meghalaya, Jharkhand and Chhattisgarh, and

Central – Uttar Pradesh and Madhya Pradesh

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INDUSTRY CURRENT SCENARIO

SECTOR OUTLOOK

Indian Cement Industry is set to increase production capacity by 28.3 mt in FY09E, 41.4 mt in

FY10E and 18.9 mt in FY11E. This will take the aggregate installed capacity to ~288 mt. In

FY08, 21 mt of capacity was added. The Industry planned this massive capacity expansion of

108 mt because they had never seen such a good run till FY2006. During this period, the

capacity utilization rate of the Industry reached an all time high level of ~99% in FY08. In the

period FY05 to FY08, cement demand grew at a CAGR of 10.5% and average retail price

increased by a whopping 41% to Rs 230 per bag. Cement manufacturers made huge profits and

the Industry average per tonne of operating profits crossed Rs 1100. Driven by theses

profitability levels, average RoCE level of the Industry crossed the 25% mark.

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Cement Industry is set to add ~89 mn tonnes of capacity between FY09-FY11E, which accounts

for ~48% of FY08 installed capacity. We expect ~21 mt of capacity addition in Q4FY09,

followed by 41 mt of additional capacity in FY10 and 18.9 mt in FY11. Of the new capacities, ~

41 mt (~50%) is expected to be commissioned in the South, followed by 13.3 mt (~16.4%) in the

North and 13 mt (16.1%) in the East.

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SHARE OF CAPACITY ADDITION (REGION-WISE AND TOP 5 GROUPS)

ANTICIPATED GROWTH IN CEMENT DEMAND

19

Housing construction accounts for around 60-65% of the total cement demand and the balance

comes from infrastructure sectors including roads, railways, ports and power, among others. The

demand for cement is directly linked to economic activity and has a high correlation with GDP

growth. Infrastructure investments and construction activities, which are the major drivers of

cement demand, are also key components of GDP. Further, rural housing, which is a determinant

of cement demand, depends on agricultural productivity, which again is a key component of

GDP.

Historical data of last 12 yrs shows that cement demand in India has increased at the rate of

1.27x the growth rate of GDP. It is expected that cement consumption growth would shrink

over the next two years due to uncertain economic conditions and slowdown in real estate

construction activities. Cement demand will consequently grow by 8.7%, 7.6% and 8.9% in

FY09, FY10 and FY11 respectively.

CAPACITY EXPANSION TO WEAKEN PRICING POWER

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It is believed that the capacity expansion program will only weaken the pricing power and

profitability of the companies in the future. In a scenario where oversupply is inevitable,

companies could try to increase their market share by decreasing their prices, leading to a

possible price war.

Economic Analysis

-Key Economic Indicators

World GDP, also known as world gross domestic product or GWP - gross world product,

calculated on a nominal basis, was estimated at $65.61 trillion in 2007 by the CIA World Fact

book. While the US is the largest economy, growth in world GDP of 5.6% was led by China

(11.9%) and India (7.2%)

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Inflation worldwide

The recessionary pressures felt across the globe resulted in a massive decline in the supply of money. This, in turn, affected commodity prices, resulted in low inflation rates

22

Higher degrees of inflation, particularly in two digits, will defeat all business planning, lead to cost escalations and squeeze on profit margins. These will adversely affect the performance of industry and companies.

Unemployment Rates:

23

Interest rates: the rate offered on overnight deposits by the Central Bank or other authority

24

If interest rates increase across the board, then investment decreases, causing a fall in national income.

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Characteristics of Cement Industry

This section describes the basic economic characteristics of the cement industry by following the

classical approach which consists of successively examining demand, supply and market

structure. On the basis of these characteristics are described the main economic stakes in the

sector.

Demand &Market

Demand in the cement industry is typically that of an activity which is mature, cyclical and with

low price elasticity. It is also characterized by a high degree of horizontal differentiation in terms

of location and a low degree of vertical differentiation in terms of quality.

Cement is a homogeneous product. Most of its sales concern about half a dozen commercial

varieties, of which Portland cement is by far the leader. No brand name exists, so that one

supplier’s products can easily be substituted for another. Cement is, however, an experience

good; its quality is guaranteed by standards with which the supplier has to comply. These

standards are often national but in most cases the products of one country can easily be approved

in neighboring countries. Standards therefore do not constitute trade barriers as such, even if they

may hinder trade.

The demand for cement is geographically widely dispersed and corresponds roughly to

population density. Although cement is an upstream industry, it differs from other basic

industries such as aluminum, steel or glass, for which demand id concentrated both

geographically and in terms of the number of customers. In the cement industry demand is by, by

contrast, dispersed in multiple zones of consumption, each of which comprises numerous

customers. Geographical factors thus determine the structure of the market.

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Supply

Two economic considerations are important a priori in structuring supply in a market

characterized by strong horizontal differentiation:

The trade-off between fixed costs and transport costs which, depending on the economic

size of the factories, gives an initial idea of the density of the network of production units cover-

ing the territory, in relation to the density of demand.

The level of investment costs and the life-span of facilities which determine the rigidity

and the duration of the network.

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Expected Demand and Supply

Major Demand Drivers

Present Demand drivers Infrastructure & construction sector the major demand drivers. Some demand determinants

Economic growth

Industrial activity

Real estate business

Construction activity

Investments in the core sector

Growth in mortgage business in retail housing

Higher surplus income of household

Opportunities growth in the housing sector

central road fund established for national highways and railway over bridges to provide

the necessary impetus

expansion plans, Greenfield projects on the anvil

Demand – supply balance expected in the next 12 – 15 months

Encouraging trend in demand due to pick-up in rural housing demand and industrial revival

Industry likely to grow at 8-10% in the next few years

Newer capacities in future

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MAJOR PLAYERS IN CEMENT INDUSTRY:

SHREE CEMENT LTD

Shree Cement Ltd is a Rajasthan based company, located at Beawar. The company has installed

capacity of 10.2 mn tonnes per annum in Rajasthan. It is a leading cement manufacture company

in North India and has been participating in the infrastructure transformation of India for over

two decades now. It started operations in the year 1985 and has been growing ever since. Its

manufacturing units are located at Beawar, district Ajmer, and Ras, district Pali, in Rajasthan. It

also has grinding units at Khushkhera, district Alwar in Rajasthan, near Gurgaon.. It has three

brands under its portfolio viz. Shree Ultra Jung Rodhak Cement, Bangur Cement and Rockstrong

Cement. The multi-brand strategy makes Shree the number one cement player in Rajasthan,

Haryana and Delhi. The company has also established two grinding units one at Suratgarh

(Rajasthan) and another at Roorke (Uttaranchal),.

GUJARAT AMBUJA CEMENT LIMITED

GACL was set up in 1986 with 0.7 million tonnes. The capacity has grown 25 times since then to

18.5 million tonnes. GACL exports as much as 15 percent of its production. 35% of the company

products transported are by sea which is the cheapest mode. It has earned the reputation of being

the lowest cost producer in the cement industry. Ambuja cement is one of GACL’s well

established brands. The company plans to increase capacity by 3-4 million tonnes in the near

future.

