PROJECT REPORT

ON

FINANCIAL ANALYSIS OF CEMENT INDUSTRY

Under The Guidance Of

Dr. ANUBHA SHRIVASTAVA

Submitted by:

SHIKHA GUPTA (49)

ACHIN CHAUDHARY (26)

VANSHIKA CHAUDHARY (19)

GAURAV AGARWAL (29)

SECTION-D

MBA(Gen.)

ACKNOWLEDGEMENT

As a part of our curriculum for Accounting for Managers, we had to make a project

on the topic Financial Analysis of Cement Industry, to enhance our knowledge

about accounting in cement industry. With the completion of this project, we have

developed a better understanding of the subject and have learnt some new facts about

the field.

However, this project would not have reached successful completion had it not been for

the able guidance of our project guide, Mrs. Anubha Srivastava. We would also take

this opportunity to extend our gratitude to all those who have been a part of this

enlightening project in whatever capacity and thank them for their contribution in

terms of both, time and knowledge.

CEMENT INDUSTRY

INTRODUCTION:

Cement Industry originated in India when the first plant commenced production in 1914 at Porbandar, Gujarat. The industry has since been growing at a steady pace, but in the initial stage, particularly during the period before Independence, the growth had been very slow. Since indigenous production was not sufficient to meet the entire domestic demand, the Government had to control its price and distribution statutorily. Large quantities of cement had to be imported for meeting the deficit. The industry was partially decontrolled in 1982 and this gave impetus to its pace of growth. Installed capacity increased to more than double from 27 million tons in 1980-81to 62 million tons in 1989-90.

The cement industry responded positively to liberalization policy and the Government decontrolled the industry fully on 1st March 1989. From 1991 onwards cement industry got the status of a priority industry in schedule III of the industry policy statement, which made it eligible for automatic approval for foreign investment up to 51% and also for technical collaboration on normal terms of payment of royalty.

After the globalization and liberalization of Indian economy, the cement industry has been growing rapidly at an average rate of 9 per cent. The country is now the second largest producer of cement in the world next only to China. Additionally, in the last two decades, the industry has undergone rapid technological up gradation and growth, and now, some of the cement plants in India are comparable to the world’s best operating plants in all respects.

Till a few years ago India was importing cement from other countries, as the production could not meet the demand for the whole country. Now the tables have turned as India has started exporting large quantities of cement and clinker to Bangladesh, Nepal, Sri Lanka, Maldives, Mauritius, Africa, Seychelles, Burma, UAE, and Singapore etc.

India is today the second largest producer of cement in world.95 % is consumed domestically and only 5% is exported. Demand is growing at more than 10 % per annum. More than 90 % of production comes from large cement plants. There are a total of 146 large and more than 350 small cement manufacturing units in the country.

More than 80% of the cement manufacturing units use modern environment friendly “dry” process.

In the cement industry there are two sectors – one consisting of large plants and the other consisting of mini cement plants. A factory with an installed capacity exceeding 2,97,000 tones per annum (900 tons per day) is a large plant and with capacity up to and including 2, 97,000 tons is a mini cement plant.

Since mini cement plants are scattered all over the country with a number of associations representing different types of processes, sizes etc. and some of them are even tiny units, it has not been possible to obtain correct data of this sector.

OVERVIEW OF THE PERFORMANCE OF THE CEMENT SECTOR:

The Indian cement Industry not only ranks second in the production of cement in the world but also produces quality cement, which meets global standards. However, the industry faces a number of constraints in terms of high cost of power, high railway tariff; high incidence of state and central levies and duties; lack of private and public investment in infrastructure projects; poor quality coal and inadequate growth of related infrastructure like sea and rail transport, ports and

bulk terminals. In order to utilize excess capacity available with the cement industry, the government has identified the following thrust areas for increasing demand for cement:

• Housing development programmers and Promotion of concrete highways and roads.

• Use of ready-mix concrete in large infrastructure projects.• Construction of concrete roads in rural areas under Prime Ministers Gram

Sadak Yojana.

BUDGET PROVISIONS:

Some of the provisions in the budget that could have a direct and indirect bearing on the cement sector are as follows

• In order to provide incremental lending to the infrastructure sector, Indian Infrastructure Finance Company (IIFCL) will evolve a takeout financing scheme in consultation with banks. IIFCL will refinance 60% of commercial bank loans for PPP projects in critical sectors over the next 15 to 18 months. IIFCL and Banks are now in a position to support projects involving total investment of Rs 100,000 crore.

