Microeconomic Analysis of Ballarpur Industries Limited

Microeconomic

Analysis of

Ballarpur Industries

Limite

“Microeconomics is the study of specific individual units;

particular firms, particular households,

individual industries particular commodities. The microeconomic

theory or price theory thus is the study of individual parts of the

economy. In microeconomic analysis we study the demand

analysis ( derive the market demand for a g

production function and the market structure of an individual

firm”

GROWTH

EXECUTION ANALYSIS REPORT

SUSTAINABILITY 2005-2010

Microeconomic

Analysis of

Ballarpur Industries

Limited

“Microeconomics is the study of specific individual units;

particular firms, particular households, individual prices, wages,

individual industries particular commodities. The microeconomic

theory or price theory thus is the study of individual parts of the

economy. In microeconomic analysis we study the demand

analysis ( derive the market demand for a good), cost analysis,

production function and the market structure of an individual

� � �

�

Submitted By:

ANALYSIS REPORT

2010

November 15

2011

Demand Analysis Cost Analysis Production Analysis

Market Structure

Submitted By: Nipun Goyal

Ist Semester, MBA - Gen

Section A

University Business School

Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 1

I�TRODUCTIO�: I�DIA� PAPER

I�DUSTRY

he Indian Paper Industry is a booming industry and is expected to grow in the years

to come. The Indian Paper Industry is among the top 15 global players today, with

an output of more than 6 millions tones annually with an estimated turnover of Rs.

150,000 millions. (approx. USD 3400 million).Paper Industry in India is riding on a strong

demand and on an expanding mood to meet the projected demand of 13 million tonnes by

2020.A large number of expansion programme & expansion of capacities with an outlay of

Rs. 10,000 crores have been announced covering the various sectors like paper, paperboard,

newsprint etc.

The paper industry is regarded as one of the core sectors in India. The industry is estimated to

grow at 7-8% compounded rate until 2010. With over 600 mills in India, only few are

government owned, making it a largely private sector. Currently, the total paper market is

worth around RS 200 billion. Nineteen companies members of Indian Paper Manufacturer's

Association (IPMA), who control over 55% of the total aggregate industry revenue will

conjointly commit Rs 2.5 billion in the next two or three years to expand additional 2 million

tonnes of capacity and improve cost competitiveness.

The new millennium is going to be the millennium of the knowledge. So demand for paper

would go on increasing in times to come. In view of paper industry's strategic role for the

society and also for the overall industrial growth it is necessary that the paper

industry performs well.

Government has completely delicensed the paper industry with effect from17th July, 1997.

The Paper industry is a priority sector for foreign collaboration and foreign equity

participation upto 100% receives automatic approval by Reserve Bank of India. Several fiscal

incentives have also been provided to the paper industry, particularly to those mills which are

based on non-conventional raw material.

The usage of paper cannot be ignored and this awareness is bound to bring about changes in

the paper industry for the better. It is a well known fact that the use of plastic is being

objected to these days. The reason being, there are few plastics which do not possess the

property of being degradable, as such, use of plastic is being discouraged. Excessive use of

non degradable plastics upsets the ecological equilibrium. (Indian Paper Industry/Paper

Watch n.d.)

T


What keeps the Indian Paper industry

rolling?

n order to keep the Indian Paper industry rolling, the foremost thing which must be kept

in mind is the availability of the raw materials. Every possible effort is to be made to

take India at par with the other paper industries of the world. Application of paper is

varied and one cannot think of a life without paper. The raw materials need to be of good

quality. There should be enough modernized techniques to carry out production. Reducing

costs should be accompanied by low cost of production. Policies should be implemented to

bring about optimum production.

Softwood producing wood fibers make up the main raw material in the manufacturing

process worldwide. China and India are excluded from this category. The reason being wood

products availability is meager. Instead, straw, bagasse which are obtained as residues from

the agriculture industry are used for the production of paper. Indian paper industry uses used

paper for the manufacturing of paper after recycling. It has been estimated that around 40%

of paper used is recycled.

BILT: Ballarpur Industries Limited

allarpur Industries Limited (BILT) is a flagship of the US$ 4 bn Avantha Group and

India's largest manufacturer of writing and printing (W&P) paper. The current

chairman of the company is Gautam Thapar.

BILT's subsidiaries include Sabah Forest Industries (SFI), Malaysia's largest pulp and paper

company, and BILT Tree Tech Limited (BTTL), which runs BILT's farm forestry programme

in several states in India.

BILT has six manufacturing units across India, which give the company geographic coverage

over most of the domestic market. BILT has a dominant share of the high-end coated paper

segment in India. The company accounts for over 50% of the coated wood-free paper market,

an impressive 85% of the bond paper market and nearly 45% of the hi-bright Maplitho

market, besides being India's largest exporter of coated paper.

BILT’s acquisition of SFI in 2007 was a watershed event – it was the first overseas

acquisition by an Indian paper company. This acquisition transformed BILT into a major

regional player, and elevated the company's ranking among the global top 100. (Ballarpur

Industries Limited n.d.)

I

B


DEMA�D A�ALYSIS

Determinants of Demand for Paper

a) Advent of Global Business Houses: The advent of more and more global business

houses in different sectors has created more and more need of communication needs.

Paper being one of the strongest pillar of any communication, needs have increased

many times. Varied applications of the fine paper for annual reports, CSR reports,

catalogues, brochures, business cards, carry bags and packaging etc, makes this

product extremely important for the corporate world.

b) Changing lifestyles: With improving domestic living standards, demand for

speciality paper (tissue paper, fine art paper, business card paper and greeting card

paper) has increased. Moreover, the bent of young generation towards reading habit

has increased the demand of paper.

c) Increasing presence of modern retail formats: Opening of realty and retail sectors,

have increased the demand of paper and its uses in various type of communication

application. Following reasons have also contributed the growing demand for fine

paper.

• The advent of more and more branded paper.

• The growing acceptance of specialty paper.

d) Government Educational Policies: Demand for writing and printing paper is

expected to grow owing to the opening of more schools and colleges, driven by the

government’s thrust on education sector and overall economic growth. Example:

“Sarva Shiksha Abhiyaan”.

e) Packaging industry: The Indian paper industry has close linkages with economic

growth as higher industrial output leads to increased demand for industrial paper for

packaging, increased marketing spend benefits the newsprint and value-added

segments, and increased education and office activities increase demand for writing

and printing paper.

f) Low per capita consumption: India’s per capita paper consumption grew 10.6% in

2009-10 (from 8.3 kg in 2008-09 to 9.18 kg) compared with 42 kg in China and 350

kg in developed countries (Source: Assocham), implying a large scope for demand.

g) Population growth: According to 2011 census of India, India’s population accounts

for 17.5 % of the world’s population. India added 181 million to its population since

2001 and it is expected to grow at a very high rate. With the increasing population

more paper and paper products will be needed to satisfy the needs of the people.

Moreover the average age per person of India is around 26 years which clearly

indicates that there would be more demand for education which would further boost

the demand for paper.


h) Level of literacy: According to 2011 census of India, literacy rate increased to a total

of 74.04% from 64.83% in year 2001, which further indicates that with the increased

level of literacy, the demand for paper is expected to rise.

i) Growing economy: With the growing economy of India, there will be more demand

for paper products as consumers will have higher paying capacity.

j) Growing circulation and readership: Owing to the increased level of literacy, the

newspaper circulation and readers are also growing at a very high rate. Thus the

demand for paper is likely to rise.

k) Export opportunity: A number of European and US paper mills are shutting down

owing to overcapacity and cost issues, an attractive export opportunity for Indian

paper mills. Besides, Indian paper manufacturers, utilising agriculture-based raw

material, possess a sustainable growth opportunity on account of growing

environment consciousness.

For more details please refer to the below:

S.�O

PAPER

TYPE USES VARIETIES DEMA�D DRIVERS

1 Writing and printing paper

Writing, printing, stationery

Creamwove, maplitho, paperboard, copier and coated paper

Population growth, level of literacy, public and private spending on education, level of business activity, increasing presence of modern retail formats and growth in the printing industry

2 Paperboard Industrial purpose Kraft paper, recycled board and virgin board

Growth in the packaging industry, industrial production and development in packaging technology and substitution by other materials

3 Speciality paper

Tissue paper, fine art paper, paper for specialised industrial usages such as steel mill kraft, insulation grades, etc

Duplex, grey and white board and MG posters

Consumption of this paper variety is linked to the standard of living as well as per capita income.

4 Newsprint paper

Printing of newspapers and magazines

Glazed and standard paper

Growing economy, growing circulation and readership


REGRESSIO� A�ALYSIS

egression analysis is a statistical tool for the investigation of relationships between

variables. Regression analysis includes any techniques for modeling and analyzing

several variables, when the focus is on the relationship between a dependent

variable and one or more independent variables. More specifically, regression analysis helps

one understand how the typical value of the dependent variable changes when any one of the

independent variables is varied, while the other independent variables are held fixed.

Regression analysis is widely used for prediction and forecasting, where its use has

substantial overlap with the field of machine learning. Regression analysis is also used to

understand which among the independent variables are related to the dependent variable, and

to explore the forms of these relationships. In restricted circumstances, regression analysis

can be used to infer causal relationships between the independent and dependent variables.

A large body of techniques for carrying out regression analysis has been developed. Familiar

methods such as linear regression and ordinary least squares regression are parametric, in

that the regression function is defined in terms of a finite number of unknown parameters that

are estimated from the data. �onparametric regression refers to techniques that allow the

regression function to lie in a specified set of functions, which may be infinite-

dimensional.

Linear Regression

inear regression is an approach to modeling the relationship between a scalar

variable Y and one or more variables denoted X. In linear regression, data are

modeled using linear functions, and unknown model parameters are estimated from

the data. Such models are called linear models. The various regression equations which can

be used for forecasting exercise are:

Fitting Simple Linear Regression: In this case a straight line is fitted to the data

containing one dependent variable and only one independent variable, e.g.,

Sales = a + b*(Price)

Fitting of the straight line can be done by following methods:

i. Graphical Method

ii. Least Squares Method

i. Graphical Method: In graphical method, we plot the sets of data of the two

variable (dependent and independent variable) on the graph and a line is drawn

through all the points. Thereafter, the movement of the series is assessed and

future values of the variable are forecasted.

R

L

Microeconomic Analysis of Ballarpur Industr

Figure 1.0 shows how to project trend by graphical method, using the figures on sales for

paper products from the numerical example of Ballarpur Industries Limited cited below:

ii. Least Squares Method

the coefficients of a linear function. It is based on the minimisation of squared

deviations between the best fitting line and the original observations given. In this

method, we fit the data on deman

Year

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

1578 1553

2146

400

800

1200

1600

2000

2400

2800

2001 2002 2003

Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005



Least Squares Method: Least squares estimation is a powerful tool to estimate



method, we fit the data on demand and time in the form of equations and then

Year

Bilt Sales

(In Rs. crs…..)

2001 1578

2002 1553

2003 2146

2004 2280

2005 2011

2006 2085

2007 2376

2008 1050

2009 1076

2010 1,100.00

Figure 1.0 Graphical Trend

2146

2280

20112085

2376

1050

2003 2004 2005 2006 2007 2008

Limited, Year: 2005-2010 6



Least squares estimation is a powerful tool to estimate



d and time in the form of equations and then

1076 1100

2009 2010


project the demand for the future period. These equations are termed as normal

equations and the task of least square method is to find out the values of the

coefficients in these equations.

The Equation of the linear trend is given by: Y =a + b X, where a is the intercept of the

demand curve, b is the slope of the curve (a and b are known as regression coefficients) and

X is the deviation from mean of independent variable. We can find the values of a and b

using the normal equations:

∑Y= n.a + b∑X

∑Y.X= a∑X + b∑X2

Let us explain linear trend projection with the help of a numerical example, data being the

same as taken in the graphical method:

Here n=9, i.e. odd and therefore, we shift the origin to the middle time period, viz., the year

2006.

Computation Of Trend Values (Standalone Data)

Year

(t)

BILT Sales

(In Rs. Crs…)

(Y) X=t - Middle Pt. X2 X*Y

Trend Values

Y= 1740.77 – 118.61x

2002 1553 -4 16 -6212 2215.21

2003 2146 -3 9 -6438 2096.6

2004 2280 -2 4 -4560 1977.99

2005 2011 -1 1 -2011 1859.38

2006 2085 0 0 0 1740.77

2007 2376 1 1 2376 1622.16

2008 1050 2 4 2100 1503.55

2009 1076 3 9 3228 1384.94

2010 1,100.00 4 16 4400 1266.33

∑Y= 15677 ∑X= 0 ∑X2=60 ∑X*Y= -7117


The equation for linear trend is given by Y= a + b

The normal equations for estimating a and b are:

∑Y= na + b∑X and ∑Y.X= a∑X + b∑X

15667= 9a + 0

a= 15667/9

a= 1740.77

Solving the normal equations we get a= 1740.77 and b=

Hence the equation for linear trend is Y= 174

Trend values for the years 2002 to 2010 are obtained on putting the value of X corresponding

to the given year and have been tabulated in the last column of table drawn above.

