KESORAM: Beyond Limitations

INTRODUCTION TO CAPITAL BUDGEING:

An efficient allocation of capital is the most important finance function in modern times. It
involves decisions to commit firm’s funds to long-term assets. Such decisions are tend to determine
the value of company/firm by influencing its growth, profitability & risk.

Investment decisions are generally known as capital budgeting or capital expenditure

decisions. It is clever decisions to invest current in long term assets expecting long-term benefits
firm’s investment decisions would generally include expansion, acquisition, modernization and
replacement of long-term assets.

Such decisions can be investment decisions, financing decisions or operating decisions.

Investment decisions deal with investment of organization’s resources in Long tern (fixed) Assets and
/ or Short term (Current) Assets. Decisions pertaining to investment in Short term Assets fall under
“Working Capital Management”. Decisions pertaining to investment in Long term Assets are
classified as “Capital Budgeting” decisions.

Capital budgeting decisions are related to allocation of investible funds to different long-term assets.
They have long-term implications and affect the future growth and profitability of the firm.

In evaluating such investment proposals, it is important to carefully consider the expected benefits of
investment against the expenses associated with it.

Organizations are frequently faced with Capital Budgeting decisions. Any decision that requires the
use of resources is a capital budgeting decisions. Capital budgeting is more or less a continuous
process in any growing concern.

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 KESORAM: Beyond Limitations

PROFILE OF THE COMPANY

One among the industrial gains in the country today serving the nation on the industrial front kesoram
industries limited has a tenured and extent full history dating hock to the twenties when the industrial
house of Birla’s enquired it. With only a Textile mill under its banner in 1924, it grew from strength
and spread its activities to newer fields like Rayon pulp Transparent Paper. Spun pipes and Refectory
Tyres oil mills and refinery Extraction.

Looking to the wide gap between the demand and supply of vital commodity cement which
it plays on important role in Nation Building, the government Private entrepreneurs to argument the
cement production Kesoram rose to the occasion and decided to set up few cement plants in the
country.

Kesoram cement is one of the prestigious units in the renowned Kesoram industries group
that is one of India’s leaden industrial conglomerates, under the leadership of Mr.B.K.Birla, the
famous personality of Indian Industry, who owes branches all over India.

Kesoram cement Industry is one of the leading manufacturer of cement in India Kesoram cement is
a division of Kesoram Industries limited. It is a dry process cement plant. It is located at Basant Nagar
in Karimnagar District of Andhra Pradesh with the plant capacity is 8.26 lakhs tones per annum. It is
8Kms away from the Ramagundam Railway Station Lining Madras to New Delhi.

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 KESORAM: Beyond Limitations

STATEMENT OF PROBLUM

 The Project study is undertaken to analyze and understand the Capital Budgeting
process in cement manufacturing sector, which gives mean exposure to practical
implication of theory knowledge.
 To know about the company’s operation of using various Capital Budgeting
techniques.
 To know how the company gets funds from various resources.

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 KESORAM: Beyond Limitations

OBJECTIVES OF THE STUDY

 To study the relevance of capital budgeting in evaluating the project for project finance

 To study the technique of capital budgeting for decision- making.

 To measure the present value of rupee invested.

 To understand an item wise study of the company financial performance of the company.

 To make suggestion if any for improving the financial position if the company.
 To understand the practical usage of capital budgeting techniques

 To understand the nature of risk and uncertainty

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 KESORAM: Beyond Limitations

RESEARCH METHODOLOGY

To achieve aforesaid objective the following methodology has been adopted. The
information for this report has been collected through the primary and secondary sources.

Primary sources

It is also called as first handed information; the data is collected through the
observation in the organization and interview with officials. By asking question with the
accounts and other persons in the financial department. A part from these some information
is collected through the seminars, which were held by KESORAM

Secondary sources

The secondary data have been collected through the various books, magazines,
broachers & websites

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 KESORAM: Beyond Limitations

DATA ANALYSIS AND INTERPRETATION

All finance activity commences with an investment proposal, which calls for a financial
appraisal of a project. Here, capital Budgeting has its role. Each one of the projects is
apprised on following basis”

 Cost Estimates.
 Cost Generations.