• Allocation under Jawaharlal Nehru National Urban Renewal Mission (JNNURM) was stepped up by 87% to Rs 12887 crore in 2009‐10 compared to 2008‐09.

• Allocation for housing and provision of basic amenities to urban poor enhanced to Rs 3,973 crore in 2009‐10. This includes provision for Rajiv Awas Yojana (RAY), a new scheme announced.

• Allocation for Bharat Nirman increased 45% in 2009‐10.• Allocations under Pradhan Mantri Gram Sadak Yojana (PMGSY) increased

59% over B.E. 2008‐09 to Rs 12,000 crore in B.E. 2009‐10.• Under Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), allocation

increased by 27% to Rs 7,000 crore.• Allocation under Indira Awaas Yojana (IAY) increased 63% to Rs 8,800

crore in 2009‐10. Allocation of Rs 2,000 crore made for Rural Housing Fund (RHF) in National Housing Bank (NHB) to boost the resource base of NHB for refinance operations in rural housing sector.

SWOT ANALYSISSTRENGTHS-High Entry BarriersCement being a capital-intensive industry creates high entry barriers for the new players. Moreover, the creation of distribution channel, acquisition of limestone reserves etc makes entry of new players extremely difficult.WEAKNESS-Dependence on GovernmentIndustry is highly dependent on government authorities for power supply. Cement industry has been suffering from frequent power cuts.Increasing dependence on imported coalOver the years, there has been deterioration in the quality of coal. In particular, the ash content has increased implying lower calorific values for coal, and improper and inefficient burning, etc.This has increased the dependence of cement industry on imported coal. Poor port infrastructure and high volatility in exchange rates creates concerns.OPPORTUNITIES-Growth from newer products - Ready to mix concreteRMC is a value-added semi-finished product that results in a superior quality concrete.Various advantages of RMC are quality control, eco friendly, greater speed of construction, correct proportion of ingredients, lower wastage, reduced manpower requirement etc. RMC is a high margin product as compared to site mixed concrete (SMC).In India, RMC accounting for meager 5% of cement production that is converted to RMC as against 70% in developed countries.Though India is the second largest cement manufacturer, it is among the lowest cement consuming countries. In India per capita cement consumption is 122 kg, which is far below the world average of approximately 320 kg. With the growth of economy, per capita cement consumption rises at brisk pace. It indicates there is a potential for growth in cement industry.THREATS-Rising input costRising interest rateRising interest rates may impact housing demand and thereby affecting cement demand and also capital expenditure.Substitutes

Bitumen and Engineering plastic have emerged as substitute of cement in road and building construction.

TYPES OF CEMENT IN INDIA:

The types of cement in India have increased over the years with the advancement in research, development, and technology. The Indian cement industry is witnessing a boom as a result of which the production of different kinds of cement in India has also increased. By a fair estimate, there are around 11 different types of cement that are being produced in India. The production of all these cement varieties is according to the specifications of the BIS.

Some of the various types of cement produced in India are:• Clinker Cement• Ordinary Portland Cement• Portland Pozzolana Cement(PPC)• Portland Blast Furnace Slag Cement• Oil Well Cement• Rapid Hardening Portland Cement(RHPC)• Sulphate Resisting Portland Cement(SRPC)• White Cement

In India, the different types of cement are manufactured using dry, semi-dry, and wet processes. In the production of Clinker Cement, a lot of energy is required. It is produced by using materials such as limestone, iron oxides, aluminum, and silicon oxides. Among the different kinds of Cement produced in India, PortlandPozzolana Cement, Ordinary Portland cement, and Portland Blast Furnace SlagCement is the most important because they account for around 99% of the total cement production in India.The Portland variety of cement is the most common among the types of cement in India and is produced from gypsum and clinker. The Ordinary Portland cement and Portland Blast Furnace Slag Cement are used mostly in the construction of airports and bridges. The production of white cement in the country is very less for it is very expensive in comparison to grey cement. In India, while cement is usually utilized for decorative purposes, marble foundation work, and to fill up the gaps between tiles of ceramic and marble.The different types of cement in India have registered an increase in production in the last few years. Efforts must be made by the cement industry in India and the

government of India to ensure that the cement industry continues innovation and research to come up with more and more varieties in the near future.

