A

PROJECT STUDY REPORT

ON
TRAINING UNDERTAKEN AT
SHREE CEMENT LIMITED, BEAWAR

TITLED

“ COST OF CAPITAL”
SUBMITTED IN PARTIAL FULFILLMENT FOR

THE AWARD OF DEGREE OF

“MASTER OF BUSINESS ADMINSTRATION”

SUBMITTED TO SUBMITTED BY

Dr. SHOBHA KHINVASARE J.ANSHUL CHAWRA

MBA PART II (SEM –III)

(2010-2011)

SUBODH INSTITUTE OF MANAGE MENT & CAREER STUDIES

BR SHASH MBA BLOCK, RAMBAGH CIRCLE,

JAIPUR-(302004)

Certificate of Approval

1
 The following Summer Internship Report titled "Cost of Capital" is hereby approved as a certified
study in management carried out and presented in a manner satisfactory to warrant its acceptance as a
prerequisite for the award of Master of Business Administration for which it has been submitted. It
is understood that by this approval the undersigned do not necessarily endorse or approve any
statement made, opinion expressed or conclusion drawn therein but approve the Summer Internship
Report only for the purpose it is submitted.

Summer Internship Report Examination Committee for evaluation of Summer Internship Report

Organizational Guide

: Signature………………………….

: Name: Mr. N. C Jain

: Designation: Assist. Vice President, Finance

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

Beawar 305901, Rajasthan, INDIA

: Email: jainnc@shreecementltd.com

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 Preface

About three decade ago, the scope of financial management was confined to the raising of funds,
whenever needed and little significance used to be attached to financial decision-making and problem
solving. As a consequence, the traditional finance texts were structured around this theme and
contained description of the instruments and institutions of raising funds and of the major events, such
as promotion, reorganization, Readjustment, merger, consolidation etc. When funds were raised. In the
mid fifties, the emphasis shifted to the judicious utilization of funds. The modern thinking in financial
management accords a far greater importance to management decision-making and policy. Today,
financial management donot perform the passive role of scorekeepers of financial data and information,
and arranging funds, whenever directed to do so. Rather, they occupy the key position in top
management areas and play a dynamic role in solving complex management problems. They are now
responsible for the fortune of the enterprises and are involved in the most vital management decision of
allocation of capital. It is their duty to insure the funds are raised most economically and used in the
most efficient and effective manner. Because of this change in emphasis, the descriptive treatment of
the subject of financial management is being replaced by growing analytical content and sound
theoretical underpinnings.

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 Acknowledgement

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

It’s a moral responsibility of each individual to acknowledge the help of each individual who has made
your journey smoother for you. First of all I would like to express my gratitude to Mr. N.C. Jain
(Assist. Vice President, Finance) who despite his tight schedule spared time for discussions and
informed about basic groundwork and direction without whose support, this report would not have been
possible. I appreciate him of giving me an option of selecting such a wonderful project. The learning
has been immense for me from this project.

I am thankful to all employees at Shree Cement Ltd. for providing me all the information and help I
required for completion of this project. I am highly grateful to the management at Shree Cement for
giving me this opportunity to work on a dream project and in the process harness myself with the huge
learning on all aspects.

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

Last but not the least, I am grateful to my institute SUBODH INSTITUTE OF MANAGEMENT &
CAREER STUDIES jaipur which provided me this opportunity to interact with this organization and
understand the intricacies of the corporate world.

J.ANSHUL CHAWRA

CONTENT’S

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 Page
Sr. No. Particulars No.

1. History of Company 7

2. The Current Industry profile 11

Cement-types 13

The Cement Industry Structure 14

Characteristic of Cement Industry 25

Major Demand Drivers 26

Major Players in Cement Industry 27

Cement Manufacturing 30

Business and Managerial Challenges 33

Risk and Return of Cement Companies 33

3. Organization profile of Shree Cement Limited 37

  The Company’s Vision & Mission 37

  Marketing 38

Award of Company 42

4. Need of the study 43

5. Objective of study 45

 6. Scope of study 47

7. Concept of “Cost of Capital” 49

Features 52

Significance 52

Classification 54

  Assumption 55

  Cost of debt capital 56

  Cost of prefrential share capital 57

  Cost of equity Share capital 58

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  Weighted average cost of Capital 60

  Calculation of cost of capital of SCL 64

History
of
Company

6
 History of Company

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

(i) 48,00,000 shares to Shree Digvijay Cement Co. Ltd.;

(ii) 11,00,000 shares each to Graphite India, Ltd. and Fort Gloster Industries, Ltd.
(iii) 36,99,930 shares to Directors, their friends etc. including upto 25,00,000 shares to 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
modernisation/renovation/modification work. The Company undertook to set up a new cement plant of 0.6
million TPA capacity in Rajasthan 7,96,000 No. of Equity shares issued to financial institution in conversion
of loan.
1992 - 36,00,000 shares allotted to FLT Ltd. a wholly owned subsidiary of P.L. Smith & Co. Denmark under
financial collaboration agreement.1993 The Company undertook a scheme of implementing second stage of
its licensed capacity to increase its capacity to 3300 tonnes per day The Company issued 21975 - 16% each
with equity warrants and these will 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 and

7
finance Company with the Company was prepared for undertaking leasing activities and other financial
services on largescale.

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

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

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

●Decides to change the Accounting year to April - March each year and accordingly the current year is only
for nine months. Appoints Mr M K Singhi as the Executive Director of Shree Cements. In pursuance to the
IDBI, company approve for early redemption of privately placed under noted cummulative redeemable
preference shares.Change in Management Structure: Mr B G Bangur re-appointed as executive chairman and
Shri H M Bangur re-appointed as the Managing Director for a period of five years.

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

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

● Company conferred 'BEST PRODUCITY AWARD-2003' by the Rajasthan state

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

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

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 The
Cement
Industry PROFILE

The Cement Industry PROFILE

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The Indian Cement industry dates back to 1914, with first unit were set-up at Porbandar with a capacity of
1000 tones. Currently The Indian cement industry with a total capacity of about 170 m tones (excluding mini
plants) in FY07-08, has surpassed developed nations like USA and Japan and has emerged as the second
largest market after China. Although consolidation has taken place in the Indian cement industry with the
top five players controlling almost 50% of the capacity, the remaining 50% of the capacity remains pretty
fragmented.

Per capita consumption has increased from 28 kg in 1980-81 to 115 kg in 2005. In relative terms, India’s
average consumption is still low and the process of catching up with international averages will drive future
growth. Infrastructure spending (particularly on roads, ports and airports), a spurt in housing construction and
expansion in corporate production facilities is likely to spur growth in this area.

South-East Asia and the Middle East are potential export markets. Low cost technology and extensive
restructuring have made some of the Indian cement companies the most efficient across global majors.
Despite some consolidation, the industry remains somewhat fragmented and merger and acquisition
possibilities are strong. Investment norms including guidelines for foreign direct investment (FDI) are
investor-friendly. All these factors present a strong case for investing in the Indian market.

