PROJECT REPORT
ON
“COST OF CAPITAL”
IN
SUBMITTED TO SUBMITTED BY
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………………………….
: Email: jainnc@shreecementltd.com
2
Acknowledgement
At the outset, I offer my sincere thanks to SHREE CEMENTS LTD. for giving me an
opportunity to work on the project titled, “Cost of Capital”.
It’s a moral responsibility of each individual to acknowledge the help of each individual
who has made your journey smoother for you. First of all I would like to express my
gratitude to Mr. N.C. Jain (Assist. Vice President, Finance) who despite his tight schedule
spared time for discussions and informed about basic groundwork and direction without
whose support, this report would not have been possible. I appreciate him of giving me an
option of selecting such a wonderful project. The learning has been immense for me from
this project.
I am thankful to all employees at Shree Cement Ltd. for providing me all the information
and help I required for completion of this project. I am highly grateful to the management
at Shree Cement for giving me this opportunity to work on a dream project and in the
process harness myself with the huge learning on all aspects.
I would like to give credit to all sources form where I have drawn material for this project.
Last but not the least, I am grateful to my institute Mahairshi arvind institute of
engineering& technology jaipur which provided me this opportunity to interact with this
organization and understand the intricacies of the corporate world.
3
CONTENTS
4
Sr. No. Particulars Page No.
1 Preface 6
Cement-types
Cement Manufacturing
Marketing
Cost of Equity
Cost of Debts
Capital Structure
6
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.
CHET
AN PRAKESH SANKHLA
7
History
of
Company
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
8
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:
9
1996 - The Company commissioned its second cement plant - Raj Cement with a
capacity of 12.4 lakh tonnes per annum in Beawar. 58,06,204 rights shares issued
(prem. Rs 10 per share) in the prop. 1:5. 1998 - Shree Cement, the Calcutta-based
PD-BG Bangur group company, has decided to issue preference shares aggregating
Rs 15 crore to mobilise long-term funds. Shree Cement's expansion in capacity by
12.4 lakh tonnes at the new unit in Reawar, has made it a leading cement
manufacturer in North India.
- ICRA has downgraded the rating of the NCD programme of Shree Cement Ltd
(SCL) from LAA to LA. The Rs 372-crore 1.25 million tonne cement plant near
Ajmer was commissioned during the year after considerable delay due to an
explosion in the electro-static precipitator. Shree Cements has an installed capacity
to produce up to two million tonnes of cement per annum in Rajasthan and has an
equity capital of about Rs. 34 crores. 1999 - The company has been awarded the
first prize for energy conservation in 1998 in the cement sector. SCL, belonging to
the house of Bangurs, is one of the largest cement manufacturers in North India,
having the installed capacity of 2 million tonnes. Its plants are located in Rajasthan.
The new plant was set up at Beawar with the capacity of 1.24 million tpa in
Rajasthan.
●
-Unit I and Unit II of the company receives National Award for 'Best Electrical
Energy
Performance' and 'Best Thermal Energy Performance' in the Cement Industry for
the year
●
Decides to change the Accounting year to April - March each year and accordingly
the current year is only for nine months. Appoints Mr M K Singhi as the Executive
Director of Shree Cements. In pursuance to the IDBI, company approve for early
redemption of privately placed under noted cummulative redeemable preference
shares.Change in Management Structure: Mr B G Bangur re-appointed as
executive chairman and Shri H M Bangur re-appointed as the Managing Director
for a period of five years.
●
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
10
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
11
The
Cement
Industry
PROFILE
12
The Cement Industry PROFILE
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.
13
Types of Cement
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
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.
14
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.
• Mini plants were meant to tap scattered limestone reserves. However most set up in AP
15
• Production cost / tonne - Rs. 1,000 to 1,400
REGIONAL DIVISION
• 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
16
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.
17
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.
18
SHARE OF CAPACITY ADDITION (REGION-WISE AND TOP 5
GROUPS)
19
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.
20
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
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%)
21
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
22
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:
23
Interest rates: the rate offered on overnight deposits by the Central Bank or other
authority
24
If interest rates increase across the board, then investment decreases, causing a fall in
national income.