MANUFACTURING PROCESS:

Mining - Limestone is extracted from own mines, which are situated approx. 4 km. away from plant. The mining of limestone is done in such a way so as to get 78% to 82% pure limestone.Crushing - The extracted limestone is then transported to Jai crusher by dumpers. The limestone is crushed into small pieces of approx. 16 to 25 mm. sizes.Grinding - The crushed limestone along with latrine is feed into the Raw Mill for grinding. The ground material is called Raw Meal. It is than sent to the CF Silo.Blending - In the Silo the Raw Material is blended to make the mixture uniform. From here the material is sent to the pre heaters.Burning - In pre heaters, the mixture is heated at various temperatures at various stages. This preheated material is now fed into the kiln where it is heated at the temperature of 1400- 1500 degree where calcinations take place. Coal is used in the kiln to maintain the temperature and finally clinker emerges out of it. This clinker is transported through a conveyor into a storage Silo from where it taken out through vibratory feeders and fed into the open circuit cement grinding mill hoppers.Grinding - The grinding of clinker with gypsum is done in cement mill. It is basically have where the grade of cement is controlled gypsum is added to increase the setting time of the cement. Then cement is than stored for some time.Storage and packing - The cement is than conveyed to different cement storage silos according to their grades and from silos it is packed in pp bags by using electronic packaging machines.

INTRODUCTION TO FIANCIAL RATIOSLIQUIDITY RATIOS

Liquidity implies a firm’s ability to pay its debts in the short run. If a firm has sufficient net working capital, it is assumed to have enough liquidity. The current ratio and the quick ratio and Absolute Liquid ratio are the three ratios, which directly measure liquidity.

Current Ratio: It measures the ability of the enterprise to meet its current obligations. It gives an idea about the short term liquidity position of the firm.

CURRENT RATIO = CURRENT ASSETS CURRENT LIABILITIES

Quick Ratio or Liquid Ratio: In current ratio, the composition of current assets is not considered. A firm which has large amount of cash and accounts receivable is more liquid than a firm with high amount of inventories in its current asset. Thus we take quick ratio which shows the firm‘s ability to pay its liabilities without relying on sale and recovery of its inventory.

QUICK RATIO = CURRENT ASSETS – INVENTORY – PREPAID EXPENSES CURRENT LIABILITIES

Absolute Liquid Ratio: It is similar to liquid ratio; here absolute liquid assets are calculated by adding both cash and bank balance and investments.

ABSOLUTE LIQUID RATIO =ABSOLUTE LIQUID ASSETS CURRENT LIABILITIESPROFITABILITY RATIOS:

These ratios measure the efficiency of the firm’s activities and ability to generate profits.

Gross Profit Margin: This ratio is used as an indicator of the efficiency of the production operation and the relation between production costs and selling price.

 Indicates of how much profit is earned on your products without consideration of selling and administration costs.

GROSS PROFIT MARGIN= GROSS PROFIT NET SALES

Net Profit Margin: It measures the overall efficiency of production, administration, selling, financing, pricing and tax management.

NET PROFIT MARGIN= NET PROFIT NET SALES

Operating Profit Margin: This ratio indicates how much of income is generated with respect to sales.

Operating Income =Profit before Interest, Depreciation and Tax (PBIDT)

OPERATING PROFIT MARGIN= OPERATING PROFIT NET SALES

Return on Equity (ROE): It measures the corporation's profitability that reveals how much profit a company generates with the money shareholders have invested.

ROE = PROFIT AFTER TAX (PAT) SHAREHOLDER‘S EQUITY

The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Return on Capital employed (ROCE): It measures the efficiency and profitability of firm’s capital investments.

ROCE = PBIDT CAPITAL EMPLOYED ROCE should be always greater than company borrows. Otherwise increase in borrowings will result in decrease in Earnings per Share.

TURNOVER RATIO: It gives the speed of conversion of current assets (liquidity) into cash.

Inventory Turnover Ratio: It measures Number of times that you turn over or sell inventory during the year. High inventory turnover is an indicator of good inventory management. But a high ratio can also mean there is a shortage of inventory. A low turnover may indicate overstocking, or obsolete inventory.

Inventory Turnover Ratio = SALES INVENTORYDays in Inventory: It measures the average number of days it will take to sell your inventory.

Days in Inventory = NUMBER OF DAYS INVENTORY TURNOVER RATIO

Debtors Turnover Ratio: It measures the how many times credit sales have been created and collected.