Types of Cement

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Cements are of two basic types- gray cement and white cement. Grey cement is used only for construction
purposes while white cement can be put to a variety of uses. It is used for mosaic and terrazzo flooring and
certain cements paints. It is used as a primer for paints besides has a variety of architectural uses. The cost of
white cement is approximately three times that of gray cement. White cement is more expensive because its
production cost is more and excise duty on white cement is also higher. Shree cement does not manufacture
white cement at present.

GREY WHITE

Portland Pozzolona Cement Ordinary Portland cement

(PPC)

Pozzolona used in the manufacture of Portland cement is burnt clay of flyash generated at thermal power
plants. PPC is hydraulic cement. PPC differs from OPC on a number of counts. Pozzolona during
manufacturing consumes lot of hydration heat and forms ‘cementious gel’. Reduced heat of hydration leads
to lesser shrinkage cracks. An additional gel formation leads to lesser pores in concrete or mortar. It also
minimizes problem of leaching and efflorescence.

The Cement Industry Structure

Presently the total installed capacity of Indian Cement Industry is more than 175 mn tones per annum, with a
production around 168 mn tones. The whole cement industry can be divided into Major cement plants and
Mini cement plants.

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 Major Cement Plants:
  Plants : 140

  Typical installed capacity 

  Per plant : Above 1.5 mntpa

  Total installed capacity : 170 mntpa

  Production 07-08: 161 mntpa

  All India reach through multiple plants

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

  Strong marketing network, tie-ups with customers, contractors

  Wide spread distribution network. 

  Sales primarily through the dealer channel

Mini Cement Plants:

  Nearly 300 plants & Located in Gujarat, Rajasthan, MP mainly

  Typical capacity < 200 tpd

  Installed capacity around 9 mn. Tones

  Production around : 6.2 mn tones 

  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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REGIONAL DIVISION

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

 North – Punjab, Delhi, Haryana, Himachal Pradesh, Rajasthan, Chandigarh, J&K and Uttaranchal
 West – Maharashtra and Gujarat
 South – Tamil Nadu, Andhra Pradesh, Karnataka, Kerala, Pondicherry, Andaman & Nicobar and Goa
 East – Bihar, Orissa, West Bengal, Assam, Meghalaya, Jharkhand and Chhattisgarh, and
 Central – Uttar Pradesh and Madhya Pradesh

REGIONWISE CEMENT PRODUCTION

SOUTH CENTRAL
33% 14%
EAST
15%

WEST
15%
NORTH
23%

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 INDUSTRY CURRENT SCENARIO

SECTOR OUTLOOK
Indian Cement Industry is set to increase production capacity by 28.3 mt in FY09E, 41.4 mt in FY10E and
18.9 mt in FY11E. This will take the aggregate installed capacity to ~288 mt. In FY08, 21 mt of capacity
was added. The Industry planned this massive capacity expansion of 108 mt because they had never seen
such a good run till FY2006. During this period, the capacity utilization rate of the Industry reached an all
time high level of ~99% in FY08. In the period FY05 to FY08, cement demand grew at a CAGR of 10.5%
and average retail price increased by a whopping 41% to Rs 230 per bag. Cement manufacturers made huge
profits and the Industry average per tonne of operating profits crossed Rs 1100. Driven by theses profitability
levels, average RoCE level of the Industry crossed the 25% mark.

CAPACITY ADDTION (MTPA)

60

50

40

30 41.4

28.3
20 18.9
21.0

10 15.2 7.7
7.6 6.0
7.8 3.4 9 10
5 6 7 8
1 2 3 4
0
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09E FY10E FY11E

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Cement Industry is set to add ~89 mn tonnes of capacity between FY09-FY11E, which accounts for ~48% of
FY08 installed capacity. We expect ~21 mt of capacity addition in Q4FY09, followed by 41 mt of additional
capacity in FY10 and 18.9 mt in FY11. Of the new capacities, ~ 41 mt (~50%) is expected to be
commissioned in the South, followed by 13.3 mt (~16.4%) in the North and 13 mt (16.1%) in the East.

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

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ANTICIPATED GROWTH IN CEMENT DEMAND

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Housing construction accounts for around 60-65% of the total cement demand and the balance comes from
infrastructure sectors including roads, railways, ports and power, among others. The demand for cement is
directly linked to economic activity and has a high correlation with GDP growth. Infrastructure
investments and construction activities, which are the major drivers of cement demand, are also key
components of GDP. Further, rural housing, which is a determinant of cement demand, depends on
agricultural productivity, which again is a key component of GDP.

Historical data of last 12 yrs shows that cement demand in India has increased at the rate of 1.27x the
growth rate of GDP. It is expected that cement consumption growth would shrink over the next two years
due to uncertain economic conditions and slowdown in real estate construction activities. Cement demand
will consequently grow by 8.7%, 7.6% and 8.9% in FY09, FY10 and FY11 respectively.

CAPACITY UTILIZATION (%)

120%
1 97.0% 98.7%
100% 91.5%
86.1% 87.6% 84.5%
79.5%
80%

60%

40%

20%

0%
FY05 FY06 FY07 FY08 FY09E FY10E FY11E

CAPACITY EXPANSION TO WEAKEN PRICING POWER

It is believed that the capacity expansion program will only weaken the pricing power and profitability of the
companies in the future. In a scenario where oversupply is inevitable, companies could try to increase their
market share by decreasing their prices, leading to a possible price war.

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Economic Analysis

-Key Economic Indicators

World GDP, also known as world gross domestic product or GWP - gross world product, calculated on a
nominal basis, was estimated at $65.61 trillion in 2007 by the CIA World Fact book. While the US is the
largest economy, growth in world GDP of 5.6% was led by China (11.9%) and India (7.2%)

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Inflation worldwide

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

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

20
Unemployment Rates:

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

authorit

21
 If interest rates increase across the
board, then investment decreases, causing a fall in national income.

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 Characteristics of Cement Industry

This section describes the basic economic characteristics of the cement industry by following the classical
approach which consists of successively examining demand, supply and market structure. On the basis of
these characteristics are described the main economic stakes in the sector.

Demand &Market

Demand in the cement industry is typically that of an activity which is mature, cyclical and with low price
elasticity. It is also characterized by a high degree of horizontal differentiation in terms of location and
a low degree of vertical differentiation in terms of quality.

Cement is a homogeneous product. Most of its sales concern about half a dozen commercial varieties, of
which Portland cement is by far the leader. No brand name exists, so that one supplier’s products can easily
be substituted for another. Cement is, however, an experience good; its quality is guaranteed by standards
with which the supplier has to comply. These standards are often national but in most cases the products of
one country can easily be approved in neighboring countries. Standards therefore do not constitute trade
barriers as such, even if they may hinder trade.

The demand for cement is geographically widely dispersed and corresponds roughly to population density.
Although cement is an upstream industry, it differs from other basic industries such as aluminum, steel or
glass, for which demand id concentrated both geographically and in terms of the number of customers. In the
cement industry demand is by, by contrast, dispersed in multiple zones of consumption, each of which
comprises numerous customers. Geographical factors thus determine the structure of the market.

Supply
Two economic considerations are important a priori in structuring supply in a market characterized by strong
horizontal differentiation:

 The trade-off between fixed costs and transport costs which, depending on the economic size of the
factories, gives an initial idea of the density of the network of production units covering the territory, in
relation to the density of demand.

