Professional Documents
Culture Documents
The main objective of a business firm is to maximize the wealth of its shareholders in the long run. The management should only invest in those projects which give a return in excess of cost of fund invested in the project of the business. The difficulty will rise in determination of cost of funds, if it is raised from different sources and different quantum. The various sources of funds to the company are in the form of equity and debt. The cost of capital is the rate of return that the company has to pay to various suppliers of fund in the company. There are two main sources of capital for a company- shareholder and lender. The cost of equity and cost of debt are the rate of return that need to be offered to those two groups of suppliers of capital in order to attract funds from them. The primary function of every financial manager is to arrange adequate capital for the firm. A business firm can raise capital from various sources such as equity and/or preference shares, debentures, retained earnings etc. This capital is invested in different projects of the firm for generating revenue. On the other hand, it is necessary for the firm to pay a minimum return to each source of capital. Therefore, each project must earn so much of the income that a minimum return can be paid to these sources or supplier of capital. What should be the minimum return? The concept used to determine this minimum return is called Cost of Capital. On the basis of it the management evaluates alternative sources of finance and selects the optimal one.
1.1 Concept of Cost of Capital: Cost of Capital is the measurement of the sacrifice made by investors in order to invest with a view to get a fair return in future on his investments as a reward for the postponement of his present needs. On the other hand, from the point of view of the firm using the capital, cost of capital is the price paid to the investor for the use of capital provided by him. Thus, cost of capital is reward for the use of capital. Author Lutz has called it BORROWING AND LENDING RATES. The borrowing rates means the rate of interest which must be paid to obtained and use
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the capital. Similarly, lending rate is the rate at which the firm discounts its profit. It may also the opportunity cost of the fund to the firm i.e. what the firm would earn by investing these funds elsewhere. In practice, the borrowing rates used indicate the cost of capital in preference to lending rates. Technically and operationally, the cost of capital define as the minimum rate of return a firm must earn on its investment in order to satisfy investors and to maintain its market value, i.e. it is the investors required rate of return. Cost of capital also refers to the discount rate which is used while determining the present value of estimated future cash flows. For example, if a firm borrows Rs. 5 crore at an interest of 11% per annum, then the cost of capital is 11%. It is essential for the firm to invest these Rs. 5 crore in such a way that it earn atleast Rs. 55 lacs i.e. rate of return at 11%. If the return is less than this, then the rate of dividend which the shareholders are receiving till now will go down resulting in a decline in its market value. Thus the cost of capital is the reward for the use capital.
capital does not carry any cost but this is not true. When additional equity shares are issued, the new equity share holders get proportionate share in future dividend and undistributed profits of the company. If reduces the earning per shares of existing share holders resulting in a fall in marker price of shares. Therefore, at the time of issue of new equity shares, it is the duty of the management to see that the company must earn at least so much income that the market price of its existing share remains unchanged. This expected minimum rate of return is the cast o equity share capital. Thus, cost of equity share capital may be define as the minimum rate of return that a firm must earn on the equity financed portion of a investment- project in order to leave unchanged the market price of its shares.
Method of calculating Weighted Average Cost of Capital Though, the concept of weighted average cost of capital is very simple. Yet there are many problems in its calculation. Its computation requires: 1. Assignment of Weights: First of all, weights have to be assigned to each source of capital for calculating the weighted average cost of capital. Weight can be either book value weight or market value weight. Book value weights are the relative
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proportion of various sources of capital to the total capital structure of a firm. The book value weight can be easily calculated by taking the relevant information from the capital structure as given in the balance sheet of the firm. Market value weights may be calculated on the basic on the market value of different sources of capital i.e. the proportion of each source at its market value. In order to calculate the market value weights, the firm has to find out the current market price of each security in each category. Theoretically, the use of market value weights for calculating the weighted average cost of capital is more appealing due to the following reasons: The market value of securities is closely approximate to the actual amount to be received from the proceeds of such securities. The cost of each specific source of finance is calculated according to the prevailing market price. But, the assignment of the weight on the basic of market value is operationally inconvenient as the market value of securities may frequently fluctuate. Moreover, sometimes, no market value is available for the particular type of security, especially in case of retained earnings can indirectly be estimated by Gitmans method. According to him, retained earnings are treated as equity capital for calculating cost of specific sources of funds. The market value of equity share may be considered as the combined market value of both equity shares and retained earnings or individual market value (equity shares and retained earnings) may also be determined by allocating each of percentage share of the total market value to their respective percentage share of the total values. For example: - the capital structure of a company consists of 40,000 equity shares of Rs. 10 each ad retained earnings of Rs. 1,00,000. if the market price of companys equity share is Rs. 18, than total market value of equity shares and retained earnings would be Rs. 7,20,000 (40,000* 18) which can be allocated between equity capital and retained earnings as followsMarket Value of Equity Capital = 7,20,000*4,00,000/5,00,000 =Rs. 5,76,000. Market Value of Retained Earnings= 7,20,000*1,00,000/5,00,000 =Rs. 1,44,000.
