A STUDY ON CAPITAL BUDGETING

A Study on Financial Position

(With reference to ZUARI CEMENTLtd kadapa)

CHAPTER I

A Study on Financial Position

ABSTRACT
Capital Budgeting decision pertains to fixed/long-term assets which are in operation and yield a return over a period of time. They therefore involve current outlay in return for series of anticipated flow of future benefits. Capital budgeting decisions are of paramount importance in financial decision making. In first place such decision affects the profitability at a firm. They also have a bearing on the competitive position of the enterprise mainly because of the fact that the may enable the firm. To generate finished goods that can ultimately be sold for profit. During the project, I have gone through Capital Budgeting information and I Chose ZUARI CEMENT INDUSTRIES LIMITED. I found Increase in Investment Turn over Ratio, Fixed Assets Turn over Ratio and Fixed Assets to Net worth Ratio and decrease in Return on Investment and Fixed Assets Ratio I Suggest that the use of various project evaluation techniques, such as return on investment, pay back period, discounted cash flow Evaluation and Review Technique, Critical path method and strengths weaknesses, opportunities and Threats Analysis

A Study on Financial Position

INTRODUCTION
STUDY OF CAPITAL BUDGETING
The financial or capital requirement of a firm is of two types-Fixed capital requirement and Working capital requirements. The fixed capital requirement relate to firms investment in fixed assets like land, buildings, machinery, furniture, fixtures and patents etc, from which the benefits will be received over a period of time. It, therefore, involves a current cash outlay or huge investment in expectation of a series of anticipated future benefits. The working capital requirements of a firm refer to the amount of capital required to meet its dayto-day expenses, like purchase of raw materials, payments of expenses, such as salaries, wages, rates, rents etc. An efficient allocation of capital is one of the most important aspects of financial management in a firm as it involves investment decisions. The decisions of investing a firms funds in long term assets are of considerable significance since they tend to have an impact on its wealth, size, pace and direction of its growth and its business risk. Mainly two types of investment decisions are there, the first one is short-term investment decisions. It is also known as working capital management or management of current asset. The second type of decision is the long-term investment decision. This is widely known as capital budgeting or the capital expenditure decision. Capital budgeting involves decision on investment of firms funds in long term activities in anticipation of an expected flow of future benefits over a series of years.

A Study on Financial Position Capital budgeting is the decision making process by which affirms evaluates the purchase of major assets. For example Buildings, Machinery and equipment etc.

BASICS OF CAPITAL BUDGETING

INTRODUCTION
The term Capital Budgeting means Planning for Capital Assets. Capital budgeting is of paramount importance in financial management. It was made clear in the first chapter that modern financial management is not only concerned with providing funds but also with their effective use. Accounting the subject of financial management is concerned with three financial decisions, Investment decision& Dividend decision. Capital budgeting part of the investment decision which involves the allocation of funds among different assets. In other words, investment decision refers to making a choice regarding the assets in which the funds will be invested. The assets to be acquired by a firm will be of two types. A) Long term or Fixed assets, and B) Short- term or Current assets. Accordingly, the investment decision is divided into two categories:A) Capital budgeting decision and B) Working capital management or management of current assets. Capital budgeting decision deals with allocation of funds among longterm or fixed assets, while working capital management is concerned with current assets. Working capital management is dealt in a separate chapter. The various dimensions of capital budgeting, Such as its meaning, significance, types, cash flow analysis etc are presented in this lesson while 4

A Study on Financial Position basic aspects of capital budgeting techniques are presented in the subsequent lesson. WHAT IS CAPITAL BUDGETING Capital budgeting is a required managerial tool. One duty of a financial manager is to choose investments with satisfactory cash flows and rates of return. Therefore, a financial manager must be able to decide whether an investment is worth undertaking and be able to choose intelligently between two or more alternatives. budgeting. CAPITAL IS A LIMITED RESOURCE: In the form of either debt or equity, capital is a very limited resource. There is a limit to the volume of credit that the banking system can create in the economy. Commercial banks and other lending institutions have limited deposits from which they can lend money to individuals, corporations, and governments. In addition, the Federal Reserve System requires each bank to maintain part of its deposits as reserves. Having limited resources to lend, lending institutions are selective in extending loans to their customers. But even if a bank were to extend unlimited loans to a company, the management of that company would need to consider the impact that increasing loans would have on the overall cost of financing. To do this, a sound procedure to evaluate, compare, and select projects is needed. This procedure is called capital

In reality, any firm has limited borrowing resources that should be allocated among the best investment alternatives. One might argue that a company can issue an almost unlimited amount of common stock to raise capital. Increasing the number of shares of company stock, however, will serve only to distribute the same amount of equity among a greater number of shareholders. In other words, as the number of shares of a company 5

A Study on Financial Position increases, the company ownership of the individual stockholder may proportionally decrease.

The argument that capital is a limited resource is true of any form of capital, whether debt or equity (short-term or long-term, common stock) or retained earnings, accounts payable or notes payable, and so on. Even the best-known firm in an industry or a community can increase its borrowing up to a certain limit. Once this point has been reached, the firm will either be denied more credit or be charged a higher interest rate, making borrowing a less desirable way to raise capital. Faced with limited sources of capital, management should carefully decide whether a particular project is economically acceptable. In the case of more than one project, management must identify the projects that will contribute most to profits and, consequently, to the value (or wealth) of the firm. This, in essence, is the basis of capital budgeting. CAPITAL BUDGETING TECHNIQUES EVALUATION OF CAPITAL BUDGETING PROPOSALS At each point of time business managers will have a number of proposals regarding various projects in which he can invest money. He has to compare and evaluate all these projects and decide which one to take up and which one to reject. Of course, apart from the financial considerations, there are many other factors which are important in making capital budgeting decisions. Sometimes a project may be undertaken only with a view to establish foothold in the market or because it results in better welfare of the society as a whole or because it increases the safety and welfare of the workers. These considerations apart, the major consideration in taking a capital budgeting decision is to evaluate its returns on compared to its investments. 6

A Study on Financial Position CAPITAL BUDJETING DECISIONS:

Traditional Approach (Or) Non-discounted cash flows Pay back period (PB)

Modern Approach (Or) Discounted cash flows Net present value (NPV)

Accounting rate of return (ARR)

Internal rate of return (IRR) Profitability index (PI) Discounted payable period

NET PRESENT VALUE (NPV) 7

A Study on Financial Position It is economic method of evaluating the investment proposal. It explicitly recognizes the time value of money. Correct postulation of cash flows arising at different time periods improving that they differ in value are comparable only when their equivalents present values are found out. Steps: 1) Cash flows should be forecasted based on realistic assumptions. 2) Appropriate discount rate (that is firms opportunity cost of capital) should be identified. 3) Present value of cash flows should be calculated using opportunity cost. 4) NPV is calculated by subtracting present value of cash outflows from present value of cash in flows. Acceptance rule: Accept if NPV > 0 Reject if NPV < 0 May accept if NPV= 0 One with higher NPV is selected.