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 The level of investment costs and the life-span of facilities which determine the rigidity and the
duration of the network.

Expected Demand and Supply

Major Demand Drivers

Present Demand drivers

 Infrastructure & construction sector the major demand drivers. Some demand determinants

  Economic growth

  Industrial activity

  Real estate business

  Construction activity

  Investments in the core sector

 Growth in mortgage business in retail housing

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  Higher surplus income of household

Opportunities
 growth in the housing sector

 central road fund established for national  highways and railway over bridges to provide the necessary
impetus

 expansion plans, Greenfield projects on the anvil

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

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

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

 Newer capacities in future

MAJOR PLAYERS IN CEMENT INDUSTRY:

SHREE CEMENT LTD

Shree Cement Ltd is a Rajasthan based company, located at Beawar. The company has installed capacity of
10.2 mn tonnes per annum in Rajasthan. It is a leading cement manufacture company in North India and has
been participating in the infrastructure transformation of India for over two decades now. It started operations
in the year 1985 and has been growing ever since. Its manufacturing units are located at Beawar, district
Ajmer, and Ras, district Pali, in Rajasthan. It also has grinding units at Khushkhera, district Alwar in
Rajasthan, near Gurgaon.. It has three brands under its portfolio viz. Shree Ultra Jung Rodhak Cement,
Bangur Cement and Rockstrong Cement. The multi-brand strategy makes Shree the number one cement
player in Rajasthan, Haryana and Delhi. The company has also established two grinding units one at
Suratgarh (Rajasthan) and another at Roorke (Uttaranchal),.

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GUJARAT AMBUJA CEMENT LIMITED

GACL was set up in 1986 with 0.7 million tonnes. The capacity has grown 25 times since then to 18.5
million tonnes. GACL exports as much as 15 percent of its production. 35% of the company products
transported are by sea which is the cheapest mode. It has earned the reputation of being the lowest cost
producer in the cement industry. Ambuja cement is one of GACL’s well established brands. The company
plans to increase capacity by 3-4 million tonnes in the near future.

ACC LIMITED

Being formed in 1936, ACC has a capacity of 22.40 million (0.53 million tonnes of Damodar Cement and
Slag and 0.96 million tonnes of Bargarh Cement). ACC Super is one of the company’s well established
brands. It is planning to expand the capacity of its wholly-owned subsidiary Damodar Cement and Slag at
Purulia in West Bengal. This is aimed at increasing its presence in the eastern region.

THE ADITYA BIRLA GROUP

The Aditya Birla Group is the world’s eight largest cement producer. The first cement plant of Grasim, the
flagship of the Aditya Birla Group, at Jawad in Madhya Pradesh went on stream in 1985. In total, Grasim has
five integrated grey cement plants and six ready-mix concrete plants. The company is India’s largest white
cement producer with a capacity of 4 lakh tonnes. It has one of the world’s largest white plants at Kharia
Khangar (Rajasthan). Shree Digvijay Cement, a subsidiary of Grasim, which was acquired in 1998, has its
integrated grey cement plant at Sikka (Gujarat). Finally Grasim acquired controlling stake in Ultra Tech
Cement Limited (Ultra Tech), the demerged cement business of L&T. Grasim has a total cement capacity of
31 million tonnes and eyeing to increase it to 48 MT by FY 09. Grasim has a portfolio of national brands

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which include Birla Super, Birla Plus, Birla White and Birla Ready mix and also regional brands like Vikram
Cement and Rajshree Cement.

BINANI CEMENT

A fierce competition with a 2.2 MTPA plant is located at Binanigram, Pindwara, a village in Sirobi in the
state of Rajasthan. It’s a tough nut player which is outside CMA (Cement Manufacturer’s Association) and is
prime reason for driving prices low in markets. Offers a good quality product at cheap rates and has very
good brand image. Sales are focused in the North India, Gujarat and Rajasthan. It holds around 14% of the
Rajasthan market.

JK

An entrenched competitor that has brands across the price spectrum with JK Nembahera leading the pack.
Also operates in the white cement market with Birla as its only competitor. It lost significant market when
Ambuja came to Rajasthan.

Others

Other players like Shriram have insignificant share and are highly localized. Shriram has a small presence
and that too largely in southern Rajasthan. There are various mini plants operating too which supply cheap
cement which has no ISI certification and does not confirm BIS standards. Quite often they are supplied in
other established brand’s cement bags. L&T is a strong player nationally and regarded as quality product. It
has a footprint but not a foothold in Rajasthan market

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 Cement Manufacturing

Raw Material Preparation

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

Raw Mill

Transport belt conveyor transfers the blended raw materials to ball

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

Fuels

The heat required to produce temperatures of 1,800°C at the flame is

supplied by ground and dried petroleum coke and/or fuel oil. The
Petcock is imported via the companies' internal wharf, stored and then
ground in dedicated mills. Careful control of the mills ensures optimum
fineness of the Petcock and excellent combustion conditions within
the kilns system.

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Burning

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

Cooler Units

The clinker discharging from the kiln is cooled by air to a

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

Filters

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

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

 Clinker

 Gypsum

 Limestone addition

 Blast Furnace Slag

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

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 Business & Managerial Challenges

Cement market is highly competitive with major players having advantage of brand equity, capacity and
early movers. The major players are Binaani, Birla (with products like Birla Super and Birla Chetak), Grasim
(with products like Vikram and Birla Plus), Gujarat Ambuja, JK (with products like JK Nimbahera), Laxmi,
Mangalam (with products like Mangalam and Birla Uttam), ACC, DCM Shriram, L & T and Kamdhenu.
Each of these players has their dominance across whole Rajasthan in addition to their respective regional
dominance.

Another issue is that the product (cement) cannot be differentiated clearly on the basis of quality and hence,
cost plays one of the most important role in this industry. If the company can control cost of manufacturing
& distribution, then not only would profitability of the company increase, but this benefit would also trickle
down to the customers.

Logistics is the most important cost associated with cement industry. This is the single most important reason
for strong dominance of all cement companies in the regions around their factory. But if this system can be
improved upon, and costs can be managed, then Shree Cements Ltd. can strengthen their hold in present
states of distribution as well as look forward to gaining foothold in newer and farther regions.

Risk and Return of Cement Companies

General Risk Factors

 Economic Conditions - The performance of cement companies may be significantly affected by

changes in economic conditions, and particularly conditions which affect the cement industry, its top
consumers. These industries include the real estate sector and construction companies. Profitability of the
business may also be affected by factors such as market conditions, interest rates, and inflation.

31
 Geo-political Factors –The companies may be affected by the impact that geo-political factors have
on the world economy or on financial markets and investments generally or specifically. These include the
demand for cement from China, and other export destinations.

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

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

32
 THE
ORGANIZATION
PROFILE

33
 THE ORGANIZATION PROFILE

COMPANY PROFILE

COMPANY Shree Cement Ltd.