25
Characteristics of Cement Industry
This section describes the basic economic characteristics of the cement industry by following the
classical approach which consists of successively examining demand, supply and market
structure. On the basis of these characteristics are described the main economic stakes in the
sector.
Demand &Market
Demand in the cement industry is typically that of an activity which is mature, cyclical and with
low price elasticity. It is also characterized by a high degree of horizontal differentiation in terms
of location and a low degree of vertical differentiation in terms of quality.
Cement is a homogeneous product. Most of its sales concern about half a dozen commercial
varieties, of which Portland cement is by far the leader. No brand name exists, so that one
supplier’s products can easily be substituted for another. Cement is, however, an experience
good; its quality is guaranteed by standards with which the supplier has to comply. These
standards are often national but in most cases the products of one country can easily be approved
in neighboring countries. Standards therefore do not constitute trade barriers as such, even if they
may hinder trade.
The demand for cement is geographically widely dispersed and corresponds roughly to
population density. Although cement is an upstream industry, it differs from other basic
industries such as aluminum, steel or glass, for which demand id concentrated both
geographically and in terms of the number of customers. In the cement industry demand is by, by
contrast, dispersed in multiple zones of consumption, each of which comprises numerous
customers. Geographical factors thus determine the structure of the market.
26
Supply
• 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.
27
Major Demand Drivers
• Economic growth
• Industrial activity
• Construction activity
Opportunities
• growth in the housing sector
• central road fund established for national highways and railway over bridges to provide
the necessary impetus
• Encouraging trend in demand due to pick-up in rural housing demand and industrial revival
28
MAJOR PLAYERS IN CEMENT INDUSTRY:
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),.
GACL was set up in 1986 with 0.7 million tonnes. The capacity has grown 25 times since then to
18.5 million tonnes. GACL exports as much as 15 percent of its production. 35% of the company
products transported are by sea which is the cheapest mode. It has earned the reputation of being
the lowest cost producer in the cement industry. Ambuja cement is one of GACL’s well
established brands. The company plans to increase capacity by 3-4 million tonnes in the near
future.
29
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 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.
30
BINANI CEMENT
A fierce competition with a 2.2 MTPA plant is located at Binanigram, Pindwara, a village in
Sirobi in the state of Rajasthan. It’s a tough nut player which is outside CMA (Cement
Manufacturer’s Association) and is prime reason for driving prices low in markets. Offers a good
quality product at cheap rates and has very good brand image. Sales are focused in the North
India, Gujarat and Rajasthan. It holds around 14% of the Rajasthan market.
JK
An entrenched competitor that has brands across the price spectrum with JK Nembahera leading
the pack. Also operates in the white cement market with Birla as its only competitor. It lost
significant market when Ambuja came to Rajasthan.
Others
Other players like Shriram have insignificant share and are highly localized. Shriram has a small
presence and that too largely in southern Rajasthan. There are various mini plants operating too
which supply cheap cement which has no ISI certification and does not confirm BIS standards.
Quite often they are supplied in other established brand’s cement bags. L&T is a strong player
nationally and regarded as quality product. It has a footprint but not a foothold in Rajasthan
market
31
Cement Manufacturing
Raw Mill
Fuels
32
Burning
Cooler Units
33
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
Different types of cement are produced by mixing and weighing proportionally the following
constituents:
• Clinker
• Gypsum
• Limestone addition
• Blast Furnace Slag
34
Cement manufacturing from the quarrying of limestone to the bagging of cement.
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.
36
General Risk Factors
• 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.
• 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.
37
THE
ORGANIZATIO
N
PROFILE
38
THE ORGANIZATION PROFILE
COMPANY PROFILE
39
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.
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
Mission
Marketing
40
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
41
Following are the various products of Shree Cements Ltd.
2 Shree OPC
3 Bangur Cement
4 Rockstrong Cemento
POLICIES:
Quality Policy:
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:
• Conservation of Energy
42
Environment Policy:
To ensure:
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.
• To ensure good health and safe environment for all concerned by:
• 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
43
Human Resource Policy:
• Empower people
• Develop Competency
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.