INTERNAL RATE OF RETURN (IRR):

A Study on Financial Position It takes in to account of the magnitude &timing of cash flows. IRR is called so because it depends solely on the out play & proceeds associated with the investment &not on any rate determined outside the investment. IRR is the discount rate that make NPV=0. Acceptance rule: Accept if r>k Reject if r<k May accept if r=k Value additively principle does not hold when IRR methods is use IRR of projects do not add. where r=rate return k=opportunity cost of capital

A Study on Financial Position Profitability index (PI): It is benefit cost ratio. It is ration of present value of cash inflows at the required rate of return, to the initial cash outflow of the investment.

PI

PV of cash inflows ----------------------------Initial cash out lay

Acceptance rule: Accept if PI>I Reject if PI<I May accept if PI-I PI is a relative measure of projects profitability.

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A Study on Financial Position Pay back Period (PBP) : It is defined as the number of years required covering the original cash outlay invested to recover the original cash outlay invested in a project. If project generates constant annual cash inflows, the pay back period is completed as follows. Initial investment ---------------------------Annual cash flow

PI =

In case of UN equal cash inflows, the pay back period can be found out by adding up the cash flows until the total is equal to initial cash outlay. Acceptance rule: Accept if calculated value is less than standard fixed by management other wise reject it. In case of ranking method, accept the lowest rank.

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A Study on Financial Position Discounted pay back period: One of the serious objections to pay back method is that it does not discount the cash flows. Hence discounted pay back period has come into existence. The number of period taken in recovering the investment out lay on the present value basis is called the discounted pay back period. Discounted pay back rule is better as it does discount the cash flows until the out lay is recovered. Average Rate Return (ARR): It is also known as return on investment (ROI). It was accounting information as related by financial statements, to measure the profitability of an investment. ARR can be computed as follows: Average income ------------------------------Average investment

ARR

Average income=average of after tax profit Average investment=half of original investment.

ACCEPTANCE RULE: Accept if calculated is higher than minimum rate established by management. Otherwise reject. Incase of ranking, highest ARR is given number one rank.

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A Study on Financial Position CAPITAL BUDGETING METHODS IN PRACTICE In a study of the capital budgeting practices of fourteen medium to large size companies in India, it was found that almost all companies used by back. With pay back and/or other techniques, about 2/3 of companies used IRR and about 2/5 NPV. IRR s found to be second most popular method. Pay back gained significance because of is simplicity to use & understand its emphasis on the early recovery of investment &focus on risk. It was found that 1/3 of companies always insisted on computation of pay back for all projects, 1/3 for majority of projects &remaining for some of the projects. Reasons for the secondary of DCF techniques in India included difficulty in understanding & using three techniques, lack of qualified professionals & unwillingness of top management to use DCF technique. One large manufacturing and marketing organization mentioned that conditions of its business were such that DCF techniques were not needed. Yet another company started that replacement projects were very frequent in the company, and it was not considered necessary to use DCF techniques for evaluating such projects. Techniques in India included difficulty in understanding &using three techniques, lack of 13

A Study on Financial Position qualified professionals & UN willingness of top management to use DCF techniques. PROCESS:

CAPITAL BUDGETING PROCESS:At least five phases of capital expenditure planning & control can be identified: Identification (or organization) of investment opportunities. Development of forecast of benefits and costs. Evaluation of the net benefits. Authorization for progressing and spending capital expenditure. Control of capital projects.

INVESTMENT IDEAS: Investment opportunities have to be identified or created investment proposals arise at different levels with in a firm. Nature of idea Cost reduction Replacement (50% in India cover this level) Expansion 14 top management level plant level

A Study on Financial Position

Diversification

(in India, it is insignificant)

New product Replacing an old Machine (or)

marketing department (or) plant manager

Factory level Improving the Production technique. Enough investment proposals should be generated to employee the firms found fully well and efficiently. FORECASTING: Cash flow estimates should be development by operating managers with the help of finance executives. Risk associated should be properly handled. Estimation of cash flows requires collection and analysis of all qualitative and quantitative, both financial and non-financial of in nature. MIS provide such data. Correct treatment should be given to: Additional working capital Sale proceeds of existing asset. Depreciation Financial flows (to be distinguished from operation flows)

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A Study on Financial Position

EVALUATION: Group of experts who have no ace to grind should be taken in selecting the methods of evaluation as NPV, IRR, PI , pay back, ARR & discounted payback. Pay back period is used as primary method &IRR/NPV as secondary method in India. The following are to be given due importance. For evaluation, minimum rate of return or cut-off is necessary. Usually if is computed by means of weighted average cost of capital (WACC) Opportunity cost of capital should be based on riskyness of cash flow of investment proposals. Assessment of risk is an important aspect. Sensitivity analysis & conservation for costs are two important methods used in India.

OBJECTIVES OF CAPITAL BUDGETING: The objectives of capital budgeting is as follows: 1. It determine the capital projects on which work can be started during the budge period after taking in to account their urgency and the expected rate of return on cash project. 2. It estimates the expenditure that is to be incurred on fixed assets approved by the management together with the source from which funds are to be raised.

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A Study on Financial Position 3. It restricts the expenditure on project within authorized limits. The overall objective of capital budgeting decisions to maximize the wealth of the firm by properly striking a balance between risk and return associated with commitment of fund in each fixed asset of the firm. The specific objectives in brief are: A) Increasing Revenue and B) Reducing Cost 4. This study of capital budgeting process to determine the true profitability of the Project. 5. It should provide for an objective and unambiguous way of separating good project from bad project (less profitability). 6. This study can compare current (actual) returns with standard rate of returns of the profitability. 7. It should recognize the fact that bigger cash flows are preferable to smaller ones and early cash flow is preferable to latter one. 8. This study can choose among mutually exclusive projects that project with maximizes the shareholders wealth. . BASIC STEPS OF CAPITAL BUDGETING 1. Estimate the cash flows 2. Assess the riskyness of the cash flows. 3. Determine the appropriate discount rate. 4. Find the PV of the expected cash flows. 5. Accept the project if PV of inflows > costs. Payback < policy 17 IRR > Hurdle Rate and/or

A Study on Financial Position IMPORTANCEOFCAPITAL EXPENDITURE DECISION: Capital budgeting decision is paramount importance in finance decision making. Because these not only affect probability of the firm but also the competitive position, and consequently its survival and growth. Further, these are strategic invest decision .these decision assume greater importance because of the following reasons:

a)

Investment of heavy funds: Capital budgeting decisions require large capital outlays. Therefore at should carefully plan its investment program, in terms of providing the funds to allocate then among different fixed assets.

b)

Long-term implication: these decisions have their impact on its firms future direction and growth firms future cost, break-even point, sale or profit-all are determined by the selection of its assets.

c)

Irreversible decisions: most of the capital budgeting decisions, keeping in view the size of investment and longevity of the project, are not general reversible. In case, the firm has to scrap the assets, it has to incur heavy losses.

d)

Most difficult to make: Capital budgeting decision are most difficult to make because of the following reasons:

i) ii) iii)

Benefits from these decisions are received in some

future which is uncertain, unpredictable and associated with risk. Cost incurred and befits received from capital budgeting

decision occur in different time periods, making comparison difficulty. The estimates relating to future cash flow cannot be

made perfectly due to ever changing social, economics, political, and technological factors.