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Example: Following information is available with regard to the capital structure of ABC Limited: Sources of Funds Amount (Rs.) After tax cost of Capital E.S. Capital 3,50,000 .12 Retained Earnings 2,00,000 .10 P.S. Capital 1,50,000 .13 Debentures 3,00,000 .09 You are required to calculate the weighted average cost of capital.
Source (1)
After tax cost Weighted cost (4) (5) .12 .10 .13 .09 .0420 .0200 .0195 .0270 .1085 .10850 10.85% or
It is expected that the industry players will continue to increase their annual cement output in coming years and Indias cement production will grow at a compound annual growth rate (CAGR) of around 12 percent during 2011-12- 2013-14 to reach 303 million metric tons, according to Indian Cement Industry Forecast to 2012. Cement Manufacturing Association (CMA) is targeting to achieve 550 MT capacities by 2020. A large number of overseas players are also expected to enter into the industry in the coming years as 100 percent FDI is permitted in the cement industry.
Pozzolona used in the manufacture of Portland cement is burnt clay of fly ash generated at thermal power plants. PPC is hydraulic cement. PPC differs from OPC on a number of counts. Pozzolona during manufacturing consumes lot of hydration heat and forms cementious gel. Reduced heat of hydration leads to
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lesser shrinkage cracks. An additional gel formation leads to lesser pores in concrete or mortar. It also minimizes problem of leaching and efflorescence.
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south
east
north
23 15 west central
Geographical distribution
Sales primarily through the dealer channel. 2.1.4 Mini Cement Plants:
Nearly 300 plants & Located in Gujarat, Rajasthan, MP mainly Typical capacity < 200 tpd Installed capacity around 9 mn. Tones Production around : 6.2 mn tones Mini plants were meant to tap scattered limestone reserves. However most set up in AP Most use vertical kiln technology Production cost / tonne - Rs. 1,000 to 1,400 Presence of these plants limited to the state Infrastructural facilities not the best
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capacity of the company is 18.5 million tonnes. The company has a market share of around 10 per cent, with a strong foothold in the northern and western markets. Gujarat Ambuja is India's largest cement exporter and one of the most cost efficient firms. India Cements: India Cements is the largest cement producer in southern India with three plants in Tamil Nadu and four in Andhra Pradesh. The company has a market share of 5.4 per cent. Jaiprakash Associates Limited: Jaiprakash Industries, now known as Jaiprakash Associates Limited (JAL) is part of the Jaypee Group with businesses in civil engineering, hospitality, cement, hydropower, design consultancy and IT. Madras Cements: Madras Cements Ltd is one of the oldest cement companies in the southern region and is a part of the Ramco group. The company is engaged in cement, clinker, dolomite, dry mortar mix, limestone, ready mix cement (RMC) and units generated from windmills. The company has three plants in Tamil Nadu, one in Andhra Pradesh and a mini cement plant in Karnataka. It has a total capacity of 10 million tonnes annually and holds a market share of 4 per cent.
