Capital Structure Project

8/20/2019 Capital Structure Project

1/162

A STUDY ON CAPITAL STRUCTURE

WITH REFERENCE TO ULTRATECH CEMENT LTD

A Project report submitted to Jawaharlal Nehru Technological University, Hyderabad,

in partial fulfillment of the requirements for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

By

K.RAVI KISHORE

Reg. No. 10241E0039

Under the Guidance of

D.INDIRA

Associate Professor

Department of Management Studies

Gokaraju Rangaraju Institute of Engineering & Technology

(Affiliated to Jawaharlal Technological University,

Hyderabad) Hyderabad

2010-2012


2/162

1


3/162


4/162


5/162

DECLARATION

I hereby declare that the project entitle “A STUDY ON CAPITAL STRUCTURE ” Submitted in

partial fulfillment of the requirements for award of the degree of MBA at Gokaraju

Rangaraju Institute of Engineering and Technology, affiliated to Jawaharlal Nehru

Technological University, Hyderabad, is an authentic work and has not been submitted to

any other University/Institute for award of any degree/diploma.

K.RAVI KISHORE

(10241E0039)

MBA, GRIET

HYDERABAD

4


6/162

ACKNOWLEDGEMENT

Firstly I would like to express our immense gratitude towards our institution Gokaraju Rangaraju Institute of Engineering

& Technology, which created a great platform to attain profound technical skills in the field of MBA, thereby fulfilling our

most cherished goal.

I would thank all the finance department of “ULTRATECH CEMENT LTD( ADITYA BIRLA GROUP) “. specially Mr.

RAMA KRISHNA (Asst Manager Finance), and the employees in the finance department for guiding me and helping me in

successful completion of the project

I am very much thankful to our professor Mrs. D.INDIRA (Internal Guide) madam for extending his cooperation in doing

this project.

I am also thankful to our project coordinator Mr. S. Ravindra Chary Sir for extending his cooperation in completion of

Project.

I convey my thanks to my beloved parents and my faculty who helped me directly or indirectly in bringing this project

successfully.

K.RAVI

KISHORE (10241E0039)


7/162

5

INDEX

S.No: CONTENTS PAGE NO.

CHAPTER-1 1-6

INTRODUCTION

Scope of the Study

Objectives of the Study

Methodology of the Study

Limitations of the Study

CHAPTER-2 7-26

REVIEW OF LITERATURE

CHAPTER-3 27-56

INDUSTRY PROFILE

COMPANY PROFILE

CHAPTER-4 57-88

DATA ANALYSIS AND INTERPRETATION

CHAPTER-5 89-94

FINDINGS

CONCLUSIONS

SUGGESTION

BIBLIOGRAPHY


8/162

6


9/162

CHAPTER-I

INTRODUCTION

7


10/162

CAPITAL STRUCTURE DEFINED:

The assets of a company can be financed either by increasing the owners claim or the creditors

claim. The owners claims increase when the form raises funds by issuing ordinary shares or by retaining

the earnings, the creditors’ claims increase by borrowing .The various means of financing represents the

“financial structure” of an enterprise .The financial structure of an enterprise is shown by the left hand

side (liabilities plus equity) of the balance sheet. Traditionally, short-term borrowings are excluded from

the list of methods of financing the firm’s capital expenditure, and therefore, the long term claims are

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

proportionate relationship between debt and equity .Equity includes paid-up share capital, share

premium and reserves and surplus.

The financing or capital structure decision is a significant managerial decision .It influences the

shareholders returns and risk consequently; the market value of share may be affected by the capital structure

decision. The company will have to plan its capital structure initially at the time of its promotion.

8


11/162

NEED AND IMPORTANCE OF CAPITAL STRUCTURE:

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

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

capital. Thus, the capital structure decision can affect the value of the firm either by changing the

expected earnings of the firm, but it can affect the reside earnings of the shareholders. The effect of

leverage on the cost of capital is not very clear. Conflicting opinions have been expressed on this issue.

In fact, this issue is one of the most continuous areas in the theory of finance, and perhaps more

theoretical and empirical work has been done on this subject than any other.

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

would be obtained at that combination of debt and equity that maximizes the total value of the firm or

minimizes the weighted average cost of capital. The question of the existence of optimum use of

leverage has been put very succinctly by Ezra Solomon in the following words.

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

and quality, and given a certain structure of rates in the capital markets, is there some specific degree of

financial leverage at which the market value of the firm’s securities will be higher than at other degrees

of leverage?

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

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

operating approaches.

SCOPE OF THE STUDY:

A study of the capital structure involves an examination of long term as well as short term

sources that a company taps in order to meet its requirements of finance. The scope of the study is

confined to the sources that Ultra tech cements tapped over the years under study i.e. 2007-2011.


12/162

9


13/162

OBJECTIVES OF THE STUDY:

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

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

1. To Study the capital structure of Ultra tech cements through EBIT-EPS analysis

2. Study effectiveness of financing decision on EPS and EBIT of the firm.

3. Examining the financing trends in the Ultra tech cements. For the period of 2007- 11.

4. Study debt/equity ratio of Ultra tech cements for 2007-11.

10


14/162

RESEARCH METHODOLOGY AND DATA ANALYSIS

Data relating to Ultra tech cements. Has been collected through

SECONDARY SOURCES:

• Published annual reports of the company for the year 2007-11.

PRIMARY SOURCES:

• Detailed discussions with Vice-President.

• Discussions with the Finance manager and other members of the Finance department.

DATA ANALYSIS

The collected data has been processed using the tools of

• Ratio analysis

• Graphical analysis

• Year-year analysis

These tools access in the interpretation and understanding of the Existing scenario of the Capital Structure.

11


15/162

LIMITATION OF EPS AS A FINANCING-DECISION CRITERION

EPS is one of the mostly widely used measures of the company’s performance in practice.

As a result of this, in choosing between debt and equity in practice, sometimes too much attention is paid

on EPS, which however, has serious limitations as a financing-decision criterion.

The major short coming of the EPS as a financing-decision criterion is that it does not

consider risk; it ignores variability about the expected value of EPS. The belief that investors would be

just concerned with the expected EPS is not well founded. Investors in valuing the shares of the

company consider both expected value and variability.

12


16/162

CHAPTER-II

REVIEW OF LITERATURE

13


17/162

CAPITAL STRUCTURE DEFINED:

The assets of a company can be financed either by increasing the owners claim or the creditors

claim. The owners claims increase when the form raises funds by issuing ordinary shares or by retaining

the earnings, the creditors claims increase by borrowing .The various means of financing represents the

“financial structure” of an enterprise .The financial structure of an enterprise is shown by the left hand

side (liabilities plus equity) of the balance sheet. Traditionally, short-term borrowings are excluded from

the list of methods of financing the firm’s capital expenditure, and therefore, the long term claims are

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

proportionate relationship between debt and equity .Equity includes paid-up share capital, share

premium and reserves and surplus.

The financing or capital structure decision is a significant managerial decision .It influences the

shareholders returns and risk consequently; the market value of share may be affected by the capital structure

decision. The company will have to plan its capital structure initially at the time of its promotion.

FACTORS AFFECTING THE CAPITAL STRUCTURE:

• LEVERAGE: The use of fixed charges of funds such as preference shares, debentures and term-loans

along with equity capital structure is described as financial leverage or trading on. Equity. The term

trading on equity is used because for raising debt.

• DEBT /EQUITY RATIO-Financial institutions while sanctioning long-term loans insists that companiesshould generally have a debt –equity ratio of 2:1 for medium and large scale industries and 3:1 indicates

that for every unit of equity the company has, it can raise 2 units of debt. The debt-equity ratio indicates

the relative proportions of capital contribution by creditors and shareholders.