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ACC LIMITED

Being formed in 1936, ACC has a capacity of 22.40 million (0.53 million tonnes of Damodar

Cement and Slag and 0.96 million tonnes of Bargarh Cement). ACC Super is one of the

company’s well established brands. It is planning to expand the capacity of its wholly-owned

subsidiary Damodar Cement and Slag at Purulia in West Bengal. This is aimed at increasing its

presence in the eastern region.

THE ADITYA BIRLA GROUP

The Aditya Birla Group is the world’s eight largest cement producer. The first cement plant of

Grasim, the flagship of the Aditya Birla Group, at Jawad in Madhya Pradesh went on stream in

1985. In total, Grasim has five integrated grey cement plants and six ready-mix concrete plants.

The company is India’s largest white cement producer with a capacity of 4 lakh tonnes. It has

one of the world’s largest white plants at Kharia Khangar (Rajasthan). Shree Digvijay Cement, a

subsidiary of Grasim, which was acquired in 1998, has its integrated grey cement plant at Sikka

(Gujarat). Finally Grasim acquired controlling stake in Ultra Tech Cement Limited (Ultra Tech),

the demerged cement business of L&T. Grasim has a total cement capacity of 31 million tonnes

and eyeing to increase it to 48 MT by FY 09. Grasim has a portfolio of national brands which

include Birla Super, Birla Plus, Birla White and Birla Ready mix and also regional brands like

Vikram Cement and Rajshree Cement.

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BINANI CEMENT

A fierce competition with a 2.2 MTPA plant is located at Binanigram, Pindwara, a village in

Sirobi in the state of Rajasthan. It’s a tough nut player which is outside CMA (Cement

Manufacturer’s Association) and is prime reason for driving prices low in markets. Offers a good

quality product at cheap rates and has very good brand image. Sales are focused in the North

India, Gujarat and Rajasthan. It holds around 14% of the Rajasthan market.

JK

An entrenched competitor that has brands across the price spectrum with JK Nembahera leading

the pack. Also operates in the white cement market with Birla as its only competitor. It lost

significant market when Ambuja came to Rajasthan.

Others

Other players like Shriram have insignificant share and are highly localized. Shriram has a small

presence and that too largely in southern Rajasthan. There are various mini plants operating too

which supply cheap cement which has no ISI certification and does not confirm BIS standards.

Quite often they are supplied in other established brand’s cement bags. L&T is a strong player

nationally and regarded as quality product. It has a footprint but not a foothold in Rajasthan

market

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Cement Manufacturing

Raw Material Preparation

Limestone of differing chemical composition is freely available in the quarries. This limestone is carefully blended before being crushed. Red mineral is added to the limestone at the crushing stage to provide consistent chemical composition of the raw materials. Once these materials have been crushed and subjected to online chemical analysis they are blended in a homogenized stockpile. A bucket wheel reclaimer is used to recover and further blend this raw material mix before transfer to the raw material grinding mills.

Raw Mill

Transport belt conveyor transfers the blended raw materials to ball mills where it is ground. The chemical analysis is again checked to ensure excellent quality control of the product. The resulting ground and dried raw meal is sent to a homogenizing and storage silo for further blending before being burnt in the kilns.

Fuels

The heat required to produce temperatures of 1,800°C at the flame is supplied by ground and dried petroleum coke and/or fuel oil. The Petcock is imported via the companies' internal wharf, stored and then ground in dedicated mills. Careful control of the mills ensures optimum fineness of the Petcock and excellent combustion conditions within the kilns system.

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Burning

The raw meal is fed into the top of a pre-heater tower equipped with four cyclone stages. As it falls, the meal is heated up by the rising hot gases and reaches 800°C. At this temperature, the meal dehydrates and partially decarbonizes. The meal then enters a sloping rotary kiln, which is heated by a 1,800°C flame, which completes the burning process of the meal. The meal is heated to a temperature of at least 1,450°C. At this temperature the chemical changes required to produce cement clinker are achieved. The dry process kiln is shorter than the wet process kiln and is the most fuel-efficient method of cement production available.

Cooler Units

The clinker discharging from the kiln is cooled by air to a temperature of 70°C above ambient temperature and heat is recovered for the process to improve fuel efficiency. Some of the air from the cooler is de-dusted and supplied to the coal grinding Plant. The remaining air is used as preheated secondary air for the main combustion burner in the kiln. Clinker is analyzed to ensure consistent product quality as it leaves the cooler. Metal conveyors transport the clinker to closed storage areas.

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Filters

Dedicated electrostatic precipitators dedust the air and gases used in the Clinker Production Line Process. In this way, 99.9% of the dust is collected before venting to the atmosphere. All dust collected is returned to the process.

Constituents

Different types of cement are produced by mixing and weighing proportionally the following constituents:

Clinker

Gypsum

Limestone addition

Blast Furnace Slag

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Cement manufacturing from the quarrying of limestone to the bagging of cement.

Business & Managerial Challenges

35

Cement market is highly competitive with major players having advantage of brand equity,

capacity and early movers. The major players are Binaani, Birla (with products like Birla Super

and Birla Chetak), Grasim (with products like Vikram and Birla Plus), Gujarat Ambuja, JK (with

products like JK Nimbahera), Laxmi, Mangalam (with products like Mangalam and Birla

Uttam), ACC, DCM Shriram, L & T and Kamdhenu. Each of these players has their dominance

across whole Rajasthan in addition to their respective regional dominance.

Another issue is that the product (cement) cannot be differentiated clearly on the basis of quality

and hence, cost plays one of the most important role in this industry. If the company can control

cost of manufacturing & distribution, then not only would profitability of the company increase,

but this benefit would also trickle down to the customers.

Logistics is the most important cost associated with cement industry. This is the single most

important reason for strong dominance of all cement companies in the regions around their

factory. But if this system can be improved upon, and costs can be managed, then Shree Cements

Ltd. can strengthen their hold in present states of distribution as well as look forward to gaining

foothold in newer and farther regions.

Risk and Return of Cement Companies

36

General Risk Factors

Economic Conditions - The performance of cement companies may be significantly af-fected by changes in economic conditions, and particularly conditions which affect the cement industry, its top consumers. These industries include the real estate sector and construction com-panies. Profitability of the business may also be affected by factors such as market conditions, interest rates, and inflation.

Geo-political Factors –The companies may be affected by the impact that geo-political factors have on the world economy or on financial markets and investments generally or specifi-cally. These include the demand for cement from China, and other export destinations.

Government policies and legislation –The companies may be affected by changes to government policies and legislation, including those relating to the real estate and construction industry in addition to the cement sector. Taxation and the regulation of trade practices and com-petition. In recent times there has been an attempt by the government to control the price of ce-ment by changing the tax structure. Such attempts could cause price instability and hit on mar-gins.

Currency Risk: The recent appreciation of the Indian rupee is going to be a major hin-drance to export to other countries especially china as well as other nations. Currency risk repre-sents a major issue facing exports however the risk is currently less due to the robust demand for cement in the domestic economy. However with addition to plant capacity and increase in vol-ume of production, such a risk would prove to be a major challenge.

37

THE ORGANIZATION

PROFILE

38

THE ORGANIZATION PROFILE

C O M P A N Y P R O F I L E

COMPANY Shree Cement Ltd.