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A Study on Financial Position METHODOLOGY & PROCEDURE: NATURE OF CAPITAL BUDGETING DECISION: Capital expenditure is incurred for the following purpose. The examples of capital expenditure decisions are: 1. Expansion: Whenever, there is a heavy demand to the products of a company beyond its installed capacity, it has to acquire new plant and machinery, building etc, to increase its production capacity. This is known as expansion from which investment benefits are expected over a series of year in future. 2. Diversification: In the ever changing business world no firm can depend solely on a simple product but it has to diversify, its activities by adding new products or areas to withstand the competition in the market this requires huge amounts of investment. For example, Hindustan CIBA geigy added two more products viz. Colgate get and Colgate faster to the existing Colgate, to withstand the competition. 3. Replacement: When an existing fixed assets become either absolute assets. The objective would be to improve operating efficiency and reduce cost. For example, a company may shift from manual or semi mechanized production process. 4. Research and development: to be in the market and also to keep abreast of the changes taking place in the dynamic business world, firm have to invest huge capital on research and development in develop new and innovative product. But the benefit out of this expenditure will occur only in the long run.

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A Study on Financial Position 5. Miscellaneous: Sometime firms have to invest large amount of funds quantities, though they are not going to result in any benefit at the firm level. But in the general interests, of the society, they may be required to spend. For extinstallation of pollution control equipment by a firm. DATA COLLECTION: The data for present study is collected through secondary source the data has been collected from the financial reports of the company for the last six years. The data also collected from industry report. The collected data is presented in one way and two ways tables. The stateside like averages, percentages are used wherever me. METHODOLOGY: For the study the data collected from primary and secondary sources has been scrutinizes, edited, and presented in the form of a tables and statements. The analysis of the data has been made with the help of certain mathematical techniques like percentages, proportions etc, and ratio analysis to draw conclusion.

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A Study on Financial Position

INDUSTRY PROFILE
CEMENT INDUSTRY PROFILE
INTRODUCTION OF CEMENT:
The 85 years old Indian Cement Industry is one of the Cardinal and basic infrastructure industries, which enjoys core sector status and plays a crucial role in the economic development and growth of a country. Being a core sector is industry was subject to price and or distribution controls almost uninterruptedly from World war-II to 1982.when the government of India announced the partial decontrol of Prices and decontrol manufacturing cement became increasingly attractive industry and the industry experienced substantial expansion. As the supply in responses to the 1982 partial decontrol was significant in March 1989. Price and distribution control were finally dispensed with. It was one of the First major industries in the country to be so deregulated. Cement is the basic construction material used extensively all over the world. The per capital consumption of cement is universally acknowledged as one of the country. The per capital consumption of cement in India is estimated at approximately Rs.57 ke. And India is the third lowest consumer in the world. Thus there is an excellent potential growth of cement industry in India.

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A Study on Financial Position Cement was first patented in 1824 in England. In India, the first cement plant was established by India cement industrial growth was continuously increased. By 1961, cement production in the country achieved self sufficiency and import of cement was stopped. In August, 1965 the Government accepted the principle to decontrol the price and distribution of cement. A scheme of decontrol drawn and brought into effect from January, 1996 and a cement allocation and coordination organization (CACO) was formed. As the decontrol scheme did not prove to satisfaction of the Government, CACO was abolished and its function over by the cement controller attached by the Government Corporation of India Limited. Prices of cement are revised by the Government from time to time based on studies and reports of Bureau of Industrial cost and prices.

DEFINITION:
Cement may be defined, as it is a mixture of calcium silicate and Aluminates which have the property of setting and hardening under water the amount of Silica, alumnus which is present in each crust are sufficient to combine with calcium Oxide (Cao) to form the corresponding calcium silicate and aluminates

CLASSIFICATION OF CEMENT:
Cement is three types: 1) Puzzolantic cement 2) Natural cement 3) Portland cement

1) Puzzolantic Cement:
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A Study on Financial Position It consists of silicates calcium and aluminum: It shows the hydraulic properties when it is in the form of powder and being mixed with suitable preparation of time. The rate of hardening is much slower and the comprehensive strength developed is about a half of Portland cement. Is us found more resistant to the chemical action that others. 2) Natural Cement: This is natural occurring material. It is obtained form cement rocks. These cement rocks are claying lime stone containing silicates aluminates of calcium. The selling property of this cement is more than the Portland cement but is comprehensive strength is half of its. 3) Portland Cement: a) Ordinary Portland cement b) Rapid Hardening Portland cement c) Low Heat Cement d) White or Colored Cement e) Water Proof Portland cement f) Portland Slag Cement g) Portland Puzzling Cement h) Sulphate Resisting Cement i) Oil Well Cement.

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A Study on Financial Position

CHAPTER-2

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A Study on Financial Position

ZUARI CEMENT

The Zuari Agro Chemicals Limited (ZACL) was conceptualized on 12th May, 1967 with main objective of Manufacturing, Distributing and Marketing of fertilizer and other agricultural inputs. Zuari cement is a division of Zuari Industries Limited, a company promoted by the Birla and U.S. multinational giant USX, having its registered office at Jai Kisaan Bhavan, Zuari Nagar, Goa. The company is a part of the 4500 crore Birla Group, having primary interest in fertilizers, Agro inputs, cement RTA furniture, engineering service, and home furniture etc., Zuari Cement is running under the flagship of Zuari Agro Chemicals Limited. Zuari Cement is strategies located 6kms away from Yerraguntla town of kamalapuram taluka in Kadapa District, Andhra Pradesh. Railway line has been laid connection the Yerraguntla station of Zuari Cement.

Zuari cement formerly known as Texmaco Cement, take over by Zuari Agro Chemicals Limited in the year 1994. the plant was modernized and upgraded to increase the production capacity of 1500tonnes per day to 5500tonnes per day. In 1995 february 7th acquired it for an amount of 137.78crores. Texmaco limited commenced its production in 1985 with an installed capacity of 1500tpd. The annual capacity of the plant is 9.7 million tones. The plant is currently performing quite well with the production exceeding its rated capacity.
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Zuari Group has identified cement as one of the core business to grow. It has therefore, been decided to constitute a separate corporate entity and hire off the cement business to it. To accelerate the growth and achieve capacity additions quickly it decided to form a joint venture with a strategic partner, after careful evaluation the multinational cements giant Italcementi Group was identified to be suitable partner for pursuing growth. Zuari and Italcementi Groups has agreed to form a joint venture with 50 -50 equity sharing. The Zuari cement business will get transferred to the joint venture company viz., Zuari Company Limited. It is proposed to have head quarters to have head quarters of Cement Business at Hyderabad. It is proposed to increase the capacity of 1.7 MTPA in a span of 3 to 4 years. Italcement Group is the largest producer and distributor of cement is European and one of the leaders in the world maker place. The group operates in 13 countries including Belgium, Canada, France, Greece, Italy, Morocco, Spain, Turkey and U.S. with recent acquisition in Bulgaria, Kazakhstan and Thailand.

