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)

1
 Certificate of Approval

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

2
 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.

Acknowledgement

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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

4
 Page
Sr. No. Particulars No.

1. History of Company 7

2. CONTENT’S
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

5
  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.

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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 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.

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●-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.

●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

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   Infrastructural facilities not the best

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.

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 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

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.

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

17
 ANTICIPATED GROWTH IN CEMENT DEMAND

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

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 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.

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%)

19
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

20
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.

Unemployment Rates:

21
Interest rates: the rate offered on overnight deposits by the Central Bank or other

authorit

22
 If interest rates increase across
the board, then investment decreases, causing a fall in national income.

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.

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 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.
 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

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 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

 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

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  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),.

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

26
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 which include Birla Super, Birla Plus, Birla White and Birla
Ready mix and also regional brands like Vikram Cement and Rajshree Cement.

BINANI CEMENT

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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

Cement Manufacturing

Raw Material Preparation

28
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.

Burning

29
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
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

30
 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.

31
 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.

32
 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.

33
 THE
ORGANIZATION
PROFILE

34
 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

35
 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

36
 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

37
 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

38
 Water Policy:

 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

39
 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.

40
 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.

41
NEED
FOR
STUDY

42
 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 .

43
 OBJECTIVES
OF
THE STUDY:

OBJECTIVES OF THE STUDY:

44
 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

45
 SCOPE
OF
THE
OBJECTIVES:

SCOPE OF THE OBJECTIVES:

46
 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

47
 Concept
COST
of CAPITAL

COST OF CAPITAL

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

48
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

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

49
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.

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.

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

51
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. 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.

52
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

53
 earning to them as dividends. Therefore, explicit cost will arise only when funds are raised whereas
implicit cost arises when they are used.

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

54
 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))

55
 The before tax rate of interest can be calculated as below:

= 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

56
 Shree Cement has not paid any dividend to the Preference Shareholders. Thus the Cost of Preference
Capital is 0 (Zero).

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:

57
 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 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,

58
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

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.

59
 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 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:

60
 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.

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 :

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 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

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.

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 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%

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%

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 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 %

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

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 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 %

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%

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

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

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 = 7.25%

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

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%.

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COST OF EQUITY CAPITAL:

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

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 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

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

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 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:-

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

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WEIGHTED AVERAGE COST OF CAPITAL (WACC)

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

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

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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-

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.

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 LIMITATION OF WEIGHTED AVERAGE COST OF CAPITAL

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,

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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.

Research

Methodology

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 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.
 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

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 SWOT Analysis

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

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 SWOT ANALYSIS

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

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 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.
• 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

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 FINDINGS & CONCLUSIONS

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 &
RECOMMENDATION
S

82
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.

➢ 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.

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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.
 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

1) Shree Cements annual reports 2006-07, 07-08,08-09,09-2010,

2) www.shreecementltd.com

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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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