INCORPORATION YEAR 1979

Bangur Nagar, Beawar, Ajmer

REGISTERED OFFICE
(Rajasthan)

CORPORATE OFFICE 21, Strand Road, Kolkata

INDUSTRY Cement Manufacturing

CHAIRMAN B.G. Bangur

MANAGING DIRECTOR H.M. Bangur

EXECUTIVE DIRECTOR M.K. Singhi

34
 INTRODUCTION Shree Cements Ltd.

Shree Cements Ltd. is a Rajasthan based company, located at Beawer. The company has installed capacity of
10.2 mtpa tones per annum in Rajasthan.. For the last 18 years, it has been consistently producing many
notches above the nameplate capacity. The company retains its position as north India’s largest single-
location manufacturer. Shree’s principal cement consuming markets comprise Rajasthan, Delhi, Haryana,
Punjab, Uttar Pradesh and Uttranchal. Shree manufactures Ordinary Portland Cement (OPC) and Portland
Pozzolana Cement (PPC). Its output is marketed under the Shree Ultra Ordinary Portland Cement’ and
‘Shree Ultra Red Oxide jung rodhak Cement’ brand names.

THE SHREE VISION

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

Guiding Principles

 Enforce good corporate governance practices

 Encourage integrity of conduct
 Ensure clarity and un-ambiguity in communication
 Remain accountable to all stakeholders
 Encourage socially responsible behavior

Mission

 To harness sustainability through low carbon philosophy

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

35
 Marketing

Shree caters to cement demand arising in Rajasthan, Delhi, Haryana, UP and Punjab. What is strategic for
SCL is that it is located in central Rajasthan so it can cater to the entire Rajasthan market with the most
economic logistics cost. Also, Shree Cement is the closest plant to Delhi and Haryana among all cement
manufacturers in its state and proximity to these profitable cement markets renders the company an edge over
other cement companies of the company in terms of lower freight costs. SCL has a 160 MW captive thermal
power plant, which has achieved over 90 per cent load factor. In 2000-01, the company has succeeded in
substituting conventional coke with 100 per cent pet coke, a waste from refineries, as primary fuel resulting
in lower inventory and input costs. In the past two years the price of coal has gone up. Earlier dependent on
good quality imported coal, the company's switch to pet coke could not have come at a better time. The
company also replaced indigenous refractory bricks with imported substitutes, reducing its consumption per
tonne of clinker. The company has one of the most energy efficient plants in the world. The captive plant
generates power at a much lower cost of Rs 2.5 per unit (excluding interest and depreciation) as compared to
over Rs 5 per unit from the grid. In appreciation of its achievements in Energy sector, the Company has been
awarded the prestigious 'National Energy Conservation Award" various times. Shree is rated best by
Whitehopleman, an international agency specializing in the rating of cement plants.

PRODUCTS

Following are the various products of Shree Cements Ltd.

1 Shree Ultra Red Oxide Jung Rodhak Cement (ROC)

2 Shree OPC

3 Bangur Cement

4 Rockstrong Cemento

36
 POLICIES:

Quality Policy:

 To provide products conforming to national standards and meeting customers requirements to their total
satisfaction.
 To continually improve performance and effectiveness of quality management system by setting and
reviewing quality objectives for –
a) Customer satisfaction
b) Cost effectiveness

Energy Policy:

 To reduce to the maximum extent possible the consumption of energy without impairing productivity which
should help in:
 Increase in the profitability of the company
 Conservation of Energy
 Reduction in Environmental pollution at Energy producing areas.

Environment Policy:

To ensure:

 Clean, green and healthy environment

 Efficient use of natural resources, energy, plant and equipment
 Reduction in emissions, noise, waste and greenhouse gases
 Continual improvement in environment management
 Compliance of relevant environment legislation

Water Policy:

37
 To provide sufficient and safe water to people and plant as well as to conserve water, we are committed to
efficient water management practices viz.
 Develop means and methods for water harvesting
 Treatment of waste discharge water for reuse
 Educate people for effective utilization and conservation of water
 Water audit and regular monitoring of water consumption

Health and Safety Policy:

 To ensure good health and safe environment for all concerned by:
 Promoting awareness on sound health and safe working practices
 Continually improving health and safety performance by regularly setting and reviewing objectives and
targets
 Identifying and minimizing injury and health hazards by effective risk control measures
 Complying with all applicable legislations and regulations

Human Resource Policy:

Shree Cement is committed to:

 Empower people
 Honor individuality of every employee
 Non discrimination in recruitment process
 Develop Competency
 Employees shall be given enough opportunity for betterment
 None of the person below the age of 18 shall be engaged to work
 Incidence of Sexual harassment shall be viewed seriously
 To follow Safety & Health, Quality, Environment, Energy policy

38
 ADVERTISING

Need for Advertising:-

 Cement has evolved into a highly commoditized product category. Due to competitive pricing within the
industry, there was not much differentiation among the various brands on offer.
 People too did not pay much attention to this product unless there was a need felt. Hence people who were
currently making their houses or were soon to embark on such a project became the target market.

 Because of the product being commoditized, there was a need for differentiation for which there were some
changes made to the product.

Shree Cement Ltd was not advertising its products for the past few
years but looking at the competitive market and opportunities ahead
it introduced a new ad campaign which was targeted to differentiate
its products from other cement brands. It introduced an ad
campaign showing the anti rusting capability of the Red Oxide
Cement of the company. But still the presence of the company has
not been as intense as other brands have like Ambuja and Grasim etc.

39
 AWARDS OF THE COMPANY

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

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

 Golden Peacock Award - 2007 for Excellence in Corporate Governance

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

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

 CII National Award for Excellence in Energy Management 2006

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

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

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

 ICWAI National Award 2005 for excellence in cost management

 Green-Tech Environment Excellence Award

 Golden Peacock Award for Combating Climate Change

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

 SILVER CIO Award by the CIOL Dataquest

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

40
NEED
FOR
STUDY

41
 NEED FOR STUDY

The project is structured for the purpose of getting good insight of, Capital Structure and Cost of Capital,
theory and its implication. The Projects Focus On Cost Of Different Component Of Capital And Optimal
Capital Structure For Minimizing The Cost And Risk. It also discusses the different sources of funds,
different approaches of cost of capital.
The project is being made as a part of summer training and gives good insight of the topic covered under it.

The basic need behind the study to cost of capital is to understand the finance as an important asset for the
organization , their knowledge skills & attiudes should be used for the overall growth on organization as well
as for the individuals, this can be done through retaining the telent & knowledge people for the long time .

42
OBJECTIVES
OF
THE STUDY:

43
 OBJECTIVES OF THE STUDY:

 The following are the objectives of the study

 ✔ To know the Global and Indian Scenario

 ✔ To know the Key Players in the Industry

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

 ✔ To know the Company Profile

 ✔ To do SWOT Analysis, etc. of the Company

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

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

 how they are performed and coordinated.

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

 Environment

44
 SCOPE
OF
THE
OBJECTIVES:

SCOPE OF THE OBJECTIVES:

45
 Organizational Functioning is an important factor for any Organization to achieve the desired
goals and Objectives. This requires Co-ordination at all levels to smooth functioning. This

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

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

46
 Concept
COST
of CAPITAL

COST OF CAPITAL

47
The main objective of a business firm is to maximize the wealth of its shareholders in the long-run, the
Management Should only invest in those projects which give a return in excess of cost of fund invested in the
project of the business. The difficulty will arise in determination of cost of funds, if is raised from different
sources and different quantum. The various sources of funds to the company are in the form of equity and
debt. The cost of capital is the rate of return the company has to pay to various suppliers of fund in the
company. There are main two sources of capital for a company – shareholder and lender. The cost of equity
and cost of debt are the rate of return that need to be offered to those two groups of suppliers of the capital in
order to attract funds from them.