petroleum coke attracts a customs duty of 5%, which increases the cost of production in the sector. Electricity: Cement industry consumes about 5.5 billion units of electricity annually with one tonnes of cement requiring approximately 120-130 units of electricity. Since state governments supply electricity in India and since different states have different tariff structure, the power tariffs vary according to the location of the plant and on the production process. As a result, cement plants in different states attract different power tariffs. Another major hindrance to the industry is severe power cuts. Most of the cement producing states; such as Andhra Pradesh, Madhya Pradesh experience power cuts to the tune of 25-30% every year causing substantial production loss. Limestone: This constitutes the largest bulk in terms of input to cement. For producing one tonne of cement, approximately 1.6 tonnes of limestone is required. Since, the plants near limestone deposits pay less transportation cost than others; the location of cement plant is determined by the location of limestone mines. The total limestone deposit in the country is estimated to be90 billion tones, with Andhra Pradesh enjoying the largest share of 34%, followed by Karnataka, Gujarat, Madhya Pradesh and Rajasthan, with respective shares of 13%, 13%, 8%, and 6.5%. However, cementmanufacturing companies have to shed large sums of money by way of royalty payment to the central government and cess on royalties levied by the state government. Transportation: Cement is mostly packed in paper bags now. It is then transported either by rail or road. Road transportation beyond 200 kms is not economical therefore about 55% cement is carried by the railways. There is also the problem of inadequate availability of wagons especially on western railways and southeastern railways. Under this scenario, there is a need to encourage transportation through sea, which is not only economical but also reduces losses in transit. Today, 70% of the cement movement worldwide is by sea compared to 1% in India.
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2.1.7 Policies
Quality Policy: To provide products conforming to national standards and meeting customers requirements to their total satisfaction. To continually improve performance and effectiveness of quality management system by setting and reviewing quality objectives for: Customer Satisfaction Cost effectiveness. Energy Policy: To reduce to the maximum extent possible the consumption of energy without imparting productivity which should help in: Increase in the profitability of the company Conservation of Energy Reduction in Environmental pollution at energy producing areas Since Energy is Blood of Industry, It is the responsibility of all of us to utilize energy effectively and efficiently
Environment Policy: To ensure: Compliance of relevant environmental legislation Clean, green and healthy environment Efficient use of natural resources, energy, plant and equipment Reduction in emissions, noise, waste and greenhouse gases Continual improvement in environment management.
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Water Policy: To provide sufficient and safe water to people & plant as well as to conserve water, we are committed to efficient water management practices viz, Develop means & methods for water harvesting Treatment of waste discharge water for reuse Educate people for effective utilization and conservation of water
Health & Safety Policy: To ensure good health and safe environment for all concerned by: Promoting awareness on sound health and safe working practices Continually improving health and safety performance by regularly setting and reviewing objectives & Targets Identifying and minimizing injury and health hazards by effective risk control measures Complying with all applicable legislations and regulations
IT Policy: To provide a robust IT platform suitable to the business processes and integrated management practices of the company, resulting into better speed, efficiency, transparency, internal controls and profitability of business Human Resource Policy: We at Shree Cement are committed to Empower People Honour individuality Non-discrimination in recruitment process
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Develop Competency Employees shall be given enough opportunity for betterment None of the person below the age of 18 years shall be engaged to work Incidence of Sexual Harassment shall be viewed seriously Statute enacted shall be honoured in letter & spirit & standard Labour Practices shall be followed. Every employee shall be accountable to the law of the land & is expected to follow the same without any deviation Management will appreciate observance of Business ethics & professional code of conduct. To follow safety & Health. Quality, Environment, Energy Policy
2.1.8 Demand drivers: The key demand drivers of cement industry are as follows:
Present Demand drivers: Infrastructure & construction sector the major demand drivers. Some demand determinants Economic growth Industrial activity Real estate business Construction activity Investments in the core sector Growth in mortgage business in retail housing Higher surplus income of household
Opportunities: Growth in the housing sector central road fund established for national highways and railway over bridges to provide the necessary impetus expansion plans, Greenfield projects on the anvil Demand supply balance expected in the next 12 15 months
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Encouraging trend in demand due to pick-up in rural housing demand and industrial revival Industry likely to grow at 8-10% in the next few years Newer capacities in future.