The group was founded in 1864 and has its head quarters in Bermago, Italy, Currently the group has 54 plants with an installed capacity of 40 MTPA clinkers, which translate to cement capacity of above 50 MTPA spread over 13 countries. The group has also has 500 RMC plants all over the world. The consolidated group turnover in 1998 was 3.4 billion US$. The group has excellent R & D and Machine design facilitates head quartered at Bermago, Italy, which renders technical support to all over the group plants. The main raw materials required for the cement manufacture are limestone, iron ore, bauxite and literate
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A Study on Financial Position

gypsum. The limestone is begin excavated from limestone mines, which are located at a distance of half a km away from the plant within the lease area. The coal is being sourced from Singareni Collienried Limited, Western coalfields and from open market. A colony accommodation for 125 employees is located near the plant site. The water requirement for the process is being met from in Hanumangutty riverbed and bore well in plant side.

RAW MATERIALS LIMESTONE:

Limestone is the major raw material for the cement industry. Limestone constitutes 60 to 70 percent of the total raw material costs. Nearly 1.5 1.6 tons of limestone is required for producing one ton of cement clinker limestone (calcium carbonate) is a rock of either sedimentary or metamorphic origin with calcium oxide as its main constituent. In India limestone occurs mainly as sedimentary rocks and constitutes 30 percent of the total sedimentary rocks in the country. Cement grade limestone is available in 21 states in the country. About 65 percent of the cement plants in India uses sedimentary limestone and 20 percent use metamorphic crystalline limestone. India has 85,980 million tones of cement grade limestone deposits, which is enough to produce 100 million tones of cement for the next 500 years. Total reserve reserve would last

No. Of years limestone ------------------------------------Avg,limestoneConsumption

=
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8989milion tons --------------------------

A Study on Financial Position

97.5million tons = 922.02years

It is quite clear that Indias limestone reserves are adequate for the next several years. More over new reserves would be discovered every year Limestone is mixed extensively in India and ranks second in production next to coal mining. Major portion of limestone mining portion of limestone mining is for cement industry (nearly 75% to 80%) therefore the demand supply situation is quite comfortable. In India limestone deposits are abundantly found only in Siroly (Rajasthan), Santna, Belaspur (M.P., wadi (Karnataka), Yerraguntla(A.P.) and some places in Gujarat. Units are generally located in close proximity of limestone deposits in Madhya Pradesh, Andhra Pradesh, Tamil Nadu, Karnataka, Rajasthan, and Gujarat.

The quality of required for the cement production should have the following composition. Lime Silica Alumina Iron oxide Magnesia Loss on Ignition Total : : : : : : : 50% 3% 4% 0.50% 0.50% 43% 100%

If Magnesia content exceeds 0.4-o.5 percent, the limestone is not suitable for cement. Similarly, lime content is directly proportional to the clinker and cement quality and quantity.

GYPSUM:
Gypsum is another important required material for cement manufacturing, constitutes about 5 percent of the weight of the cement. Gypsum is added in required quantity at
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the time of grinding of clinker. The clinker and the required amount of the Gypsum is added to control the setting time of the cement. India possesses resources of gypsum. Hence its availability is not a concern for the cement manufacture.

OTHER RAW MATERIALS:

A few other raw materials like Blast furnace slag and fly ash are also required for the manufacture of the cement. Blast furnace slag is a waste product obtained from iron smelting furnace whereas fly ash is the left over ash from thermal power station.

INPUTS:
Although limestone is the major raw material for cement industry, the critical raw material is energy. How well the company uses coal and electricity and how much it costs will determine the success ratio for cement manufacturers. Major inputs in cement manufacturing include coal, power and freight.

COAL:
In India coal I am being used as the fuel for the manufacturing of cement. Else where in the world lignite, nature gas and oil are also used. They are not used in India as continuous supply of natural gas is not assured used by plants in southern plants ogf India, like Dalmia Cement, Chettinad cement etc., as a supplement to coal which compensates the storage for coal in this area. Non cooking coal of lower ash content is required by cement plants. It should be less than 30%. A useful heat of 4500 kilocalories per kg of coal. Coal of lower ash enables comparatively lower quality of limestone. The coal should have volatile matter and high temperature. Transport of coal is another big issue as many of larger cement plants are located close to the limestone deposits, which may not have coal deposits nearby.

POWER:

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Power constitutes about 10% of the total cement production costs. About 3 percent of the total power generated in the country is used by cement industry. The average consumption of power in the dry process kilns is around 125 units per million tons of clinker.

FREIGHT:
Freight constitutes a very significant part of the cost structure of cement units in India. On an average freight for transporting finished product alone forms 13.85% of the cost of production of large cement plants. The main areas of freight coast for the cement industries are i. ii. Transporting coal from the coal fields to the cement factories. Transporting cement from the plants to their markets.

Limestone transport would be even costlier than transporting coal or cement. Hence cement plants are located in cluster near limestone deposits. Indian railway is moving up to 60% of the total cement production.

PRODUCTION PROCESS:
Cement can be manufacture either by the wet process or by dry process. Many of the Indian cement plants use the wet process technology. However, the dry process is gaining momentum and enjoys d definite advantage, as it is more energy efficient. Today many plants are switching over to dry process. In AP all cement manufactures are using the dry process technology. Below table is presented to disclose information relating to production capacity and actual production of cement industry less than five year plans.
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PRODUCTION & PRODUCTION OF CEMENT: Year

1942 1947 1950-51(before plan) 1955-56(by the end plan) 1960-61(by the end plan) 1965-66(by the end plan) 1973-74(by the end plan) 1978-79(by the end plan) 1984-85(by the end plan) 1989-90(by the end plan) 1996-97(by the end plan) 1999-2001

Production Capacity Production (in million tones)

1.89 2.22 2.28 5.02 1.76 1.48 2.22 4.60 7.97 10.97 14.66 14.66 30.13 45.41 76.22 93.5

of

1st

of 2nd 9.30 of of of of of of 3rd 12 4th 19.76 5th 22.58 6th 42 7th 61.56 8th 105.25 105.5

Source: Annual reports of Zuari Cement Ltd.,

TYPE OF ORGANISATION:

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Zuari Agro Chemicals Limited was incorporated in the year 1967 as a public limited company under the Companys Act. The main objective of the company was to manufacture and sell nitrogenous and phosphatic fertilizers. Since 1990 the company diversified into manufacture and sale of cement and marketing of bio fertilizers, bio pesticides and pesticides. As the name Zuari Agro Chemicals did not represent other activities mentioned above, it was decided to change the name to Zuari Industries Limited. The change in the name was approved by the shareholders by the extra ordinary general meeting held on 9th February 1998, consequently the name of the company was changed to Zuari Industries Limited with effect from 12th February 1998.

BUSINESS OPERATIONS:
Zuari Cements manufactures and sells cement and clinker. The selling activity is concentrated solely South India. The business operations are controlled and managed by its four branch offices, which are located at Chennai, Cochine, Hyderabad and Banglore.