The primary function of every financial manager is to arrange adequate capital for the firm. A business firm
can raise capital from various sources such as equity and or preference shares, debentures, retain earning etc.
This capital is invested in different projects of the firm for generating revenue. On the other hand, it is
necessary for the firm to pay a minimum return to each source of capital. Therefore, each project must earn
so much of the income that a minimum return can be paid to these sources or supplier of capital. What should
be this minimum return? The concept used to determine this minimum return is called Cost of Capital. On the
basis of it the management evaluates alternative sources of finance and select the optimal one. In this chapter,
concepts and implications of firms cast of capital, determination of cast of difference sources of capital and
overall cost of capital are being discussed.

CONCEPT OF COST OF CAPITAL

48
 Cost of capital is the measurement of the sacrifice made by investors in order to invest with a view to
get a fair return in future on his investments as a reward for the postponement of his present needs. On the
other hand form the point of view of the firm using the capital, cost of capital is the price paid to the investor
for the use of capital provided by him. Thus, cost of capital is reward for the use of capital. Author Lutz has
called it” BORROWING AND LANDING RATES”. The borrowing rates means the rate of interest which
must be paid to obtained and use the capital. Similarly, landing rate is the rate at which the firm discounts its
profits. It may also the opportunity cost of the funds to the firm i.e. what the firm would earn by investing
these funds elsewhere. In practice the borrowing rates used indicate the cost of capital in preference to
landing rates.

Technically and Operationally, the cost of capital define as the minimum rate of return a firm must
earn on its investment in order to satisfy investors and to maintain its market value. I.e. it is the investors
required rate of return. Cost of capital also refers to the discount rate which is used while determining the
present value of estimated future cash flows. In the other word of John J. Hampton, “The cost of capital is
the rate of return in the firm requires from investment in order to increase the value of firm in the
market place”. For example if a firm borrows Rs. 5 crore at an interest of 11% P.A., then the cost of capital
is 11%. Hear it’s the essential for the firm to invest these Rs. 5 Crore in such a way that it earn at least Rs. 55
lacks i.e. rate of return at 11%. If the return less then this, then the rate of dividend which the share holder are
receiving till now will go down resulting in a decline in its market value thus the cost of capital is the reward
for the use capital. Solomon Ezra, has called “It the minimum required rate of return or the cut of rate for
capital expenditure.”

FEATURES OF COST OF CAPITAL

It is not a cost in reality the cost of capital is not a cost as such, but its rate of return which it requires
on the projects.

49
 MINIMUM RATE OF RETURN:

Cost of capital is the minimum rate of return a firm is required in order to maintain the market value
of its equity shares.

REWARDS FOR RISKS

Cost of capital is the reward for the business and financial risk. Business risks is the measurement of
variability in profits due to changes in sales, while financial risks depends on the capital structure i.e. that
equity mix of the firm.

SIGNIFICANCE OF CONCEPT OF COST OF CAPITAL

The cost of capital is very important concept in the financial decision making. The progressive management
always likes to consider the cost of capital while taking financial decisions as it’s very relevant in the
following spheres...

1. Designing the capital structure: the cost of capital is the significant factor in designing a balanced an
optimal capital structure of a firm. While designing it, the management has to consider the objective of
maximizing the value of the firm and minimizing cost of capital. I comparing the various specific costs of
different sources of capital, the financial manager can select the best and the most economical source of
finance and can designed a sound and balanced capital structure.
2. Capital budgeting decisions: the cost of capital sources as a very useful tool in the process of making
capital budgeting decisions. Acceptance or rejection of any investment proposal depends upon the cost of
capital. A proposal shall not be accepted till its rate of return is greater then the cost of capital. In various
methods of discounted cash flows of capital budgeting, cost of capital measured the financial performance
and determines acceptability of all investment proposals by discounting the cash flows.
3.
Comparative study of sources of financing: there are various sources of financing a project. Out of these,
which source should be used at a particular point of time is to be decided by comparing cost of different
sources of financing. The source which bears the minimum cost of capital would be selected. Although cost

50
 of capital is an important factor in such decisions, but equally important are the considerations of retaining
control and of avoiding risks.

4. Evaluations of financial performance of top management: cost of capital can be used to evaluate the
financial performance of the top executives. Such as evaluations can be done by comparing actual
profitability of the project undertaken with the actual cost of capital of funds raise o finance the project. If the
actual profitability of the project is more than the actual cost of capital, the performance can be evaluated as
satisfactory.
5. Knowledge of firms expected income and inherent risks: investors can know the firms expected
income and risks inherent there in by cost of capital. If a firms cost of capital is high, it means the firms
present rate of earnings is less, risk is more and capital structure is imbalanced, in such situations, investors
expect higher rate of return.
6. Financing and Dividend Decisions: the concept of capital can be conveniently employed as a tool in
making other important financial decisions. On the basis, decisions can be taken regarding dividend policy,
capitalization of profits and selections of sources of working capital.

CLASSIFICATION OF COST OF CAPITAL

1. Historical Cost and future Cost

Historical Cost represents the cost which has already been incurred for financing a project. It is calculated on
the basis of the past data. Future cost refers to the expected cost of funds to be raised for financing a project.

51
 Historical costs help in predicting the future costs and provide an evaluation of the past performance when
compared with standard costs. In financial decisions future costs are more relevant than historical costs.

2. Specific Cost and Composite Cost

Specific costs refer to the cost of a specific source of capital such as equity share. Preference share,
debenture, retain earnings etc. Composite cost of capital refers to the combined cost of various sources of
finance. In other words, it is a weighted average cost of capital. It is also termed as ‘overall costs of capital’.
While evaluating a capital expenditure proposal, the composite cost of capital should be as an acceptance/
rejection criterion. When capital from more than one source is employed in the business, it is the composite
cost which should be considered for decision-making and not the specific cost. But where capital from only
one source is employed in the business, the specific cost of those sources of capital alone must be considered.

3. Average Cost and Marginal Cost

Average cost of capital refers to the weighted average cost of capital calculated on the basis of cost of each
source of capital and weights are assigned to the ratio of their share to total capital funds. Marginal cost of
capital may be defined as the ‘Cost of obtaining another rupee of new capital.’ When a firm rises additional
capital from only one sources (not different sources), than marginal cost is the specific or explicit cost.
Marginal cost is considered more important in capital budgeting and financing decisions. Marginal cost tends
to increase proportionately as the amount of debt increase.

4. Explicit Cost and Implicit Cost

Explicit cost refers to the discount rate which equates the present value of cash outflows or value of
investment. Thus, the explicit cost of capital is the internal rate of return which a firm pays for procuring the
finances. If a firm takes interest free loan, its explicit cost will be zero percent as no cash outflow in the form
of interest are involved. On the other hand, the implicit cost represents the rate of return which can be earned
by investing the funds in the alternative investments. In other words, the opportunity cost of the funds is the
implicit cost. Port field has defined the implicit cost as “the rate of return with the best investment
opportunity for the firm and its shareholders that will be forgone if the project presently under consideration
by the firm were accepted.” Thus implicit cost arises only when funds are invested somewhere, otherwise
not. For example, the implicit cost of retained earnings is the rate of return which the shareholder could have
earn by investing these funds, if the company would have distributed these earning to them as dividends.
Therefore, explicit cost will arise only when funds are raised whereas implicit cost arises when they are used.