INCORPORATION YEAR 1979

REGISTERED OFFICEBangur Nagar, Beawar, Ajmer

(Rajasthan)

CORPORATE OFFICE 21, Strand Road, Kolkata

INDUSTRY Cement Manufacturing

CHAIRMAN B.G. Bangur

MANAGING DIRECTOR H.M. Bangur

EXECUTIVE DIRECTOR M.K. Singhi

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INTRODUCTION Shree Cements Ltd.

Shree Cements Ltd. is a Rajasthan based company, located at Beawer. The company has

installed capacity of 10.2 mtpa tones per annum in Rajasthan.. For the last 18 years, it has been

consistently producing many notches above the nameplate capacity. The company retains its

position as north India’s largest single-location manufacturer. Shree’s principal cement

consuming markets comprise Rajasthan, Delhi, Haryana, Punjab, Uttar Pradesh and Uttranchal.

Shree manufactures Ordinary Portland Cement (OPC) and Portland Pozzolana Cement (PPC). Its

output is marketed under the Shree Ultra Ordinary Portland Cement’ and ‘Shree Ultra Red Oxide

jung rodhak Cement’ brand names.

THE SHREE VISION

Vision “To drive and sustain industry leadership Within a global context - by developing individual Competencies at every level, through a robust Trust, support, innovation and reward”

Guiding Principles

Enforce good corporate governance practices Encourage integrity of conduct Ensure clarity and un-ambiguity in communication Remain accountable to all stakeholders Encourage socially responsible behavior

Mission

To harness sustainability through low carbon philosophy To sustain its reputation as one of the most efficient manufacturers globally. To continually have most engaged team To drive down cost through innovative practices To continually add value to its products and operations meeting expectations of all its

stakeholders

40

Marketing

Shree caters to cement demand arising in Rajasthan, Delhi, Haryana, UP and Punjab. What is

strategic for SCL is that it is located in central Rajasthan so it can cater to the entire Rajasthan

market with the most economic logistics cost. Also, Shree Cement is the closest plant to Delhi

and Haryana among all cement manufacturers in its state and proximity to these profitable

cement markets renders the company an edge over other cement companies of the company in

terms of lower freight costs. SCL has a 160 MW captive thermal power plant, which has

achieved over 90 per cent load factor. In 2000-01, the company has succeeded in substituting

conventional coke with 100 per cent pet coke, a waste from refineries, as primary fuel resulting

in lower inventory and input costs. In the past two years the price of coal has gone up. Earlier

dependent on good quality imported coal, the company's switch to pet coke could not have come

at a better time. The company also replaced indigenous refractory bricks with imported

substitutes, reducing its consumption per tonne of clinker. The company has one of the most

energy efficient plants in the world. The captive plant generates power at a much lower cost of

Rs 2.5 per unit (excluding interest and depreciation) as compared to over Rs 5 per unit from the

grid. In appreciation of its achievements in Energy sector, the Company has been awarded the

prestigious 'National Energy Conservation Award" various times. Shree is rated best by

Whitehopleman, an international agency specializing in the rating of cement plants.

PRODUCTS

41

Following are the various products of Shree Cements Ltd.

1 Shree Ultra Red Oxide Jung Rodhak Cement (ROC)

2 Shree OPC

3 Bangur Cement

4 Rockstrong Cemento

POLICIES:

Quality Policy:

To provide products conforming to national standards and meeting customers requirements to

their total satisfaction.

To continually improve performance and effectiveness of quality management system by setting

and reviewing quality objectives for –

a) Customer satisfaction

b) Cost effectiveness

Energy Policy:

To reduce to the maximum extent possible the consumption of energy without impairing produc-

tivity which should help in:

Increase in the profitability of the company

Conservation of Energy

Reduction in Environmental pollution at Energy producing areas.

42

Environment Policy:

To ensure:

Clean, green and healthy environment

Efficient use of natural resources, energy, plant and equipment

Reduction in emissions, noise, waste and greenhouse gases

Continual improvement in environment management

Compliance of relevant environment legislation

Water Policy :

To provide sufficient and safe water to people and plant as well as to conserve water, we are

committed to efficient water management practices viz.

Develop means and methods for water harvesting

Treatment of waste discharge water for reuse

Educate people for effective utilization and conservation of water

Water audit and regular monitoring of water consumption

Health and Safety Policy :

To ensure good health and safe environment for all concerned by:

Promoting awareness on sound health and safe working practices

Continually improving health and safety performance by regularly setting and reviewing objec-

tives and targets

Identifying and minimizing injury and health hazards by effective risk control measures

Complying with all applicable legislations and regulations

Human Resource Policy :

Shree Cement is committed to:

Empower people

43

Honor individuality of every employee

Non discrimination in recruitment process

Develop Competency

Employees shall be given enough opportunity for betterment

None of the person below the age of 18 shall be engaged to work

Incidence of Sexual harassment shall be viewed seriously

To follow Safety & Health, Quality, Environment, Energy policy

ADVERTISING

Need for Advertising:-

Cement has evolved into a highly commoditized product category. Due to competitive pricing

within the industry, there was not much differentiation among the various brands on offer.

People too did not pay much attention to this product unless there was a need felt. Hence people

who were currently making their houses or were soon to embark on such a project became the

target market.

Because of the product being commoditized, there

was a need for differentiation for which there were

some changes made to the product.

44

Shree Cement Ltd was not advertising its products for the past few years but looking at the

competitive market and opportunities ahead it introduced a new ad campaign which was targeted

to differentiate its products from other cement brands. It introduced an ad campaign showing the

anti rusting capability of the Red Oxide Cement of the company. But still the presence of the

company has not been as intense as other brands have like Ambuja and Grasim etc.

AWARDS OF THE COMPANY

4 star rating from Whitehopleman UK, an International Cement Consultants, since 2000 (No one in world has been rated 5 star!!

45

Reckoned as 2nd fastest growing mid sized Company in 2006 by “Business Today” a national level magazine (6 May 07 edition

Golden Peacock Award - 2007 for Excellence in Corporate Governance

Golden Peacock Award - 2007 in recognition of excellent Environment Management practices

National Awards for Energy Conservation from Ministry of Power, Govt of India

CII National Award for Excellence in Energy Management 2006

National Safety Award awarded by the Honorable President of India, Smt. Pratibha Patil

Best Annual Report Award by Rajasthan Chamber of Commerce and Industry in 2007

“Amity Corporate Excellence Award” by Amity International Business School, Noida.

ICWAI National Award 2005 for excellence in cost management

Green-Tech Environment Excellence Award

Golden Peacock Award for Combating Climate Change

Corporate Excellence Award by Rajasthan Chamber of Commerce & Industry (RCCI) in all four categories namely Corporate Governance & Capital Market, Financial Performance & Analysis, Business & Qualitative Aspects and Annual Report Presentation as well as Management

SILVER CIO Award by the CIOL Dataquest Enterprise Connect Awards 2008.Note: Recently their name is registered for Limca book of Records (National Records 2010), for the completion of 1 new mtpa plant in a record 12 months –from march 23, 2008 to march 24, 2009.