44
• Because of the product being commoditized, there was a need for differentiation for
which there were some changes made to the product.
45
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
• National Awards for Energy Conservation from Ministry of Power, Govt of India
• 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
46
• ICWAI National Award 2005 for excellence in cost management
47
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.
48
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 .
49
OBJECTIVES
OF
THE STUDY:
50
• how they are performed and coordinated.
51
SCOPE
OF
THE
OBJECTIVES:
• 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 trimester, 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
52
• ✔ To make contacts with the industrial people and maintain it
Concept
53
COST
of CAPITAL
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
54
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.
Cost of capital is the measurement of the sacrifice made by investors in order to invest with
a view to get a fair return in future on his investments as a reward for the postponement of his
present needs. On the other hand form the point of view of the firm using the capital, cost of
capital is the price paid to the investor for the use of capital provided by him. Thus, cost of
capital is reward for the use of capital. Author Lutz has called it” BORROWING AND
LANDING RATES”. The borrowing rates means the rate of interest which must be paid to
obtained and use the capital. Similarly, landing rate is the rate at which the firm discounts its
profits. It may also the opportunity cost of the funds to the firm i.e. what the firm would earn by
investing these funds elsewhere. In practice the borrowing rates used indicate the cost of capital
in preference to landing rates.
Technically and Operationally, the cost of capital define as the minimum rate of return a
firm must earn on its investment in order to satisfy investors and to maintain its market value. I.e.
it is the investors required rate of return. Cost of capital also refers to the discount rate which is
used while determining the present value of estimated future cash flows. In the other word of
John J. Hampton, “The cost of capital is the rate of return in the firm requires from
investment in order to increase the value of firm in the market place”. For example if a firm
borrows Rs. 5 crore at an interest of 11% P.A., then the cost of capital is 11%. Hear it’s the
essential for the firm to invest these Rs. 5 Crore in such a way that it earn at least Rs. 55 lacks i.e.
rate of return at 11%. If the return less then this, then the rate of dividend which the share holder
are receiving till now will go down resulting in a decline in its market value thus the cost of
capital is the reward for the use capital. Solomon Ezra, has called “It the minimum required rate
of return or the cut of rate for capital expenditure.”
55
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.
Cost of capital is the minimum rate of return a firm is required in order to maintain the
market value of its equity shares.
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.
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.
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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.
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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.
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.
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
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investments. In other words, the opportunity cost of the funds is the implicit cost. Port field has
defined the implicit cost as “the rate of return with the best investment opportunity for the firm
and its shareholders that will be forgone if the project presently under consideration by the firm
were accepted.” Thus implicit cost arises only when funds are invested somewhere, otherwise
not. For example, the implicit cost of retained earnings is the rate of return which the shareholder
could have earn by investing these funds, if the company would have distributed these earning to
them as dividends. Therefore, explicit cost will arise only when funds are raised whereas implicit
cost arises when they are used.
While computing the cost of capital, the following assumptions are made:
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 –
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COST OF DEBT CAPITAL
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.
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Example-: If a company issues 12% debentures worth Rs. 5 lacs of Rs. 100 each at par, then it
must be earn at least Rs.60000(12% of Rs. 5 lacs) per year on this investment to maintain the
income available to the shareholders unchanged. If the company earns less than this interest rate
(12%) than the income available to the shareholders will be reduced and the market value of the
share will go down. Therefore, the cost of debt capital is the contractual interest rate adjusted
further for the tax liability of the firm. But, to know the real cost of debt, the relation of the
interest rate is to be established with the actual amount 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.
---------------------------------------- X 100
Total Debt
Net Proceeds:
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
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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.
Shree Cement has not paid any dividend to the Preference Shareholders. Thus the Cost of
Preference Capital is 0 (Zero).