52
 Assumption of Cost of Capital

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

 The cost can be either explicit or implicit.

 The financial and business risks are not affected by investing in new investment
proposals.
 The firm’s capital structure remains unchanged.
 Cost of each source of capital is determined on an after tax basis.
 Costs of previously obtained capital are not relevant for computing the cost of capital
to be raised from specific source.

Computation of specific costs

A firm can raise funds from different sources such as loan, equity shares, preference shares, retained earnings
etc. All these sources are called components of capital. The cost of capital of these different sources is called
specific cost of capital. Computation of specific cost of capital helps in determining the overall cost of capital
for the firm and in evaluating the decision to raise funds from a particular source. The computation procedure
of specific costs is explained in the pages that follow

COST OF DEBT CAPITAL

53
 Cost of Debt is the effective rate that a company pays on its current debt. This can be measured in
either before- or after-tax returns; however, because interest expense is deductible, the after-tax cost is seen
most often. This is one part of the company's capital structure, which also includes the cost of equity.

Much theoretical work characterizes the choice between debt and equity, in a trade-off context: Firms
choose their optimal debt ratio by balancing the benefits and costs. Traditionally, tax savings that occur
because interest is deductible while equity payout is not have been modelled as a primary benefit of debt.
Large firms with tangible assets and few growth options tend to use a relatively large amount of debt. Firms
with high corporate tax rates also tend to have higher debt ratios and use more debt incrementally. A
company will use various bonds, loans and other forms of debt, so this measure is useful for giving an idea as
to the overall rate being paid by the company to use debt financing. The measure can also give investors an
idea as to the riskiness of the company compared to others, because riskier companies generally have a
higher cost of debt.

Example-: If a company issues 12% debentures worth Rs. 5 lacs of Rs. 100 each at par, then it must be earn
at least Rs.60000(12% of Rs. 5 lacs) per year on this investment to maintain the income available to the
shareholders unchanged. If the company earns less than this interest rate (12%) than the income available to
the shareholders will be reduced and the market value of the share will go down. Therefore, the cost of debt
capital is the contractual interest rate adjusted further for the tax liability of the firm. But, to know the real
cost of debt, the relation of the interest rate is to be established with the actual amount realised or net
proceeds from the issue of debentures.

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

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

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

54
 = Interest Expense of the company

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

Total Debt

Net Proceeds:

1. At par = Par value – Floatation cost

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

COST OF PREFERENCE SHARE CAPITAL

Preference share is another source of Capital for a company. Preference Shares are the shares that have a
preferential right over the dividends of the company over the common shares. A preference shareholder
enjoys priority in terms of repayment vis-à-vis equity shares in case a company goes into liquidation.
Preference shareholders, however, do not have ownership rights in the company. In the companies under
observation only India Cement has preference shares issued.

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

Shree Cement has not paid any dividend to the Preference Shareholders. Thus the Cost of Preference Capital
is 0 (Zero).

55
 COST OF EQUITY SHARE CAPITAL

The computation of cost of equity share capital is relatively difficult because neither the rate of dividend
is predetermined nor the payment of dividend is legally binding, therefore, some financial experts hold the
opinion the p.s capital does not carry any cost but this is not true. When additional equity shares are issued,
the new equity share holders get proponate share in future dividend and undistributed profits of the company.
If reduces the earning per shares of existing share holders resulting in a fall in marker price of shares.
Therefore, at the time of issue of new equity shares, it is the duty of the management to see that the company
must earn at least so much income that the market price of its existing share remains unchanged. This
expected minimum rate of return is the cast o equity share capital. Thus, cost of equity share capital may be
define as the minimum rate of return that a firm must earn on the equity financed portion of a investment-
project in order to leave unchanged the market price of its shares. The cost of equity can be computed by any
of the following method:

1. Dividend yield method:

Ke = DPS\MP*100

Ke= cost of equity capital

Dps= current cash dividend per share

Mp=current market price per share

2. Earning yield method:

Ke= EPS\mp*100

Eps= earnings per share

3. Dividing yield plus growth in dividend method:

While computing cost of capital under dividend yield(d\p ratio)method, it had been assumed that present rate
of dividend will remain the same in future also. But, if the management estimates that companies present
dividend will increased continuously for the year to come, then adjustment for this increase is essential to
compute the cost of capital.

The growth rate in dividend is assumed to be equal to the growth rate in earning per share. For example if the
EPS increase at the rate of 10% per year, the DPS and market price per share would show an increase at the

56
 rate of 10%. Therefore, under this method, cost of equity capital is computed by adjusting the present rate of
dividend on the basis of expected future increase in company’s earning.

Ke= DPS\MP*100+G

G= Growth rate in dividend.

4. Realised yield method:

In case where future dividend and market price are uncertain, it is very difficult to estimate the rate of return
on investment. In order to overcome this difficulty, the average rate of return actually realise in the past few
year by the investors is used to determine the cost of capital. Under this method, the realised yield is
discounted at the present value factor, and then compare with value of investment this method is based on
these assumptions.

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

The alternative investment opportunities, elsewhere for the investor, yield the return which is equal to
realised yields in the company, and

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

Cost of newly issued equity shares

when new equity share are issued by a company, it is not possible to realise the market price per share,
because the company has to incur some expenses on new issue, including underwriting commission,
brokerage etc. so, the amount of net proceeds is calculated by deducting the issue expenses form the expected
market value or issue price. To ascertain the cost of capital, dividend per share or EPS is divided by the
amount of net proceeds. Any of the following formulae may be used for this purpose:

Ke= DPS\NP*100

57
 Or

Ke= EPS\NP*100

Or

Ke=DPS\NP*100+G

COST OF RETAIN EARNINGS OR INTERNAL EQUITY

Generally, company’s do not distribute the entire profits by way of dividend among their share
holders. A part of such profit is retained for future expansion and development. Thus year by year,
companies create sufficient fund for the financing through internal sources. But , neither the company pays
any cost nor incur any expenditure for such funds. Therefore, it is assumed to cost free capital that is not true.
Though retain earnings like retained earnings like equity funds have no explicit cost but do have opportunity
cost. The opportunity cost of retained earnings is the income forgone by the share holders. It is equal to the
income what a share holders could have earns otherwise by investing the same in an alternative investment, if
the company would have distributed the earnings by way of dividend instead of retaining in the business.
Therefore , every share holders expects from the company that much of income on retained earnings for
which he is deprived of the income arising o its alternative investment. Thus, income forgone or sacrificed is
the cost of retain earnings which the share holders expects from the company.