FUTURE PROSPECTS AND GROWTH:

The production capacity has increased form 5lakh tones per annum to 17lakh tones per annum. In the last before year Zuari Cement has entered into joint venture agreement with Italcementi Group, which is a multinational company. The joint venture is for the manufacture and sale of cement.

RAW MATERIALS AND REQUIRMENT:

Limestone, Iron ore, Bauxite, Gypsum and Coal are the basic raw materials used in the manufacturing process of cement. The average consumption of various raw materials is shown in the table.

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REQUIREMENTS OF RAWMATERIAL S. No
1 2 3 4 5

Raw material
Limestone Additives Bauxite iron ore coal Gypsum Product clinker

Tones day
7200 375 773 200 500

per Consumption per tones of Cement

1.4 to 1.5 0.06 to 0.75 1.16 to 0.20 0.04 to 0.05 ------

Source: Annual reports of Zuari Cements Limited.,

NOTE
Due to change in the quality of lime stone and coal, the consumption of additives has been changed accordingly.

MATERIAL BALANCE:
Limestone + Additives Raw material (1.46%) +coal Clinker + Gypsum Clinker + Fly ash Raw material Calcinations clinker Ordinary Portland cement Pozzoland Portland

NOTE:
Depending upon quality of raw materials the above consumption may value.

PRODUCT PROFILE
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Zuari Cement manufactures and distributes its own main product lines of cement. It aims to optimize production across all the marketers, providing a completer solution for customers needs at the lowest possible cost, an approach known as strategic Integration of Activities. Cement is made from a mixture of 80 percent limestone and 20 percent clay. These are crushed and ground to provide the raw meal, a pale, flour like powder. Heated to around 1450o C (2642o F) rotating kilns, the meal undergoes complex chemical changes and is transformed into clinker. Fine grinding the clinker together with a small quality of gypsum produces cement. Adding other constituents at this stage produces cements for specialized uses. PRESENTLY THE PLANT PRODUCES THREE TYPES OF PRODUCTS 1. 43 Grade Cement 2. 56 Grade Cement 3. Pozzoland Portland Cement

ADVANTAGES:
Here are five of the many reasons why Zuari 53 Grade and 43 Grade cement edges out its competitors. High compressive strength Low heat of hydration Better soundness Lesser consumption of cement for M-20 Concreate Grade and above Faster de shuttering of formed work Reduced construction time with a superior and wide range of cement catering to every conceivable building need, Zuari Cement is a formidable player in the cement market.
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A Study on Financial Position

Here are just reasons why Zuari Cement is chosen by billions of people Ideal raw material Low lime and magnesia content and high proportion of silicates Greater fineness Slow initial and fast final setting Wide range of applications Quality customer services

LIST OF BOARD OF DIRECTORS

S. No
1 2 3 4 5 6 7 8

NAME
Shri K.K. Birla Shri H.S. Bawa Shri Maurizio canepple Shri R.Danielli Shri O.P.Jagetiya Shri M.Lefebvre Shri Y.R. Nanot Shri S.K. Poddar

DESIGNATION
Chairman Director Executive Director Director Whole Director Director Director director Time

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A Study on Financial Position

CHAPTER-3

PREAMBLE
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A Study on Financial Position

In India the cement industry is one of the major and oldest, manufacturing industries in the economy. It is indigenous industry in which the country is the wells endowed with all necessary raw materials, skilled manpower, equipment, technology and transport and know how. It produces a commodity that is useful in various constructions. It is a contribution to the development of modern civilization. It is a vital industry that, assumes a crucial part in the economic growth and development of the country. To every development effort from the construction of small house to multipurpose project, cement constitutes basic industry. So, in modern life and in developing countries like India, cement is more essential for the construction of so many projects, dams bridges, buildings and industries. It is indeed gratifying that the country is heading towards the era of cement. After the partial decontrol of cement in February 1982 gave impact us to growth and development of the cement industry. Cement is available to consumers thought the country. Industry has witnessed spectacular progress mainly due to the forces of economic liberalization and the jettisoning of price controls and capacity restrictions.

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A Study on Financial Position

INTRODUCTION:
Cement is a key infrastructure industry. It has been decontrolled from price and distribution on 1st march, 1989 and deli censed on 25th July, 1991. However, the performance of the industry and prices of cement are monitored regularly. The constraints faced by the industry are reviewed in the Infrastructure Coordination Committee meetings held in the Cabinet Secretariat under the Chairmanship of Secretary (Coordination). Its performance is also reviewed by the Cabinet Committee on Infrastructure.

CEMENT INDUSTRY HISTORICAL PERSPECTIVE

Cement like steel is one of the basic materials for the technical development of the country. Cement, as a building material has been known in one from or another since the time of ancient Sindh Civilization at Civilization at Mohenjadaro in India. Though it has a long history of its manufacturing is relatively of recent origin. Cement industry is one the major and oldest established manufacturing industries in the modern sector of the Indian economy. It is an indigenous industry in which the company is well endowed with all the necessary raw materials, skilled manpower, equipments, and a machinery technology. It produces a commodity that enters into various construction, investment and welfare activities in almost every segment of the economy. Cement is required by firms, bridges, buildings, water supply projects, dams, roads, hydroelectric power projects, seaports, airports, and irrigation schemes. Thus this industry plays a crucial part in the economic development of the country. Thus it regards, as major nation building industry whose importance in a developing economy can never be over emphasized. The information about the preparation and use of the cement before 18th century was scantly. Egyptians are known as the first users of cement. The Greek civilization used some of mortar but Romans has developed it. When one speaks about the cement industry, it invariably refers to Portland cement, which has its origin in England, but until the 19th century a mixture of limestone with pozland of volcanic earth was known as cement. The first cement factory was
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A Study on Financial Position

established around 1890 in both Canada and Australia, while it was invented in 1884 in New Zealand. The cement industry occupies a position of predominance not only in an infrastructure for development but also it is eight largest in the world, which directly employs about millions of persons.

RECENT SCENARIO OF CEMENT INDUSTRY

The cement industry was one of the few industries to be liberalized in the 1980. The government partially decontrolled the cement industry in 1982 followed by total decontrol in 1989. The cement industry has witnessed spectacular progress mainly due to the forces of economic liberalization and the jettisoning of price controls of capacity restrictions. This act generated tremendous interest and within a decade nearly 30 million tones capacity was added to the exiting cement, which checked price rise. To add that healthy competition among the place improved the quality of cement. This turn has helped the Indian cement industry to continue its impressive performance over the years. During the fiscal year 1955- 56, cement production touched a new peak of 69 million tones as against 62.47 million tones in the previous year representing a remarkable growth of 10 percent. The year 1955-56 witnessed a hoping 12% increased a demand for cement the highest ever in the last decade. In the year 1966-67 the demand has continued to

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A Study on Financial Position

growth at still high rare. The first quarter has witnessed 14% growth over the previous year. Considering the government emphasis on improving infrastructure in the country and the various planes it has announced in this direction, the upward trend of the cement industry is expected to continue.