Similarly, we can find the estimate sales of the commodity for 2011 and same will be

obtained on putting X= 5 in * equation, i.e.

Y2011= 1740.77 – 118.61 X 5

2215.21

2096.6

1977.99

500

1000

1500

2000

2500

2002 2003 2004


The equation for linear trend is given by Y= a + b.X

The normal equations for estimating a and b are:

∑Y= na + b∑X and ∑Y.X= a∑X + b∑X2

-7117= 0 + 60b

b= -7117/60

b= -118.61

Solving the normal equations we get a= 1740.77 and b= -118.61

Hence the equation for linear trend is Y= 1740.77 + (-118.61)X

i.e. Y= 1740.77 – 118.61X ---------------


e been tabulated in the last column of table drawn above.


obtained on putting X= 5 in * equation, i.e.

= 1147.72(Rs. In Crores)

1977.99

1859.38

1740.77

1622.16

1503.55

2004 2005 2006 2007 2008


7117= 0 + 60b

7117/60

118.61

--------------- *


e been tabulated in the last column of table drawn above.


1384.94

1266.33

2009 2010


Ballarpur Industries Ltd. (Consolidated Data)

Linear Regression: Income vs Raw Material

All Figures In Billion Rs…..

Year

Income

(X)

Raw Material Expenses

(Y) X2 X.Y

Trend Values

Y= -3.576 + 0.546 X

2005 20.2 7.4 408.04 149.48 7.4532

2006 21.7 8.1 470.89 175.77 8.2722

2007 25.6 10.3 655.36 263.68 10.4016

2008 31.9 12.8 1017.61 408.32 13.8414

2009 30 13.4 900 402 12.804

2010 40.3 19.2 1624.09 773.76 18.4278

∑X= 169.7 ∑Y= 71.2 ∑X

2= 5076 ∑X.Y= 2173

7.48.1

10.3

12.813.4

19.2

7.45328.2722

10.4016

13.841412.804

18.4278

0

5

10

15

20

25

2005 2006 2007 2008 2009 2010

ACTUAL RAW MATERIAL EXPENSES (Y) TREND LINE : Y= -3.576 + 0.546 X


Ballarpur Industries Limited (Standalone Data)

Linear Regression: Income vs Raw Material

All Figures In Billion Rs…..

Year

Income

(X)

Raw Material Expenses

(Y) X2 X.Y

Trend Values

Y= -0.6314 + 0.474 X

2001 14.90 5 222.01 74.5 6.4312

2002 14.50 5.03 210.25 72.935 6.2416

2003 19.90 8.7 396.01 173.13 8.8012

2004 20.70 9 428.49 186.3 9.1804

2005 18.20 8.6 331.24 156.52 7.9954

2006 19.10 8.7 364.81 166.17 8.422

2007 21.80 10.20 475.24 222.36 9.7018

2008 10.20 4.6 104.04 46.92 4.2034

2009 10.70 5.1 114.49 54.57 4.4404

2010 10.90 5.12 118.81 55.808 4.5352

∑X= 161 ∑Y= 70 ∑X2= 2765 ∑X.Y= 1209

5 5.03

8.7 98.6 8.7

10.2

4.65.1 5.12

6.4312 6.2416

8.80129.1804

7.99548.422

9.7018

4.2034 4.4404 4.5352

0

2

4

6

8

10

12

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

ACTUAL RAW MATERIAL EXPENSES (Y) TREND LINE: Y= -0.6314 + 0.474 X


�on Linear Regression

onlinear regression is a form of regression analysis in which observational data are

modeled by a function which is a nonlinear combination of the model parameters

and depends on one or more independent variables. The non linear equation can take

any one of the forms : parabolic, logarithmic, exponential etc. depending on the way the trend

of the dependent variable behaves.

Fitting �on-Linear Regression: Some of the popular methods are the following:

i. Logarithmic Model:

Y= a.bX

Taking logarithm on both sides, we get , Log Y= Log a + X Log

i.e. Y1= A + B.X ,where Y1= Log Y , A= Log a and B= Log b

Normal Equations for estimating A and B are:

∑Y= n.A + B∑X

∑X.Y= A∑X + B∑X2

We solve these equations to get the value of A and B and finally we get, a= antilog A and

b= antilog B.

ii. Parabolic Regression Model: Sometimes we need to fit a curved trend line which by

a change in variable, could not be reduced to a linear form. The curved line can be

second degree polynomial or third degree polynomial etc. Let us assume that it is a

second degree polynomial given by the equation:

Y= a +b.X+c.X2

The normal equations for calculating a, b and c are:

∑Y= na + b∑X+ c∑X2

∑X.Y= a∑X + b∑X2 + c∑X3

∑X2.Y= a∑X2 + b∑X3 + c∑X4

�


iii. Multiple Regression Analysis: When more than one independent variable is taken in

the regression model, we get multiple regression coefficients and equations. A

multiple regression model, say for sales, may be stated as:

Sales = a*price + b*advertising + c*income + d*rivals price levels + e*personal disposable

income + u, where a, b, c, d and e are the partial regression coefficients which show the

effect of corresponding variables on sales. For example, a represents the percentage change

in sales as a result of 1% change in price, other things remain constant. Similarly b shows the

percentage change in sales as a result of 1% change in advertising outlay and so on. The

constant u represents the effect of all the variables which have been left out in the equation

but have an effect on sales.

In the above equation, sales is the dependent variable and all the variables on the right hand

side of the equation are independent variables. If the expected values of the independent

variables are substituted in the equation, the sales will be forecasted. The main advantage of

this model is that the effect of a large number of variables can be taken into account. Also,

this type of model enables the businessman to experiment with what might happen under

extreme or unlikely conditions. He might for example, like to find out the effect of doubling

of his rivals’ price, or reducing his own advertising outlay on his total sales. He can simply

inject these values into the model and get the required results.

Let us explain multiple regression analysis with the help of a numerical example.

Income = β0 + β1*Sales + β2*Salaries & Wages + β3*Raw Material Expense + β4*Selling

Expense

Year Income Sales Salaries

Raw Material

Expense

Selling & Dist.

Expenses

2005 2026.48 2011.72 105.86 740.54 39.67

2006 2169.56 2130.23 114.3 810.04 37.82

2007 2557.6 2531.5 105.73 1029.52 39.35

2008 3188.62 3052.76 34.89 1285.21 66.51

2009 3009.42 2975.03 49.12 1343.3 70

2010 4031.55 3986.5 52.03 1920.78 162.67


Using SPSS software, the above written model i.e :

Income = β0 + β1*Sales + β2*Salaries & Wages + β3*Raw Material Expense + β4*Selling

Expense

Will get reduce to

Income = β0 + β1*Sales + β2*Raw Material Expense

Now, putting values in the above equation, we get

Income = -481.441 + 1.627*Sales – 1.020*Raw Material Expense

i.e., we can analyze from the above equation that:

1. If sales are increased by 1 unit, then Income will be increased by 1.627 units.

2. If raw material expenses are increased by 1 unit, then income will be reduced by

1.020 units.


COST A�ALYSIS

y "Cost" we mean the sacrifice or foregoing that has occurred or has potential to

occur in future measured in monetary terms.

The following elements are included in the cost of production: Purchase of raw machinery,

Installation of plant and machinery, Wages of labour, Rent of Building, Interest on capital,

Wear and tear of the machinery and building, Advertisement expenses, Insurance charges,

Payment of taxes, In the cost of production, the imputed value of the factor of production

owned by the firm itself is also added, The normal profit of the entrepreneur is also included

in the cost of production.

The different types of costs are:

a) Actual Cost: Actual cost is defined as the cost or expenditure which a firm incurs for

producing or acquiring a good or service. The actual costs or expenditures are

recorded in the books of accounts of a business unit. Actual costs are also called as

"Outlay Costs" or "Absolute Costs" or "Acquisition Costs". Examples: Cost of raw

materials, Wage Bill etc.

b) Opportunity Cost: Opportunity cost is concerned with the cost of forgone

opportunities/alternatives. In other words, it is the return from the second best use of

the firms resources which the firms forgoes in order to avail of the return from the

best use of the resources. It can also be said as the comparison between the policy

that was chosen and the policy that was rejected. The concept of opportunity cost

focuses on the net revenue that could be generated in the next best use of a scare

input.

If a firm owns a land, there is no cost of using the land (i.e., the rent) in the firms

account. But the firm has an opportunity cost of using the land, which is equal to the

rent forgone by not letting the land out on rent.

c) Sunk Cost: Sunk costs are those do not alter by varying the nature or level of

business activity. Sunk costs are generally not taken into consideration in decision -

making as they do not vary with the changes in the future. Sunk costs are a part of the

outlay/actual costs. Sunk costs are also called as "Non-Avoidable costs" or

"Inescapable costs". Examples: All the past costs are considered as sunk costs. The

best example is amortization of past expenses, like depreciation.

d) Incremental Cost: Incremental costs are addition to costs resulting from a change in

the nature of level of business activity. As the costs can be avoided by not bringing

any variation in the activity in the activity, they are also called as "Avoidable Costs"

or "Escapable Costs". More ever incremental costs resulting from a contemplated

change is the Future, they are also called as "Differential Costs"

Example: Change in distribution channels, adding or deleting a product in the

product line.

e) Explicit Cost: Explicit costs are those expenses/expenditures that are actually paid

by the firm. These costs are recorded in the books of accounts. Explicit costs are

B


important for calculating the profit and loss accounts and guide in economic

decision-making. Explicit costs are also called as "Paid out costs" Example: Interest

payment on borrowed funds, rent payment, wages, utility expenses etc.

f) Implicit Cost: Implicit costs are a part of opportunity cost. They are the theoretical

costs i.e., they are not recognized by the accounting system and are not recorded in

the books of accounts but are very important in certain decisions. They are also called

as the earnings of those employed resources which belong to the owner himself.

Implicit costs are also called as "Imputed costs". Examples: Rent on idle land,

depreciation on dully depreciated property still in use, interest on equity capital etc.

g) Book Cost: Book costs are those business costs which don't involve any cash

payments but a provision is made in the books of accounts in order to include them in

the profit and loss account and take tax advantages, like provision for depreciation

and for unpaid amount of the interest on the owners capital.

h) Out Of Pocket Costs: Out of pocket costs are those costs or expenses which are paid

to the outsiders of the firm. All the explicit costs fall into the category of out of

pocket costs. Examples: Rent Paid, wages, salaries, interest etc.

i) Accounting Costs: Accounting costs are the actual or outlay costs that point out the

amount of expenditure that has already been incurred on a particular process or on

production as such accounting costs facilitate for managing the taxation need and

profitability of the firm. Examples: All Sunk costs are accounting costs.

j) Economic Costs: Economic costs are related to future. They play a vital role in

business decisions as the costs considered in decision - making are usually future

costs. They have the nature similar to that of incremental, imputed explicit and

opportunity costs.

k) Direct Cost: Direct costs are those which have direct relationship with a unit of

operation like manufacturing a product, organizing a process or an activity etc. In

other words, direct costs are those which are directly and definitely identifiable. The

nature of the direct costs are related with a particular product/process, they vary with

variations in them. Therefore all direct costs are variable in nature. It is also called as

"Traceable Costs" Examples: In operating railway services, the costs of wagons,

coaches and engines are direct costs.

l) Indirect Costs: Indirect costs are those which cannot be easily and definitely

identifiable in relation to a plant, a product, a process or a department. Like the

direct costs indirect costs, do not vary i.e., they may or may not be variable in nature.

However, the nature of indirect costs depend upon the costing under consideration.

Indirect costs are both the fixed and the variable type as they may or may not vary as

a result of the proposed changes in the production process etc. Indirect costs are also

called as Non-traceable costs. Examples: The cost of factory building, the track of a

railway system etc., are fixed indirect costs and the costs of machinery, labour etc.

m) Controllable Costs: Controllable costs are those which can be controlled or

regulated through observation by an executive and therefore they can be used for

assessing the efficiency of the executive. Most of the costs are controllable.

Example: Inventory costs can be controlled at the shop level etc.


n) �on Controllable Costs: The costs which cannot be subjected to administrative

control and supervision are called non controllable costs. Example: Costs due

obsolesce and depreciation, capital costs etc.

o) Historical Costs and Replacement Costs: Historical cost or original costs of an

asset refers to the original price paid by the management to purchase it in the past.