46

NEED

FOR

STUDY

NEED FOR STUDY

The project is structured for the purpose of getting good insight of, Capital Structure and Cost of Capital, theory and its implication. The Projects Focus On Cost Of Different Component Of Capital And Optimal Capital Structure For Minimizing The Cost And Risk. It also discusses the different sources of funds, different approaches of cost of capital.

47

The project is being made as a part of summer training and gives good insight of the topic

covered under it.

The basic need behind the study to cost of capital is to understand the finance as an important

asset for the organization , their knowledge skills & attiudes should be used for the overall

growth on organization as well as for the individuals, this can be done through retaining the

telent & knowledge people for the long time .

48

OBJECTIVES OF THE STUDY:

OBJECTIVES OF THE STUDY:

The following are the objectives of the study

✔ To know the Global and Indian Scenario

✔ To know the Key Players in the Industry

✔ To know the Business Level Functions & Process of the Organization

✔ To know the Company Profile

49

✔ To do SWOT Analysis, etc. of the Company

✔ To learn about the Organizational Culture, Values, Benefits in a Practical way

✔ To get an exposure to the different functions of the Organization and understand

how they are performed and coordinated.

✔ To relate various concepts studied in the first term to a real Organizational Environment

50

SCOPE OF THE OBJECTIVES:

SCOPE OF THE OBJECTIVES:

Organizational Functioning is an important factor for any Organization to achieve the desired goals and Objectives. This requires Co-ordination at all levels to smooth functioning. This

study is to know the overall efficiency and performance cement Industries and a general study on Shree Cement Ltd at Beawar, Rajasthan.

As a part of two year MBA program at the end of 1st trimester, we had to carry on a project in an organization in order to understand the organization structure and their functions. This was a great opportunity to get the first hand information

51

and understand the functioning of the various departments

✔ To learn about convincing people and how to extract what we want

✔ To make contacts with the industrial people and maintain it

52

Concept

COST

of CAPITAL

Concept COST OF CAPITAL

The main objective of a business firm is to maximize the wealth of its shareholders in the

long-run, the Management Should only invest in those projects which give a return in excess of

cost of fund invested in the project of the business. The difficulty will arise in determination of

cost of funds, if is raised from different sources and different quantum. The various sources of

funds to the company are in the form of equity and debt. The cost of capital is the rate of return

the company has to pay to various suppliers of fund in the company. There are main two sources

of capital for a company – shareholder and lender. The cost of equity and cost of debt are the rate

of return that need to be offered to those two groups of suppliers of the capital in order to attract

funds from them.

53

The primary function of every financial manager is to arrange adequate capital for the

firm. A business firm can raise capital from various sources such as equity and or preference

shares, debentures, retain earning etc. This capital is invested in different projects of the firm for

generating revenue. On the other hand, it is necessary for the firm to pay a minimum return to

each source of capital. Therefore, each project must earn so much of the income that a minimum

return can be paid to these sources or supplier of capital. What should be this minimum return?

The concept used to determine this minimum return is called Cost of Capital. On the basis of it

the management evaluates alternative sources of finance and select the optimal one. In this

chapter, concepts and implications of firms cast of capital, determination of cast of difference

sources of capital and overall cost of capital are being discussed.

CONCEPT OF COST OF CAPITAL

Cost of capital is the measurement of the sacrifice made by investors in order to invest with

a view to get a fair return in future on his investments as a reward for the postponement of his

present needs. On the other hand form the point of view of the firm using the capital, cost of

capital is the price paid to the investor for the use of capital provided by him. Thus, cost of

capital is reward for the use of capital. Author Lutz has called it” BORROWING AND

LANDING RATES”. The borrowing rates means the rate of interest which must be paid to

obtained and use the capital. Similarly, landing rate is the rate at which the firm discounts its

profits. It may also the opportunity cost of the funds to the firm i.e. what the firm would earn by

investing these funds elsewhere. In practice the borrowing rates used indicate the cost of capital

in preference to landing rates.

Technically and Operationally, the cost of capital define as the minimum rate of return a

firm must earn on its investment in order to satisfy investors and to maintain its market value. I.e.

it is the investors required rate of return. Cost of capital also refers to the discount rate which is

used while determining the present value of estimated future cash flows. In the other word of

John J. Hampton, “The cost of capital is the rate of return in the firm requires from

investment in order to increase the value of firm in the market place”. For example if a firm

borrows Rs. 5 crore at an interest of 11% P.A., then the cost of capital is 11%. Hear it’s the

54

essential for the firm to invest these Rs. 5 Crore in such a way that it earn at least Rs. 55 lacks i.e.

rate of return at 11%. If the return less then this, then the rate of dividend which the share holder

are receiving till now will go down resulting in a decline in its market value thus the cost of

capital is the reward for the use capital. Solomon Ezra, has called “It the minimum required rate

of return or the cut of rate for capital expenditure.”

FEATURES OF COST OF CAPITAL

It is not a cost in reality the cost of capital is not a cost as such, but its rate of return

which it requires on the projects.

MINIMUM RATE OF RETURN:

Cost of capital is the minimum rate of return a firm is required in order to maintain the

market value of its equity shares.

REWARDS FOR RISKS

Cost of capital is the reward for the business and financial risk. Business risks is the

measurement of variability in profits due to changes in sales, while financial risks depends on the

capital structure i.e. that equity mix of the firm.

SIGNIFICANCE OF CONCEPT OF COST OF CAPITAL

The cost of capital is very important concept in the financial decision making. The progressive

management always likes to consider the cost of capital while taking financial decisions as it’s

very relevant in the following spheres...

55

1. Designing the capital structure: the cost of capital is the significant factor in designing a

balanced an optimal capital structure of a firm. While designing it, the management has to con-

sider the objective of maximizing the value of the firm and minimizing cost of capital. I compar -

ing the various specific costs of different sources of capital, the financial manager can select the

best and the most economical source of finance and can designed a sound and balanced capital

structure.

2. Capital budgeting decisions: the cost of capital sources as a very useful tool in the

process of making capital budgeting decisions. Acceptance or rejection of any investment pro-

posal depends upon the cost of capital. A proposal shall not be accepted till its rate of return is

greater then the cost of capital. In various methods of discounted cash flows of capital budgeting,

cost of capital measured the financial performance and determines acceptability of all investment

proposals by discounting the cash flows.

3. Comparative study of sources of financing: there are various sources of financing a

project. Out of these, which source should be used at a particular point of time is to be decided

by comparing cost of different sources of financing. The source which bears the minimum cost

of capital would be selected. Although cost of capital is an important factor in such decisions, but

equally important are the considerations of retaining control and of avoiding risks.

4. Evaluations of financial performance of top management: cost of capital can be used to

evaluate the financial performance of the top executives. Such as evaluations can be done by

comparing actual profitability of the project undertaken with the actual cost of capital of funds

raise o finance the project. If the actual profitability of the project is more than the actual cost of

capital, the performance can be evaluated as satisfactory.

5. Knowledge of firms expected income and inherent risks: investors can know the firms

expected income and risks inherent there in by cost of capital. If a firms cost of capital is high, it

means the firms present rate of earnings is less, risk is more and capital structure is imbalanced,

in such situations, investors expect higher rate of return.