2.2 COMPANY ANALYSIS 2.2.1 History of the company 1979 - The Company was incorporated on 25th October, at Jaipur. The Company was promoted by members of the Bangur family and others. Shree Digvijay Cement Co. Ltd., Graphite India, Ltd. and Fort Gloster Industries, Ltd. took active part in the promotion of the Company. The Company manufacture's cement & cement products. To reduce fuel and power consumption, the Company adopted the latest dry process, four stage preheater precalcination technology of clinkerisation and air swept roller mill grinding system for raw material and coal grinding. The Company entered into agreement with F.L. Smidth & Co. A/s Copenhagen, a designer and manufacture of cement plants, its associates F.L. Smidth & Cia. Espanola S.A., Madrid and with Larsen & Toubro Ltd., Mumbai for the supply of plant equipment and services for the proposed project.
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1984 - 70 No. of equity shares subscribed for by the signatories to the Memorandum of Association. In Oct./Nov. 1,53,99,930 No. of equity shares issued of which 1,06,99,930 shares reserved for firm allotment as follows: 48,00,000 shares to Shree Digvijay Cement Co. Ltd.; 11,00,000 shares each to Graphite India, Ltd. and Fort Gloster Industries, Ltd. 36,99,930 shares to Directors, their friends etc. including upto 25,00,000 shares to NRIs with repatriation rights. The balance 47,00,000 shares offered to the public of which 18,80,000 shares offered for allotment on preferential basis to Non-Residents. 1985 - Commercial production commenced from 1st May. 1986 A diesel generating set of 13.6 MW was installed for captive power generation. 1987- 46,00,000 shares issued to financial institutions in conversion of loans. 1991 - Production of clinker and cement declined due to a major shut down of the plant for implementation of modernization/renovation/modification work. The Company Undertook to set up a new cement plant of 0.6 million TPA capacities in Rajasthan 7,96,000 No. of Equity shares issued to financial institution in conversion of loan. 1992 - 36,00,000 shares allotted to FLT Ltd. a wholly owned subsidiary of P.L. Smith & Co. Denmark under financial collaboration agreement. 1993-The Company undertook a scheme of implementing second stage of its licensed capacity to increase its capacity to 3300 tonnes per day The Company issued 21975 - 16% each with equity warrants and these will be converted as per institutional guidelines.2,40,021 shares issued in pursuance of scheme of Amalgamation. 1994 - The Company issued 10,00,000-16% Secured Redeemable NCD of Rs 100 each on private placement basis. A scheme of amalgamation of an existing leasing
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and finance Company with the Company was prepared for undertaking leasing activities and other financial services on large scale. 1995 The Company undertook the implementation of new unit of 124 MT capacity per annum named Raj Cement. 43,95,000 No. of Equity shares on surrender of detachable optional share warrants attached with 16% unsubscribed non- Convertible Debentures of 100 each. 1996 - The Company commissioned its second cement plant - Raj Cement with a capacity of 12.4 lakh tonnes per annum in Beawar. 58,06,204 rights shares issued (prem. Rs 10 per share) in the prop. 1:5. 1998 - Shree Cement, the Calcutta-based PD-BG Bangur group company, has decided to issue preference shares aggregating Rs 15 crore to mobilise long-term funds. 1999 - The company has been awarded the first prize for energy conservation in 1998 in the cement sector. SCL, belonging to the house of Bangur, is one of the largest cement manufacturers in North India, having the installed capacity of 2 million tonnes. 2002- Unit I and Unit II of the company receives National Award for 'Best Electrical Energy Performance' and 'Best Thermal Energy Performance' in the Cement Industry for the year 2000-01. 2003 -Members approve for the delisting of its shares from 4 stock exchanges of Jaipur, Kolkata, Delhi and Chennai exchanges. 2004- Company conferred 'BEST PRODUCITY AWARD-2003' by the Rajasthan State Productivity Council in recognition of productivity measures and productivity improvements achieved. 2005- Shree Cement commissions 6 MW captive Thermal Power Plant at Rajasthan.