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:
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Dps= current cash dividend per share
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
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
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The market of equity share of the company does not fluctuate widely.
when new equity share are issued by a company, it is not possible to realise the market price per
share, because the company has to incur some expenses on new issue, including underwriting
commission, brokerage etc. so, the amount of net proceeds is calculated by deducting the issue
expenses form the expected market value or issue price. To ascertain the cost of capital, dividend
per share or EPS is divided by the amount of net proceeds. Any of the following formulae may
be used for this purpose:
Ke= DPS\NP*100
Or
Ke= EPS\NP*100
Or
Ke=DPS\NP*100+G
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
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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.
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’.
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
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weight’ or ‘market value weight’. Book value weights are the relative proportion of
various sources of capital to the total capital structure of a firm. The book value weight
can be easily calculated by taking the relevant information from the capital structure as
given in the balance sheet of the firm. Market value weights may be calculated on the
basic on the market value of different sources of capital i.e. the proportion of each source
at its market value. In order to calculate the market value weights, the firm has to find out
the current market price of each security in each category. Theoretically, the use of
market value weights for calculating the weighted average cost of capital is more
appealing due to the following reasons:
• The market values of securities are closely approximate to the actual amount to be
received from the proceeds of such securities.
• The cost of each specific source of finance is calculated according to the
prevailing market price.
But, the assignment of the weight on the basic of market value is operationally inconvenient as
the market value of securities may frequently fluctuate. Moreover, sometimes, no market value is
available for the particular type of security, specially in case of retained earnings can indirectly
be estimated by Gitman’s method. According to him, retained earnings are treated as equity
capital for calculating cost of specific sources of funds. The market value of equity share may be
considered as the combined market value of both equity shares and retained earnings or
individual market value (equity shares and retained earnings) may also be determined by
allocating each of percentage share of the total market value to their respective percentage share
of the total values.
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-
=Rs. 5,76,000.
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Market Value of Retained Earnings= 7,20,000*1,00,000/5,00,000
=Rs. 1,44,000.
Kw = ∑XW/∑W
Example : Following information is available with regard to the capital structure of ABC
Limited :
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Retained Earning 2,00,000 .10
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CALCULATION OF COST OF CAPITAL OF SHREE
CEMENT LTD.
Total Debt
................................................. X 100
161570.37
= 8.08 %
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Kd (after tax) = Interest Rate Before Tax – Tax Rate ( 30%.)
Total Debt
9355.94
105716.94
= 8.85 %
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For the year 2007-08
9636.72
113373.18
= 8.50%
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For the year 2006-07
= 83427.02+1400= 84827.02lacs
6573.02
84827.02
= 7.25%
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COMPARATIVE CALCULATION OF Kd FOR FOUR YEAR
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COST OF EQUITY CAPITAL:
DPS Given 13 10 8 6
Ke = DPS\mP*100 + G
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Dps = Current cash dividend per share = 13Rs.
13
2300.05
= 10.56%
194.07
Ke = -------------------- X 100
2300.05
= 8.43%
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3. Dividend per share method:-
4528.84
Ke = -------------------- = 13
348.37
Particular 2008-09
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WEIGHTED AVERAGE COST OF CAPITAL (WACC)
Wd = Weight of Debt.
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MERITS OF WEIGHTED AVERAGE COST OF CAPITAL
The WACC is widely used approach in determining the required return on a firm’s
investments. It offers a number of advantages including the followings-
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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, marginal capital structure and optimal capital structure. Which
of these capital structure be selected. Generally, current capital structure is regarded as
the optimal structure, but it is not always correct.
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Research
Methodology
Research Methodology
The research methodology was subdivided and performed in the following method-
• Analyzing relevant figures and date for the last financial years.
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• 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.
1 Secondary Data:-
Major source of data for the project were the pass years’ financial statement
It included information provided by the company workers. I adopted a holistic approach
and toiled to collect the information about the company other than Shree Cement through
secondary sources such as internet, newspaper, magazines, papers , online data basis ect..
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swot
analysis
swot analysis
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A) Non trade network Non- Trade Network
B) Trade Network
Consumers
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
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• 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
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.
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Threats
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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 These all departments are
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SUGGESTION
&
RECOMMENDATI
ONS
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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.
➢ 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:
• How to apply the management learning and soft skills while working at the
coalface.
• 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
91
Bibliography
92
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