NEW

TECHNOLOGIES

New technologies such as online x-ray analyzer per blending of coal, vertical roller mills for raw material grinding and cement grinding high efficiency separators 5 to 6 stages pre heaters, and total computerized control operations have let to increased productivity and consistent quality.

Cement industry shown a very remarkable growth rate with the total installed capacity touching about 97 million tones (matt) per annum with a cement production of

68.47 million Tones during the year 1955-56. Out of this production of 68.47 million tones during the year Indian
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A Study on Financial Position

countries to enjoy the prestige of being the largest cement producer in the world after Japan, U.S.A, and China, with 106 ants belonging to 54 companies.

The per capita consumption of cement in India is low at 63kgs compared to 24kgs in China. This clearly shapes the scope for increase in per capital consumption. Of cement in out country that in the need for increase in housing facilities etc., demand for cement.

CEMENT INDUSTRY IN INDIA:

In India it came to be established during the beginning of 20 century. In fact the cement era in India commenced with the establishment of a small cement factory at WASHERMANPET in 1904 by South India industry Ltd. a company that dates to 1879. The potential capacity of this plant was only 10,000 metric tones per annum. This was the first attempt of manufacturing Portland cement with cat carious seashells as a principal raw material. There was sufficient demand for that product, but because of technological defects and inadequate supply of raw materials, the plant did not operate economically, a later on collapsed. India is ranked forth in the world after China, Japan, and USA in cement production. Yet the per-capital consumption of cement in India however low at 70 to 80 kgs against the world average of around 220kgs.
th

Cement industry in India is eight decades old. However, the growth has not kept pace with period of its existence. Decades of the government control have restricted the growth of the industry. The real foundation stone of the present industry was laid in the year 1942, when a small factory was
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A Study on Financial Position

established Porbandar in Kaythiwar by India Cement Limited. This factory commenced its production in 1914 at the rate of 199 metric tones per day. This company adopted dry process. This plant had easy access of limestone quarries of Porbandar. This initial attempt could cause the attempt of two or more factories. One at Kanthi (MP) another at Lakhier (Rajasthan) Kanthi Cement Limited and Bundi Portland Cement Limited respectively in January 1915 and December 1916. The advent of the First Worland War gave fillip to this industry and the output of the plants was under government control. The government control was lifted immediately after the world war and the boom period of the industry started. The demand for cement increased very steadily as the cement was used not only for housing but also for dams, roads, bridges and other developed activities. The analysis of the data concerning cement dispatch showed that the demand for cement rising particularly in the Northern states, ASS, L&T, Grasim, ZUARI, Centurty, Euka and many others who have plants in Northern states had reported increase in capacity utilization.

As selling prices remained low and the output not be raised the desired rate. There was unsatisfied demand for the materials. On February 28th 1982 when government of India announced the decontrol of cement it made

In the beginning of new era for the cement industry, in March 1989, the government withdrew all restrictions on distribution and pricing. As a result of this with in a decade nearly 34 million tones was added. The production control disappeared completely in 1991 with de licensing. Dependence on imported cement was stopped after 1986-87.

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A Study on Financial Position

The demand for cement would go up significantly with the acceleration in the economic growth. Cement industry would likely to grow at the rate of 8 to 10 percent annually to satisfy the increasing needs of domestic demand as well as growing export market. The industry has a turnover of around Rs.19, 500Crores and accounts for direct and indirect employment of 110 million persons. Private sectors contribute over 85 percent of cement output in the country. India has 165 large cement plants and more than 315 mini cement plants. Cement industry has made a tremendous progr3ess in both capacity addition and production. There is a slow down in infrastructure and real estate projects. Hence, cement market is depressed since growth of the economy is leasing to investments in infrastructure and housing sector and as the cement industrys growth in seen to and linked with growth of the economy. Cement companies are planning, expansion, integration and diversification.

A new impetus to the cement industry was provided during the post independence period through setting up of targets for cement production less than five-year plans.

CEMENT INDUSTRY IN ANDHRA PRADESH

Cement was first manufactured in America in the year 1875. In India, in 1914 the India Cements Company Limited was established a cement factory at Portland. Andhra Pradesh is the second largest cement production state in India, one third of the limestone (138crore tones) is available in A.P.I.A.P. the cement production was started in 1936 with two factories. Of these two factories one is Andhra Cement Company Limited and another in Krishna Cement Factory. One is on the side of Krishna Cement Factory. One is on the side of Krishna River and another is in between Krishna and Guntur districts respectively. In 1995, one more factory was established at Panyam in Kurnool Dist., named as Panyam Cement and mineral industries. At the same time one more factory has
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A Study on Financial Position

been established at Maacherla in Guntur district. At the end of July 1985 the total capital invested on cement industry was Rs.427.81lakhs and provided employment for 1262 persons and 19 factories were functioning with a production of 85lakh tones. Today there are 18 large scale cement plants and 18 mini cement plants in the state, with the total capacity of 1.80crore tones per annum and it is expected to rise to 2.15crore tones per annum in the year 1989-90. Our state consumes 217lakhs of cement per annum. The remaining production is distributed to other states. Power cut is the main reason for low production in Andhra Pradesh. During to their heavy coal prices, railway freight, etc., it is very difficult to service the cement industry in Andhra Pradesh. Today, Portland cement is an essential commodity on which our modern standard of living is greatly dependent. Buildings, water supply projects, dams, bridges, roads hydro electric power project, seaports, airports, irrigation schemes etc., a;; demand cement. Cement is manufactured either by Wet Process or Dry Process. Wet process is remained popular for many years. With the modern development of the technique of dry missing of powered materials using compressed air, the dry process gained momentum. Nowadays in most of the plants cement is being manufacture by dry process.

The basic raw material for manufacturing cement is limestone. This is available in plenty in the form of limestone is ensured. The same is passed through crushes to bring it to required size.

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A Study on Financial Position

The raw materials consist of limestone, iron ore and bauxite or literate, in the correct proportions are fed into a grinding mill where they are reduced to a very fine of compressed air. The power from the storage ribs is fed into rotary kiln; the material is subjected to a temperature of about 1500 C. chemical reaction takes place between the various materials resulted in the formation of cement compounds like tri calciyum silicate (about 24%), decalcium silicate (about 20%), tri calcium aluminate (about 7 to 10%), tetra calcium alumino ferrite (about 10 to 12%).

CAPACITY AND PRODUCTION:

The cement industry comprises of 125 large cement plants with an installed capacity of 148.28 million tones and more than 300 mini cement plants with an estimate capacity of 11.10 million tones per annum. The cement Corporation of India, which is a Central Public Sector Undertaking, has 10 units. There are 10 large cement plants owned by various State Governments. The total installed capacity in the country as a whole is 159.38 million tones as against a production of 106.90 million tones in 2001-02, registering a growth rate of 8.84%. Keeping in view the trend of the growth of the industry in previous years, a production target of 126 million tones has been fixed for the year 2003-04. During the period April June 2003, a production (provisional) was 31.30 million tones. The industry has achieved a growth rate of 4.86 percent during this period.