EBIT-EPS ANALYSIS-In our research for an appropriate capital structure we need to understand how

sensitive is EPS (earnings per share) to change in EBIT (earnings before interest and taxes) under

different financing alternatives.

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

• Cost of capital

• Cash flow projections of the company

• Size of the company

• Dilution of control

• Floatation costs


18/162

14


19/162

FEATURES OF AN OPTIMAL CAPITAL STRUCTURE:

An optimal capital structure should have the following features,

1.PROFITABILITY: - The Company should make maximum use of leverages at a minimum cost.

2.FLEXIBILITY: - The capital structure should be flexible to be able to meet the changing conditions .The

company should be able to raise funds whenever the need arises and costly to continue with particular

sources.

3.CONTROL: - The capital structure should involve minimum dilution of control of the company.

4.SOLVENCY: - The use of excessive debt threatens the solvency of the company. In a high interest rate

environment, Indian companies are beginning to realize the advantage of low debt.

CAPITAL STRUCTURE AND FIRM VALUE:

Since the objective of financial management is to maximize shareholders wealth, the key issue is:

what is the relationship between capital structure and firm value? Alternatively, what is the relationship

between capital structure and cost of capital? Remember that valuation and cost of capital are inversely

related. Given a certain level of earnings, the value of the firm is maximized when the cost of capital is

minimized and vice versa.

There are different views on how capital structure influences value. Some argue that there is no

relationship what so ever between capital structure and firm value; other believe that financial leverage (i.e.,the use of debt capital) has a positive effect on firm value up to a point and negative effect thereafter; still

others contend that, other things being equal, greater the leverage, greater the value of the firm.


20/162

15


21/162

CAPITAL STRUCTURE DIAGRAM

The Capital Structure Decision Process

16


22/162

CAPITAL STRUCTURE AND PLANNING:

Capital structure refers to the mix of long-term sources of funds. Such as debentures,

long-term debt, preference share capital including reserves and surplus (i.e., retained earnings) The

board of directors or the chief financial officer (CEO) of a company should develop an appropriate

capital structure, which are most factors to the company. This can be done only when all those factors

which are relevant to the company’s capital structure decision are properly analysed and balanced. The

capital structure should be planned generally keeping in view the interests of the equity shareholders,

being the owners of the company and the providers of risk capital (equity) would be concerned about the

ways of financing a company’s operations. However, the interests of other groups, such as employees,

customers, creditors, society and government, should also be given reasonable consideration. When the

company lays down its objective in terms of the shareholder’s wealth maximization (SWM), it is

generally compatible with the interests of other groups. Thus while developing an appropriate capitalstructure for its company, the financial manager should inter alia aim at maximizing the long-term

market price per share. Theoretically, there may be a precise point or range within an industry there may

be a range of an appropriate capital structure with in which there would not be great differences in the

market value per share. One way to get an idea of this range is to observe the capital structure patterns of

companies’ vis-à-vis their market prices of shares. It may be found empirically that there are not

significant differences in the share values within a given range. The management of a company may fix

its capital structure near the top of this range in order to make maximum use of favorable leverage,

subject to other requirements such as flexibility, solvency, control and norms set by the financial

institutions, the security exchange Board of India (SEBI) and stock exchanges.


23/162

17


24/162

FEATURES OF AN APPROPRIATE CAPITAL STRUCTURE: -

The board of Director or the chief financial officer (CEO) of a company should

develop an appropriate capital structure, which is most advantageous to the company. This

can be done only when all those factors, which are relevant to the company’s capital structure

decision, are properly analyzed and balanced. The capital structure should be planned

generally keeping in view the interest of the equity shareholders and financial requirements of

the company. The equity shareholders being the shareholders of the company and the

providers of the risk capital (equity) would be concerned about the ways of financing a

company’s operation. However, the interests of the other groups, such as employees,

customer, creditors, and government, should also be given reasonable consideration. When

the company lay down its objectives in terms of the shareholders wealth maximizing (SWM),

it is generally compatible with the interest of the other groups. Thus, while developing an

appropriate capital structure for it company, the financial manager should inter alia aim at

maximizing the long-term market price per share. Theoretically there may be a precise point

of range with in which the market value per share is maximum. In practice for most

companies with in an industry there may be a range of appropriate capital structure with inwhich there would not be great differences in the market value per share. One way to get an

idea of this range is to observe the capital structure patterns of companies’ Vis-a Vis their

market prices of shares. It may be found empirically that there is no significance in the

differences in the share value with in a given range. The management of the company may fit

its capital structure near the top of its range in order to make of maximum use of favorable

leverage, subject to other requirement (SEBI) and stock exchanges.


25/162

18


26/162

A SOUND OR APPROPRIATE CAPITAL STRUCTURE SHOULD HAVE THE FOLLOWING FEATURES

1) RETURN: the capital structure of the company should be most advantageous, subject to the

other considerations; it should generate maximum returns to the shareholders without adding

additional cost to them.

2) RISK: the use of excessive debt threatens the solvency of the company. To the point debt does

not add significant risk it should be used other wise it uses should be avoided.

3) FLEXIBILITY: the capital structure should be flexibility. It should be possible to the company

adopt its capital structure and cost and delay, if warranted by a changed situation. It should

also be possible for a company to provide funds whenever needed to finance its profitable

activities.

4) CAPACITY: - The capital structure should be determined within the debt capacity of the

company and this capacity should not be exceeded. The debt capacity of the company

depends on its ability to generate future cash flows. It should have enough cash flows to pay

creditors, fixed charges and principal sum.

5) CONTROL: The capital structure should involve minimum risk of loss of control of the

company. The owner of the closely held company’s of particularly concerned about dilution

of the control.

APPROACHES TO ESTABLISH APPROPRIATE CAPITAL STRUCTURE:

The capital structure will be planned initially when a company is incorporated .The

initial capital structure should be designed very carefully. The management of the company

should set a target capital structure and the subsequent financing decision should be made

with the a view to achieve the target capital structure .The financial manager has also to deal

with an existing capital structure .The company needs funds to finance its activities

continuously. Every time when fund shave to be procured, the financial manager weighs the

pros and cons of various sources of finance and selects the most advantageous sources

keeping in the view the target capital structure. Thus, the capital structure decision is a

continues one and has to be taken whenever a firm needs additional Finances.


27/162

19


28/162

The following are the three most important approaches to decide about a firm’s capital

structure.

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

Valuation approach for determining the impact of debt on the shareholder’s value.

Cash flow approached for analyzing the firm’s ability to service debt.

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

EBIT-EPS APPROACH:

We shall emphasize some of the main conclusions here .The use of fixed cost sourcesof finance, such as debt and preference share capital to finance the assets of the company, is

know as financial leverage or trading on equity. If the assets financed with the use of debt

yield a return greater than the cost of debt, the earnings per share also increases without an

increase in the owner’s investment.

The earnings per share also increase when the preference share capital is used to acquire the

assets. But the leverage impact is more pronounced in case of debt because

1. The cost of debt is usually lower than the cost of performance share capital and

2. The interest paired on debt is tax deductible.

Because of its effect on the earnings per share, financial leverage is an

important consideration in planning the capital structure of a company. The companies with

high level of the earnings before interest and taxes (EBIT) can make profitable use of the high

degree of leverage to increase return on the shareholder’s equity. One common method of

examining the impact of leverage is to analyze the relationship between EPS and various

possible levels of EBIT under alternative methods of financing.