Debtors Turnover Ratio= NET SALES DEBTORS Debtors Collection Period: It measures the length of time your trade payables are outstanding before they are paid.

Debtors Collection Period= NUMBER OF DAYS DEBTORS TURNOVER RATIO

Fixed Asset Turnover Ratio: It indicates the ability of the firm to use fixed assets to generate sales for the firm.

Fixed Asset Turnover Ratio = NET SALES FIXED ASSETS

LEVERAGE RATIO: These are of two types:

1. Capital Structure Ratio- these are based on proportions of debt and equity in the capital structure of the firm. 2. Coverage Ratio- these are derived from the relationships between debt servicing commitments and sources of funds for meeting this obligation.

Capital Structure Ratio: Debt Equity ratio: It indicates the relative contributions of creditors and owners. Debt equity ratio = DEBT EQUITY

Coverage Ratio:

Interest Coverage Ratio: This ratio tells us how many times the firm can cover or meet the interest payments associated with debt.

Interest coverage ratio= EBIT INTEREST

EQUITY – RELATED RATIOS It measures the shareholders return and value. Earnings per Share (EPS): It gives the performance of the firm.

EPS = NET PROFIT NUMBER OF EQUITY SHARES

Price Earnings Ratio: It is the number of times the market price of a share is discounted vis-à-vis the EPS of the firm. It is the most popular financial ratio in the stock market for secondary market investors as it indicates whether the stock is undervalued or overvalued. This method is useful as long as the firm is a viable business entity and its real value is reflected in its profits.

P/E RATIO = MARKET PRICE OF SHARE EARNING PRICE OF SHARE (EPS)

Dividend per Share (DPS): Dividend paid for each Equity Share holder.

DPS= DIVIDEND PAID NUMBER OF EQUITY SHARES

Dividend payout ratio: It indicates ratio of amount of Divided paid from Net profit as Dividend to equity share holders. Dividend paid include the Dividend Tax

Dividend payout ratio= DIVIDEND PAID (INCLUDING DIVIDEND TAX) NET PROFIT

Net worth per Share: It indicates the Book Value of each Equity share of the company.

Net Worth per Share= NET WORTH NUMBER OF EQUITY SHARES

MAJOR PLAYER’S OF THE INDUSTRY

This section provides the overview and financial information on prominent players in the Indian cement sector like

• Associated Cement Company Ltd. (ACC),• Grasim Industries Ltd.• Ambuja Cements Ltd.• UltraTech Cement Ltd.• J.K. Cement Limited.• Madras Cements Ltd.• Jaypee Group Ltd.• Binani Cement Ltd.• Prism Cement Ltd.• India Cements Ltd.

ULTRATECH CEMENT LTD

UltraTech Cement Limited was incorporated as a public limited company on August 2000, as “L&T Cement Limited” a 100% Subsidiary of Larsen & Toubro Limited. The name of the Company was changed to UltraTech Cement Co. Limited with effect from 19th November 2003 after the Aditya Birla group owned Grasim Industries acquired it. The name of the company was again changed to UltraTech Cement Limited with effect from 11th October 2004.UltraTech Cement Limited, a Grasim subsidiary was incorporated in 24th August 2000 as L&T Cement Limited, has an annual capacity of 17 million tonnes.

PRODUCTS:

It manufactures and markets Ordinary Portland Cement, Portland Blast Furnace Slag Cement and Portland Pozzolana Cement and Ready Mix Concrete.

FINANCIAL HIGHLIGHTS:

Domestic sales volume rose by 13% over FY09, though total volume was up by 11%.Net Turnover rose by 10%, attributable to higher domestic sales volume. Exports and Ready Mix Concrete (RMC), each, contributed to around 7% of Company’s net turnover.Interest cost decreased from Rs. 126 crores in FY09 to Rs. 118 crores in FY10 due to repayment of long term debts to the tune of Rs. 300 crores.Net profit for FY10 stood at Rs. 1,093 crores as compared to Rs. 977 crores in FY09.