Cost Estimates:-

Feasibility Report of the project is prepared based on the cost of similar units
prevailing at the time of preparation of projects report of the latest costs are not available,
the same should be escalated. Collection of data with regard to the cost of the various
equipment should from part of a continuous planning so that a realistic cost estimate is
made for the project Reports for civil works are generally based on KESORAM schedule of
rates with reasonable premium there on.

Cost of Generation:-
The financing of public sector company is generally based on Debt Equity of 3:1 the
general rate of interest chargeable by the central Government on loan components is 10.5% (
Now enhanced to 11%) . The plant life as provided under the Electricity Supply Act, 1948 is
25 years and depreciation based on this period has to be calculated on straight line method,
on 90% of the cost fixed assets. The operation & maintenance expenses are generally of the
order 2.5% of the capital cost based on the above assumptions, the cost of generation could
be worked out discounted cash flow basis taking 12% IRR (Internal Rate of Return). This
rate has been generally accepted by various appraising agencies of the power projects.

Feasibility Report based on above methodology and indicating site selection, coal
linkage, power distribution examined by Central Electricity Authority in all cases where
investment is Rs.1 Crore and above. Since KESORAM is public sector undertaking, all the
investment decisions have to be formally sanctioned by Government after PIB’s (Public
Investment Board’s) clearance.

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 KESORAM: Beyond Limitations

SHARE CAPITAL:
The entire share capital is owned by Government of India. During the Year no
addition has been made. However the authorized capital has been increased from Rs. 80,000
million to Rs.1, 00,000 million and the face value or share has been split to Rs.10/- each from
Rs.1000/- each.

ROLE OF FINANCE MANAGEMENT IN INVESTMENT

DECISIONS IN KESORAM:

Finance Manager is the number of a project team. He plays an important role in

investigation stage of the project, when various alternatives are analyzed & the most
optimum solution is decided upon. The soundness upon the accuracy of the data & as a
finance manager has to questing and satisfies him on the validity of the data.

The power projects are extremely capital intensive and before large resources are
committed to a scheme a detailed feasibility study need to be prepared covering-

 The need of the project

 The demand projections
 The alternatives of the site locations
 The broad parameters of the plant and equipment
 The cost estimates
 The viability of the scheme.

Cost Estimates: - Cost estimates and financial justification and returns of the projects are
the areas where financial management has to play its role. Cost estimates should be
prepared by the cost engineers and vetted by the finance manager. Cost engineering is a
specialized filed & need to be developed in the contest of power projects because of
insufficient cost data on the components of the projects.

This raises an important question of the present methodology of preparing the cost
estimates without any provision for price contingencies. Because of time lag between

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 KESORAM: Beyond Limitations

preparation of cost estimates and investment decisions, after its scrutiny by the appraising
agencies, these estimates are already out of data and hence would need updating.

CAPITAL BUDGETING
EXAMPLE OF STAGE I & II

Sl. Schemes Outlay

1. Stage-I (3 x 20000 MT) 5,48,92,00,000

2. Stage- II (3 x 50000 MT) 11, 03,69,00,00

3. Stage-III (1 x 50000MT) 1229.38(Millions)

Stage – I consisting outlay of 5,48,92,00,000 this is recovered in 5 years of time.

RECOVERY OF PROJECTS (Stage-I):

Following calculations are under consider

Under Discounted Pay Back Period:
Stage – I (3 x 20000) Outlay : 5,48,92,00,000

NET PRESENT VALUE:

Year Cash Inflows Dis. @12% Present Value of Cash flows

1 Rs. 1.129.384.000 0,892 Rs. 1.007.410.528

2 Rs. 1.310.895.000 0,797 Rs. 1.043.986.315

3 Rs. 1.761.879.000 0,711 Rs. 1.252.695.969

4 Rs. 1.732.086.000 0,635 Rs. 1.109.874.610

5 Rs. 2.193.061.000 0,567 Rs. 1.243.465.587

Present Value of Cash Flows Rs. 5.647.433.010

Less: Cash Outlay Rs. 5.489.200.000

Net Present Value Rs. 158.233.010

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 KESORAM: Beyond Limitations

GRAPH 1:

2500000 2193061

2000000 1761879 1732086

1309895
1500000 1129384
1252695 1243465
1043986 1099874
1000000 1007410
500000
1 2 3 4 5
0
1 2 3 4 5
Year Cash Inflows Present Value of Cashflows

Interpretation:
The Net Present Value is the difference between the “Present value of cash inflows” and
“Present value of cash outflows.