6. Financing and Dividend Decisions: the concept of capital can be conveniently employed

as a tool in making other important financial decisions. On the basis, decisions can be taken re-

56

garding dividend policy, capitalization of profits and selections of sources of working capital.

CLASSIFICATION OF COST OF CAPITAL

1. Historical Cost and future Cost

Historical Cost represents the cost which has already been incurred for financing a project. It is

calculated on the basis of the past data. Future cost refers to the expected cost of funds to be

raised for financing a project. Historical costs help in predicting the future costs and provide an

evaluation of the past performance when compared with standard costs. In financial decisions

future costs are more relevant than historical costs.

2. Specific Cost and Composite Cost

Specific costs refer to the cost of a specific source of capital such as equity share. Preference

share, debenture, retain earnings etc. Composite cost of capital refers to the combined cost of

various sources of finance. In other words, it is a weighted average cost of capital. It is also

termed as ‘overall costs of capital’. While evaluating a capital expenditure proposal, the

composite cost of capital should be as an acceptance/ rejection criterion. When capital from more

than one source is employed in the business, it is the composite cost which should be considered

for decision-making and not the specific cost. But where capital from only one source is

employed in the business, the specific cost of those sources of capital alone must be considered.

3. Average Cost and Marginal Cost

Average cost of capital refers to the weighted average cost of capital calculated on the basis of

cost of each source of capital and weights are assigned to the ratio of their share to total capital

funds. Marginal cost of capital may be defined as the ‘Cost of obtaining another rupee of new

capital.’ When a firm rises additional capital from only one sources (not different sources), than

marginal cost is the specific or explicit cost. Marginal cost is considered more important in

capital budgeting and financing decisions. Marginal cost tends to increase proportionately as the

amount of debt increase.

57

4. Explicit Cost and Implicit Cost

Explicit cost refers to the discount rate which equates the present value of cash outflows or value

of investment. Thus, the explicit cost of capital is the internal rate of return which a firm pays for

procuring the finances. If a firm takes interest free loan, its explicit cost will be zero percent as

no cash outflow in the form of interest are involved. On the other hand, the implicit cost

represents the rate of return which can be earned by investing the funds in the alternative

investments. In other words, the opportunity cost of the funds is the implicit cost. Port field has

defined the implicit cost as “the rate of return with the best investment opportunity for the firm

and its shareholders that will be forgone if the project presently under consideration by the firm

were accepted.” Thus implicit cost arises only when funds are invested somewhere, otherwise

not. For example, the implicit cost of retained earnings is the rate of return which the shareholder

could have earn by investing these funds, if the company would have distributed these earning to

them as dividends. Therefore, explicit cost will arise only when funds are raised whereas implicit

cost arises when they are used.

Assumption of Cost of Capital

While computing the cost of capital, the following assumptions are made:

The cost can be either explicit or implicit.

The financial and business risks are not affected by investing in new in-

vestment proposals.

The firm’s capital structure remains unchanged.

Cost of each source of capital is determined on an after tax basis.

Costs of previously obtained capital are not relevant for computing the

cost of capital to be raised from specific source.

Computation of specific costs

58

A firm can raise funds from different sources such as loan, equity shares, preference shares,

retained earnings etc. All these sources are called components of capital. The cost of capital of

these different sources is called specific cost of capital. Computation of specific cost of capital

helps in determining the overall cost of capital for the firm and in evaluating the decision to raise

funds from a particular source. The computation procedure of specific costs is explained in the

pages that follow –

COST OF DEBT CAPITAL

Cost of Debt is the effective rate that a company pays on its current debt. This can be

measured in either before- or after-tax returns; however, because interest expense is deductible,

the after-tax cost is seen most often. This is one part of the company's capital structure, which

also includes the cost of equity.

Much theoretical work characterizes the choice between debt and equity, in a trade-off

context: Firms choose their optimal debt ratio by balancing the benefits and costs. Traditionally,

tax savings that occur because interest is deductible while equity payout is not have been

modelled as a primary benefit of debt. Large firms with tangible assets and few growth options

tend to use a relatively large amount of debt. Firms with high corporate tax rates also tend to

have higher debt ratios and use more debt incrementally. A company will use various bonds,

59

loans and other forms of debt, so this measure is useful for giving an idea as to the overall

rate being paid by the company to use debt financing. The measure can also give investors an

idea as to the riskiness of the company compared to others, because riskier companies generally

have a higher cost of debt.

Example-: If a company issues 12% debentures worth Rs. 5 lacs of Rs. 100 each at par, then it

must be earn at least Rs.60000(12% of Rs. 5 lacs) per year on this investment to maintain the

income available to the shareholders unchanged. If the company earns less than this interest rate

(12%) than the income available to the shareholders will be reduced and the market value of the

share will go down. Therefore, the cost of debt capital is the contractual interest rate adjusted

further for the tax liability of the firm. But, to know the real cost of debt, the relation of the

interest rate is to be established with the actual amount realised or net proceeds from the issue of

debentures.

To get the after-tax rate, you simply multiply the before-tax rate by one minus the marginal tax

rate.

Cost of Debt = (before-tax rate x (1-marginal tax))

The before tax rate of interest can be calculated as below:

= Interest Expense of the company

---------------------------------------- X 100

Total Debt

Net Proceeds:

1. At par = Par value – Floatation cost

2. At premium = Par value + Premium – Floatation cost

60

3. At Discount = Par value – Discount – Floatation cost

COST OF PREFERENCE SHARE CAPITAL

Preference share is another source of Capital for a company. Preference Shares are the shares

that have a preferential right over the dividends of the company over the common shares. A

preference shareholder enjoys priority in terms of repayment vis-à-vis equity shares in case a

company goes into liquidation. Preference shareholders, however, do not have ownership rights

in the company. In the companies under observation only India Cement has preference shares

issued.

Cost of Preference Capital = Preference Dividend/Market Value of Preference

Shree Cement has not paid any dividend to the Preference Shareholders. Thus the Cost of

Preference Capital is 0 (Zero).

COST OF EQUITY SHARE CAPITAL

The computation of cost of equity share capital is relatively difficult because neither the rate

of dividend is predetermined nor the payment of dividend is legally binding, therefore, some

financial experts hold the opinion the p.s capital does not carry any cost but this is not true.

When additional equity shares are issued, the new equity share holders get proponate share in

future dividend and undistributed profits of the company. If reduces the earning per shares of

existing share holders resulting in a fall in marker price of shares. Therefore, at the time of issue

of new equity shares, it is the duty of the management to see that the company must earn at least

so much income that the market price of its existing share remains unchanged. This expected

minimum rate of return is the cast o equity share capital. Thus, cost of equity share capital may

be define as the minimum rate of return that a firm must earn on the equity financed portion of a

61

investment- project in order to leave unchanged the market price of its shares. The cost of equity

can be computed by any of the following method:

1. Dividend yield method:

Ke = DPS\MP*100

Ke= cost of equity capital

Dps= current cash dividend per share

Mp=current market price per share

2. Earning yield method:

Ke= EPS\mp*100

Eps= earnings per share

3. Dividing yield plus growth in dividend method:

While computing cost of capital under dividend yield(d\p ratio)method, it had been assumed that

present rate of dividend will remain the same in future also. But, if the management estimates

that companies present dividend will increased continuously for the year to come, then

adjustment for this increase is essential to compute the cost of capital.