Whereas replacement costs refers to the cost that a firm incurs to replace or acquire

the same asset now. The distinction between the historical cost and the replacement

cost result from the changes of prices over time. In conventional financial accounts,

the value of an asset is shown at their historical costs but in decision-making the firm

needs to adjust them to reflect price level changes. Example: If a firm acquires a

machine for $20,000 in the year 2000 and the same machine costs $40,000 now. The

amount $20,000 is the historical cost and the amount $40,000 is the replacement cost.

p) Shutdown Costs: The costs which a firm incurs when it temporarily stops its

operations are called shutdown costs. These costs can be saved when the firm again

start its operations. Shutdown costs include fixed costs, maintenance cost, layoff

expenses etc.

q) Abandonment Costs: Abandonment costs are those costs which are incurred for the

complete removal of the fixed asset from use. These may occur due to obsolesce or

due to improvisation of the firm. Abandonment costs thus involve problem of

disposal of the asset.

r) Urgent Costs and Postponable Costs: Urgent costs are those costs which have to be

incurred compulsorily by the management in order to continue its operations. If

urgent costs are not incurred in time the operational efficiency of the firm falls.

Example: Cost of material, labour, fuel etc.

Postponable costs are those which if not incurred in time do not effect the operational

efficiency of the firm. Examples are maintenance costs.

s) Business Cost and Full Cost: Business costs include all the expenses incurred by

the firm to carry out business activities. Costs Include all the payments and

contractual obligations made by the firm together with the book cost of depreciation

on plant and equipment. Full costs include business costs, opportunity costs, and

normal profits. Opportunity costs is the expected return/earnings from the next best

use of the firms resources like capital, land and building, owners efforts and time.

Normal profits is necessary minimum earning in addition to the opportunity costs,

which a firm must receive to remain in its present occupation.

t) Fixed Costs: Fixed costs are the costs that do not vary with the changes in output. In

other words, fixed costs are those which are fixed in volume though there are

variations in the output level.. If the time period in volume under consideration is

long enough to make the adjustments in the capacity of the firm, the fixed costs also

vary. Examples: Expenditures on depreciation costs of administrative, staff, rent,

land and buildings, taxes etc.

u) Variable Costs: Variable Costs are those that are directly dependent on the

output i.e., they vary with the variation in the volume/level of output. Variable costs

increase in output level but not necessarily in the same proportion. The


proportionality between the variable costs and output depends upon the utilization of

fixed facilities and resources during the production process. Example: Cost of raw

materials, expenditure on labour, running cost or maintenance costs of fixed assets

such as fuel, repairs, routine maintenance expenditure.

v) Total Cost, Average Cost and Marginal Cost: Total cost (TC) refers to the money

value of the total resources/inputs required for the production of goods and services

by the firm. In other words, it refers to the total outlays of money expenditure, both

explicit and implicit, on the resources used to produce a given level output. Total

cost includes both fixed and variable costs and is given by:

TC = VC + FC

Average Cost (AC) , refers to the cost per unit of output assuming that production of

each unit incurs the same cost. It is statistical in nature and is not an actual cost. It is

obtained by dividing Total Cost (TC) by Total Output (Q)

AC= TC/Q

Marginal costs(MC), refers to the additional costs that are incurred when there is an

addition to the existing output level of goods and services. In other words, it is the

addition to the Total Cost (TC) on account of producing additional units.

w) Short Run Cost and Long Run Cost: Both short run and long run costs are related

to fixed and variable costs and are often used in economic analysis.

Short Run Cost: The costs which vary with the variation in the output with size of the firm

as same. Short run costs are same as variable costs. Broadly, short run costs are associated

with variable inputs in the utilization of fixed plant or other requirements.

Long Run Cost: The costs which are incurred on the fixed assets like land and building,

plant and machinery etc., Long run costs are same as fixed costs. Usually, long run costs are

associated with variations in size and kind of plant.

For the cost analysis, the consolidated data of the expenses and income statements of the

company for the previous six years has been taken.

The expenses have been divided on various bases such as

� Raw material expenses

� Marketing expenses

� Compensation to employees

� Rent and lease rent

� Taxes

� Power, Fuel & Water expenses

� Selling and Distribution Expenses

� Repair & Maintenance Expenses

These are the major heads under which expenses are found.


The income has been divided on various bases such as

� Income from financial services

� Income from non-financial services

� Interest

� Dividends

� Treasury operations

� Other Income

� Prior period income and extraordinary income

� Industrial Sales

Ballarpur Industries Ltd. 2005 2006 2007 2008 2009 2010

(all figures in Rs. Crores……)

Total income 2026.48 2169.56 2557.6 3188.62 3009.42 4031.55

Sales 2011.72 2130.23 2531.5 3052.76 2975.03 3986.5

Industrial sales 1877.28 2130.17 2531.32 3052.28 2974.45 3985.67

Income from non-financial services 134.44 0.06 0.18 0.48 0.58 0.83

Income from financial services 8.21 14.52 15.12 84.99 20.93 33.62

Interest 5.6 14.52 15.12 84.99 20.88 22.76

Dividends 0 0 0 0 0 0

Treasury operations 2.61 0 0 0 0.05 10.86

Other income 2.77 6.4 9.87 12.71 8.27 10.09

Prior period income & extraordinary income 3.78 18.41 1.11 38.16 5.19 1.34

Change in stock 4.7 5.58 -19.96 2.13 47.44 12.92

Total expenses 1863.05 1961.1 2282.54 2887.13 2868.98 3804.06

Raw material expenses 740.54 810.04 1029.52 1285.21 1343.3 1920.78

Purchase of finished goods 119.48 92.36 49.47 12.42 41.76 56.67

Power, fuel & water charges 225.17 246.81 326.35 446.17 441.85 546.49

Compensation to employees 123.69 128.32 140.8 207.34 219.11 248.3

Indirect taxes 211.41 215.41 207.79 198.22 120.67 104.7

Lease rent & other rent 8.61 3.23 3.32 1.77 1.33 1.17

Repairs & maintenance 51.28 54.2 53.55 62.46 37.67 56.69

Insurance premium paid 6.41 6.04 5.85 4.99 7.83 8.77

Outsourced mfg. jobs (incl. job works, etc.) 4.28 8.29 8.23 11.06 11.01 9.03

Selling & distribution expenses 39.67 37.82 39.35 66.51 70 162.67

Miscellaneous expenses 13.01 19.09 43.65 32.88 37.99 47.17


Ballarpur Industries Limited (Consolidated Data)

Cost Analysis: Raw Material Cost to Income

Year Income Raw Material Cost Raw Material Cost

Income Percentage

2005 2026.48 740.54 0.365431684 36.54316845

2006 2169.56 810.04 0.373366028 37.33660281

2007 2557.6 1029.52 0.402533625 40.25336253

2008 3188.62 1285.21 0.403061513 40.30615125

2009 3009.42 1343.3 0.44636508 44.63650803

2010 4031.55 1920.78 0.476437102 47.64371024

36.54 37.34

40.25 40.31

44.64

47.64

0

5

10

15

20

25

30

35

40

45

50

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2005 2006 2007 2008 2009 2010

Income RAW MATERIAL COST Ratio: Raw Material Cost to Income(in %)


The cost/income ratio is (operating expenses/operating income). The cost income ratio is

most commonly used in the financial sector. It is useful to measure how costs are changing

compared to income - for example, if a bank's interest income is rising but costs are rising at

a higher rate looking at changes in this ratio will highlight the fact. The cost-to-income ratio

shows a company's costs in relation to its income. To get the ratio, divide the operating costs

(administrative and fixed costs, such as salaries and property expenses, but not bad debts that

have been written off) by operating income. The ratio gives investors a clear view of how

efficiently the firm is being run - the lower it is, the more profitable the organization will be.

Changes in the ratio can also highlight potential problems: if the ratio rises from one period

to the next, it means that costs are rising at a higher rate than income, which could suggest

that the company has taken its eye off the ball in the drive to attract more business.

� From the data, we can clearly see that the Raw Material Cost w.r.t. Income of the

company is increasing at a very excessive or exorbitant rate. The raw material cost for

the year 2005 accounts for around 36.5% of the total Income of the company and

accounts for around 37.3% for the year 2006. This increase in percentage tells us that

the raw material costs are increasing at a higher rate than income. Similarly, for the

year 2007 & 2008, the cost/income ratio (in %) is 40.25% & 40.3% i.e. for the period

from 2007 to 2008 the cost/income ratio is almost constant. The cost/income ratio for

the year 2009 (44.63%) is increasing at a very high rate as compared to previous

years. From the year 2008-2009 the cost/income ratio increased from 40.3% to

44.63%, showing around 11% increase in the cost to income ratio and in the year

2010 the cost/income ratio again increased from 44.63% to 47.64%.

Therefore, considering the above figures, we can conclude that the company has taken its

eye off the ball and there is a need to control the raw material costs of the company

because the income is not growing/increasing at the same rate as costs are.



Cost Analysis: Power/Fuel/Water costs to Income

Year Income Power, Fuel &

Water Charges

Power/Fuel/Water Costs

Income Percentage

2005 2026.48 225.17 0.111113853 11.11138526

2006 2169.56 246.81 0.113760394 11.37603938

2007 2557.6 326.35 0.127600094 12.76000938

2008 3188.62 446.17 0.139925736 13.99257359

2009 3009.42 441.85 0.146822311 14.68223113

2010 4031.55 546.49 0.135553323 13.55533232

11.11 11.38

12.76

13.9914.68

13.56

0

2

4

6

8

10

12

14

16

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2005 2006 2007 2008 2009 2010

Income(in Rs. crs...) Power, Fuel & Water Charges(in Rs. crs.....)

Ratio: Power,Fuel & Water costs to Income (in %)


From the data given on the previous page, we can analyze that the Power, Fuel & Water Cost

w.r.t. Income of the company is increasing at a moderate/reasonable rate. From year 2005-

2009 the Power, Fuel & Water cost w.r.t. Income increased from 11.11% to 14.68% which

shows percentage increase of around 32%. From year 2008 to 2009, the company took some

effective measures that resulted in decrease in power, fuel and water costs from Rs. 446.17

crs to Rs. 441.85 crs. Some of the measures taken by the company, during the period 2008-

2009, to reduce the power, fuel and water costs are:

� Installation of VFD's at various locations. � Installation of energy efficient pumps. � Installation of energy efficient motors. � Installation of electronic chokes in place of conventional chokes in lighting system of

mills, CFLs in place of incandescent lamps and Metal Halide Lamps in street lighting system of mills & colony.

� Power Sensors in street Lighting � VFDs in various equipment. � Optimisation in water consumption by optimising the operation of Disc Filter at PM 1

for recycling of base water. � Optimising water consumption across the mill for reduction in intake pump operating

hours. � Improvement in power factor 0.999 by addition of capacitors. � Reduction in the idle running hrs of equipments. � Maximisation of the utilization of bamboo dust consumption in boiler to save the coal. � Use of CFL to conserve the lighting energy. 13.0ptimize the thermal losses by

promptly attending the steam/condensate leakages. From year 2009-2010, the power, fuel, water costs increased from Rs. 441.85 crs to Rs.546.49 crs, showing increase of 23.7% and Income increased around 34% which resulted in decrease, in the power, fuel, water costs to income ratio, from 14.68% to 13.56%. Therefore, considering the above figures, we can conclude that the company has taken

effective measures to control the power, fuel and water costs of the company during the

period from 2008-2009 but has taken its eye off the ball during the period 2009-2010. So

there is a need to control the power, fuel and water costs of the company which would

gradually result in increase in Income of the company.



Cost Analysis: Indirect Taxes to Income

Year Income Indirect Taxes Indirect Taxes

Income Percentage

2002-2003 1699.14 116.5 0.068564097 6.856409713

2003-2004 2281.43 173.02 0.0758384 7.58383996

2004-2005 2300.59 195.2 0.0848478 8.484779991

2005-2006 2026.48 211.41 0.104323754 10.43237535

2006-2007 2169.56 215.41 0.099287413 9.928741312

2007-2008 2557.6 207.79 0.081244135 8.124413513

2008-2009 3188.62 198.22 0.062164824 6.216482365

2009-2010 3009.42 120.67 0.040097427 4.009742741

2010-2011 4031.55 104.7 0.02597016 2.597016036

Indirect taxes w.r.t. income are continuously increasing from the period 2002-03 to 2005-06

and then it is continuously decreasing from the period 2005-06 to 2010-11.