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

into the firm’s capital structure management .He can considered the possible fluctuations in EBIT

and examine their impact on EPS under different financial plans of the probability of earning a

rate of return on the firm’s assets less than the cost of debt is insignificant, a large


29/162

20


30/162

amount of debt can be used by the firm to increase the earning for share. This may have a

favorable effect on the market value per share. On the other hand, if the probability of earning

a rate of return on the firm’s assets less than the cost of debt is very high, the firm should

refrain from employing debt capital .it may, thus, be concluded that the greater the level of

EBIT and lower the probability of down word fluctuation, the more beneficial it is to employ

debt in the capital structure However, it should be realized that the EBIT EPS is a first step in

deciding about a firm’s capital structure .It suffers from certain limitations and doesn’t

provide unambiguous guide in determining the capital structure of a firm in practice.

RATIO ANALYSIS: -

The primary user of financial statements are evaluating part performance and

predicting future performance and both of these are facilitated by comparison. Therefore the

focus of financial analysis is always on the crucial information contained in the financial

statements. This depends on the objectives and purpose of such analysis. The purpose of

evaluating such financial statement is different form person to person depending on its

relationship. In other words even though the business unit itself and shareholders, debenture

holders, investors etc. all under take the financial analysis differs. For example, trade creditors

may be interested primarily in the liquidity of a firm because the ability of the business unit to

play their claims is best judged by means of a through analysis of its l9iquidity. The

shareholders and the potential investors may be interested in the present and the future

earnings per share, the stability of such earnings and comparison of these earnings with other

units in thee industry. Similarly the debenture holders and financial institutions lending long-

term loans maybe concerned with the cash flow ability of the business unit to pay back the

debts in the long run. The management of business unit, it contrast, looks to the financialstatements from various angles. These statements are required not only for the management’s

own evaluation and decision making but also for internal control and overall performance of

the firm. Thus the scope extent and means of any financial analysis vary as per the specific

needs of the analyst. Financial statement analysis is a part of the larger information processing

system, which forms the very basis of any “decision making” process.


31/162


32/162

The financial analyst always needs certain yardsticks to evaluate the efficiency

and performance of business unit. The one of the most frequently used yardsticks is ratio

analysis. Ratio analysis involves the use of various methods for calculating and interpreting

financial ratios to assess the performance and status of the business unit.

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

between with other variable and such ratio value is compared with standard or norms in order

to highlight the deviations made from those standards/norms. In other words, ratios are

relative figures reflecting the relationship between variables and enable the analysts to draw

conclusions regarding the financial operations.

However, it must be noted that ratio analysis merely highlights the potential areas of

concern or areas needing immediate attention but it does not come out with the conclusion as

regards causes of such deviations from the norms. For instance, ABC Ltd. Introduced the

concept of ratio analysis by calculating the variety of ratios and comparing the same with

norms based on industry averages. While comparing the inventory ratio was 22.6 as compared

to industry average turnover ratio of 11.2. However on closer sell tiny due to large variation

from the norms, it was found that the business unit’s inventory level during the year was kept

at extremely low level. This resulted in numerous production held sales and lower profits. In

other words, what was initially looking like an extremely efficient inventory management,

turned out to be a problem area with the help of ratio analysis? As a matter of caution, it must

however be added that a single ration or two cannot generally provide that necessary details

so as to analyze the overall performance of the business unit.

In order to arrive at the reasonable conclusion regarding overall performance of the

business unit, an analysis of the entire group of ratio is required. However, ration analysis

should not be considered as ultimate objective test but it may be carried further based on the

out come and revelations about the causes of variations. Some times large variations are due

to unreliability of financial data or inaccuracies contained there in therefore before taking any

decision the basis of ration analysis, their reliability must be ensured.


33/162

22


34/162

Similarly, while doing the inter-firm comparison, the variations may be due to

different technologies or degree of risk in those units or items to be examined are in fact the

comparable only. It must be mentioned here that if ratios are used to evaluate operating

performance, these should exclude extra ordinary items because there are regarded as non-

recurring items that do not reflect normal performance.

Ratio analysis is the systematic process of determining and interpreting the numerical

relationship various pairs of items derived form the financial statements of a business.

Absolute figures do not convey much tangible meaning and is not meaningful while

comparing the performance of one business with the other.

It is very important that the base (or denominator) selected for each ratio is

relevant with the numerator. The two must be such that one is closely connected and is

influenced by the other

CAPITAL STRUCTURE RATIOS

Capital structure or leverage ratios are used to analyse the long-term solvency orstability of a particular business unit. The short-term creditors are interested in current

financial position and use liquidity ratios. The long-term creditors world judge the soundness

of a business on the basis of the long-term financial strength measured in terms of its ability to

pay the interest regularly as well as repay the installment on due dates. This long-term

solvency can be judged by using leverage or structural ratios.

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

1. Ability to repay the principal when due, and

2. Regular payment of interest, there are thus two different but mutually dependent and

interrelated types of leverage ratio such as:

3. Ratios based on the relationship between borrowed funds and owner’s capital, computed

form balance sheet eg: debt-equity ratio, dividend coverage ratio, debt service coverage ratio

etc.,


35/162

23


36/162

THE CAPITAL STRUCTURE CONTROVERSY:

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

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

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

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

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

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

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

on this subject than any other.

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

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

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

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

following words.

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

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

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

will be higher than at other degrees of leverage?

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

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


37/162

24


38/162

1. Net Income Approach:

Under the net income approach (NI), the cost of debt and cost of equity are assumed to

be independent to the capital structure. The weighted average cost of capital declines and the

total value of the firm rise with increased use of leverage.

2. Net Operating Income Approach:

Under the net operating income (NOI) approach, the cost of equity is assumed to

increase linearly with average. As a result, the weighted average cost of capital remains

constant and the total value of the firm also remains constant as leverage is changed.

3. Traditional Approach:

According to this approach, the cost of capital declines and the value of the

firm increases with leverage up to a prudent debt level and after reaching the optimum point,

coverage cause the cost of capital to increase and the value of the firm to decline.

Thus, if NI approach is valid, leverage is significant variable and financing decisions

have an important effect on the value of the firm. On the other hand, if the NOI approach is

correct then the financing decisions should not be a great concern to the financing manager, as

it does not matter in the valuation of the firm.

Modigliani and Miller (MM) support the NOI approach by providing logically

consistent behavioral justifications in its favor. They deny the existence of an optimum capital

structure between the two extreme views; we have the middle position or intermediate version

advocated by the traditional writers.

Thus these exists an optimum capital structure at which the cost of capital is minimum. The

logic of this view is not very sound. The MM position changes when corporate taxes are

assumed. The interest tax shield resulting from the use of debt adds to the value of the firm.

This advantage reduces the when personal income taxes are considered.


39/162

25


40/162

Capital Structure Matters: The Net Income Approach:

The essence of the net income (NI) approach is that the firm can increase its value or

lower the overall cost of capital by increasing the proportion of debt in the capital structure.

The crucial assumptions of this approach are:

1.The use of debt does not change the risk perception of investors; as a result, the equity

capitalization rate, k c and the debt capitalization rate, k d, remain constant with changes in

leverage.

2.The debt capitalization rate is less than the equity capitalization rate (i.e.

k d


41/162

26


42/162


43/162

27


44/162

equivalently the average cost of capital) of the firm. Arguing in a similar vein, Modigliani and

Miller, in a seminal contribution made in 1958, forcefully advanced the proposition that the

cost of capital of a firm is independent of its capital structure.