The growth rate in dividend is assumed to be equal to the growth rate in earning per share. For

example if the EPS increase at the rate of 10% per year, the DPS and market price per share

would show an increase at the rate of 10%. Therefore, under this method, cost of equity capital is

computed by adjusting the present rate of dividend on the basis of expected future increase in

company’s earning.

Ke= DPS\MP*100+G

G= Growth rate in dividend.

4. Realised yield method:

In case where future dividend and market price are uncertain, it is very difficult to estimate the

rate of return on investment. In order to overcome this difficulty, the average rate of return

62

actually realise in the past few year by the investors is used to determine the cost of capital.

Under this method, the realised yield is discounted at the present value factor, and then compare

with value of investment this method is based on these assumptions.

The company’s risk does not change i.e. dividend and growth rate are stable.

The alternative investment opportunities, elsewhere for the investor, yield the return which is

equal to realised yields in the company, and

The market of equity share of the company does not fluctuate widely.

Cost of newly issued equity shares

when new equity share are issued by a company, it is not possible to realise the market price per

share, because the company has to incur some expenses on new issue, including underwriting

commission, brokerage etc. so, the amount of net proceeds is calculated by deducting the issue

expenses form the expected market value or issue price. To ascertain the cost of capital, dividend

per share or EPS is divided by the amount of net proceeds. Any of the following formulae may

be used for this purpose:

Ke= DPS\NP*100

Or

Ke= EPS\NP*100

Or

63

Ke=DPS\NP*100+G

COST OF RETAIN EARNINGS OR INTERNAL EQUITY

Generally, company’s do not distribute the entire profits by way of dividend among their

share holders. A part of such profit is retained for future expansion and development. Thus year

by year, companies create sufficient fund for the financing through internal sources. But , neither

the company pays any cost nor incur any expenditure for such funds. Therefore, it is assumed to

cost free capital that is not true. Though retain earnings like retained earnings like equity funds

have no explicit cost but do have opportunity cost. The opportunity cost of retained earnings is

the income forgone by the share holders. It is equal to the income what a share holders could

have earns otherwise by investing the same in an alternative investment, if the company would

have distributed the earnings by way of dividend instead of retaining in the business. Therefore ,

every share holders expects from the company that much of income on retained earnings for

which he is deprived of the income arising o its alternative investment. Thus, income forgone or

sacrificed is the cost of retain earnings which the share holders expects from the company.

WEIGHTED AVERAGE COST OF CAPITAL

Once the specific cost of capital of the long-term sources i.e. the debt, the preference

share capital, the equity share capital and the retained earnings have been ascertained, the next

step is to calculate the overall cost of capital of the firm. The capital raised from various sources

is invested in different projects. The profitability of these projects is evaluated by comparing the

expected rate of return with overall cost of capital of the firm. The overall cost of capital is the

weighted average of the costs of the various sources of the funds, weights being the proportion of

each source of funds in the total capital structure. Thus, weighted average as the name implies,

is an average of the cost of specific sources of capital employed in the business properly

weighted by the proportion they held in firm’s capital structure. It is also termed as

‘Composite Cost of Capital’ or ‘Overall Cost of Capital’ or ‘Average Cost of Capital’.

64

WEIGHTED AVERAGE, How to calculate?

Though, the concept of weighted average cost of capital is very simple. Yet there are many

problems in its calculation. Its computation requires:

1. Assignment of Weights: First of all, weights have to be assigned to each source of capital for cal-

culating the weighted average cost of capital. Weight can be either ‘book value weight’ or ‘mar-

ket value weight’. Book value weights are the relative proportion of various sources of capital to

the total capital structure of a firm. The book value weight can be easily calculated by taking the

relevant information from the capital structure as given in the balance sheet of the firm. Market

value weights may be calculated on the basic on the market value of different sources of capital

i.e. the proportion of each source at its market value. In order to calculate the market value

weights, the firm has to find out the current market price of each security in each category. Theo-

retically, the use of market value weights for calculating the weighted average cost of capital is

more appealing due to the following reasons:

The market values of securities are closely approximate to the actual amount to be

received from the proceeds of such securities.

The cost of each specific source of finance is calculated according to the prevail-

ing market price.

But, the assignment of the weight on the basic of market value is operationally inconvenient as

the market value of securities may frequently fluctuate. Moreover, sometimes, no market value is

available for the particular type of security, specially in case of retained earnings can indirectly

be estimated by Gitman’s method. According to him, retained earnings are treated as equity

capital for calculating cost of specific sources of funds. The market value of equity share may be

considered as the combined market value of both equity shares and retained earnings or

individual market value (equity shares and retained earnings) may also be determined by

allocating each of percentage share of the total market value to their respective percentage share

of the total values.

For example:- the capital structure of a company consists of 40,000 equity shares of Rs. 10 each

ad retained earnings of Rs. 1,00,000. if the market price of company’s equity share is Rs. 18,

65

than total market value of equity shares and retained earnings would be Rs. 7,20,000 (40,000*

18) which can be allocated between equity capital and retained earnings as follows-

Market Value of Equity Capital = 7,20,000*4,00,000/5,00,000

=Rs. 5,76,000.

Market Value of Retained Earnings= 7,20,000*1,00,000/5,00,000

=Rs. 1,44,000.

2. Computation of Specific Cost of Each Source :

After assigning the weight; specific costs of each source of capital, as explained earlier, are to be

calculated. In financial decisions, all costs are ‘after tax’ costs. Therefore, if any source has

‘before tax’ cost, it has to be converted in to ‘after tax’ cost.

3. Computation of Weighted Cost of Capital :

After ascertaining the weights and cost of each source of capital, the weighted average cost is

calculated by multiplying the cost of each source by its appropriate weights and weighted cost of

all the sources is added. This total of weighted costs is the weighted average cost of capital. The

following formula may be used for this purpose :

Kw = ∑XW/∑W

Here; Kw = Weighted average cost of capital

X = After tax cost of different sources of capital

W = Weights assigned to a particular source of capital

66

Example : Following information is available with regard to the capital structure of ABC

Limited :

Sources of Funds Amount(Rs.) After tax cost of Capital

E.S. Capital 3,50,000 .12

Retained Earning 2,00,000 .10

P.S. Capital 1,50,000 .13

Debentures 3,00,000 .09

You are required to calculate the weighted average cost of capital.

Computation of Weighted Average Cost of Capital

Source

(1)

Amount

Rs.

(2)

Weights

(3)

After tax

Cost

(4)

Weighted

Cost

(5)= (3) * (4)

E.S. Capital 3,50,000 .35 .12 .0420

Retained Earning 2,00,000 .20 .10 .0200

P.S. Capital 1,50,000 .10 .13 .0195

Debentures 3,00,000 .09 .09 .0270

Total 10,00,000 1.00 .1085

Weighted Average Cost of Capital (WACC) .10850 or 10.85%

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CALCULATION OF COST OF CAPITAL OF SHREE

CEMENT LTD.