6.86

7.58

8.48

10.439.93

8.12

6.22

4.01

2.60

0

2

4

6

8

10

12

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

Income (in Rs. crs) Indirect Taxes (in Rs. crs) Ratio: Indiect Taxes to Income (in %)



Cost Analysis: Marketing Expenses to Income

Year Income Marketing

Expenses

Marketing Expenses

Income Percentage

2002-2003 1699.14 28.42 0.016726109 1.67261085

2003-2004 2281.43 37.66 0.016507191 1.650719067

2004-2005 2300.59 40.4 0.017560713 1.756071269

2005-2006 2026.48 22.85 0.01127571 1.12757096

2006-2007 2169.56 5.57 0.002567341 0.256734084

2007-2008 2557.6 18.93 0.00740147 0.740147013

2008-2009 3188.62 37.95 0.0119017 1.190170042

2009-2010 3009.42 39.19 0.013022443 1.302244286

2010-2011 4031.55 106.45 0.026404237 2.640423658

1.67 1.651.76

1.13

0.26

0.74

1.191.30

2.64

0

0.5

1

1.5

2

2.5

3

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

Income (in Rs. crs) Marketing Expenses (in Rs. crs) Ratio: Marketing Expenses to Income (in %)


From the data, we can clearly see that the Marketing Expenses (which includes commissions,

rebates, discounts, sales promotional, expenses on direct selling agents & entertainment

expenses) w.r.t. Income of the company is increasing at a very moderate rate from year 2002-

03 to 2004-05. Then from year 2004-05 to 2007-08, there is a fall in the Marketing

Expenses/Income ratio and accounts for around 57.71%. The reason is quite obvious that

between this period company reduced the manpower, due to which company was able to cut

on the commission expenses and expenses on direct selling agents.

From year 2007-08 to 2009-10, the marketing expenses/income ratio again increased from

0.74% to 1.30%, showing around 75.67% increase in the marketing expenses to income ratio.

And from year 2009-10 to 2010-11, the marketing expenses to income ratio almost doubled.

As income and marketing expenses are directly proportional to each other. Therefore,

considering the above figures, we can conclude that the company has taken the effective

measures to control the perks and the commissions given to the employees.



Cost Analysis: Rent Expense to Income

Year Income Rent & Lease Rent Rent Expense

Income Percentage

2002-2003 1699.14 12.47 0.007339007 0.733900679

2003-2004 2281.43 18.4 0.008065117 0.806511705

2004-2005 2300.59 17.78 0.007728452 0.772845227

2005-2006 2026.48 8.61 0.004248747 0.42487466

2006-2007 2169.56 3.23 0.001488781 0.148878114

2007-2008 2557.6 3.32 0.001298092 0.129809196

2008-2009 3188.62 1.77 0.000555099 0.055509907

2009-2010 3009.42 1.33 0.000441946 0.044194562

2010-2011 4031.55 1.17 0.000290211 0.029021096

We can conclude from the above graph that the company has taken the effective measures

to control the rent expense of the company. Rent Expense as a percentage of income is

continuously decreasing from period 2002-03 to 2010-11.

0.73

0.810.77

0.42

0.15 0.13

0.06 0.04 0.03

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

Income (in Rs. crs) Rent Expense (in Rs. crs) Ratio: Rent Expense to Income (in %)



Cost Analysis: Repair & Maintenance Cost to Income

Year Income

Repair &

Maintenance

Costs

Repair & Maintenance Costs

Income Percentage

2002-2003 1699.14 46.9 0.027602199 2.760219876

2003-2004 2281.43 50.31 0.022051959 2.205195864

2004-2005 2300.59 51.43 0.022355135 2.235513499

2005-2006 2026.48 51.28 0.025304962 2.53049623

2006-2007 2169.56 54.2 0.024982024 2.4982024

2007-2008 2557.6 53.55 0.020937598 2.093759775

2008-2009 3188.62 62.46 0.019588411 1.958841129

2009-2010 3009.42 37.67 0.012517362 1.251736215

2010-2011 4031.55 56.69 0.014061589 1.406158922

We can conclude from the above graph that the company has taken the effective measures to

control the repair and maintenance cost of the company. Repair & Maintenance costs as a

percentage of income is continuously decreasing except for the period 2004-05 and 2005-06.

2.76

2.21 2.24

2.53 2.50

2.091.96

1.251.41

0

0.5

1

1.5

2

2.5

3

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

Income (in Rs. crs) Repair & Maintenance Costs (in Rs. crs)

Ratio: Repair & Maintenance Costs to Income (in%)


Ballarpur Industries Limited

Cost Analysis: Salary & Wages to Income Ratio

Year Income Salaries & Wages Salaries & Wages

Income Percentage

2005 2026.48 105.86 0.052238364 5.223836406

2006 2169.56 114.3 0.052683493 5.268349343

2007 2557.6 105.73 0.041339537 4.133953707

2008 3188.62 34.89 0.010942038 1.094203762

2009 3009.42 49.12 0.016322082 1.6322082

2010 4031.55 52.03 0.012905706 1.290570624

5.22 5.27

4.13

1.09

1.63

1.29

0

1

2

3

4

5

6

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2005 2006 2007 2008 2009 2010

Income (in Rs.crs) Salaries & Wages (in Rs. crs) Salaries & Wages costs w.r.t. Income (in %)


From the graph, we can analyze that salaries and wages w.r.t. income is decreasing at a very

high rate. Salary and wages of the employees in the year 2005 accounts for 5.22% of the total

income of the company and accounts for 5.27% of the total income in the year 2006. From

year 2006 to 2007, the salary expense/income ratio decreased from 5.27% to 4.13% showing

around 21.6% decrease in the salary/income ratio and the ratio further decreased from 4.13%

to 1.09% from the year 2007 to 2008, which accounts for around 73.6% decrease in the

salary/income ratio (Reason: the employee strength of the company in the year 2007 was

6000 and in the year 2008, the employee strength was reduced to 2000 which resulted in the

sharp decline in the salary/income ratio). From the year 2008 to 2010, the salary

expense/income ratio is increasing at a very moderate rate.

Therefore, considering the above figures, we can conclude that the company has taken

effective measures to control the salary and wages expense.


Ballarpur Industries Limited

Cost Analysis: Selling & Dist. Expenses to

Income Ratio

Year Income

Selling &

Distribution

Expenses

Selling & Distribution Expenses

Income Percentage

2005 2026.48 39.67 0.019575816 1.957581619

2006 2169.56 37.82 0.017432106 1.743210605

2007 2557.6 39.35 0.015385518 1.538551767

2008 3188.62 66.51 0.020858553 2.085855323

2009 3009.42 70 0.023260296 2.3260296

2010 4031.55 162.67 0.040349245 4.034924533

1.961.74

1.54

2.092.33

4.03

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2005 2006 2007 2008 2009 2010

Income (in Rs. Crs) Selling & Dist. Expenses (in Rs. crs)

Selling & dist. Expenses w.r.t. Income (in %)


Distribution expense is a part of selling expense. It comes under the heading of selling

expense. Selling expense includes various other heads like advertisement expense,

distribution expense, packing expense, octroi, sales tax, hidden profit, cost of product etc.

while distribution expense is the expense occured by the producer of the goods in the form of

transportation cost barred by him for making the goods reach the retailers, wholesalers.

� From the above data, we can clearly see that the Selling & Distribution expenses w.r.t.

Income of the company is decreasing at a very moderate rate in the beginning from

year 2005 to 2007. This decrease in percentage tells us that the income is increasing at

a higher rate than selling and distribution expenses. From 2007-2010, the selling and

distribution expenses/income ratio are increasing at a very high rate. From the year

2007-2010 the selling & dist. expenses/income ratio increased from 1.53% to 4.03%,

showing around 163.4% increase in the selling and distribution expenses w.r.t.

income.

Therefore, considering the above figures, we can conclude that the company has taken its

eye off the ball and there is a need to control the selling and distribution expenses of the

company because the income is not growing/increasing at the same rate as expenses are.


PRODUCTIO� A�ALYSIS

he production function for Ballarpur Industries Limited has to be calculated. The

various factors which are required in the production analysis are: -

� Output: - The output for the company is being depicted by the total income of the

company.

� Labour Cost: - The total labour cost is being taken as the total compensation that is

paid to the employees of the company.

� Capital: - The total capital cost that is taken into the company is the sum of

authorised equity capital, issued equity capital and reserves.

The data is taken for the last six years (all figures in Rs. Crores….)

Year Total

Income Employee Expenses

Authorised Equity Capital

Issued Equity Capital Reserves

Total Capital

Employee Expense / Total Income (In

%)

Total Capital / Total Income

(In %)

2005-06 2026.48 123.69 297.5 162.72 1330.67 1790.89 6.103687182 88.37442264

2006-07 2169.56 128.32 297.5 163.52 1471.12 1932.14 5.914563322 89.05676727

2007-08 2557.6 140.8 297.5 186 1801.58 2285.08 5.505161089 89.34469815

2008-09 3188.62 207.34 297.5 111.1 1664.28 2072.88 6.502499514 65.00868714

2009-10 3009.42 219.11 297.5 186 1719.21 2202.71 7.280804939 73.19383802

2010-11 4031.55 248.3 297.5 206 2112.27 2615.77 6.158921507 64.88248937

Now we plot the function of labour/output and capital/output:

a) Labour/ Output (in%) : The Value of Total Labour i.e. Employee expenditure and

the output i.e. total income is given in the above table taken from the yearly report of

BILT for 2005-06 to 2010-11. The net percentage value of Labour/Income is

calculated and then plotted in the graph as shown on the next page.

T


Analysis: From the above chart, we observe that the ratio has been fluctuating over the years

but on an average the ratio is constant over the years.

Now, we observe the pattern for capital/output.

b) Capital/ Output % : The Value of Total Capital i.e. (Sum of authorized equity

capital, issued equity capital and reserves) and the output i.e. total income is

mentioned in the table taken from the yearly report BILT for 2005-06 to 2010-11.

The net percentage value of Capital/Output is calculated and then plotted in the graph

as shown below:

Analysis: We see that the ratio capital/output has decreased over the time. The reason is

though company has increased the capital spending over the time but the income has also

increased over the subsequent years.

88.37 89.06 89.34

65.01

73.19

64.88

0

10

20

30

40

50

60

70

80

90

100

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Capital/ Output (in %)

Capital/ Output (in %)

6.10 5.915.51

6.50

7.28

6.16

0

1

2

3

4

5

6

7

8

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Labour/ Output (in %)

Labour/ Output (in %)


Now, we find the output as function of labour and capital using the function

Output = f(L,K), where L is the labour cost and K is the capital cost.

We define: O = A.KαL

β

where α, β are the constants. A is the technological parameter, α is the elasticity of output

with respect to capital and β is the elasticity of output with respect to labour.

To obtain the values of α,β we will use regression analysis. To do so we take log on both the

sides, which will give us equation:

Log O =Log A + α Log K + β Log L

The various logarithmic values for income, labour and capital are calculated. Then we use

regression analysis to calculate the values of α, β thereof.

Year Total Income Employee

Expense Total Capital

2005-06 10.30674232 9.09233459 10.25306891

2006-07 10.33637167 9.108294351 10.28603859

2007-08 10.40783262 9.148602655 10.35890141

2008-09 10.50360277 9.316683094 10.31657416

2009-10 10.4784828 9.340662199 10.34295732

2010-11 10.60547205 9.39497672 10.41759955

Using SPSS software we get the values of A, alpha and beta. The values observed are as

follows.

A = -2.001

α = 0.677

β = 0.590

α+ β = 1.267

so, we get the production function as:

O= -2.001* K0.677

*L0.590

So, we observe that the value of α+ β is more than 1, therefore the production function

exhibits increasing returns to scale because increase in output i.e. total income is more than

proportionate increase in inputs i.e. capital and labour.


MARKET STRUCTURE: I�DIA� PAPER

I�DUSTRY

he Indian Paper Industry is a booming industry and is expected to grow in the years

to come. The Indian Paper Industry is among the top 15 global players today, the

industry offers an output of nearly six million tonnes, and the industry is working

towards the objective of attaining a production capacity of 13 million tonnes by the end of

the year 2020.Indian paper industry is poised to grow and touch 11.5 million tonnes from

9.18 million tonnes in the year 2011-12 from 2009-10 at the rate of 8% per annum.

According to ASSOCHAM paper on “Growth of Paper Industry in India“, per capita paper

consumption increased to 9.18 kg in 2009-10 as compared to 8.3 kg during 2008-09. Still,

the figure is low (9.2 kg) compared to 42 kg in China and 350 kg in developed countries.

India has emerged as the fastest growing market when it comes to consumption, posting

10.6% growth in per capita consumption of paper in 2009-10.

India produces many varieties of papers, namely, printing and writing paper, packaging

paper, coated paper and some speciality paper. Varieties under printing and writing paper are

creame wove paper, super printing paper, maplitho paper (non-surface and surface size),

copier paper, bond paper and coating base paper and others. The varieties under packaging

paper are kraft paper, boards, poster paper and others. The other varieties under coated paper

are art paper/board, chromo paper/board and others. There are approximately 600 paper

mills in India, with capacity ranging from 3 to 700 TPD, of which sixteen are major players.