EXPORTS:
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A Study on Financial Position

Apart from meeting the entire domestic demand, the industry is also exporting cement and clinker. The export of cement during 2001 -02 and 2003 04 was 5.14 million tones and 6.92 million tones respectively. Export during April May 2003, was 1.35 million tones. Major exporters were Gujarat Ambuja Cements Ltd., & L&T Ltd.,

RECOMMENDATIONS ON CEMENT INDUSTRY:

For the development of the cement industry Working Group on Cement Industry was constituted by the planning commission for the formulation of X five year plan. The working groups has projected a growth rate of 10% for the cement industry during the plan period and has projected creation of additional capacity of 40-62 million tones mainly through expansion of existing plants. The Working Group has identified following thrust areas for improving demand for cement: I. Further push to housing development programs; II. Promotion of concrete Highways and roads; and III. Use of ready mix concrete in large infrastructure projects.

Further, in order to improve global competitiveness of the Indian Cements Industry, the department of industrial policy & Promotion commissioned a study on the global competitiveness of the Indian Industry through an organization of international repute, viz KPMG Consultancy Pvt., The report submitted by the organization has made several recommendations for making the Indian Cement Industry more competitive in the international market. The recommendation is under consideration.

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A Study on Financial Position

TECHNOLOGICAL CHANGE:

Cement industry has made tremendous strides in technological up gradation and assimilation of latest technology. At present 93 percent of the total capacity in the industry in based on modern and environment friendly dry process technology and only 7 percent of the capacity is based on old wet and semi-dry process technology. There is tremendous scope for waste heat recovery in cement plants and thereby reduction in emission level. One project for cogeneration of power utilizing waste heat in an Indian cement plant is being implemented with Japanese assistance under Green Aid Plan. The induction of advanced technology has helped the industry immensely to conserve energy and fuel and to save materials substantially. India is also producing different varieties of cement like Ordinary Portland Cement (OPC), Portland Pozzaland Cement (PPC), Portland Blast Furnace Slag Cement (PBFS), Oil Well Cement, Rapid Hardening Portland Cement, Sulphate Resisting Portland Cement, While Cement etc. Production of these varieties of cement conforms to the BIS specifications. It is worth mentioning that some cement plants have set up dedicated jetties for promoting bulk transportation and export.

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A Study on Financial Position

CHAPTER 4

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A Study on Financial Position

TOPIC OF THE PROFILE

LONG TERM CAPITAL BUDGET IN ZUARI CEMENTS
PRE-INVESTMENT STAGE In a planned economy, as in India, the identification of public sector projects needs to be done within the overall framework of national sect oral planning. All projects of every sector need to be identified scientifically at the time of plan formulation. In actual practice, however, it is observed that identification stage is the most neglected stage of the project planning. The five years plans indicate the broad strategy of planning economic growth rate and other basic objectives to be achieved during the plan period. The macro level planning exercise undertaken at the beginning of every five year plan indicates broadly the role of each sectors physical targets to be achieved and financial outlay, which could be made available for the sector during the plan period. The identification of a project in the five-year plan is not the sanction of the project for implementation. It provides only the green signal for the preparation of feasibility report for appraisal and investment decision. A preliminary scrutiny of the FR of the project is done in the ministry and thereafter copies of the feasibility report are submitted to the appraising agencies, viz. planning commission, bureau of public enterprises and the plan finance division of the ministry of finance.

49

A Study on Financial Position Thus the organizational responsibility for identifying these projects rests with the concerned administrative ministry, in consultation with its public enterprises. The essential steps for project identification and preparation relates to studying (I) imports (ii) substitutes (iii) available and raw material (IV) available technology and skills (v) inter-industry relationship (VI) existing industry (vii) development plan (viii) old projects etc. It may be mentioned that in actual practice, these steps are hardly scientifically studied and followed by the administrative ministry of public sector undertakings at the time of project identification. The public sector projects many a time come spontaneously on the basis of ideas and possibilities of demand or availability of some row materials and not an out come of scientific investigation and systematic search for feasible project. PROJECT FORMULATION The second stage of project cycle viz. project formulation, is a preinvestment exercise to determine whether to invest, where to invest, when to invest and how much to invest. The project feasibility reports are meant to provide required information for assessing technical, financial, commercial, organization and economic viability of the project planning in India, mainly because of relatively late realization of its importance. As a result, the investment decisions for large project in the past were taken on half-baked and ill-conceived projects and time-over runs of public sector project have become a regular feature rather than exception. In early seventies along with the setting up of the public investment board (PIB) the government created a new project appraisal division in the planning commission. This division prepared and circulated guidelines for preparing feasibility reports of industrial project in 1974. This guidelines, unlike earlier manual, indicates all the information and data required to be 50

A Study on Financial Position presented and analyzed in the feasibility report, so as to enable the appraisal agency to carry out

(i) Technical analysis to determine whether the specification of technical parameters are realistic, (ii) Financial analysis to determine whether the proposal is financially viable. (iii) Commercial analysis to determine soundness of the product specifications, marketing plans and organization structure and (iv) Economic analysis to determine whether a project is worthwhile from the point of view of nation and economy as a whole. The guidelines describes in details, the information required ton be given and analyzed on the following Issues: (a) General information of the sector (b) Objective of the proposal, (c) Alternative ways, if any of attaining the objective and better Suitability of the proposed project, (d) Project description gestation period, costs, (e)Technology Proposed, anticipated life of the projecetc. Demand analysis, total demand / requirements of the Country, Including anticipated imports and exports and Share of the proposed project, (f) Capital costs and norms assumed, activity wise and Year wise, (g) Operating cost and norms, (h) Revenue and benefits estimation etc.

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A Study on Financial Position PROJECT APPRAISAL

The appraisal of the project follows the formulation stage. The objective of the appraisal process is not only to decide whether to accept or reject the investment proposal, but also to recommend the ways in which the project can be redesigned or reformulated so as to ensure better technical, financial, commercial and economic viabilities. The project appraised which is an essential tool for judicious investment decisions and project selection is a multi disciplinary task. But many a times this is considered doubt, have played an important role in contributing systematic methods for forecasting the future and evolving appraisal methods to quantify socials costs and benefits, but they alone can not carry out complete appraisal of an investment. The need for project appraisal and investment decisions based on social profitability arises mainly because of the basic characteristics of developing countries limited resources for development and multiple needs objective of planning being economic growth with social justice. The project appraisal is convenient and comprehensive fashion to achieve, the laid down objectives of the economic development plan. The appraisal work presupposes availability of a certain minimum among of reliable and up to date in the country, as well as the availability of trained persons to carry out the appraisal analysis. As stated earlier the investment decision of public sector projects are required to be taken with in the approved plan frame work. The project appraisal division (PAD) prepares the comprehensive appraisal note of projects of centre plans was therefore setup in planning commission. The finance ministry issues expenditure sanctions for all investment proposals with in the frame work of animal budget. The plan finance division and the bureau 52

A Study on Financial Position of the public enterprises of the finance ministry are also are required to examine and give comments on the investment proposals of public.