WEIGHTED AVERAGE COST OF CAPITAL

Once the specific cost of capital of the long-term sources i.e. the debt, the preference share capital, the
equity share capital and the retained earnings have been ascertained, the next step is to calculate the overall
cost of capital of the firm. The capital raised from various sources is invested in different projects. The
profitability of these projects is evaluated by comparing the expected rate of return with overall cost of
capital of the firm. The overall cost of capital is the weighted average of the costs of the various sources of
the funds, weights being the proportion of each source of funds in the total capital structure. Thus, weighted
average as the name implies, is an average of the cost of specific sources of capital employed in the

58
 business properly weighted by the proportion they held in firm’s capital structure. It is also termed as
‘Composite Cost of Capital’ or ‘Overall Cost of Capital’ or ‘Average Cost of Capital’.

WEIGHTED AVERAGE, How to calculate?

Though, the concept of weighted average cost of capital is very simple. Yet there are many problems in its
calculation. Its computation requires:

1. Assignment of Weights: First of all, weights have to be assigned to each source of capital for calculating the
weighted average cost of capital. Weight can be either ‘book value weight’ or ‘market value weight’. Book
value weights are the relative proportion of various sources of capital to the total capital structure of a firm.
The book value weight can be easily calculated by taking the relevant information from the capital structure
as given in the balance sheet of the firm. Market value weights may be calculated on the basic on the market
value of different sources of capital i.e. the proportion of each source at its market value. In order to calculate
the market value weights, the firm has to find out the current market price of each security in each category.
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 values of securities are closely approximate to the actual amount to be received
from the proceeds of such securities.
 The cost of each specific source of finance is calculated according to the 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, specially in case of retained earnings can indirectly be estimated by Gitman’s
method. According to him, retained earnings are treated as equity capital for calculating cost of specific
sources of funds. The market value of equity share may be considered as the combined market value of both
equity shares and retained earnings or individual market value (equity shares and retained earnings) may also
be determined by allocating each of percentage share of the total market value to their respective percentage
share of the total values.

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 For example:- the capital structure of a company consists of 40,000 equity shares of Rs. 10 each ad retained
earnings of Rs. 1,00,000. if the market price of company’s equity share is Rs. 18, than total market value of
equity shares and retained earnings would be Rs. 7,20,000 (40,000* 18) which can be allocated between
equity capital and retained earnings as follows-

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

=Rs. 5,76,000.

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

=Rs. 1,44,000.

2. Computation of Specific Cost of Each Source :

After assigning the weight; specific costs of each source of capital, as explained earlier, are to be calculated.
In financial decisions, all costs are ‘after tax’ costs. Therefore, if any source has ‘before tax’ cost, it has to be
converted in to ‘after tax’ cost.

3. Computation of Weighted Cost of Capital :

After ascertaining the weights and cost of each source of capital, the weighted average cost is calculated by
multiplying the cost of each source by its appropriate weights and weighted cost of all the sources is added.
This total of weighted costs is the weighted average cost of capital. The following formula may be used for
this purpose :

Kw = ∑XW/∑W

Here; Kw = Weighted average cost of capital

X = After tax cost of different sources of capital

W = Weights assigned to a particular source of capital

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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 Earning 2,00,000 .10

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

Debentures 3,00,000 .09

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

Computation of Weighted Average Cost of Capital

Source Amount Weights After tax Weighted

Rs. Cost Cost

(2) (4) (5)= (3) * (4)

(1) (3)

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

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

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

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

Total 10,00,000 1.00 .1085

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

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CALCULATION OF COST OF CAPITAL OF SHREE CEMENT

LTD.

Cost of Debt Capital:

For the year 2009-10:

Total Debt Capital = Term loan from Banks + Debts

= 131570.37+30000 = 161570.37 lacs

Total Interest Paid = 13065.36 lacs

Tax Rate = 30%

Interest Expense of the company

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

Total Debt

Kd (before tax) = 13065.36

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

161570.37

= 8.08 %

Kd (after tax) = Interest Rate Before Tax – Tax Rate ( 30%.)Kd (after tax) =
8.08% - 30% = 5.65 %

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For the year 2008-09:

Total Debt Capital = Term loan from Banks + Debts

= 105716.94+000 = 105716.94 lacs

Total Interest Paid = 9355.94

Tax Rate = 30%

Interest Expense of the company

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

Total Debt

9355.94

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

105716.94

= 8.85 %

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

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

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For the year 2007-08

Total Debt Capital = Term loan from Banks + Debts

= 112573.18+800 = 113373.18 lacs

Total Interest Paid = 9636.72 lacs

Tax Rate = 30%

9636.72

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

113373.18

= 8.50%

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

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For the year 2006-07

Total Debt Capital = Term loan from Banks + Debts

= 83427.02+1400= 84827.02lacs

Total Interest Paid = 6573.02lacs

Tax Rate = 30%

6573.02

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

84827.02

= 7.25%

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

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 COMPARATIVE CALCULATION OF Kd FOR FOUR YEAR

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

Total Debts (Term loan from 131570.37+ 105716.94+ 112573.18+ 83427.02+

Bank+ Debts)
30000 000 800 1400

=161570.37 =105716.94 =113373.18 =84824.02

Total Interest paid 13065.36 9355.94 9636.72 6573.86

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

Interest Rate (After Tax)= Interest 5.65% 6.20% 5.95% 5.42%

Rate Before Tax – Tax Rate 30%.

COST OF EQUITY CAPITAL:

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 EQUITY SHARE CAPITAL

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

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

DPS Given 13 10 8 6

Market Price (at the end of 2300.05 710.50 1079.40 921.85

March)

Earning per equity share 194.07 165.91 74.74 50.81

of rs. 10(in Rs.)

Final dividend on equity 4528.84 3483.72 2786.98 Not given

share (in lacs)

Market Capitalisation (in 801268.41 247516.88 376033.01 321146.96

Lacs)

1. Dividend yield plus growth in dividend method:-

Ke = DPS\mP*100 + G

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 Dps = Current cash dividend per share = 13Rs.

Mp = Current market price per share = 2300.05 Rs.

G = Growth rate = 10%

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

2300.0

= 10.56%

Earning yield method:-

Ke= EPS\mp*100

Eps = earning per share = 194.07 Rs.

Mp = Market prise = 2300.05 Rs.

194.07

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

2300.05

= 8.43%

2. Dividend per share method:-

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

Final dividend on Equity Share = 4528.84 Lacs

No. of Equity Share = 348.37 Lacs

4528.84

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

348.37

COST OF EQUITY SHARE CAPITAL (KE)

Particular 2008-09

Dividend Per share method 13

Earning Yeild Method 8.43

Dividend yield plus growth method 10.56

WEIGHTED AVERAGE COST OF CAPITAL (WACC)

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

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 Where………... We = Weight of equity

Wd = Weight of Debt.