Market Structure Seller

�umber

Seller Entry

Barriers �ature Of Product

Buyer

�umber

Buyer Entry

Barriers

Perfect Competition

Very

Large No Homogeneous

Very

Large No

Monopolistic competition Many No Heterogeneous Many No

Oligopoly Few Yes

Homogeneous

or Heterogeneous Few No

Monopoly One Yes Unique Many No

Monopsony Many No

Homogeneous

or Heterogeneous One Yes

T


Market Structure Comparison

�umber

of firms

Market

power

Elasticity

of

demand

Product

differenti

ation

Excess

profits Efficiency

Profit

maximization

condition

Pricing

power

Perfect Competition Infinite None

Perfectly elastic None No Yes P=MR=MC

Price taker

Monopolistic competition Many Low

Highly elastic

(long run) High

Yes/No (Short/Long) No MR=MC

Price setter

Monopoly One High Relatively inelastic

Absolute (across

industries) Yes No MR=MC Price setter

Indian Paper Industry is Monopolistic competitive market, where there are a large

number of firms, each having a small proportion of the market share and slightly

differentiated products.

Monopolistic competition is a market situation in which there are many sellers of a particular

product, but the product of each seller is in some way differentiated in the minds of

consumers from the product of every other seller.

Examples of Monopolistic Competition:

For example, BILT supplies branded goods like Sunshine Super Printing, BILT Classic,

Magna Print, Wisdom Print, BILT TA NSD and Easy Print. The copier paper is available as

BILT Copy Power, BILT Image Copier, BILT Matrix and BILT Ten on Ten. There are many

other firms in the market which sell similar paper products (not identical) with different brand

names like:

Company Product �ame

ITC PSPD Digi Art, Perma White, HiZine, Alfa Zap

JK PAPER LIMITED Notepad, JK Printerblank, JK Prisitne Cote, JK IV Board, JK Endura, Cedar

TAMIL NEWSPRINT Ace Marvel, Perfect Copier, Commander A4

CENTURY PULP & PAPER Century Green, Century Elanza,

AP PAPER MILLS Andhra Royal Silk, Andhra Primavera, Andhra Starwhite & Reflection


Major Players

�ame Market

Capital Total

Assets �et

Worth Investments Income Total

Expenses Sales

Turnover �et

Profit

Ballarpur Ind 1,638.81 2,513.39 1,651.30 1,151.03 1,092.25 875.03 1,059.12 30.16

Tamil Newsprint 680.69 2,403.88 915.79 1.14 1,251.12 888.36 1,184.45 148.99

AP Paper Mills 638.11 996.3 502.94 16.64 634.98 484.21 792.64 44.94

Rainbow Papers 575.2 702.38 285.01 0 388.63 299.47 394.99 37.1

JK Paper 549.1 1,127.26 588.90 82.77 1,377.95 1,112.18 1,233.29 106.42

West Coast Paper 427.32 1,882.94 670.48 46.71 1,082.01 836.70 1,068.59 90.08

Seshasayee Paper 231.19 680.61 283.05 23.23 577.06 460.35 574.52 65

Sirpur Paper 75.03 504.68 223.49 0 366.95 327.41 367.61 -15.32

Pudumjee Pulp 69.5 156.9 111.9 9.95 235.28 216.14 226.68 8.11

Rama Newsprint 60.78 317.61 81.14 0.02 299.32 305.52 320.45 -

140.29

Star Paper 39.1 141.51 126.31 35.79 274.7 276.36 269.26 -10.15

Pudumjee Ind 29.52 81.26 40.28 17.68 114.12 111.15 100.22 -1.56

Shreyans Ind 27.23 101.47 66.1 0.22 260.67 243.33 255.81 4.72

Malu Paper 19.7 122.21 38.11 0.11 153.69 137.35 168.83 -2.98

Ruchira Papers 19.28 199.52 58.51 0 200.55 180.56 254.02 4.01

Magnum Ventures 17.11 368.48 83.58 0 134.08 118.07 173.1 -28.44

TOTAL 5,097.67 12,300.40 5,726.89 1,385.29 8,443.36 6,872.19 8,443.58 340.79

4ote: Above data is taken from www.moneycontrol.com as on October 15, 2011.

There are approximately 600 paper mills in India, with capacity ranging from 3 to 700

TPD, of which above mentioned sixteen are major players.


Characteristic

(i) A fairly large number of sellers

competition is fairly large. Each firm produces a small portion of industry, output; each buyer

also purchases a very small part of the industry output.

relatively competitive with very little market control over price or quantity.

produces or sells a close substitute for the product of other firms in

industry.

There are approximately 600 paper mills in India

Market Capital: BILT vs Others

11%

11%

8%

5%

1%1%

1%1%

1%


Characteristics Of Monopolistic Competition

(i) A fairly large number of sellers and buyers: The number of firms in

Each firm produces a small portion of industry, output; each buyer

also purchases a very small part of the industry output. This ensures that all firms are

relatively competitive with very little market control over price or quantity.

or sells a close substitute for the product of other firms in the product group or

There are approximately 600 paper mills in India, of which sixteen are major players.

32%

68%

Market Capital: BILT vs Others

32%

13%

13%

1%

0%

0%0%

Market Capital


Of Monopolistic Competition

The number of firms in monopolistic

Each firm produces a small portion of industry, output; each buyer

This ensures that all firms are

relatively competitive with very little market control over price or quantity. Each firm

the product group or

which sixteen are major players.

BILT

Others

BILT

Tamil Newsprint

AP Paper Mills

Rainbow Papers

JK Paper

West Coast Paper

Seshasayee Paper

Sirpur Paper

Pudumjee Pulp

Rama Newsprint

Star Paper

Pudumjee Ind

Shreyans Ind

Malu Paper

Ruchira Papers

Magnum Ventures


It is quite evident from the chart representing market capital of the

there are very large number of firms producing the same product i.e. paper, with each firm’s

product a fairly close substitute for the products of the other firms in the same product group.

Since numbers of sellers are very large

the market capital of Indian Paper Industry, it can be clearly seen from the chart that BILT,

which accounts for 32% of the total market capital, dominates all the other companies/firms.

On the other hand, buyers are also very large in number.

products/goods are being offered, where the goods are being sold, all differentiating

characteristics of the goods, the good's price, whether a firm is making a profit and if

much. It can be clearly seen that the sales of the companies like BILT (Rs. 1059.12 crs),

Tamil Newsprint (Rs. 1184.45 crs), JK Paper (1233.29 crs) and West Coast Paper

(Rs. 1068.59) are almost uniformly distributed i.e. buyer’s/consum

among these companies. If a particular company decides to charge a price higher than the

existing market price, its demand will certainly decline because the products are slightly

differentiated which makes consumers indifferent

companies as the consumer is price conscious.

7%

4%

3%

4%

BILT

JK Paper

Pudumjee Pulp

Shreyans Ind


It is quite evident from the chart representing market capital of the Indian Paper Industry that



Since numbers of sellers are very large, there is competition among all the firms. Comparing



On the other hand, buyers are also very large in number. Buyers know exactly what

goods are being offered, where the goods are being sold, all differentiating

characteristics of the goods, the good's price, whether a firm is making a profit and if

It can be clearly seen that the sales of the companies like BILT (Rs. 1059.12 crs),


(Rs. 1068.59) are almost uniformly distributed i.e. buyer’s/consumers are equally distributed



differentiated which makes consumers indifferent towards the products offered by different

companies as the consumer is price conscious.

13%

14%

9%

5%

15%

13%

3%

4%

3%

1%3%

2%

3%

2%Sales Turnover

Tamil Newsprint AP Paper Mills Rainbow Papers

West Coast Paper Seshasayee Paper Sirpur Paper

Rama Newsprint Star Paper Pudumjee Ind

Malu Paper Ruchira Papers Magnum Ventures


Indian Paper Industry that



, there is competition among all the firms. Comparing



uyers know exactly what

goods are being offered, where the goods are being sold, all differentiating

characteristics of the goods, the good's price, whether a firm is making a profit and if so how

It can be clearly seen that the sales of the companies like BILT (Rs. 1059.12 crs),


ers are equally distributed



towards the products offered by different

Rainbow Papers

Sirpur Paper

Pudumjee Ind

Magnum Ventures


(ii) Differentiation in products or Heterogeneous Products: Under monopolistic

competition, the firms sell differentiated products. Product differentiation may be real or

imaginary. Real differentiation is done through differences in the materials used, design,

color etc. Imaginary differences may be created through advertisement, brand name, trade

marks etc. The firms producing similar products in .this imperfectly competitive world cannot

raise the price of product much higher than their rivals. If they do so, they will lose much of

their sale, but not all the sale. In case, they lower the price, the total sale can be increased to a

certain extent. How much will the sale increase or decrease by lowering or raising the price

will depend upon the product differentiation of the different firms.

If the product of the various firms are very close substitutes of one another and no imaginary

or real difference exists in the mind of the buyers, then a slight rise or fall in the price of the

product of one firm will appreciably decrease or increase the demand for the product. If the

product of one firm differs from that of other firm, (though the difference may be an

imaginary one) a slight rise in the price of the product of one firm will not drive away all its

customers. A few faithless buyers may be attracted by the low price of the other rival product

but not all the buyers.

COMPA�Y PRODUCT �AME

BILT

Sunshine Super Printing, BILT Classic, Magna Print, Wisdom Print, BILT TA NSD, Easy Print, BILT Copy Power, BILT Image Copier, BILT Matrix and BILT Ten on Ten

ITC PSPD Digi Art, Perma White, HiZine, Alfa Zap

JK PAPER LIMITED Notepad, JK Printerblank, JK Prisitne Cote, JK IV Board, JK Endura, Cedar

TAMIL NEWSPRINT Ace Marvel, Perfect Copier, Commander A4

CENTURY PULP & PAPER Century Green, Century Elanza,

AP PAPER MILLS Andhra Royal Silk, Andhra Primavera, Andhra Star White & Reflection

The names of the firms/sellers/producers mentioned in the above table produces the same

generic product i.e. “Paper”, but they differentiate their product on the basis of design, color,

packaging, quality, brand name and advertising etc.

For example:

� ITC launched the product called Alfa Zap: a woodfree paper with unique shade and

higher opacity

� BILT launched the new shades in sack craft paper and it also introduced the retail

segment products like colored matrix grades in 5 colors.


(iii) Selling Costs: Every producer or

types of expenditures, such as attractive packaging, higher commission to distributors, sales

promotion, advertisements, and other incentives.

occupies almost the position of a monopolist. It is, thus, in a position to raise

product without losing its customers.

41%

9%

13%

0%

0%

0%

0%0%

0%

Selling & Admin Expenses

79%

Selling & Admin Expenses: BILT vs Others


Every producer or seller tries to promote its own product through different


promotion, advertisements, and other incentives. When it succeeds in its object

most the position of a monopolist. It is, thus, in a position to raise

product without losing its customers.

21%

0%

11%

0%41%

0%

0%

2%

1% 2%

Selling & Admin Expenses

21%

79%



seller tries to promote its own product through different


When it succeeds in its objective, the firm

most the position of a monopolist. It is, thus, in a position to raise-the price of the

BILT

Tamil Newsprint

AP Paper Mills

Rainbow Papers

JK Paper

West Coast Paper

Seshasayee Paper

Sirpur Paper

Pudumjee Pulp

Rama Newsprint

Star Paper

Pudumjee Ind

Shreyans Ind

Malu Paper

Ruchira Papers

Magnum Ventures


BILT

Others


The charts on the previous page shows us the distribution of Selling & Administration

Expenses across Indian Paper Industry. Selling & Administration expenses includes the

advertising expense, marketing expense and distribution expense. It is quite evident from the

charts that many of the firms do not spend on the advertising and marketing operations.

Whereas the top leaders in the industry spent considerable amount on the advertising and the

marketing operations of the firm which resulted in the overall peak performance in sales

turnover as compared to the other players in the industry.

Above figures in the chart tells us that the JK Paper spent Rs. 152.59 crs on the advertising,

marketing and distribution operations of the company which resulted in the overall sales

turnover of Rs. 1233.29 crs, and is clearly dominating the whole industry in terms of sales. In

monopolistic competition, the firms make every effort to win over the customers. Other than

price cutting, the firms may offer after sale service, a gift scheme, discount etc.

iv) Free entry and exit: In the long run there is free entry and exit. There are numerous

firms waiting to enter the market each with its own "unique" product or in pursuit of positive

profits and any firm unable to cover its costs can leave the market without incurring

liquidation costs. This assumption implies that there are low start up costs, no sunk costs and

no exit costs.

792.64 1059.12 1233.29 574.52 1068.59

42.79

80.65

152.59

47.9

33.03

0

20

40

60

80

100

120

140

160

180

0

200

400

600

800

1000

1200

1400

AP Paper

Mills

BILT JK Paper Seshasayee

Paper

West Coast

Paper

Sales (in Rs. crs)

Selling & Administration Expenses


v) Independent decision making

for its product. The firm gives no consideration to what effect its decision may have on

competitors. The theory is that any action will have such a negligible effect on the overall

market demand that an MC firm can act without fear of prompting heightened competition. In

other words each firm feels free to set prices as if it were a monopoly

oligopoly.