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2006- CII Energy Excellence Management Award 2005 & Launch of Bangur Cement in Feb 2005. 2007- Shree Cement - Best Corporate Governance Award by RCC. 2008- Shree Cement - RCCI Excellence Award & Launch of Tuff Cemento 3556 in March 2007. 2009- The Company has commissioned an additional clinker capacity of 1 mn tonnes. 2011-World Economic Forum (WEF), Switzerland has identified the Company as New Sustainability Champion. 2012-The Company has recommended final Dividend @ Rs. 8 per share.
2.2.2 Company Overview Shree Cement Limited is a Beawar based company, located in Rajasthan. The Company is a part of the Bangur Group and was incorporated on 25th October1979, at Jaipur with a Vision: To register strong consumer surplus through a superior cement quality at affordable price. Commercial production commenced from 1st May1985 with an installed capacity of 6 lacs tones per annum in Beawar dist. Ajmer, the capacity of this plant was upgraded to 7.6 lacs tones per annum during 1994-95 by a modernization and up gradation programme. In 1995 - The Company undertook the implementation of new unit of 1.24 MT capacity per annum named "Raj Cement. In 1997 The Company commissioned its second cement plant - Raj Cement with a capacity of 12.4 lacs tones per annum adjacent to its existing plant in order to take full advantage of its existing infrastructure and already developed captive mining lease enough to sustain a new cement plan. The cumulative capacity was enhanced by de-bottlenecking and balancing equipment in December 2001 to 2.6 MTPA. A product called Tuff Cemento has also launched by the company in April 2007. At present company is
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producing over 100% capacity utilization, it is the largest single location cement producer in north India (sixth in country). 2.2.3 The Shree Mission The company continues to be one of the most operationally efficient and energy conserving cements producers in the world. Its mission statement is To harness sustainability through low-carbon philosophy To sustain its reputation as one of the most efficient manufacture globally. To continually add value to its products and operation meeting expectations of all its stakeholders. To continually build and upgrade skills and competencies of its human resource for growth To be a responsible corporate citizen with total commitment to communities in which it operates and society at large. 2.2.4 The Shree Vision
Shri Bangur, Executive Chairman, Shree Cement Ltd To sustain its reputation as the most efficient cement manufacturer in the world. To strengthen realizations through intelligent brand building. To drive down costs through innovative plant practices. To increase the awareness of superior product quality trough a realistic and convincing communications process with the consumer.
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2.2.5 Focus of the Project The project is about the cost of capital- meaning, concept; the cement industry analysis, the economic view and the company analysis. This project is made to understand the cement industry outlook and the financial concepts related to capital. 2.2.6 Objective The objectives of the study are as follows: To know the Indian cement industrys scenario. To know the key players in the industry. To know the company in detail. To relate various concepts studied in the 2nd semester to real organizational environment. To learn about the organizational culture values, and benefits in a practical way. To understand the theory of capital and its implication in business structure. To know about the various sources of funds in the company. To find out the cost of various components of capital and how to minimize it.
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Lowest cost producer of cement in north India; Focused strategy; A secure source of raw materials; High penetration in Govt. projects; Largest single plant capacity in India; Shree power plant, which is producing electricity enough for Ras plant.
Weaknesses Less dealer incentives as compared to its competitors; Color of the cement has not been perceived greatly, green color was preferred the most; Poor advertising and brand promotion. Opportunities Real estate boom will lead to increased demand; International expansion; Demand from Pakistan side; Reduction in customs duties; Governments thrust on infrastructure and tax incentives on housing loans. Threats Increased competition from domestic as well as international players; Rising input (oil) prices; Sales highly dependent on monsoons; Growth of counterfeits.
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To know about the various sources of funds utilized in the company. To find out the cost of various components of capital and how to minimize it.
3.2 Hypothesis
H1- the company utilizes various sources of funds. H2- the company bears a minimum cost on its capital structure.
3.3 Data collection method Data can be collected through:o Primary sources: - The primary data are those which are collected afresh and for the first time and thus happen to be original in character. There are various ways of collecting primary data, these are as follows:
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o Secondary sources: - Secondary data can be collected using the following resources: Magazines and newspapers Internet Government publications The data collected for the study is secondary data which includes: Internal Data: This includes all the data which is provided by the company itself. Like balance sheet, annual reports, loan files and other documents to study. External Data: Read various articles on cement industry which is derived from external sources like internet and other types of media services that gives a wide picture of cement industry and the organization.