PROFITABILITY INDEX (P.I):

Year Investments (In Lakhs) Cash inflows(P.V.) Cash Out Flows (Initial)
1999-00 2,945,083.37 18180 20000
2000-01 3,040,293.17 24780 30000
2001-02 3,192,444.28 45070 60000
2002-03 3,071,183.11 54640 80000
2003-04 3,545,210.87 18630 30000
2004-05 9,025,874.00 161290 22000
2005-06 3,991,459.40 19210 33000
2006-07 4,038,114.20 11130 70000
2007-08 3,667,441.15 65420 40000
2008-09 7,338,000.00 19233 80000
2009-10 2,089,775.00 61323 60000
Total: 498896 525000

P.V. of Cash Inflows

PI = ---------------------------
Initial Cash outlays

498896
= ---------- = 0.95
525000

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 KESORAM: Beyond Limitations

GRAPH 2 :

Interpretation:
a) The profitability index of present value of cash inflows and cash out flows is
fluctuation from year to year in the year 1999-00 the present value of cash
inflows is 18180 were as in the year 2009-10 has been increased with 61323.
b) The highest cash inflows have been recorded in 2004-2005 as 161290 and lowest
has been recorded as 18180 in the year 1999-00.
PAY BACK PERIOD:
Year Investments (In Lakhs) Cash inflows(P.V.) Cash Out Flows (Initial)
1999-00 40,000.00 8000 20000
2000-01 60,000.00 1600 30000
2001-02 70,000.00 2200 60000
2002-03 20,000.00 4500 80000
2003-04 10,000.00 4000 30000
2004-05 66,000.00 3000 22000
2005-06 25,000.00 2900 33000
2006-07 12,000.00 1100 70000
2007-08 90,000.00 1600 40000
2008-09 30,000.00 1200 80000
2009-10 50,000.00 1800 60000
Total: 473,000.00 31900 525000

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 KESORAM: Beyond Limitations

Initial Investments
Pay Back Period = ---------------------------
Annual Cash inflows

40,000
= --------- 5 Years
8000

GRAPH 3:

Investments (In Lakhs)

100,000.00
80,000.00
60,000.00
Investments (In Lakhs)
40,000.00
20,000.00
0.00

00 02 04 06 08 10
9- 1- 3- 5- 7- 9-
1 99 2 00 2 00 2 00 2 00 2 00

Interpretation:

a) In the Pay Back method the Investment and the case inflows are fluctuating
from year to year where as in the year 1999-00 it is 40000 and in the year 2009-
10 is 50000.
b) Cash inflows are in the order of increasing to decreasing from 1999-00 and
2009-10.

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 KESORAM: Beyond Limitations

AVERAGE RATE OF RETURN:

Year Investments (Lakhs) Average Income Cash Flows after Taxes
(Thousands)
2000-01 400,000.00 20000 100000
2001-02 480,000.00 15000 260000
2002-03 280,000.00 28000 440000
2003-04 240,000.00 85000 750000
2004-05 150,000.00 75000 160000
2005-06 260,000.00 64000 200000
2006-07 600,000.00 78000 300000
2007-08 100,000.00 25000 600000
2008-09 250,000.00 18000 800000
2009-10 520,000.00 22000 750000
Total 3,280,000.00 430000 4360000

Average Income
Average Rate of Return = ----------------------
Average Investments

20000
= --------- = 0.06%
400000

GRAPH 4:

Investments (Lakhs)

800,000.00
600,000.00
400,000.00 Investments (Lakhs)
200,000.00
0.00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10

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 KESORAM: Beyond Limitations

Interpretation:

a) Average rate of return is calculated based on Average income and Average

investment where as Average income in the year 2003-04 is 20000 and investments in
the year 2009-10 is 400000.
b) The value from 2003-04 and 2009-10 is fluctuating from year to yea

Interpretations:

a) In the year 2009-10 the revenue is distributed in the from of fuel retained earning,
dividends is latest finance change, depreciation and for employees.

b) Where as in the year 2009-10 it is been fluctuated the rates compare to the year
2009-10.