Net Profit:BILT vs Others

30.16

148.99

44.9437.1

106.42

90.08

-145

-95

-45

5

55

105


Independent decision making: Each MC firm independently sets the terms of exchange




other words each firm feels free to set prices as if it were a monopoly

9%

91%

Net Profit:BILT vs Others

90.08

65

-15.32

8.11

-140.29

-10.15-1.56

4.72

-2.98

�et Profit


Each MC firm independently sets the terms of exchange




other words each firm feels free to set prices as if it were a monopoly rather than an

BILT

Others

4.01

-28.44

Net Profit


CO�DUCT

onduct means what firms do to compete with each other. It includes pricing,

advertising, research and development investment, decisions on product dimensions,

merger and acquisition, etc. Conduct also can include collusion both explicit or tacit.

Conduct is influenced by market structure since firm strategies differ with competition.

Inversely, conduct can influence market structure because firms can make entry cost

endogenous by choosing different levels of quality, advertising and so on, thus affect the

potential entrant number. Conduct is related to performance. For example, advertising

expenditure is usually higher in highly profitable industries, because firms with more profits

can afford higher advertising costs, and in order to keep their profits and prevent new entrants

into the profitable market, these firms would use advertising investments as endogenous sunk

costs. Econometric studies linking profit to market structure often conclude that measured

profitability is correlated with the advertising-to-sales ratio and with the R&D expenditures-

to-sales ratio. Following are the major parameters on the basis of which conduct of BILT:

Ballarpur Industries Limited can be studied:

1. Slogan: “Growth, Execution and Stability”.

2. Vision: “Our aspiration is to become a leading creator of Shareholder Value in the Paper

Industry”.

3. Mission: “To consistently outperform expectations and deliver superior value to both our

Customers and Stakeholders”.

4. Objective: At BILT, management has adopted a well calibrated growth strategy that lays

equal stress on revenue growth and profit growth. Over the last few years, company has

focused on acquisitions; on systematically growing capacities; on strengthening the

balance sheet; and on organizing production facilities to maximize value addition. While

stressing on these objectives two critical elements has become inherent to company’s

operations. These are: The stress on in Productivity: In an industry like pulp and paper,

which is highly commoditized across segments, cost competitiveness is critical. In this

endeavour, while there are some big ticket gains, the challenge is to continuously focus

on innovations and productivity improvement programmes that keep generating

incremental benefits. There has been a focused change initiative on this front over the last

few years and it has become an integral part of the operational culture at BILT across its

units. The stress on going up the value: BILT continued to find opportunities to provide

value addition across the pulp and paper value chain. In some cases, being the market

leader, these initiatives centre on creating new market segments for value added products.

It is this focus that has made BILT, India's leading player in the coated segment. The

Company's foray into the retail business is also a prime example of a stress on grabbing

opportunities for value addition in an industry that is otherwise highly commoditized.

During 2008-09, there were several developments on this front where the product mix

was altered to meet the demands of the market with products that offer better margins.

C


5. Forestry Project: BILT has always focused on being a good corporate citizen stressing

on sustainable growth and community development. While this is a key element of the

Company's value system, it is also important for its business given that units are located

in deep hinterlands and use natural resources like wood. 2008-09 has been a landmark

year in terms of recognition of BILT's focus on business practices that promote

'sustainability'. As a recognition of its efforts on sustainable use of forest resources, BI LT

became the first Indian paper Company to receive the Forest Stewardship Council-Chain

of Custody (FSC-COC) certification for three of its manufacturing units at Ballarpur,

Bhigwan and Ashti. This certification recognizes BILT's commitment to environmentally

appropriate, socially beneficial and economically viable management of the world's

forests. This allowed BILT to use the FSC label for its products that gives it a credible

link between responsible management of forests and the production, manufacturing and

marketing of wood-based products, including pulp and paper. This differentiated BILT in

the market place and aid consumers and businesses to make purchasing decisions with a

view on how it benefits people and the environment. The Company is in the process of

extending the above certification to remaining Indian units.

6. Value Proposition: BILT goal is to enhance long-term value for their shareholders

through the following initiatives: Integrated manufacturing that matches economies of

scale with an efficient capital structure, the effective integration of cutting-edge

technologies and operational discipline, a wide range of products to meet varied customer

requirements, a widespread distribution system to reach customers with speed, a

pioneering branding emphasis leading to a distinct differentiation in the marketplace, a

far-sighted investment in people and competencies to create a knowledge-led work place,

a responsible commitment to society and environment.

7. Corporate Social Responsibility: BILT has always focused on delivering value to all its

stakeholders and strived to be a marquee corporate citizen. A key element of this

endeavour is the Company’s structured corporate social responsibility (CSR) programme,

which is intrinsic to its business strategy. As the Indian economy grows rapidly, the

critical challenge is to create inclusive development. To meet this challenge, it is very

important to provide equal opportunities to all the country’s citizens. As stakeholders in

the economic prosperity of the country, the Indian corporate sector has to play a vital role

in this very crucial task. In this light, BILT has focused on ‘affirmative action’ as a key

element of its CSR programme. ‘Affirmative action’ is about giving everybody the equal

opportunity to achieve their potential without any discrimination. BILT’s operations are

located in remote and backward areas of the country where access to resources is very

limited. Most people in the community around these operations come from marginalised

backgrounds – a large number of whom belong to Schedule Castes and Tribes. As the

Company’s CSR activities are largely focused on these communities, there is

considerable scope of ‘affirmative action’. BILT recognises that the empowerment based

model of development needs strong community institutions to sustain the initiatives.

Keeping this in view, Self Help Groups (SHGs) of women belonging to the

underprivileged sections of society both in the rural areas as well as slum pockets in the

urban areas have formed the base of all the Company’s CSR activities. So far, 622 SHGs

have been created, which have worked directly with more than 9,500 women.


Adolescents, especially girls, are an important group as they are the country’s future

generation. BILT has always been working with the youth since the inception of its

structured CSR programme. More than 100 youth groups have been engaged in the

process. 8. Employee Training Programs: BILT conducted a series of training and capacity

building programmes to enable these community based organisations (CBOs) to take up a

larger role. These include vocational training and entrepreneurship training on various

skills. Training to the youth included skills related to motor driving, electrical repair,

motor winding, screen printing and plumbing. These trained youth have secured gainful

employment and are earning incomes ranging from Rs. 1,500 per month to Rs. 7,500 per

month. Rural girls have undergone full time training on tailoring and embroidery (both

hand and machine). This enabled them to supplement their family incomes. BILT

conducted employability training to the urban youth in the new emerging sectors of the

economy. Specifically, training was provided to more than 600 educated youth in the

areas of retail marketing in BPO sector, customer relations service in the retail marketing

sector and hospitality management in the service sector industries. The employability

training programme called ‘Ek Mouka’ for the unemployed SC and ST youth was

undertaken through 2009-10.

9. Farmer’s Training Program: Most of the areas where BILT is working follow

traditional agricultural practices. To bring a positive change in socio-economic conditions

of the rural population it is important to expose farmers to improved agricultural

practices. BILT provided these farmers with training on improved agricultural practices

through exposure visits, demonstration plots, classroom/ field trainings on crop/ variety

selection, crop rotation, agronomic practices (fertilizer, pesticide, irrigation, inter-cultural

operations), kitchen gardening, mushroom cultivation, fruit and vegetable crop

cultivation, fodder cultivation and organic farming (vermi-composting, cow urine

application, etc). A total of 1,686 farmers have been trained and provided inputs in

improved agricultural practices.

10. Educational Initiatives: BILT has been working very closely with the local

communities, partner NGOs and the Government Education Department for augmenting

the quality and reach of education, especially in rural areas and slum pockets. There are

community based education centres, which focus on enhancing the reach, quality and

ownership of the initiative by the community. Through this, quality education has been

provided and more than 1000 children who would have otherwise dropped out have been

mainstreamed into formal system. Computer literacy campaign though mobile computer

labs is an innovative way of reaching the remotest area, without having to worry about

issues like electric supply and availability of qualified teachers. This campaign reached

out to more than 40 government schools with buses that are fitted with computers. The

initiative has helped in arresting the dropout rates after 5th grade.

11. Health Initiatives: 104 community health workers have been trained to identify and treat

early signs of high risk pregnancies, neonatal morbidity, and provide health education on

various issues. BILT runs two Antiretroviral Therapy (ART) centres at Ballarpur and

Koraput. These centres were started under Public Private Partnership model where BILT


is partnering with National AIDS Control Organization (NACO), New Delhi and

technical support is provided by CII, New Delhi.

12. Mergers & Acquisitions: The company has grown over the past few years organically as

well as inorganically. It acquired and subsequently merged BILT Graphic Papers in 2003.

Further, in April 2006, the company merged APR Packaging which is engaged in writing

and printing paper. The merger increased BILT's paper capacity by 55,000 tonnes per

annum. In June 2006, the company acquired 80 per cent stake in Sabah Forest Industries

(SFI), Malaysia's largest pulp and paper mill from Lion Forest Industries for USD 261

million. This acquisition was a strategic fit into the company's growth plans. SFI has

paper and pulp capacity of 1.4 lakh tonnes and 1.2 lakh tonnes per annum, respectively. It

provided the company with huge forest land of 289 thousand acres that can be used

captively for fibre requirement. Besides securing future supplies of raw material through

this acquisition, the company also created an entry into the rapidly growing South--East

Asian markets.

13. Composition of Board of Directors: As on 30 June 2010, the Company had a nine

member Board of Directors. The Chairman, Mr. Gautam Thapar is a non Executive and

Promoter Director. The Company has two Executive Directors - Mr. R. R. Vederah

(Managing Director) and Mr. B. Hariharan (Group Director-Finance). The six Non-

Executive, Independent Directors are Mr. Sanjay Labroo, Mr. R. K. Ahooja, Mr. A. S.

Dulat, Dr. Pramath Raj Sinha, Mr. Ashish Guha and Mr. A.P. Singh {Nominee Director

of the Life Insurance Corporation of India (LIC)}. The Directors are eminent personalities

and experienced professionals in business, law, finance and corporate management.

14. Retail Outlets: 2008-09 saw the expansion of the modern trade distribution channel for

tissues. In this channel, tissue and hygiene is the fastest growing category with almost 45

per cent growth rate annually. Successful business tie-ups with some of the large Indian

retailers like Big Bazaar and Spencer helped positioning BILT's products as niche

products for the modern Indian consumer. During 2008-09, the Company's business

products were promoted through a series of brand campaigns, road shows, customer

contact programmes, direct mail marketing and outlet merchandising like shop-in-shop

dispensers which exclusively displayed BI LT products. To further enhance this business

segment, BILT entered the Office Supply Retailing Business with the launch of its first

store called P3 (Paper, Print and Pens) in June 2008. These stores retail a complete suite

of office supplies vide a B2B and B2C platform. BILT's one-stop paper and office

supplies store - P3, answers all office needs ranging from stationery, technology,

corporate gifting to print solutions. With a range of 6,000 SKUs, the impressive P3 line of

products and services would go a long way in establishing BILT as a pan India one stop

solution for office supplies in the years to come. Its footprint has expanded significantly

on the B2C side; and is present in Delhi-NCR and Bangalore with 7 stores in the first year

of operation. On the B2B front, it services leading corporates and the total client list

exceeds 300. The brand P3 lives up to the promise of the "Choice of the Professional" by

providing the highest levels of customer service, satisfaction and enduring value.

15. Recruitment Process: 2008-09 has been a challenging year. BI LT continues to focus on

managing talent and increasingly systematising the HR processes. Given the economic

downturn, 'doing more with less' is a natural objective. HR played a key role of strategic


influencer, and in alignment with business goals, delivered on numerous initiatives. The

Performance Management process was given additional focus with an aim to increase

productivity, to ensure that employees stretch their potential and to build on a culture of

continuous improvement. At BILT, management believe that employees engagement with

higher expectations leads to maximum contributions. The web-based tool aligning

individual and company goals has given us exemplary results. Acquisition and retention

of talent continues to be a major thrust area and several business leaders are engaged in

the process of hiring, training, developing and retaining our key resources. As a regular

practice, BI LT visits various reputed colleges and universities for campus recruitments.

BILT recruited over 40 Management Trainees and GETs directly from campuses.

Towards long-term leadership and management development, BI LT has begun several

programmes and engages employees to upgrade their knowledge/skills in line with the

Company's goals. In 2008-09, BI LT focused on rationalizing human resources in several

units and over 600 employees availed the Voluntary Retirement Scheme. BILT has

excellent industrial relations across all plants and strongly believe that the unions and

workers will continue to work towards a profitable and productive Company. At the end

of 2008-09, BILT had 2708 permanent employees on its rolls. The Company will

continue to balance short-term workforce rationalisation with long-term business results.