COST OF CAPITAL AND VALUATION APPROACH

The cost of a source of finance is the minimum return expected by its

suppliers. The expected return depends on the degree of risk assumed by investors. A high

degree of risk is assumed by shareholders than debt-holders. In the case of debt-holders, the

rate of interest is fixed and the company is legally bound to pay dividends even if the profits

are made by the company. The loan of debt-holders is returned within a prescribed period,while shareholders will have to share the residue only when the company is wound up.

This leads one to conclude that debt is cheaper source of funds than equity. This is generally

the case even when taxes are not considered. The tax deductibility of interest charges further

reduces the cost of debt. The preference share capital is also cheaper than equity capital, but

not as cheap as debt. Thus, using the component, or specific, cost of capital as criterion for

financing decisions and ignoring risk, a firm would always like to employ debt since it is the

cheapest source of funds.

CASH FLOW APPROACH:

One of the features of a sound capital structure is conservatism does not mean

employing no debt or small amount of debt. Conservatism is related to the fixed charges

created by the use of debt or preference capital in the capital structure and the firm’s ability to

generate cash to meet these fixed charges. In practice, the question of the optimum

(appropriate) debt –equity mix boils down to the fir’s ability to service debt without any threat

of insolvency and operating inflexibility. A firm is considered prudently financed if it is able

to service its fixed charges under any reasonably predictable adverse conditions.


45/162

28


46/162

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

dividend and principal, and they depend on both the amount of loan securities and the terms

of payment. The amount of fixed charges will be high if the company employs a large amount

of debt or preference capital with short-term maturity. Whenever a company thinks of raising

additional debt, it should analyse its expected future cash flows to meet the fixed charges. It is

mandatory to pay interest and return the principal amount of debt of a company not able to

generate enough cash to meet its fixed obligation, it may have to face financial insolvency.

The companies expecting larger and stable cash inflows in to employ fixed charge sources of

finance by those companies whose cash inflows are unstable and unpredictable.

It is possible for high growth, profitable company to suffer from cash shortage if the liquidity

(working capital) management is poor. We have examples of companies like BHEL, NTPC,

etc., whose debtors are very sticky and they continuously face liquidity problem in spite of

being profitability servicing debt is very burdensome for them.

One important ratio which should be examined at the time of planning the

capital structure is the ration of net cash inflows to fixed changes (debt saving ratio). It

indicates the number of times the fixed financial obligation are covered by the net cash

inflows generated by the company.

LIMITATION OF EPS AS A FINANCING-DECISION CRITERION

EPS is one of the mostly widely used measures of the company’s performance

in practice. As a result of this, in choosing between debt and equity in practice, sometimes too

much attention is paid on EPS, which however, has serious limitations as a financing-decisioncriterion.

The major short coming of the EPS as a financing-decision criterion is that it

does not consider risk; it ignores variability about the expected value of EPS. The belief that

investors would be just concerned with the expected EPS is not well founded. Investors in

valuing the shares of the company consider both expected value and variability.


47/162

29


48/162

EPS VARIABILITY AND FINANCIAL RISK: -

The EPS variability resulting form the use of leverage is called financial risk.

Financial risk is added with the use of debt because of

(a) The increased variability in the shareholders earnings and

(b) The threat of insolvency. A firm can avid financial risk altogether if it does not employ

any debt in its capital structure. But then the shareholders will be deprived of the benefit of

the financial risk perceived by the shareholders, which does not exceed the benefit of increase

EPS. As we have seen, if a company increase its debt beyond a point the expected EPS will

continue to increase but the value of the company increases its debt beyond a point, the

expected EPS will continue to increase, but the value of the company will fall because of the

greater exposure of shareholders to financial risk in the form of financial distress. The EPS

criterion does not consider the long-term perspectives of financing decisions. It fails to deal

with the risk return trade-off. A long term view of the effects of the financing decisions, will

lead one to a criterion of the wealth maximization rather that EPS maximization. The EPS

criterion is an important performance measure but not a decision criterion.

Given limitations, should the EPS criterion be ignored in making financing decision?

Remember that it is an important index of the firm’s performance and that investors rely

heavily on it for their investment decisions. Investors do not have information in the projected

earnings and cash flows and base their evaluation and historical data. In choosing between

alternative financial plans, management should start with the evaluation of the impact of each

alternative on near-term EPS. But management’s ultimate decision making should be guided

by the best interests of shareholders.

Therefore, a long-term view of the effect of the alternative financial plans on the value of the

shares should be taken, o management opts for a financial plan which will maximize value in

the long run but has an adverse impact in near-term EPS, and the reasons must be

communicated to investors. A careful communication to market will be helpful in reducing

the misunderstanding between management and Investors.


49/162

30


50/162

COMPOSITION AND OBSERVATION

The sources tapped by ULTRA TECH CEMENTS Industries Ltd. Can be classified into:

• Shareholders’ funds resources

• Loan fund resources

SHAREHOLDER FUND RESOURCES:

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

EQUITY CAPITAL BUILD-UP

1.From 1995, the Authorized capital is Rs.450 lacs of equity shares at Rs.10 each. The issued

equity capital is RS.1622.93 lacs at Rs.10 each for the period 2002-2009 and subscribed and

paid-up capital is Rs. 1622.93 lacs at Rs.10 each for the period of 2004-2009.

3.There is an increase of 1.38% in the equity from 2005-2010.

RETAINED EARNINGS COMPOSITION

This includes…

• Capital Reserve

• Share Premium Account

• General Reserve

• Contingency Reserve

• Debentures Redemption Reserve

• Investment Allowance Reserve

• Profit & Loss Account

1. The profit levels, company dividend policy and growth plans determined. The amounts

transferred from P&L A/c to General Reserve. Contingency Reserve and InvestmentAllowance Reserve.

2. The Investment Allowance Reserve is created for replacement of long term leased assets

and this reserve was removed from books because assets pertaining to such reserves ceased to

exist. The account was transferred to investment allowance utilized.


51/162

31


52/162

Capital structure describes how a corporation has organized its capital—how it obtains the

financial resources with which it operates its business. Businesses adopt various capital

structures to meet both internal needs for capital and external requirements for returns on

shareholders investments. As shown on its balance sheet, a company's capitalization is

constructed from three basic blocks:

1. Long-term debt. By standard accounting definition, long-term debt includes

obligations that are not due to be repaid within the next 12 months. Such debt consists mostly

of bonds or similar obligations, including a great variety of notes, capital lease obligations,

and mortgage issues.

2. Preferred stock. This represents an equity (ownership) interest in the corporation, but

one with claims ahead of the common stock, and normally with no rights to share in

the increased worth of a company if it grows.

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

corporation's books, it is made up of: (I) the nominal par or stated value assigned to the

shares of outstanding stock; (2) the capital surplus or the amount above par value paid the

company whenever it issues stock; and (3) the earned surplus (also called retained earnings),

which consists of the portion of earnings a company retains after paying out dividends and

similar distributions. Put another way, common stock equity is the net worth after all the

liabilities (including long-term debt), as well as any preferred stock, are deducted from the

total assets shown on the balance sheet. For investment analysis purposes, security analysts

may use the company's market capitalization—the current market price times the number of

common shares outstanding—as a measure of common stock equity. They consider this

market-based figure a more realistic valuation.

32


53/162

CHAPTER-III

INDUSTRY&COMPANY PROFILE

33


54/162

INDUSTRY PROFILE

In the most general sense of the word, a cement is a binder, a

substance which sets and hardens independently, and can bind other materials together. The

word "cement" traces to the Romans, who used the term "opus caementicium" to describe

masonry which resembled concrete and was made from crushed rock with burnt lime as

binder. The volcanic ash and pulverized brick additives which were added to the burnt lime

to obtain a hydraulic binder were later referred to as cementum, cimentum, c äment and

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

The most important use of cement is the production of mortar and concrete—the bonding of

natural or artificial aggregates to form a strong building material which is durable in the face

of normal environmental effects.