TABLE 7:
FY YEAR NET BLOCK (IN LAKS)
2004-05 284738
2005-06 323083
2006-07 328916
2007-08 386106
2008-09 400381
2009-10 520861

NET BLOCK AND GROSS FIXED ASSETS

600000

520761
500000

400000 400281
366106
323073 328916
300000 284738 Series1

200000

100000

0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

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 KESORAM: Beyond Limitations

Interpretations:

a) From 2006-2007 the net block and gross fixed assets is 328916.

b) Whereas the Net Block and gross fixed asset is been increased in the year 2009-10.

TABLE 8:

FY YEAR NET SALES(IN LAKS)

2004-05 229055
2005-06 258117
2006-07 286453
2007-08 315400
2008-09 355502
2009-10 440302

NET WORTH AND NET ASSETS

500000
450000 440201
400000
350000 355501
315040
300000 286453
250000 258117 Series1
229045
200000
150000
100000
50000
0
04-05 05-06 06-07 07-08 08-09 09-10

Interpretations:

a) Net worth and net assets has been increasing from year to year from 2005-06 it is
229055 and compare to 2009-10 it has been increased to 440302.

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 KESORAM: Beyond Limitations

b) By observing the chat we can say the net worth and net assets has been increasing
from 2005-06 to 2009-2010.

TABLE 9:

FY YEAR PROFIT AFTER TAX

2004-05 34245
2005-06 37338
2006-07 35396
2007-08 36085
2008-09 52609
2009-10 72032

PROFIT AFTER TAX

80000 72022
70000
60000 52608
50000
37338 35396 36075
40000 34245 Series1
30000
20000
10000
0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Interpretations:

a) The chart shows the increase value after the deduction of tax in the year 2009-10.

b) The Profit is changing from year to year in the year 2004-05 it is 34245 where as
increasing value in the year 2004-2005 and decreased, in the year 2009-10 the value is
increased.

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 KESORAM: Beyond Limitations

TABLE 10:

FY YEAR POWER GENERATION (M UNITS)

2004-05 7470
2005-06 7080
2006-07 7090
2007-08 10923
2008-09 19790
2009-10 19237

GENERATION AND SALES

25000

19790 19237
20000

15000
10823 Series1
10000
7470 7070 7080

5000

0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

GENERATION IN MUS – SALES IN MILLIONS:

Interpretations:

a) On the X – airs year are been shown from 2004-05 to 2009-10 and the value has been
increasing from year to year.

b) In the year 2004-05 the generation and sale has been 7470 and the value has been
increasing year to year but 2009-2020 the value is decreasing.

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FINDINGS ANDSUGESSTIONS
 The Corporate mission of KESORAM is to make available reliable and quality power
in increasingly large quantities. The company will spear head the process of
accelerated development of the power sector by expeditiously planning,
implementing power project and operating power stations economically and
efficiently.

 As in project implementation, the station continued to excel in power generation with

the power station having reached its first goal of total capacity installation.
Ramagundam is generating power at consistently high plant load factor.

 The organization needs the capable personalities as management to lead to

organization successfully. The management make the plans and implement of these
plans. These plans are expressed in terms of long-term investment decisions.

 The special budgets are rarely used in the organization like long-term budgets,
research & development budget and budget and budget for constancy.

 From the Revenue budget for the year 2000-2003, it is clear that the Actual sales ( Rs.
168552.50 lacks) are more then the budgeted or Estimated sales ( Rs. 164208.54 lacks).
It is a good sign and the overall earnings of the budget indicate high volume over
estimated.

 Fuel utilization is perfectly carry out in RSTPS. And Cash from Ash effectively carry
out the job.

 New projects acceptance consider on the basis of Return Benefits. Risk is evaluated
while considering the new projects.

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 KESORAM: Beyond Limitations

CONCLUSIONS

 Every organization has pre-determined set of objective and goals, but reaching those
objectives and goals only by proper planning and executing of the plans
economically.

 With in a Short span of its existence, the corporation has commissioned 19502 MW as
on 31st March, 2000 with an operating capacity of 19.9%. KESORAM today generate
24.9% of nation’s electricity. KESORAM is presently executing 12 Cement
manufacturing Projects and 6 Gas based cement manufacturing projects with a total
approved capacity of 29,935 MT as on 31st March 2004.

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 KESORAM: Beyond Limitations

BIBLOGRAPLY

Website:

www.google.com

www.KESORAM.com

www.yahoofinance,com

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