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Example-: If a company issues 12% debentures worth Rs. 5 lacs of Rs. 100 each at par, then it must be earn at least Rs.60000 (12% of Rs. 5 lacs) per year on this investment to maintain the income available to the shareholders unchanged. If the company earns less than this interest rate (12%) than the income available to the shareholders will be reduced and the market value of the share will go down. Therefore, the cost of debt capital is the contractual interest rate adjusted further for the tax liability of the firm. But, to know the real cost of debt, the relation of the interest rate is to be established with the actual amount realized or net proceeds from the issue of debentures. To get the after-tax rate, you simply multiply the before-tax rate by one minus the marginal tax rate. Cost of Debt = {before-tax rate x (1-marginal tax)} The before tax rate of interest can be calculated as below: = Interest Expense of the company ---------------------------------------- X 100 Total Debt
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Interpretation- Cost of Debt Capital was 5.95 in 2009 which increased to 6.20 in 2010 and in 2011 it reduced to 5.65.
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4.1.2 Dividend per share The sum of declared dividends for every ordinary share issued. Dividend per share (DPS) is the total dividends paid out over an entire year (including interim dividends but not including special dividends) divided by the number of outstanding ordinary shares issued. DPS can be calculated by using the following formula: DPS= D-SD S D - Sum of dividends over a period (usually 1 year) SD - Special, one time dividends S - Shares outstanding for the period
Year Ratio
Interpretation: - Dividend per share shows an increasing trend i.e. in Mar 09 it was 10 which increased to 13 in 2010 n further increased to 14 in 2011.
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4.1.3 Return on Capital Employed A ratio that indicates the efficiency and profitability of a company's capital investments. ROCE should always be higher than the rate at which the company borrows; otherwise any increase in borrowing will reduce shareholders' earnings. Earnings before interest and tax Total assets- current liabilities
Year Ratio
Interpretation: - Return on Capital Employed shows an decreasing trend i.e. it is 30.64 in 2009 which comes down to 25.91 in 2010 n further decreases by 18.34.
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4.1.4 Return on net worth The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. RONW is expressed as a percentage and calculated as: Net income Shareholders equity
Table No. 4.4 showing Return on Net Worth
Year Ratio
Interpretation: - This ratio also shows a decreasing trend. It was 47.76 in 2009 which decrease to 36.88 in 2010 n then there is further decrease in the ratio by 26.33.
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4.1.5 Return on long term funds The return is calculated as the annual percentage return based on the yields of all the underlying securities in the portfolio, but is weighted to account for each security's market value and maturity. The return is presented net of estimated fees and the maximum offering price, but does not account for delays in income distributions from the fund.
Table No. 4.5 showing Long Term Funds
Year Ratio
Interpretation: - Return on long term funds shows decreasing trend as it keeps on decreasing every year i.e. 32.66 in 2009, then 27.13 in 2010 and 7.94 in 2011.
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.
Year Ratio
1.2 1 0.8 0.6 0.4 0.2 0 2008-09 2009-10 2010-11 debt equity ratio
Interpretation: - Debt equity ratio decreases every year. It is 1.19 in 2009, then 1.09 in 2010 n 0.93 in 2011. 4.1.7 Long term debt equity ratio
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It expresses the relationship between long-term capital contributions of creditors as related to that contributed by owners (investors). Long-Term Debt to Equity expresses the degree of protection provided by the owners for the long-term creditors. A company with a high long-term debt to equity is considered to be highly leveraged.
Table No. 4.7 showing Long Term Debt Equity Ratio
Year Ratio
1.2 1 0.8 0.6 0.4 0.2 0 2008-09 2009-10 2010-11 long term debt equity ratio
Interpretation: - It too shows decreasing trend. Long term debt equity ratio decreases every year i.e. from 2008-09 to 2009-10 it decreases by 0.05 n further by 0.16.
The payout ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio. Dividend per share Earnings per share
Table No. 4.8 showing Dividend Payout Ratio
Year Ratio
Interpretation: - Dividend payout ratio increases every year. It increases from 2009 to 2010 by 0.77 n further from 2010 to 2011 by 19.24.