16. Research & Development: BILT's Research and Development (R&D) programmes

focus on product and process development, and improvements along with issues

regarding environment management and cost reduction. The details of major R&D

programmes undertaken by Company are as follows:

a) Study on removal of calcium from wood chips during pulping.

b) Study on removal of calcium in prebleaching and bleaching operations. - Finding

most suitable bleaching sequence for APR.

c) Study of D stage bleaching with and without H2S04.

d) Introduction of synthetic thickener in pre-coat formulation.

e) Alkaline sizing: study on ASA sizing.

f) Critical evaluation of raw material storage practice, study on changes of moisture and

cellulosic component in wood and bamboo during storage.

g) Improvement in pulp brightness and whiteness.

h) Colour control in enzymatic starch size press dispersion.


PERFORMA�CE

he performance of an industry or firm is measured by profitability. Profit is the

difference between revenue and cost, and revenue is determined by price. Thus

performance can be influenced through changing costs or prices. Profitability can

also be affected by a firm’s agility (i.e. ability to adjust to things like changes in market

demand). Research and development, and availability of capitol and resources are factors that

greatly influence whether or not a firm is agile. The ability to measure performance between

industries is important in understanding the SCP(Structure-Conduct-Performance)

relationships. For example, if an industry is dominated by one firm or cartel does not see

higher costs than a competitive industry yet has monopoly prices, then that non-competitive

industry will see higher profits, whereas if costs increase, then profitability levels will be

relatively similar. This comparison is the driving force behind anti-trust legislation. SCP

predicts that performance increases with concentration of the industry. This is in contrast with

the efficiency hypothesis that states that a firms performance is based on how well and

efficiently it produces its product for the consumer. Here in this section performance will be

measured by doing the financial analysis of BILT i.e. ratio analysis, trend analysis, vertical

analysis and horizontal analysis.

Consolidated highlights

Sales Profit before Tax (PBT) Increased by 2.4 per cent from Rs. 1076.3 Decreased by 38.6 per cent from Rs.142.23

crore in 2009-10 to Rs. 1102.17 crore in crore in 2009-10 to Rs. 87.4 crore in

2010-11. 2010-11.

Total Income Profit after Tax (PAT)

Increased by 1.6 per cent from Rs.1110.2 Decreased by 53.5 per cent from Rs.125.39

Crore in 2009-10 to Rs.1127.79 crore in crore in 2009-10 to Rs.58.28 crore in

2010-11. 2010-11.

T


BILT’s Accounting Policy

Fixed Assets –Tangible

� Fixed Assets are stated at cost net of Value Added tax, rebates, less accumulated

depreciation and impairment loss, if any.

� All costs, including financing costs till commencement of commercial production, net

charges on foreign exchange contract and adjustments arising from exchange rate

variations attributable to fixed assets are capitalized.

� Preoperative expenditure : Indirect expenditure incurred during construction period is

capitalized under the respective asset head as a part of the indirect construction cost,

to the extent to which the expenditure is indirectly related to the assets head. Other

indirect expenditure incurred during the construction period, which is not related to

the construction activities or which is not incidental thereto is written off in the profit

and loss account.

Depreciation Method

Depreciation on Fixed Assets is provided on Straight Line Method on certain Assets and on

Written down Value Method on other Assets in accordance with Schedule XiV of the

companies Act, 1956, except in case of improvements to leased premises which are amortised

over the period of lease. Land is not depreciated. Depreciation on revalued portion of fixed

Assets, as applicable, is appropriated and adjusted out of Revaluation Reserve if available

with the company, on a global pooling basis and the balance is charged off in Accounts.

Fixed Assets –Intangible

Assets identified as intangible assets are stated at cost including incidental expenses thereto,

and are amortised over a predetermined period.

Inventory Valuation Method

Raw Materials, Stores, Spare parts, chemicals etc., are valued at cost, computed on weighted

average basis. Finished goods and work in process are valued at cost or net realisable

value, whichever is lower. In the case of finished goods and work in process cost comprises

of material, direct labour and applicable overhead expenses. The cost of finished goods also

includes applicable excise duty.


Investments

i. Investments made by the company in various securities are primarily meant to be held

over a long–term period.

ii. Holding of certain investments is of strategic importance to the company and

therefore, the company does not consider it necessary to provide for decrease in the

Book Value of such investments, till continuation of the relationship of strategic

importance with the investee company, namely that of a Subsidiary, Associate,

company under the same management, Foreign Joint Ventures and/or company

associated with Avantha Group. However, appropriate provisions are made to

recognise decrease in the Book Value of investments in companies of Strategic

importance also, as and when the investee company either wound up or goes into

liquidation or where the operations cease or are taken over by Receiver by Operation

of Law.

iii. Investments in Government Securities are shown at cost and investments, other than

that of Strategic importance to the company are shown in the books at lower of cost or

fair market value.

iv. As a conservative and prudent policy, the company does not provide for increase in

the Book Value of individual investments held by it on the date of Balance Sheet.

Revenue Recognition

As per the requirement of the companies (Amendment) Act, 1988, all expenses and income

were accounted for on accrual basis.

Retirement Benefits

Short term employee benefits are charged off in the year in which the related services are

rendered. Post employment and other long term employee benefits are charged off in the year

in which the employee has rendered services. the amount charged off is recognized at the

present value of the amount payable determined using actuarial valuation techniques.

Actuarial gain and losses in respect of post employment and other long term benefits are

charged to profit & Loss Accounts.

Income From Investments

Income from investments, where appropriate, is taken to revenue in full on declaration or

receipt and tax deducted at source thereon is treated as advance tax.


Advance License, Import Entitlements

Advance license ,import entitlements are recognized at the time of export and the benefit in

respect of advance License received by the company against export made by it are

recognized as and when goods are imported against them.

Taxation

Provision for current tax is made on the basis of estimated taxable income for the relevant

accounting year in accordance with the income tax Act, 1961. The deferred tax liability on

account of timing differences between the book profits and the taxable profits for the year is

accounted by applying the tax rates as applicable as on the balance sheet date. Deferred tax

assets arising from timing differences are recognised on the principles of virtual certainty that

these would be realised in future.

Impairment Of Assets

The company applies the test of impairment of certain assets as provided in Accounting

Standard (AS) – 28 “impairment of Assets”.

Provision And Contingencies

The company shall create a provision when there is a present obligation as a result of past

events that probably require an outflow of resources and a reliable estimate can be made of

the amount of obligation. A disclosure for a contingent liability is made, when there is a

possible obligation or a present obligation that probably will not require an outflow of

resources or where a reliable estimate of the obligation cannot be made.


Financial statement analysis

inancial statement analysis is defined as the process of identifying financial strengths

and weaknesses of the firm by properly establishing relationship between the items of

the balance sheet and the profit and loss account or Financial statement analysis is a

process that examines past and current financial data for the purpose of evaluating

performance and estimating future risk and potentials. Financial statement analysis is used by

investors, creditor, security analysts, bank lending officers, managers, governmental

agencies, suppliers, and many other parties who rely on financial data for making economic

decisions about a company. These statements play a dominant role in setting the framework

of managerial decisions. But the information provided in the financial statements is not an

end in itself as no meaningful conclusions can be drawn from these statements alone.

However, the information provided in the financial statements is of immense use in making

decisions through analysis and interpretation of financial statements.

There are various methods or techniques that are used in analyzing financial statements. The

most commonly used analytical techniques are:

� Ratio Analysis

� Horizontal Analysis

� Vertical Analysis

� Trend Analysis

1. Ratio Analysis: The ratios analysis is the most powerful tool

of financial statement analysis. Ratio analysis helps in identifying significant

relationships between financial statement items for further investigation. Commonly

used financial ratios are discussed below:

Using Financial Ratios

A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical

values taken from an enterprise's financial statements. Financial ratios quantify many aspects

of a business and are an integral part of the financial statement analysis. Financial ratios are

categorized according to the financial aspect of the business which the ratio measures.

Financial ratios are used to evaluate profitability, liquidity, solvency and capital market

strength. Liquidity ratios measure the availability of cash to pay debt. Activity ratios measure

how quickly a firm converts non-cash assets to cash assets. Debt ratios measure the firm's

ability to repay long-term debt. Profitability ratios measure the firm's use of its assets and

control of its expenses to generate an acceptable rate of return. Market ratios measure

investor response to owning a company's stock and also the cost of issuing stock. These are

concerned with the return on investment for shareholders, and with the relationship between

return and the value of an investment in company’s shares.

F


Profitability Ratios

rofitability ratios measure the company's use of its assets and control of its expenses

to generate an acceptable rate of return or in other words it is the degree of operating

success of a company. The commonly used ratios to evaluate profitability are:

i. Profit Margin Ratio: The net income divided by sales, often expressed as a

percentage. This number is an indication of how effective a company is at cost

control.

PROFIT MARGI� = PROFIT AFTER TAX

SALES

Below is the computation of profit margin ratio of Ballarpur Industries Limited:

All figures in Rs. Crores 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06

Net Profit 58.28 125.39 129.45 250.77 212 168.1

Sales 1102.17 1076.32 1049.67 2,375.92 2,085.34 2,011.59

Net Profit Margin (%) 5.29 11.65 12.33 10.55 10.17 8.36

Analysis: The ratio shows that the profit margin decreased from 12.33% in the year 2008-09

to 5.29% in the year 2010-11. The profit margin ratio provides some indication of the cushion

available to the company in the event of an increase in costs, drop in selling prices in the face

of a recession or greater competition. Profit margin was 8.36% in the year 2005-06 and

inched up to 12.33% in the year 2008-09, but has fallen since then.

ii. Asset Turnover Ratio: This ratio is more useful for growth companies to check if in

fact they are growing revenue in proportion to sales. Companies with low profit

margins tend to have high asset turnover, those with high profit margins have low

asset turnover – it indicates pricing strategy.

ASSET TUR�OVER = SALES

AVERAGE TOTAL ASSETS

Using the sales data and total assets data, we can compute the asset turnover ratio of

Ballarpur Industries Limited as follows:

P


All figures in Rs. crores 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06

Sales 1102.17 1076.32 1049.67 2,375.92 2,085.34 2,011.59

Average Total Assets 2,934.90 2,693.32 3,347.07 3,850.10 3,445.73 3,229.96

Asset Turn Over 0.38 0.40 0.31 0.62 0.61 0.62

Analysis: In year 2005-06, BILT had sales of about Rs. 0.62 per rupee of investment in

assets as compared to Rs. 0.31 in 2008-09. The decrease of 31 paise in sales rupee of

investment indicates significant deterioration in utilization of assets between this period. This

decrease in asset turnover could be because of excess capacity, frequent equipment

breakdown, non- availability of raw materials or power etc. However had been able to

recover its asset turnover ratio, as is evident from the above chart, showing sales of about Rs.

0.31 per rupee of investment in assets in the year 2008-09 as compared to Rs. 0.38 in 2010-

2011.

iii. Return on Assets or Return on Investment – ROA/ROI: An indicator of how

profitable a company is relative to its total assets. ROA gives an idea as to how

efficient management is at using its assets to generate earnings.

ROA = PROFIT AFTER TAX

AVERAGE TOTAL ASSETS

Analysis: There is a significant decrease in BILT’s ROA from the year 2007-08 to 2010-

11, which indicates deterioration in the company’s overall profitability. Therefore we can say

that company’s is not better at converting its investment into profit. Here management's most

important job is to make wise choices in allocating its resources.

iv. Return on Equity: The Return on Equity ratio is perhaps the most important of all

the financial ratios to investors in the company. It measures the return on the money

the investors have put into the company. This is the ratio potential investors look at

when deciding whether or not to invest in the company. Net Profit comes from the


Profit after tax 58.28 125.39 129.45 250.77 212 168.1

Average Total Assets 2,934.90 2,693.32 3,347.07 3,850.10 3,445.73 3,229.96

Return on Assets (%) 1.986 4.656 3.868 6.513 6.153 5.204


income statement and stockholder's equity comes from the balance sheet. In general,

the higher the percentage, the better it is with some exceptions, as it shows that the

company is doing a good job using the investors' money.

ROE = PROFIT AFTER TAX

AVG. SHAREHOLDER'S EQUITY


Profit after tax 58.28 125.39 129.45 250.77 212 168.1

Average Share holder's

equity 1,500.54 1,308.88 1,634.21 1,816.85 1,563.55 1,455.13

Return on Equity (%) 3.88 9.58 7.92 13.80 13.56 11.55

Analysis: ROE is one measure of how efficiently a company uses its assets to produce

earnings. A healthy company may produce an ROE in the 13% to 15% range. A steadily

increasing ROE from the year 2005-06 to 2006-07, is a hint that management is giving

shareholders more for their money, which is represented by shareholders' equity. This

indicates how well management is employing the investors' capital invested in the company.

But from the year 2007-08 to 2010-11, ROE declined sharply from 13.8% to 3.88%, possibly

because it could not find oppurtunities that would yield higher returns.

v. Earnings per Share: Earnings per share ratio (EPS Ratio) is a small variation

of return on equity capital ratio and is calculated by dividing the net profit after taxes

and preference dividend by the total number of equity shares.