BALANCE SHEET AND P/L ACCOUNT OF ULTRATECH CEMENT

FINANCIAL RATIOSYear Mar’15 Mar’14 Mar’13 Mar’12 Mar’11

Current Ratio 1.13 1.09 1.02 1.27 1.39Liquid Ratio 0.50 0.54 0.54 0.70 0.71Absolute Liquid Ratio 1.35 0.91 0.21 0.76 0.42Operating Profit % 30 28 33 30 18Gross Profit % 28 26 32 28 15Net Profit % 16 15 18 16 7Return on Equity (ROE) % 24 27 37 44 22Return on Capital employed (ROCE) % 37 31 36 41 19Net Working Capital(in Crores) 173.3 118.89 25.33 204.99 216.47Inventory Turnover Ratio 8.58 9.22 9.04 11.33 8.69Fixed Asset Turnover Ratio 1.43 1.38 2.20 1.95 1.30Debtors Turnover Ratio 32.66 32.91 25.43 26.76 19.12Debtors Collection Period 11.17 11.09 14.35 13.64 19.09Debt equity ratio 0.35 0.59 0.65 0.90 1.40Interest coverage ratio 14.52 14.41 24.14 17.03 6.59EPS(in Rs) 87.82 78.48 80.94 62.84 18.47P/E RATIO 13.14 7.01 9.65 12.29 36.98DPS(in Rs) 6.00 5.00 5.00 4.00 1.75Dividend payout % 8 7 7 7 11Net Worth per Share(in Rs) 370.21 289.36 216.65 141.69 83.46

IMPORTANT FINDINGS

Optimum ratio to be maintained is 2:1.The Company should have twice the current assets to match its current obligations.

Liquid ratio includes only liquid asset which can be readily converted to meet current obligations of the company. Ratio should be maintained optimum. It is more precise than current ratio it clearly indicates the solvency position if the company. Ultratech cement have a liquid ratio of 0.50.

Operating profit % highlights the operational efficiency of the firm. Operating profit is Profit before Interest, Depreciation and Tax (PBIDT). Higher the value satisfies the shareholders of the company. It has operating profit of 30%.

Net Profit indicates the equity earning of the company. Higher the value satisfies the shareholders of the company. Madras cements Ltd has Net Profit % of 15 though having high Operating Profit % is due to high Interest, Depreciation cost. It has a net profit of 16%.

Return to Equity higher makes the share holders of the company happy and attracts more retail and institutional investors.It has a return to equity of 24.

Debt equity indicates the capital structure of company. Debt Equity ratio must be maintained at optimum value. It has a debt equity of 0.35.

Higher the ratio shows the better the financial position the firm. It clearly shows the interest paying ability of the firm.

EPS is amount earned by one equity share. Higher EPS makes it highly attractive for shareholders. Ultratech Ltd has highest EPS . it has a EPS of Rs. 87.82.

Higher the P/E ratio indicate stock is valued richly this is could be due to market expectations.  P/E ratio is a "fundamental" measure used by long-term investors. Industry average P/E ratio is around 9. It has P/E of 13.14.

Dividend per Share is dividend earned by each share.DPS depends upon Dividend allocated for the year by management board. It has a DPS of 6.00.

Percentage of Net Profit to be distributed as dividend to Equity shareholders while the rest of the net profit is added to reserves and surplus. It has a net profit of 320.21.

CONCLUSION:

The cement industry is likely to record an annual growth of over 10% in the coming years on the back of higher domestic demand. Domestic cement demand is expected to remain strong, given the revival in the housing sector and continued Government spending on infrastructure. The cement industry in spite of facing many problems is utilizing the capacity of 80 % average to meet the demand.The cement industry is a cyclical commodity industry where the profit and return on capital is dependent on the demand cycle picture. From the mid 90’s to 2002-2003 periods, there was an excess of supply and hence prices were depressed. Most companies had poor to non-existent profits and accordingly the stock prices suffered. Since 2003, the demand has increased rapidly and so have the prices. Most of top players in the cement industry are able to give good consistent returns. With the Indian economy growing with strong positive signs. With increased demand projected for coming years Cement industry is expected to be in upswing. Thus prospective future outlook of cement industry makes attractive for investors.

The strong growth driver increase in cement demand due to this growth drivers, Government of India spending on infrastructure, Strong market trends and Economy in growing phase makes Cement industry very attractive in the market but with caution due to increase in raw material prices.

BIBLIOGRAPHY

www.capitalline.comwww.economywatch.comwww.ibef.orgwww.researchandmarkets.comwww.grasim.comwww.indiacementsltd.co.inwww.madrascements.comwww.gujuratambuja.comwww.ultratech.comwww.cmaindia.orgwww.jkcements.com