Concrete should not be confused with cement because the term cement refers only to the dry

powder substance used to bind the aggregate materials of concrete. Upon the addition of water

and/or additives the cement mixture is referred to as concrete, especially if aggregates have

been added.

It is uncertain where it was first discovered that a combination of hydrated non-hydraulic lime

and a pozzolan produces a hydraulic mixture (see also: Pozzolanic reaction), but concrete

made from such mixtures was first used on a large scale by Roman engineers.They used bothnatural pozzolans (trass or pumice) and artificial pozzolans (ground brick or pottery) in these

concretes. Many excellent examples of structures made from these concretes are still

standing, notably the huge monolithic dome of the Pantheon in Rome and the massive Baths

of Caracalla. The vast system of Roman aqueducts also made extensive use of hydraulic

cement. The use of structural concrete disappeared in medieval Europe, although weak

pozzolanic concretes continued to be used as a core fill in stone walls and columns.

Modern cement

Modern hydraulic cements began to be developed from the start of the Industrial Revolution

(around 1800), driven by three main needs:

Hydraulic renders for finishing brick buildings in wet climates

Hydraulic mortars for masonry construction of harbor works etc, in contact with sea water.

Development of strong concretes.


55/162

34


56/162

In Britain particularly, good quality building stone became ever more expensive during a

period of rapid growth, and it became a common practice to construct prestige buildings from

the new industrial bricks, and to finish them with a stucco to imitate stone. Hydraulic limes

were favored for this, but the need for a fast set time encouraged the development of new

cements. Most famous was Parker's "Roman cement." This was developed by James Parker in

the 1780s, and finally patented in 1796. It was, in fact, nothing like any material used by the

Romans, but was a "Natural cement" made by burning septaria - nodules that are found in

certain clay deposits, and that contain both clay minerals and calcium carbonate. The burnt

nodules were ground to a fine powder. This product, made into a mortar with sand, set in 5–

15 minutes. The success of "Roman Cement" led other manufacturers to develop rival

products by burning artificial mixtures of clay and chalk.

John Smeaton made an important contribution to the development of cements when he was

planning the construction of the third Eddystone Lighthouse (1755-9) in the English Channel.

He needed a hydraulic mortar that would set and develop some strength in the twelve hour

period between successive high tides. He performed an exhaustive market research on the

available hydraulic limes, visiting their production sites, and noted that the "hydraulicity" of

the lime was directly related to the clay content of the limestone from which it was made.

Smeaton was a civil engineer by profession, and took the idea no further. Apparently

unaware of Smeaton's work, the same principle was identified by Louis Vicat in the first

decade of the nineteenth century. Vicat went on to devise a method of combining chalk and

clay into an intimate mixture, and, burning this, produced an "artificial cement" in 1817.

James Frost,orking in Britain, produced what he called "British cement" in a similar manner

around the same time, but did not obtain a patent until 1822. In 1824, Joseph Aspdin patented

a similar material, which he called Portland cement, because the render made from it was in

color similar to the prestigious Portland stone.

All the above products could not compete with lime/pozzolan concretes because of fast-

setting (giving insufficient time for placement) and low early strengths (requiring a delay of

many weeks before formwork could be removed). Hydraulic limes, "natural" cements and

"artificial" cements all rely upon their belite content for strength development. Belite develops

strength slowly. Because they were burned at temperatures below 1250 °C, they contained no

alite, which is responsible for early strength in modern cements. The first cement to


57/162

35


58/162

consistently contain alite was made by Joseph Aspdin's son William in the early 1840s. This

was what we call today "modern" Portland cement. Because of the air of mystery with which

William Aspdin surrounded his product, others (e.g. Vicat and I C Johnson) have claimed

precedence in this invention, but recent analysis of both his concrete and raw cement have

shown that William Aspdin's product made at Northfleet, Kent was a true alite-based cement.

However, Aspdin's methods were "rule-of-thumb": Vicat is responsible for establishing the

chemical basis of these cements, and Johnson established the importance of sintering the mix

in the kiln.

William Aspdin's innovation was counter-intuitive for manufacturers of "artificial cements",

because they required more lime in the mix (a problem for his father), because they required a

much higher kiln temperature (and therefore more fuel) and because the resulting clinker was

very hard and rapidly wore down the millstones which were the only available grinding

technology of the time. Manufacturing costs were therefore considerably higher, but the

product set reasonably slowly and developed strength quickly, thus opening up a market for

use in concrete. The use of concrete in construction grew rapidly from 1850 onwards, and was

soon the dominant use for cements. Thus Portland cement began its predominant role. it is

made from water and sand

Types of modern cement

Portland cement

Cement is made by heating limestone (calcium carbonate), with small quantities of other

materials (such as clay) to 1450°C in a kiln, in a process known as calcination, whereby a

molecule of carbon dioxide is liberated from the calcium carbonate to form calcium oxide, or

lime, which is then blended with the other materials that have been included in the mix . The

resulting hard substance, called 'clinker', is then ground with a small amount of gypsum into a

powder to make 'Ordinary Portland Cement', the most commonly used type of cement (often

referred to as OPC).

Portland cement is a basic ingredient of concrete, mortar and most non-speciality grout. The

most common use for Portland cement is in the production of concrete. Concrete is a

composite material consisting of aggregate (gravel and sand), cement, and water. As a

construction material, concrete can be cast in almost any shape desired, and once hardened,

can become a structural (load bearing) element. Portland cement may be gray or white.


59/162

36


60/162

Portland cement blends

These are often available as inter-ground mixtures from cement manufacturers, but similar

formulations are often also mixed from the ground components at the concrete mixing plant.

Portland blastfurnace cement contains up to 70% ground granulated blast furnace slag, with

the rest Portland clinker and a little gypsum. All compositions produce high ultimate strength,

but as slag content is increased, early strength is reduced, while sulfate resistance increases

and heat evolution diminishes. Used as an economic alternative to Portland sulfate-resisting

and low-heat cements.

Portland flyash cement contains up to 30% fly ash. The fly ash is pozzolanic, so that

ultimate strength is maintained. Because fly ash addition allows a lower concrete water

content, early strength can also be maintained. Where good quality cheap fly ash is available,

this can be an economic alternative to ordinary Portland cement.

Portland pozzolan cement includes fly ash cement, since fly ash is a pozzolan, but also

includes cements made from other natural or artificial pozzolans. In countries where

volcanic ashes are available (e.g. Italy, Chile, Mexico, the Philippines) these cements are

often the most common form in use.

Portland silica fume cement. Addition of silica fume can yield exceptionally high strengths,

and cements containing 5-20% silica fume are occasionally produced. However, silica fume is

more usually added to Portland cement at the concrete mixer.

Masonry cements are used for preparing bricklaying mortars and stuccos, and must not be

used in concrete. They are usually complex proprietary formulations containing Portland

clinker and a number of other ingredients that may include limestone, hydrated lime, air

entrainers, retarders, waterproofers and coloring agents. They are formulated to yield

workable mortars that allow rapid and consistent masonry work. Subtle variations of Masonry

cement in the US are Plastic Cements and Stucco Cements. These are designed to produce

controlled bond with masonry blocks.

Expansive cements contain, in addition to Portland clinker, expansive clinkers (usually

sulfoaluminate clinkers), and are designed to offset the effects of drying shrinkage that

is normally encountered with hydraulic cements. This allows large floor slabs (up to 60

m square) to be prepared without contraction joints.


61/162

37


62/162

White blended cements may be made using white clinker and white supplementary materials

such as high-purity metakaolin.