Cost of Debt Capital:

For the year 2009-10:

Total Debt Capital = Term loan from Banks + Debts

= 131570.37+30000 = 161570.37 lacs

Total Interest Paid = 13065.36 lacs

Tax Rate = 30%

Interest Expense of the company

Kd (before tax) = -------------------------------------------- X 100

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Total Debt

Kd (before tax) = 13065.36

................................................. X 100

161570.37

= 8.08 %

Kd (after tax) = Interest Rate Before Tax – Tax Rate ( 30%.)

Kd (after tax) = 8.08% - 30% = 5.65 %

For the year 2008-09:


= 105716.94+000 = 105716.94 lacs

Total Interest Paid = 9355.94

Tax Rate = 30%

Interest Expense of the company

Kd (before tax) = -------------------------------------------- X 100

Total Debt

9355.94

Kd (before tax) = ---------------------- X 100

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105716.94

= 8.85 %

Kd (after tax) = Interest Rate Before Tax – Tax Rate ( 30%.)

Kd (after tax) = 8.85% - 30% = 6.20 %

For the year 2007-08


= 112573.18+800 = 113373.18 lacs

Total Interest Paid = 9636.72 lacs

Tax Rate = 30%

9636.72

Kd (before tax) = ---------------------- X 100

113373.18

= 8.50%

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Kd (after tax) = 8.50% - 30% = 5.95%

For the year 2006-07


= 83427.02+1400= 84827.02lacs

Total Interest Paid = 6573.02lacs

Tax Rate = 30%

6573.02

Kd (before tax) = ---------------------- X 100

84827.02

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= 7.25%

Kd (after tax) = 7.25% - 30% = 5.42%

COMPARATIVE CALCULATION OF Kd FOR FOUR YEAR

Particular 2009-10 2008-09 2007-08 2006-07

Total Debts (Term loan from

Bank+ Debts)

131570.37+

30000

=161570.37

105716.94+

000

=105716.94

112573.18+

800

=113373.18

83427.02+

1400

=84824.02

Total Interest paid 13065.36 9355.94 9636.72 6573.86

Interest Rate (Before Tax) 8.08% 8.85% 8.50% 7.75%

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Interest Rate (After Tax)= Interest

Rate Before Tax – Tax Rate 30%.

5.65% 6.20% 5.95% 5.42%

COST OF EQUITY CAPITAL:

EQUITY SHARE CAPITAL

Particular 2009-10 2008-09 2007-08 2006-07

No. of Shares (In lacs) 348.37 348.37 348.37 348.73

DPS Given 13 10 8 6

Market Price (at the end of

March)

2300.05 710.50 1079.40 921.85

Earning per equity share 194.07 165.91 74.74 50.81

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of rs. 10(in Rs.)

Final dividend on equity

share (in lacs)

4528.84 3483.72 2786.98 Not given

Market Capitalisation (in

Lacs)

801268.41 247516.88 376033.01 321146.96

1. Dividend yield plus growth in dividend method:-

Ke = DPS\mP*100 + G

Dps = Current cash dividend per share = 13Rs.

Mp = Current market price per share = 2300.05 Rs.

G = Growth rate = 10%

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Ke = -------------------- X 100 + 10%

2300.05

= 10.56%

2. Earning yield method:-

Ke= EPS\mp*100

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Eps = earning per share = 194.07 Rs.

Mp = Market prise = 2300.05 Rs.

194.07

Ke = -------------------- X 100

2300.05

= 8.43%

3. Dividend per share method:-

Ke = Proposed final dividend on Equity Share / No. of Equity Share

Final dividend on Equity Share = 4528.84 Lacs

No. of Equity Share = 348.37 Lacs

4528.84

Ke = -------------------- = 13

348.37

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COST OF EQUITY SHARE CAPITAL (KE)

Particular 2008-09

Dividend Per share method 13

Earning Yeild Method 8.43

Dividend yield plus growth method 10.56

WEIGHTED AVERAGE COST OF CAPITAL (WACC)

WACC = (We * Ke) + (Wd * Kd)

Where………... We = Weight of equity

Wd = Weight of Debt.

Ke = Cost of Equity Share capital

Kd = Cost of Debt. capital

WACC = ( 0.8322 * 10.56) +( 0.1678 *05.65 ) = 9.74%

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WACC OF SHREE CEMENT LIMITED (2008-2009)

MERITS OF WEIGHTED AVERAGE COST OF CAPITAL

The WACC is widely used approach in determining the required return on a firm’s

investments. It offers a number of advantages including the followings-

1. Straight forward and logical : It is the straightforward and logical approach to a diffi-

cult problem. It depicts the overall cost of capital as the some of the cost of the individual com-

ponents of the capital structure. It employs a direct and reasonable methodology and is easily cal-

culated and understood.

2. Responsiveness to Changing Condition : Since, it is based upon individual debt and eq-

uity components, the weighted average cost of capital reflects each element in the capital struc-

ture. Small changes in the capital structure of the firm will be noted by small changes in overall

cost of capital of the firm.

3. Accurate when Profits are Normal : During the period of normal profits, the weighted

average cost of capital is more accurate as a cut-off rate in selecting the capital budgeting pro-

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Source

(1)

Amount

Rs.

(2)

Weights

(3)

After tax

Cost

(4)

Weighted

Cost

(5)= (3) * (4)

E.S. Capital 801268.41 .8322 10.56 8.79

Debentures 161570.37 .1678 05.65 0.95

Total 962838.78 1.00 9.74

Weighted Average Cost of Capital (WACC) 9.74%

posals. It is because the weighted average cost recognises the relatively low debt cost and the

need to continue to achieve the higher return on the equity financed assets.

4. Ideal Creation for Capital Expenditure Proposals : With the help of weighted average

cost of capital, the finance manager decides the cut-off rate for taking decisions relating to capi-

tal expenditure proposals. This cut-off rate determines the miimum limit for accepting an invest-

ment proposal. If an investment proposal is accepted below this limit, the firm incur a loss.

Therefore, this cut-off rate is always decided above the weighted average cost of capital.

LIMITATION OF WEIGHTED AVERAGE COST OF CAPITAL

The weighted Average cost approach also has some weaknesses, important among them are

as follows :

1. Unsuitable in case of Excessive Low-cost Debts : Short term loan can represent an im-

portant sources of fund for firm experiencing financial difficulties. When a firm relies on Zero

cost (in the form of payables) or low cost short term debt, the inclusion of such debts in the cal-

culation of cost of capital will result in a low WACC. If the firm accepts low-return projects on

the basic of this low WACC, the firm will be in a high financing risk.

2. Unsuitable in Case of Low Profits : If a firm is experiencing a period of low profits,

not earning profit as compared to other firms in the industry, WACC will be inaccurate and of

limited value.

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3. Difficulty in Assigning Weights : The main difficulty in calculating the WACC is to as-

sign weight to different components of capital structure. Normally, there are two type of weights-

(i) book value weights and (ii) market value weight. These two type of weights give different re-

sults. Hence, the problem is which type of weight should be assigned. Though, market value is

more appropriate than book value, but the market value of each component of capital of a com-

pany is not readily available. When the securities of the company are unlisted, the problem be-

comes more intricate.