Ke = Cost of Equity Share capital

Kd = Cost of Debt. capital

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

WACC OF SHREE CEMENT LIMITED (2008-2009)

Source Amount Weights After tax Weighted

Rs. Cost Cost

(2) (4) (5)= (3) * (4)

(1) (3)

E.S. Capital 801268.41 .8322 10.56 8.79

Debentures 161570.37 .1678 05.65 0.95

Total 962838.78 1.00 9.74

Weighted Average Cost of Capital (WACC) 9.74%

MERITS OF WEIGHTED AVERAGE COST OF CAPITAL

The WACC is widely used approach in determining the required return on a firm’s investments. It
offers a number of advantages including the followings-

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1. Straight forward and logical : It is the straightforward and logical approach to a difficult problem. It
depicts the overall cost of capital as the some of the cost of the individual components of the capital
structure. It employs a direct and reasonable methodology and is easily calculated and understood.
2. Responsiveness to Changing Condition : Since, it is based upon individual debt and equity
components, the weighted average cost of capital reflects each element in the capital structure. Small changes
in the capital structure of the firm will be noted by small changes in overall cost of capital of the firm.
3. Accurate when Profits are Normal : During the period of normal profits, the weighted average cost
of capital is more accurate as a cut-off rate in selecting the capital budgeting proposals. It is because the
weighted average cost recognises the relatively low debt cost and the need to continue to achieve the higher
return on the equity financed assets.
4. Ideal Creation for Capital Expenditure Proposals : With the help of weighted average cost of
capital, the finance manager decides the cut-off rate for taking decisions relating to capital expenditure
proposals. This cut-off rate determines the miimum limit for accepting an investment proposal. If an
investment proposal is accepted below this limit, the firm incur a loss. Therefore, this cut-off rate is always
decided above the weighted average cost of capital.

LIMITATION OF WEIGHTED AVERAGE COST OF CAPITAL

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

1. Unsuitable in case of Excessive Low-cost Debts : Short term loan can represent an important
sources of fund for firm experiencing financial difficulties. When a firm relies on Zero cost (in the form of
payables) or low cost short term debt, the inclusion of such debts in the calculation of cost of capital will
result in a low WACC. If the firm accepts low-return projects on the basic of this low WACC, the firm will
be in a high financing risk.
2. Unsuitable in Case of Low Profits : If a firm is experiencing a period of low profits, not earning
profit as compared to other firms in the industry, WACC will be inaccurate and of limited value.
3. Difficulty in Assigning Weights : The main difficulty in calculating the WACC is to assign weight
to different components of capital structure. Normally, there are two type of weights- (i) book value weights
and (ii) market value weight. These two type of weights give different results. Hence, the problem is which
type of weight should be assigned. Though, market value is more appropriate than book value, but the market
value of each component of capital of a company is not readily available. When the securities of the company
are unlisted, the problem becomes more intricate.
4. Selection of Capital Structure : The selection of capital structure to be used for determining the
WACC is also not easy job. Three types of capital structure are there i.e. current capital structure, marginal
capital structure and optimal capital structure. Which of these capital structure be selected. Generally, current
capital structure is regarded as the optimal structure, but it is not always correct.

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 Research

Methodology

Research Methodology

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

 Analyzing relevant figures and date for the last financial years.
 Analyzing the future outlook of the companies and its expansion plan.
 Study of the complete process of the uses of Cost of Capital using literature and discussing
with the organizational guide.

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 Connection of the data regarding the use of Cost of Capital and financial policies for Shree
Cement.
 On the basis of the data collected, necessary suggestions regarding the financial structure are
given.

DATA SOURCNG

While performing this project both Secondary Data sources were use.

Secondary Data:-
Major source of data for the project were the pass years’ financial statement
It included information provided by the company workers. I adopted a holistic approach and toiled to
collect the information about the company other than Shree Cement through secondary sources such as
internet, newspaper, magazines, papers , online data basis ect..

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 swot
analysis

SWOT Analysis

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

A) Non trade network Non- Trade Network

Govt. Non-trade Private Non-trade

for govt infrastructure building - for Group housing / retail

Govt. Housing Projects housing
Railways - Contractor’s projects on
Airports behalf of govt.
Cement Roads - Any industrial projects taken
Bridges up by the private sector like
Dams bridges, roads etc.
Canals
These are all bulk requirements

B) Trade Network
Company Handling Agent Stockiest Retailers

Consumers

SWOT ANALYSIS

Strength and weaknesses are essentially internal to the organization and relate to the matter

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 Concerning resources, programmes and organization in key areas such as
• Sales
• Marketing
• Capacity
• Manufacturing cost etc

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

STRENGTH

 Company is established in Beawar where most of the land is rocky and material is suitable for the
production of cement, thus it is closely bound to the resources.
 Specific chemical composition which makes it co erosion free and also have very Good chemical recovery
efficiency.
 Company has its own electricity production unit thus need not to depend on the Availability of power n
dependency on electricity department.
 Well transport facility; it has its own railway track.
 Leading brand in north India. Thus people give preference to the brand.
 Maintain a very good customer loyalty and relationship.
 A very superior production quality thus customer is always satisfied.
• Upper level of management is too skillful.

Weakness

• Poor access of distribution.

• Very less advertising thus in other part of country it’s not as popular.
• Technical knowledge is less at lower level of employee, which is draw back for Achieving maximum profit.
• It’s difficult for them to change to an alternate line o production with existing Machinery.

Opportunities

• Changing customer taste, thus they may get the market from the switchers.
• Liberalization of geographic works, thus they can enter into different market.
• Huge land available for expansion of business in future.

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• Govt. is planning for betterment on infra structure thus there will be huge demand for cement.
• Booming real estate sector.
• Good relation with bankers thus for expansion of business they need not to look too far.

Threats

• Changing customer taste, any time they may switch to other.

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

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 FINDINGS &
CONCLUSIONS

FINDINGS & CONCLUSIONS

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

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 SUGGESTION’s &
RECOMMENDATIONS

SUGGESTION & RECOMMENDATIONS

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

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

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➢ 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
contractor’s 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.

➢ In sales promotion activity, we should focus on counter meeting, contractor’s meeting

& retailer meeting, in which we can give some gifts and refreshments to contractor,
dealer and retailers.

➢ 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.

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

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

Learning’s:

 Practical insights into the life and work in a corporate.

 How to apply the management learning and soft skills while working at the coalface.
 How to approach companies with a proposal.
 Interacting with various institutes from IT retailers to B-schools to companies.

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 Various details on deal negotiation and closures.
 Exposure to the fierce competition and the struggle, where only the fittest survive.
 How to remain patient and composed in the face of anxiety and pressure.
 Accepting negative feedback and listening to ‗NO‘ but still finding a way out

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Bibliography

Bibliography

84
1) Shree Cements annual reports 2006-07, 07-08,08-09,09-2010,
2) www.shreecementltd.com
3) ASSOCHAM Report on Cement Industry 2007
4) www.cseindia.org/programme/industry/cement_rating.htm
5) www.worldcement.com
6) international_cement_industry.htm
7) Fundament of Financial management by Brigham & Huston.
8) Analysis Financial Management by Robert C. Higgins
9) Financial Reports of ACC ltd, Grasim Industries Ltd., Gujarat Ambuja Cement Ltd. and India
Cement Ltd.
10) Quarterly Performance Analysis of Companies, India Cement Industry: Cygnus,
Business Consulting and Research.

11) Prowess Online Database

12) www.cmaindia.org
13) http://www.wikipedia.com
14) http://www.investopedia.com
15) http://www.moneypore.com
16) http://www.moneycontrol.com
17) www.indiancementindustry.com
18) Times of India (News Paper)
19) Economic times (News paper)
20) Financial management by Ravi M Kishor (Book)
21) Financial management by M. Pandey (Book)
22) Financial management by M R Agarwal(Book)

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