Colored cements are used for decorative purposes. In some standards, the addition of

pigments to produce "colored Portland cement" is allowed. In other standards (e.g. ASTM),pigments are not allowed constituents of Portland cement, and colored cements are sold as

"blended hydraulic cements".

Very finely ground cements are made from mixtures of cement with sand or with slag or

other pozzolan type minerals which are extremely finely ground together. Such cements can

have the same physical characteristics as normal cement but with 50% less cement

particularly due to their increased surface area for the chemical reaction. Even with intensive

grinding they can use up to 50% less energy to fabricate than ordinary Portland cements.

Non-Portland hydraulic cements

Pozzolan-lime cements. Mixtures of ground pozzolan and lime are the cements used by the

Romans, and are to be found in Roman structures still standing (e.g. the Pantheon in Rome).

They develop strength slowly, but their ultimate strength can be very high. The hydration

products that produce strength are essentially the same as those produced by Portland cement.

Slag-lime cements. Ground granulated blast furnace slag is not hydraulic on its own, but is

"activated" by addition of alkalis, most economically using lime. They are similar to pozzolanlime cements in their properties. Only granulated slag (i.e. water-quenched, glassy slag) is

effective as a cement component.

Supersulfated cements. These contain about 80% ground granulated blast furnace slag, 15%

gypsum or anhydrite and a little Portland clinker or lime as an activator. They produce

strength by formation of ettringite, with strength growth similar to a slow Portland cement.

They exhibit good resistance to aggressive agents, including sulfate.

Calcium aluminate cements are hydraulic cements made primarily from limestone and

bauxite. The active ingredients are monocalcium aluminate CaAl2O4 (CaO · Al2O3 or CA in

Cement chemist notation, CCN) and mayenite Ca12Al14O33 (12 CaO · 7 Al2O3 , or C12A7 in

CCN). Strength forms by hydration to calcium aluminate hydrates. They are well-adapted for

use in refractory (high-temperature resistant) concretes, e.g. for furnace linings.

Calcium sulfoaluminate cements are made from clinkers that include ye'elimite (Ca4(AlO2)6SO4


63/162

or C4A3 in Cement chemist's notation) as a primary phase. They are used in

38


64/162

expansive cements, in ultra-high early strength cements, and in "low-energy" cements.

Hydration produces ettringite, and specialized physical properties (such as expansion or

rapid reaction) are obtained by adjustment of the availability of calcium and sulfate ions.

Their use as a low-energy alternative to Portland cement has been pioneered in China, where

several million tonnes per year are produced. Energy requirements are lower because of the

lower kiln temperatures required for reaction, and the lower amount of limestone (which

must be endothermically decarbonated) in the mix. In addition, the lower limestone content

and lower fuel consumption leads to a CO2 emission around half that associated with

Portland clinker. However, SO2 emissions are usually significantly higher.

"Natural" Cements correspond to certain cements of the pre-Portland era, produced by

burning argillaceous limestones at moderate temperatures. The level of clay components inthe limestone (around 30-35%) is such that large amounts of belite (the low-early strength,

high-late strength mineral in Portland cement) are formed without the formation of excessive

amounts of free lime. As with any natural material, such cements have highly variable

properties.

Geopolymer cements are made from mixtures of water-soluble alkali metal silicates

and aluminosilicate mineral powders such as fly ash and metakaolin.


65/162

39


66/162

Cement Industry in India

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

Manufacturers’ Association.

During September 2010, the cement production touched 12.54 million tonnes (MT), while the

cement despatches quantity was 12.56 MT during the month. The total cement production

during April-September 2010-11 reached 81.54 MT as compared to 77.22 MT over the

corresponding period last fiscal. Further, cement despatches also witnessed an upsurge from

76.50 MT during April-September 2009-10 to 81.10 MT during April-September 2010-11.

Moreover, the government's continued thrust on infrastructure will help the key buildingmaterial to maintain an annual growth of 9-10 per cent in 2010, according to India's largest

cement company, ACC.

In January 2010, rating agency Fitch predicted that the country will add about 50 million

tonne cement capacity in 2010, taking the total to around 300 million tonne.

Further, speaking at the Green Cementech 2010, a seminar jointly organised by the

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

Hyderabad in May 2010, G Jayaraman, Executive President, Birla Corporation Ltd, said that

in 2009, 40 MT of capacity was added and he expects a similar trend to follow this year.

New Investments

Cement and gypsum products have received cumulative foreign direct investment (FDI) of

US$ 1,971.79 million between April 2000 and September 2010, according to the Department

of Industrial Policy and Promotion (DIPP).

• Dalmia Bharat Enterprises plans to invest US$ 554.32 million to set up two greenfield

cement plants in Karnataka and Meghalaya.

• Bharathi Cement plans to double its production capacity by the end of the current

financial year by expanding its plant in Andhra Pradesh, with an investment of US$ 149.97

million.


67/162

40


68/162

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

manufacturing capacity of its Ariyalur plant in Tamil Nadu to 4.5 MT from 2 MT by April

2011.

• My Home Industries Limited (MHI), a 50:50 joint venture (JV) between the

Hyderabad-based My Home Group and Ireland's building material major CRH Plc, plans to

scale up its cement production capacity from the existing 5 million tonne per annum (mtpa) to

15 mtpa by 2016. The company would undertake this capacity expansion at a cost of US$ 1

billion.

• Shree Cement, plans to invest US$ 97.13 million this year to set up a 1.5 million MT

clinker and grinding unit in Rajasthan. Moreover, in June 2010, Shree Cement signed a

memorandum of understanding (MoU) with the Karnataka government to invest US$ 423.6

million for setting up a cement unit and a power plant. US$ 317.7 million will be used to set

up a cement manufacturing unit with an annual capacity of 3 mtpa while the balance will be

for the 100 mega watt power plant.

• Jaiprakash Associates plans to invest US$ 640 million to increase its cement capacity.

• Swiss cement company Holcim plans to invest US$ 1 billion in setting up 2-3

greenfield manufacturing plants in the country in the next five years to serve the rising

domestic demand. Holcim is present in the country through ACC and Ambuja Cements and

holds around 46 per cent stake in each company. While ACC operates 16 cement plants,

Ambuja Cements controls five plants in India. The Aditya Birla group is the largest cement-

making group by capacity in the country and controls Grasim Industries and Ultratech

Cement.

Government Initiatives

The cement industry is pushing for increased use of cement in highway and road construction.The Ministry of Road Transport and Highways has planned to invest US$ 354 billion in road

infrastructure by 2012. Housing, infrastructure projects and the nascent trend of concrete

roads would continue to accelerate the consumption of cement.

Increased infrastructure spending has been a key focus area. In the Union Budget 2010-11,

US$ 37.4 billion has been provided for infrastructure development.


69/162

41


70/162


71/162

42


72/162

Nascent Stage of Indian Cement Industry.

During the earlier years, production of cement exceeded the demand. Society had a biased

opinion against the cement manufactured in India, which further led to reduction in demand.

The government intervened by giving protection to the Industry and by encouraging

cooperation among the manufacturers.

In 1927, the Concrete Association of India was formed with the twin goals of creating

a positive awareness among the public of the utility of cement and to propagate cement

consumption.

After Independence

The growth rate of cement was slow around the period after independence due to various

factors like low prices, slow growth in additional capacity and rising cost. The

government intervened several times to boost the industry, by increasing prices and

providing financial incentives. But it had little impact on the industry.

In 1956, the price and distribution control system was set up to ensure fair prices for both the

manufacturers and consumers across the country and to reduce regional imbalances and reach

self sufficiency.