4. Selection of Capital Structure : The selection of capital structure to be used for deter-

mining the WACC is also not easy job. Three types of capital structure are there i.e. current capi -

tal structure, marginal capital structure and optimal capital structure. Which of these capital

structure be selected. Generally, current capital structure is regarded as the optimal structure, but

it is not always correct.

Research

Methodology

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Research Methodology

The research methodology was subdivided and performed in the following method-

Analyzing relevant figures and date for the last financial years.

Analyzing the future outlook of the companies and its expansion plan.

Study of the complete process of the uses of Cost of Capital using literature and

discussing with the organizational guide.

Connection of the data regarding the use of Cost of Capital and financial policies

for Shree Cement.

On the basis of the data collected, necessary suggestions regarding the financial

structure are given.

DATA SOURCNG

While performing this project both Secondary Data sources were use.

1 Secondary Data:-

Major source of data for the project were the pass years’ financial statement

It included information provided by the company workers. I adopted a holistic approach

and toiled to collect the information about the company other than Shree Cement through

secondary sources such as internet, newspaper, magazines, papers , online data basis ect..

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swot

analysis

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swot analysis

Trade and Non-Trade NetworksThere are two types of Networks: Trade and Non-tradea) Non-trade Network

A) Non trade network Non- Trade Network

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for govt infrastructure buildingGovt. Housing ProjectsRailwaysAirportsCement RoadsBridgesDamsCanals

These are all bulk requirements

Govt. Non-trade Private Non-trade

- for Group housing / retail housing

- Contractor’s projects on be-half of govt.

- Any industrial projects taken up by the private sector like bridges, roads etc.

B) Trade Network

Company Handling Agent Stockiest Retailers

Consumers

SWOT ANALYSIS

Strength and weaknesses are essentially internal to the organization and relate to the matterConcerning resources, programmes and organization in key areas such as• Sales• Marketing• Capacity• Manufacturing cost etc

Opportunity and Threat are external to the organization and can exist or develop in thefollowing areas• Size & Segmentation• Growth pattern and maturity• International dimensions• Relative attractive of segments• New Technologies etc

STRENGTH

Company is established in Beawar where most of the land is rocky and material is suitable for the production of cement, thus it is closely bound to the resources.

Specific chemical composition which makes it co erosion free and also have very Good chemical recovery efficiency.

Company has its own electricity production unit thus need not to depend on the Availability of power n dependency on electricity department.

Well transport facility; it has its own railway track. Leading brand in north India. Thus people give preference to the brand. Maintain a very good customer loyalty and relationship. A very superior production quality thus customer is always satisfied.

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• Upper level of management is too skillful.

Weakness

• Poor access of distribution.• Very less advertising thus in other part of country it’s not as popular.• Technical knowledge is less at lower level of employee, which is draw back for Achieving maxi-

mum profit.• It’s difficult for them to change to an alternate line o production with existing Machinery.

Opportunities

• Changing customer taste, thus they may get the market from the switchers.• Liberalization of geographic works, thus they can enter into different market.• Huge land available for expansion of business in future.• Govt. is planning for betterment on infra structure thus there will be huge demand for cement.• Booming real estate sector.• Good relation with bankers thus for expansion of business they need not to look too far.

Threats

• Changing customer taste, any time they may switch to other.• Advancement in technology.• Entry of new player.• Few major players are situated near the main plant thus market share is difficult to Increase.• Change in Govt. policy as they may increase the tax.• Non availability on raw material.• Labor and higher technical personnel may switch to another plants.

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FINDINGS & CONCLUSIONS

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FINDINGS & CONCLUSIONS

Learning is a never ending process which continues from birth of human being to his/her death. It can also be done by reading book and through training and work. Spending 45 days in SHRRE CEMENT LTD. was good learning experience for me. After completing the organization study I come to know that academic learning is different and working in organization and learning is different. After spending such precious time in an organization my major finding in that particular organization are as follows: Firstly, organization culture of Shree Cement is formal, where every person cannot directly meet to High authority with out any systematic way which I considered was good because it encourages employees at work. Secondly, organization structure of Shree Cement is well formatted in which each and every department plays important role Thirdly, in the organisation structure is divided into to 4 part one is in Finance, Marketing, Operation & Quality, Human and Resources These all departments are

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SUGGESTION &

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RECOMMENDATIONS

SUGGESTION & RECOMMENDATIONS

➢ Advertising strategies should be revised. More focus should be given on publicity andawareness among customer should be there.

➢ A price of shree Cement is much higher than other competitor’s brands and thislead to very less margin of profit for retailers. To prevent this type of problemcompany should provide more margins of profit & incentives to defer it.

➢ The main & lucrative factor may for shree cement is contracted , relation will createa smooth flow of sales for shree cement. So they should make more frequent incontractor’s meeting.

➢ We often see that retailers would like to sale only that product in which he gains moreprofit, so we should give a good margin of profit to retailer.

➢ In sales promotion activity, we should focus on counter meeting, contractor’s meeting& retailer meeting, in which we can give some gifts and refreshments to contractor,dealer and retailers.

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➢ They should offer POP material and other incentives to push the confidence in shreecement dealers and contractor.

➢ Literature can be provided to stockiest and retailers. This written material will alsohelp them to advertise and promote the product.

➢ The major problem faced by the retailers is great transparency in prices so companyshould make a policy for stability in prices at every stockiest in jaipur city.

➢ Company should also provide more technical services, so they can visit every site &solve the customer’s problem.

Learning’s:

Practical insights into the life and work in a corporate.

How to apply the management learning and soft skills while working at the coal-

face.

How to approach companies with a proposal.

Interacting with various institutes from IT retailers to B-schools to companies.

Various details on deal negotiation and closures.

Exposure to the fierce competition and the struggle, where only the fittest sur-

vive.

How to remain patient and composed in the face of anxiety and pressure.

Accepting negative feedback and listening to ‗NO‘ but still finding a way out

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Bibliography

Bibliography

1) Shree Cements annual reports 2006-07, 07-08,08-09,09-2010,

2) www.shreecementltd.com

3) ASSOCHAM Report on Cement Industry 2007

4) www.cseindia.org/programme/industry/cement_rating.htm

5) www.worldcement.com

6) international_cement_industry.htm

7) Fundament of Financial management by Brigham & Huston.

8) Analysis Financial Management by Robert C. Higgins

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http://www.cseindia.org/programme/industry/cement_rating.htm

9) Financial Reports of ACC ltd, Grasim Industries Ltd., Gujarat Ambuja Cement Ltd. and

India Cement Ltd.

10) Quarterly Performance Analysis of Companies, India Cement Industry: Cygnus,

Business Consulting and Research.

11) Prowess Online Database

12) www.cmaindia.org

13) http://www.wikipedia.com

14) http://www.investopedia.com

15) http://www.moneypore.com

16) http://www.moneycontrol.com

17) www.indiancementindustry.com

18) Times of India (News Paper)

19) Economic times (News paper)

20) Financial management by Ravi M Kishor (Book)

21) Financial management by M. Pandey (Book)

22) Financial management by M R Agarwal(Book)

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c p Sankhla Cost of Capital

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