Profit after tax 58.28 125.39 129.45 250.77 212 168.1

Weighted avg no of

Equity shares (in crores) 66 56 56 19 16 16

Earnings per Share (in

Rs.) 0.89 2.26 2.33 13.50 12.98 10.35

Analysis: There is constant decrease in the BILT’s EPS which indicates that the earning

power of the company is decreasing.

EPS = �ET PROFIT AFTER TAX

TOTAL EQUITY SHARES


Liquidity Ratios

hese ratios are used to determine a company's ability to pay off its short-terms

obligations when they fall due. Generally, the higher the value of the ratio, the larger

is the margin of safety that the company possesses to cover short-term debts. The

commonly used ratios to evaluate liquidity are:

i. Current Ratio: A liquidity ratio that measures a company's ability to pay short-term

obligations. A ratio under “one” suggests that the company would be unable to pay

off its obligations if they came due at that point. While this shows the company is not

in good financial health, it does not necessarily mean that it will go bankrupt - as there

are many ways to access financing - but it is definitely not a good sign. Current ratio

can give a sense of the efficiency of a company's operating cycle or its ability to

turn its product into cash. Companies that have trouble getting paid on their

receivables or have long inventory turnover can run into liquidity problems because

they are unable to alleviate their obligations.

CURRE�T RATIO = CURRE�T ASSETS

CURRE�T LIABILITIES

Below is the computation of profit margin ratio of Ballarpur Industries Limited:


Current assets 911.31 714.85 939.84 1326.6 1377.44 875

Current liabilities 525.02 373.4 359.10 440.94 372.01 345.99

Current Ratio (in ratio) 1.74 1.91 2.62 3.01 3.70 2.53

Analysis: It can be clearly seen from the above figure that BILT has more current assets per

rupee of current liabilities i.e. it may be able to pay its current liabilities using its current

assets. In other words, its operation would not be disrupted. The constant decrease in the

current ratio of BILT represents deterioration in the liquidity position of the firm.

ii. Quick Ratio: The quick ratio or the acid-test ratio - is a liquidity indicator that further

refines the current ratio by measuring the amount of the most liquid current assets

there are to cover current liabilities.

QUICK RATIO = (CURRE�T ASSETS – I�VE�TORIES)

CURRE�T LIABILITIES

T



Quick assets 470.88 355.77 653.52 908.88 1012.01 557.87

Current liabilities 525.02 373.4 359.10 440.94 372.01 345.99

Quick Ratio (in ratio) 0.90 0.95 1.82 2.06 2.72 1.61

Analysis: The increase in the quick ratio from 2005-06 to 2006-07 is in line with current

ratio. The decrease in the quick ratio is again in line with the current ratio over five years

period i.e. from 2006-07 to 2010-11. When used along with Current ratio it gives a clearer

picture of business's liquidity position. Rule of thumb for acid test ratio is 1: 1 i.e., if business

liquid assets are 100 percent of its current liabilities it is considered to be having fairly good

current financial position. But in the case of BILT, quick ratio indicates that financial position

of the company is not good.

iii. Debtors Turnover Ratio: This ratio indicates the efficiency of the concern to collect

the amount due from debtors. It determines the efficiency with which the trade

debtors are managed. Higher the ratio, better it is as it proves that the debts are being

collected very quickly.

DEBTORS TUR�OVER RATIO = SALES

AVERAGE DEBTORS

Analysis: In the initial years, company’s higher debtor turnover ratio clearly indicates that

company was able to convert the debtors into cash and the quality of the company’s portfolio

of debtors was good in that period. However, in the subsequent years i.e. from 2005-06 to

2010-11, there is continuous decline in the debtors turnover ratio, implies inefficient

management of debtors or less liquid debtors.


Sales 1102.17 1076.32 1049.67 2,375.92 2,085.34 2,011.59

Average debtors 367.03 317.55 427.015 527.57 446.715 404.444

Debtor turnover ratio (in

ratio) 3.00 3.39 2.46 4.50 4.67 4.97


iv. Inventory Turnover Ratio: This ratio is a relationship between the cost of goods

sold during a particular period of time and the cost of average inventory during a

particular period. It is expressed in number of times.Inventory turn over ratio indicates

the number of time the stock has been turned over during the period and evaluates

the efficiency with which a firm is able to manage its inventory. This ratio indicates

whether investment in stock is within proper limit or not.

Using the information available on cost of goods sold and inventories, we calculated the

inventory turnover ratio as follows:


Cost of goods sold 1,000.88 945.11 885.12 1,967.56 1,758.29 1,718.52

Average inventories 154.17 132.23 223.435 308.24 292.15 281.5275

Inventory turnover 6.49 7.15 3.96 6.38 6.02 6.10

Analysis: The inventory turnover ratio for BILT has been very good but has not been

following a consistent trend i.e. it is fluctuating b/w different time periods. A

low inventory turnover ratio in the year 2008-09 indicates an inefficient management

of inventory and further implies over-investment in inventories, dull business, poor quality of

goods, stock accumulation, accumulation of obsolete and slow moving goods and low profits

as compared to total investment. Whereas high inventory turnover in the year 2009-10

indicates efficient management of inventory because more frequently the stocks are sold, the

lesser amount of money is required to finance the inventory. A high inventory turnover ratio

may also be due to under-investment in inventories.

Solvency Ratios

hese ratios are used to measure a company's ability to meet long-term obligations.

The solvency ratio measures the size of a company's after-tax income; excluding

non-cash depreciation expenses, as compared to the firm's total debt obligations. It

provides a measurement of how likely a company will be to continue meeting its debt

obligations. The commonly used ratios to evaluate liquidity are:

T

I�VE�TORY TUR�OVER = COST OF GOODS SOLD

AVERAGE I�VE�TORIES


i. Debt to Equity Ratio: A measure of a company's financial leverage calculated by

dividing its total liabilities by stockholders' equity. It indicates what proportion of

equity and debt the company is using to finance its assets. A high debt/equity ratio

generally means that a company has been aggressive in financing its growth with

debt. This can result in volatile earnings as a result of the additional interest expense.

If a lot of debt is used to finance increased operations (high debt to equity), the

company could potentially generate more earnings than it would have without

this outside financing. If this were to increase earnings by a greater amount than the

debt cost (interest), then the shareholders benefit as more earnings are being spread

among the same amount of shareholders. However, the cost of this debt financing

may outweigh the return that the company generates on the debt through investment

and business activities and become too much for the company to handle. This can lead

to bankruptcy, which would leave shareholders with nothing.

Debt to equity ratio of BILT is computed as follows:

Analysis: The debt to equity ratio for the year 2005-06 is 0.80 or we can say 4:5, it means

that for every four rupee worth of the creditors investment the shareholders have invested five

rupee. Debt to equity ratio indicates the proportionate claims of owners and

the outsiders against the firms assets. The debt to equity ratio of 0.52 for the year 2010-11

indicates that the owners of the company want to do the business with maximum of outsider's

funds in order to take lesser risk of their investment and to increase their earnings (per share)

by paying a lower fixed rate of interest to outsiders. The outsiders (creditors) on the other

hand, want that shareholders (owners) should invest and risk their share of proportionate

investments.

ii. Liabilities to Equity Ratio: It Is a Variant of Debt to Equity Ratio where numerator

not only includes debt but also current liabilities and deferred tax liability in order to

get the firm’s total liabilities. The ratio is computed as follows:


Secured + Unsecured loans 861.06 887.75 938.06 1,332.64 1453.6 1,188.90

Shareholder's equity 1,651.30 1,349.77 1,267.99 2,000.42 1,633.27 1,493.82

Debt to Equity Ratio (in ratio) 0.52 0.66 0.74 0.67 0.89 0.80

DEBT TO EQUITY RATIO = SECURED LOA�S + U�SECURED LOA�S

SHAREHOLDER’S EQUITY

LIABILITY TO EQUITY RATIO = ALL LIABILITIES

SHAREHOLDER’S EQUITY



Debt + Current liabilities 1,499.63 1,369.10 1,399.77 2,025.96 2,040.54 1,723.83

Shareholder's equity 1,651.30 1,349.77 1,267.99 2,000.42 1,633.27 1,493.82

Liabilities to Equity Ratio (in

ratio) 0.91 1.01 1.10 1.01 1.25 1.15

iii. Interest Coverage Ratio: A ratio used to determine how easily a company can pay

interest on outstanding debt. The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses.

I�TEREST COVER = PBIT

I�TEREST EXPE�SE

The interest coverage ratio for BILT is computed as follows:


Profit before interest & tax 130.36 186.45 277.20 420.24 369.14 312.57

Interest expense 42.96 44.22 103.07 96.62 103.93 105.45

Interst Cover (in times) 3.03 4.22 2.69 4.35 3.55 2.96

Analysis: The interest coverage ratio is very important from the lender's point of view.

Throughout the period from 2005-06 to 2010-11, company has been able to achieve the

interest coverage ratio above 1.5 which is a clear assurance to the lenders a regular and

periodical interest income.

Capital market ratios

Capital market ratios relate the market price of a company’s share to the company’s earnings

and dividends. The commonly used ratios to evaluate liquidity are:

i. Price – Earnings Ratio: Price earnings ratio (P/E ratio) is the ratio between market

price per equity share andearning per share. The ratio is calculated to make an

estimate of appreciation in the value of a share of a company and is widely used

by investors to decide whether or not to buy shares in a particular company.


Analysis: Price earnings ratio helps the investor in deciding whether to buy or not to buy the

shares of a particular company at a particular market price. Generally, higher the

price earning ratio, the better it is. If the P/E ratio falls, the management should look into the

causes that have resulted into the fall of this ratio. In case of BILT, figure are quite favouring

the company and make it a favourite destination to invest in. There is constant increase in the

price earning ratio from 2.08 times in the year 2005-06 to 28.54 times in the year 2010-11,

indicates the market’s high faith in the future of BILT.

ii. Dividend Yield: Dividend yield ratio is the relationship between dividends per

share and the market value of the shares. Share holders are real owners of a

company and they are interested in real sense in the earnings distributed and paid to

them as dividend. Therefore, dividend yield ratio is calculated to evaluate the

relationship between dividends per share paid and the market value of the shares.

The dividend yield for BILT is shown below:

All figures in Rs. 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06

Dvidend per share 0.5 0.5 0.7 3 2.75 2.5

Average stock price 25.40 24.4 20.8 35 22 21.5

Dividend Yield (in %) 1.97 2.05 3.37 8.57 12.50 11.63

All figures in Rs. 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06

Average stock price 25.40 24.4 20.8 35 22 21.5

Earning per share 0.89 2.26 2.33 13.5 12.98 10.35

Price Earning Ratio (in times) 28.54 10.80 8.93 2.59 1.69 2.08

PRICE EAR�I�GS RATIO = AVERAGE STOCK PRICE

EAR�I�GS PER SHARE

DIVIDE�D YIELD = DIVIDE�D PER SHARE

AVERAGE STOCK PRICE


Analysis: This ratio helps as intending investor in knowing the effective return he is going to

get on the proposed investment. In case of BILT, the dividend yield is constantly decreasing,

indicating that the cash return on the shares went down.

iii. Price to Book Ratio: This measure compares a company’s stock price with the book

value. Book value is the amount of shareholders’ equity divided by the number of

shares.

The price to book ratio for BILT is as follows:

All figures in Rs. 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06

Market price per share 25.40 24.4 20.8 35 22 21.5

Book value per share 25.19 24.3 22.83 107.72 100.03 91.63

Price to book Ratio (in

times) 1.01 1.00 0.91 0.32 0.22 0.23

Analysis: In year 2010-11 & 2009-10 the P/B ratio of more than 1 indicates that market

expects the stock to earn at a rate higher than the required one.

2. Horizontal Analysis: Quite simply, the horizontal analysis is the financial statements

of a company of successive years presented side-by-side. The goal of horizontal

analysis is to compare the figures of the current period with that of the past period.

This helps the company and its shareholders analyze their performance and find out

areas of improvement. Horizontal analysis is done for both income statements

and balance sheets. The idea is the same. The figures for the different heads under the

income statements and the balance sheets are placed side-by-side so that the reader

can compare the two and understand how the company is doing. The horizontal

analysis also includes two more columns: the column denoting actual numerical

change over two periods and another denoting percentage change over the two

periods. The first column gives the difference between the past period and the current

period, while the percentage column shows what percentage of the past figure is the

figure denoting the change.

Horizontal analysis is an important part of the financial statements and annual reports. It

places the facts very simply in front of the shareholder and makes the job of analyzing the

improvements or the lack of it very simple for the shareholder. Horizontal analysis helps the

shareholder understand the change and the percentage change.

PRICE TO BOOK RATIO = MARKET PRICE PER SHARE

BOOK VALUE PER SHARE

Documents

Microeconomic Analysis of Ballarpur Industries Limited