Period Of Restriction (1969-1982)

The cement industry in India was severely restrained by the government during this period.

Government hold over the industry was through both direct and indirect means. Government

intervened directly by exercising authority over production, capacity and distribution of

cement and it intervened indirectly through price control.

In 1977 the government authorized higher prices for cement manufactured by new units or

through capacity increase in existing units. But still the growth rate was below par.

In 1979 the government introduced a three tier price system. Prices were different for cement

produced in low, medium and high cost plants.


73/162

43


74/162

However the price control did not have the desired effect. Rise in input cost, reduced profit

margins meant the manufacturers could not allocate funds for increase in capacity.

Partial Control (1982-1989)

To give impetus to the cement industry, the Government of India introduced a quota system in

1982.A quota of 66.60% was imposed for sales to Government and small real estate

developers. For new units and sick units a lower quota at 50% was effected. The remaining

33.40% was allowed to be sold in the open market.

These changes had a desired effect on the industry. Profitability of the manufacturers

increased substantially, but the rising input cost was a cause for concern.

After Liberalization

In 1989 the cement industry was given complete freedom, to gear it up to meet the challenges

of free market competition due to the impending policy of liberalization. In 1991 the industry

was de licensed.

This resulted in an accelerated growth for the industry and availability of state of the art

technology for modernization. Most of the major players invested heavily for capacity

expansion.

To maximize the opportunity available in the form of global markets, the industry laid

greater focus on exports. The role of the government has been extremely crucial in the

growth of the industry.

Future Trends

• The cement industry is expected to grow steadily in 2009-2010 and increase capacity

by another 50 million tons in spite of the recession and decrease in demand from the housing

sector.


75/162

44


76/162

• The industry experts project the sector to grow by 9 to 10% for the current financial

year provided India's GDP grows at 7%.

• India ranks second in cement production after China.

• The major Indian cement companies are Associated Cement Company Ltd (ACC),

Grasim Industries Ltd, Ambuja Cements Ltd, J.K Cement Ltd and Madras Cement Ltd.

• The major players have all made investments to increase the production capacity in the

past few months, heralding a positive outlook for the industry.

• The housing sector accounts for 50% of the demand for cement and this trend is

expected to continue in the near future.

An increased outflow in infrastructure sector, by the government as well as private builders,

has raised a significant demand of cement in India. It is the key raw material in construction

industry. Also, it has highly influenced those bigger companies to participate in the growing

sector. At least 125 plants set up by the big companies in India with about 300 other small

scale cement manufacturers, to fulfill the growing demand of cement. Being one of the vital

industries, the cement industry contributes to the nation's socioeconomic development. The

sum total utilization of cement in a year indicates the country's economic growth.

Cement plant was first set up in Calcutta, in 1889. At that time, the cement used tomanufacture from Argillaceous. In 1904, the first organized set up to manufacture cement was

commenced in Madras, which was named South India Industries Limited. Again in 1914,

another cement manufacturing unit was set up in Porbandar, Gujarat, but this time it was

licensed. In the early years of that era, the demand for the cement tremendously exceeded but

only after few years, the industry faced a severe downfall. To overcome from this the

worsening situation, the Concrete Association of India was founded in 1927. The organization

has two prime goals, one was to create awareness about utility of cement and another was to

encourage cement utilization.

Even after the independence, the growth of the cement industry was too gradual. In the year

1956, a Distribution Control System was established with an objective to provide Indian

manufacturers and consumers self sufficiency. Indian government then introduced a quota

45


77/162


78/162

46


79/162

COMPANY PROFILE

47


80/162

COMPANY PROFILE

ULTRATECH CEMENT:

UltraTech Cement Limited has an annual capacity of 18.2 million tonnes. It manufactures and

markets Ordinary Portland Cement, Portland Blast Furnace Slag Cement and Portland

Pozzalana Cement. It also manufactures ready mix concrete (RMC).

UltraTech Cement Limited has five integrated plants, six grinding units and three terminals —

two in India and one in Sri Lanka.

UltraTech Cement is the country’s largest exporter of cement clinker. The export

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

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

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

Pilani, set amidst the Rajasthan desert. It was here that Seth Shiv Narayan Birla started trading

in cotton, laying the foundation for the House of Birlas.

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

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

in critical sectors such as textiles and fibre, aluminium, cement and chemicals. As a close

confidante of Mahatma Gandhi, he played an active role in the Indian freedom struggle. He

represented India at the first and second round-table conference in London, along with

Gandhiji. It was at "Birla House" in Delhi that the luminaries of the Indian freedom struggle

often met to plot the downfall of the British Raj.

Ghanshyamdas Birla found no contradiction in pursuing business goals with the dedication of

a saint, emerging as one of the foremost industrialists of pre-independence India. The

principles by which he lived were soaked up by his grandson, Aditya Vikram Birla, our

Group's legendary leader.


81/162

48


82/162

Aditya Vikram Birla: putting India on the world map

A formidable force in Indian industry, Mr. Aditya Birla dared to dream of setting up a global

business empire at the age of 24. He was the first to put Indian business on the world map, as

far back as 1969, long before globalisation became a buzzword in India.

In the then vibrant and free market South East Asian countries, he ventured to set up world-

class production bases. He had foreseen the winds of change and staked the future of his

business on a competitive, free market driven economy order. He put Indian business on the

globe, 22 years before economic liberalisation was formally introduced by the former Prime

Minister, Mr. Narasimha Rao and the former Union Finance Minister, Dr. Manmohan

Singh. He set up 19 companies outside India, in Thailand, Malaysia, Indonesia, the

Philippines and Egypt.

Interestingly, for Mr. Aditya Birla, globalisation meant more than just geographic reach. He

believed that a business could be global even whilst being based in India. Therefore, back in

his home-territory, he drove single-mindedly to put together the building blocks to make our

Indian business a global force.

Under his stewardship, his companies rose to be the world's largest producer of viscose staple

fibre, the largest refiner of palm oil, the third largest producer of insulators and the sixthlargest producer of carbon black. In India, they attained the status of the largest single

producer of viscose filament yarn, apart from being a producer of cement, grey cement and

rayon grade pulp. The Group is also the largest producer of aluminium in the private sector,

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

industry in India.

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

with assets of over Rs.9,000 crore, comprising of 55 benchmark quality plants, an

employee strength of 75,000 and a shareholder community of 600,000.

Most importantly, his companies earned respect and admiration of the people, as one of

India's finest business houses, and the first Indian International Group globally. Through this

outstanding record of enterprise, he helped create enormous wealth for the nation, and respect


83/162

49


84/162

for Indian entrepreneurship in South East Asia. In his time, his success was unmatched by any

other industrialist in India.

That India attains respectable rank among the developed nations, was a dream he forever

cherished. He was proud of India and took equal pride in being an Indian.

Under the leadership of our Chairman, Mr. Kumar Mangalam Birla, the Group has sustained

and established a leadership position in its key businesses through continuous value-creation.

Spearheaded by Grasim, Hindalco, Aditya Birla Nuvo, Indo Gulf Fertilisers and companies in

Thailand, Malaysia, Indonesia, the Philippines and Egypt, the Aditya Birla Group is a leader

in a swathe of products — viscose staple fibre, aluminium, cement, copper, carbon black,

palm oil, insulators, garments. And with successful forays into financial services, telecom,software and BPO, the Group is today one of Asia's most diversified business groups.