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It is the ratio that measures the amount of earnings retained after dividends have been paid out to the shareholders. The prime idea behind earnings retention ratio is that the more the company retains the faster it has chances of growing as a business. This is also known as retention rate or retention ratio. Net income- dividend Net income
Year Ratio
Interpretation: - This ratio declines every year i.e. it shows a decreasing trend. It was 93.08 in 2009 which reduced to 91.98 in 2010 and further reduced to 63.42 in 2011. 4.1.10 Earnings per share
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The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company's profitability. When calculating, it is more accurate to use a weighted average number of shares change over time. Net income-dividends on preferred stock Average outstanding shares
Year Ratio
Interpretation: - Earning per share was 194.07 in 2009 which reduced to 60.19 in 2010 n again raised to 177.54.
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Debt equity ratio decreases every year. It is 1.19 in 2009, then 1.09 in 2010 n
0.93 in 2011.
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5.2 Recommendations
Shree Cement has a big network of suppliers. These suppliers vary in size and business. Shree Cement can take benefit of its creditworthiness with financial institutions and can introduce many of its small vendors to channel financing. Many private and PSU banks offer this facility. If Shree Cement introduces its selected suppliers to the bank, the suppliers creditworthiness will be identified by the bank. The supplier will be able to get finance from the bank in his own name under drawee bills financing due to his business with Shree Cement. This will solve his liquidity problem and it will be possible for Shree Cement to get better credit period. Company has huge cash amount in its account. Company can use this amount for further expansions. Advertising strategies should be revised. More focus should be given on publicity and awareness among customer should be there. The main & lucrative factor may for Shree cement is contracted, relation will create a smooth flow of sales for Shree cement. So they should make more frequent in contractors meeting. We often see that retailers would like to sale only that product in which he gains more profit, so we should give a good margin of profit to retailer. They should offer POP material and other incentives to push the confidence in Shree cement dealers and contractor. Literature can be provided to stockiest and retailers. This written material will also help them to advertise and promote the product. Company should also provide more technical services, so they can visit every site &solve the customers problem.
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5.3 Conclusion
The results obtained during the studies have brought me to several conclusions and enabled me to give my opinion on financial standing of the company: Over the last few years the company has been in the expansion mode and constantly increasing the installed capacity. Though there is a slowdown going on in the country and it also includes the cement industry. But the effect is least visible on the performance of this top organization. In fact this organization is getting better every year. This is because of the huge cost cutting measures going on in the company which also includes live projects like Mission 11(to reduce cost by 11% and increase profitability by 11%) and also with the increase demand of its products in the country. Shree Cement is a company where best practices of financial management are applied every day. It is very well rated by financial institutions. This gives the company possibility of cooperation with financial basis on every field and even the most sophisticated products are dedicated to the company. The company also has good relations with governmental institutions and wisely uses scheme and facilities provided by state. In effect costs of debts are very low and cost of borrowing capital for new projects is at lowest possible level. Industry situation is highly competitive within the next few years due to major capacity additions within the last period surplus of cement may take place on the market. This situation may result in margin cuts and price war. For Shree Cement it should still be very comfortable because its costs are well controlled and margin at above-the-average level. India as a second largest cement producer in nominal terms still can count on recovery in building industry. Shree Cements financial standing makes it invulnerable to buyout or acquisition. This is a great advantage because in the times of overcapacity, Greenfield investments may not bring required rate of return. That is why larger companies may try to utilize their profits on mergers and acquisitions
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to own a larger piece of the market. Shree cement as an industry has outperformed. This gives the company an opportunity to become a possible buyer of another company because there are substantial amounts of profits to be utilized in the future. SCL has healthy and sound financial status, with characteristics of a company that evolves from middle sized to large sized one. But sometimes it brings also internal pains, also on financial side, when fixed costs rise out of control, workers demand higher salaries, sometimes not parallel with efficiency growth, or invested capital does not bring required rate of return. Also going global may reduce the cost of capital but on the other side may expose the company on new kind of political risk which may be often impossible to hedge. So far as the Shree is concerned, these factors are well within the control.
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