Board of Directors

: Mr. Kumar Mangalam Birla, Chairman

: Mrs. Rajashree Birla

: Mr. R. C. Bhargava

: Mr. G. M. Dave

: Mr. N. J. Jhaveri

: Mr. S. B. Mathur

: Mr. V. T. Moorthy

: Mr. O. P. Puranmalka

: Mr. S. Rajgopal

: Mr. D. D. Rathi

: Mr. S. Misra, Managing Director


85/162

50


86/162

Executive President & Chief Financial Officer

:: Mr. K. C. Birla

Chief Manufacturing Officer

:: R.K. Shah

Chief Marketing Officer

:: Mr. O. P. Puranmalka

Company Secretary

:: Mr. S. K. Chatterjee

Our vision

"To actively contribute to the social and economic development of the communities in

which we operate. In so doing, build a better, sustainable way of life for the weaker

sections of society and raise the country's human development index."

— Mrs. Rajashree Birla, Chairperson,

The Aditya Birla Centre for Community Initiatives and Rural DevelopmentAwards won

Year Award

2010-2011 Subh Karan Sarawagi Environment Award

2010-2011 Business World FICCI-SEDF CSR Award

2010 Greentech Environment Excellence Gold Award

2010 IMC Ramkrishna Bajaj National Quality Award

2010 Asian CSR Award

2009-2010 National Award for Prevention of Pollution

2009-2010 Rajiv Gandhi Environment Award for Clean Technology

2009-2010 State Level Environment Award (Plant)


87/162

51


88/162

Making a difference

Before Corporate Social Responsibility found a place in corporate lexion, it was already

textured into our Group's value systems. As early as the 1940s, our founding father Shri G.D

Birla espoused the trusteeship concept of management. Simply stated, this entails that the

wealth that one generates and holds is to be held as in a trust for our multiple stakeholders.

With regard to CSR, this means investing part of our profits beyond business, for the larger

good of society.

While carrying forward this philosophy, his grandson, Aditya Birla weaved in the concept of

'sustainable livelihood', which transcended cheque book philanthropy. In his view, it was

unwise to keep on giving endlessly. Instead, he felt that channelising resources to ensure that

people have the wherewithal to make both ends meet would be more productive. He would

say, "Give a hungry man fish for a day, he will eat it and the next day, he would be hungry

again. Instead if you taught him how to fish, he would be able to feed himself and his family

for a lifetime."

Taking these practices forward, our chairman

Mr. Kumar Mangalam Birla institutionalised the concept of triple bottom line accountability

represented by economic success, environmental responsibility and social commitment. In aholistic way thus, the interests of all the stakeholders have been textured into our Group's

fabric.

The footprint of our social work today straddles over 3,700 villages, reaching out to more than

7 million people annually. Our community work is a way of telling the people among whom

we operate that We Care.

Our strategy

Our projects are carried out under the aegis of the "Aditya Birla Centre for Community

Initiatives and Rural Development", led by Mrs. Rajashree Birla. The Centre provides the

strategic direction, and the thrust areas for our work ensuring performance management

as well.


89/162

52


90/162

Our focus is on the all-round development of the communities around our plants located

mostly in distant rural areas and tribal belts. All our Group companies —- Grasim,

Hindalco, Aditya Birla Nuvo, Indo Gulf and UltraTech have Rural Development Cells

which are the implementation bodies.

Projects are planned after a participatory need assessment of the communities around the

plants. Each project has a one-year and a three-year rolling plan, with milestones and

measurable targets. The objective is to phase out our presence over a period of time and hand

over the reins of further development to the people. This also enables us to widen our reach.

Along with internal performance assessment mechanisms, our projects are audited by

reputed external agencies, who measure it on qualitative and quantitative parameters, helping

us gauge the effectiveness and providing excellent inputs.

Our partners in development are government bodies, district authorities, village panchayats

and the end beneficiaries -- the villagers. The Government has, in their 5-year plans, special

funds earmarked for human development and we recourse to many of these. At the same

time, we network and collaborate with like-minded bilateral and unilateral agencies to share

ideas, draw from each other's experiences, and ensure that efforts are not duplicated. At

another level, this provides a platform for advocacy. Some of the agencies we havecollaborated with are UNFPA, SIFSA, CARE India, Habitat for Humanity International,

Unicef and the World Bank.

Our focus areas

Our rural development activities span five key areas and our single-minded goal here is to

help build model villages that can stand on their own feet. Our focus areas are healthcare,

education, sustainable livelihood, infrastructure and espousing social causes.

The name “Aditya Birla” evokes all that is positive in business and in life. It exemplifies

integrity, quality, performance, perfection and above all character.


91/162

53


92/162

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

cornerstone of our corporate identity. It helps us leverage the unique

Aditya Birla brand and endows us with a distinctive visual image.

Depicted in vibrant, earthy colours, it is very arresting and shows the

sun rising over two circles. An inner circle symbolising the internal universe of the Aditya

Birla Group, an outer circle symbolising the external universe, and a dynamic meeting of rays

converging and diverging between the two.

Through its wide usage, we create a consistent, impact-oriented Group image. This

undoubtedly enhances our profile among our internal and external stakeholders.

Our corporate logo thus serves as an umbrella for our Group. It signals the common values

and beliefs that guide our behaviour in all our entrepreneurial activities. It embeds a sense of

pride, unity and belonging in all of our 130,000 colleagues spanning 25 countries and 30

nationalities across the globe. Our logo is our best calling card that opens the gateway to the

world.

Group companies

: Grasim Industries Ltd.

: Hindalco Industries Ltd.

: Aditya Birla Nuvo Ltd.

: UltraTech Cement Ltd.

Indian companies

:: Aditya Birla Minacs IT Services Ltd.


93/162

54


94/162

: Aditya Birla Minacs Worldwide Limited

: Essel Mining & Industries Ltd

: Idea Cellular Ltd.

: Aditya Birla Insulators

: Aditya Birla Retail Limited

: Aditya Birla Chemicals (India) Limited

International companies

Thailand

: Thai Rayon

: Indo Thai Synthetics

: Thai Acrylic Fibre

: Thai Carbon Black

: Aditya Birla Chemicals (Thailand) Ltd.

: Thai Peroxide

Philippines

: Indo Phil Group of companies

: Pan Century Surfactants Inc.

Indonesia

: PT Indo Bharat Rayon

: PT Elegant Textile Industry

: PT Sunrise Bumi Textiles

: PT Indo Liberty Textiles

: PT Indo Raya Kimia

Egypt

: Alexandria Carbon Black Company S.A.E

: Alexandria Fiber Company S.A.E


95/162

55


96/162

China

: Liaoning Birla Carbon

: Birla Jingwei Fibres Company Limited

: Aditya Birla Grasun Chemicals (Fangchenggang) Ltd.

Canada

:: A.V. Group

Australia

:: Aditya Birla Minerals Ltd.

Laos

:: Birla Laos Pulp & Plantations Company Limited

North and South America, Europe and Asia

:: Novelis Inc.

Singapore

:: Swiss Singapore Overseas Enterprises Pte Ltd. (SSOE)

Joint ventures

: Birla Sun Life Insurance Company

: Birla Sun Life Asset Management Company

: Aditya Birla Money Mart Limited

: Tanfac Industries Limited

UltraTech is India's largest exporter of cement clinker. The company's production facilities are

spread across eleven integrated plants, one white cement plant, one clinkerisation plant in UAE,

fifteen grinding units, and five terminals — four in India and one in Sri Lanka. Most of the plants

have ISO 9001, ISO 14001 and OHSAS 18001 certification. In addition, two plants have received

ISO 27001 certification and four have received SA 8000 certification. The process is currently

underway for the remaining plants. The company exports over 2.5 million tonnes per annum,

which is about 30 per cent of the country's total exports. The export market

Documents

Capital Structure Project