CAPITAL BUDGETING IN ZUARI

All finance activity commences with in 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 tat a realistic cost estimate is made for the project reports for civil works are generally based on ZUARI schedule of rates with reasonable premium there on.

Cost of Generation The financing of public sector company is generally based on debt equity of 2:1 the general rate of interest chargeable by the central government on loan components is 10.5% (now enhanced to 11%). The plant life as provide under the electricity supply act, 1948 is 25 years and depreciation 53

A Study on Financial Position 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 in investment is Rs .1 crore and above. Since ZUARI is public sector undertaking, all the investment decisions have to be formally sanctioned by government after PIBs (public investment boards) clearance. 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. 80000 million to Rs. 100000 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 ZUARI

Finance Manager is the member of the 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 and the accuracy of the data are ensured by the finance manager. He satisfies himself on the validity of the data. 54

A Study on Financial Position The cement projects are extremely capital intensive and before large resources are committed to a scheme. A detailed feasibility study needs 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 Estimation Cost estimates and financial justification and returns of the project 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 context of cement projects because of insufficient cost data on the component of the project.

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

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A Study on Financial Position CHARTS INTER PRETATION OF COMPOSITION OF NET FIXED ASSETS IN TOTAL ASSETS DURING THE YEARS 2005-06 AND 2006-07 The percentage of net fixed assets to total assets ranges between 46.5% to 55.19% during the years 2005-06 and 2006-07.The amount of fixed assets increase significantly during the years 2005-06 and 2006-07.It implies that that the company has purchased about Rs170crs. Of fixed assets in between the years 2007-08 and 2005-06. It is also further observed that about Rs360crs of fixed assets were purchased in between the years 2005-06 and 2008-09.

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DATA ANALYSIS & INTERPRETATION

INTERPRETATION OF CHANGE IN NET FIXED ASSETS DURING THE YEARS 2007to 2011.

The amount of net fixed assets is found to slightly decrease in between the years 2006-07 and 2008-09. There is a drastic increase in the net fixed assets by 30.1% and 48.7% annually during the years 2005-06 and 2008-09.

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A Study on Financial Position PERCENTAGE OF NET FIXED ASSETS (Rs in crores) Formula of net fixed assets ratio = net fixed assets / total assets X 100 Years 2010-11 2009-10 2008-09 2007-08 2006-07 Net assets 110519 74322 57148 56993 58955 fixed Total assets 200218 138205 123031 113444 112637 Percentage 55.12 53.78 46.45 50.24 52.34

250000 200000 150000 100000 50000 0

Series 1 Series 2 Series 3

INTERPRETATION: The percentage of net fixed assets to total assets has consistently reduced in the first three years from 52.34% to 46.45% and later raised to a certain extent to 55.12% in 2006-07 indicating that significant purchase were made during the years 2005-06 and 2006-07.

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A Study on Financial Position INCREASE IN NET FIXED ASSETS (Rs. in crores) Year 2010-11 2009-10 2008-09 2007-08 2006-07 Chang in net fixed assets 36197 17174 155 -1962 -3609 Last year net fixed assets 74322 57148 56993 58955 62564 Percentage 48.7 30.1 .263 -3.33 -5.77

INTERPRETATION: The level of net fixed assets have slightly decreased between the year 2005-06 and 2006-07 and increased later marginally during the year 2007-08 the amount of fixed asset have some what increased by .263% during the year 2009-10 and increased from 57148\- to 74322\- , i.e. by about 49 % during the year 2008-09. Net fixed asset (Rs in crores) 59

A Study on Financial Position Current year net fixed assets / base year net fixed assets Percentage Year 2010-11 2009-10 2008-09 2007-08 2005-06 Current year net fixed assets 110519 74322 57148 56993 58955 Base year net fixed assets 58955 58955 58955 58955 58955

187.46 126.07 96.93 96.67 100

120000 100000 80000 60000 40000 20000 0

Current year net fixed assets Baseyear net fixed assets percentage

INTERPRETATION: 60

A Study on Financial Position Considering the year 2005-06 as the base year the level of fixed assets as an index shows 187.46% change compared to the base year [200607 = 100] after slightly decreasing between theyear2007-08 and 2008-09.

INVESTMENT (Rs in crores) YEAR 2010-11 2009-10 2008-09 2007-08 Current year investment 2887 2902 2819 2499 Base year investment 3968 3968 3968 3968 Percentage 72.76 73.14 71.04 63

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percentag e
74 72 70 68 66 64 62 60 58

percentage

INTERPRETATION: While the level of fixed asset slightly decreased in between the years 2005-06 and 2006-07 the level of current assets shows a consistent decrease from 3968\- to 2887\- in between the year 2005-06 and 2009-10.

TOTAL ASSETS (Rs in lack)

Year 2010-11

Current year total Base assets 200218 assets 112637

year

total Percentage 177.76

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2009-10 2008-09 2007-06 2006-07

138205 123031 113444 112637

A Study on Financial Position 112637 122.7 112637 112637 112637 109.23 100.72 100

INTERPRETATION: The level of total assets has consistently increased marginally in between the year 2005-06 & 2008-09. The increase has been significant in between the year 2005-06 & 2006-07 &2007-08.

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Fixed assets turnover ratio (Rs in lack) Cost of goods sold / net fixed assets (or) net sales / net fixed assets

Year 2010-11 2009-10 2008-09 2007-08 2006-07

Net sales 220410 161412 140396 129193 113708

Net fixed assets 110519 74322 57148 56993 58955

Net Sales/Net Fixed Asset 1.99 2.17 2.45 2.27 1.92

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INTERPRETATION: The fixed asset turn over has slightly improved in between the year 2005-06 & 2006-07 peaking to a maximum of 2.45 during the year 2009-10.

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A Study on Financial Position

DEBT AND EQUITY RATIO (Rs in lack)

Formula of debt and equity ratio = long term funds/share holders funds. Years Long term funds 87280 62136 50455 44663 44090 48828 60958 43124 Share holder funds 65444 41605 31715 34848 33879 33882 36192 34870 D / E ratio 1.33 1.49 1.59 1.20 1.30 1.44 1.67 -

2009-10 2008-09 2007-08 2006-07 2005-06

2004-05 2003-04 2002-03

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TEXT AND INTERPRETATION: The D/E ratio is calculated to measure the relative proportions of outsiders funds to shareholders funds invested in the company. Shareholders funds consist of preference share capital and equity share capital. Whether this ratio is 2:1 consists favorable financial position of the concern depends and to industry. A low ratio is generally viewed as favorable from long-term creditors point of view. Keeping in the view the interest of both the shareholders and long-term creditors D/E ratio of 2:1 is acceptable. The debt equity ratio, which ranges between 1.20 & 1.67 in between the year 2000-01 &2006-07, shows that there is a reasonable amount of financial risk.

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PROPRIETARY RATIO (Rs in lack) Formula of proprietary ratio=share holders funds/total assets Years 2009-10 2008-09 2007-08 2006-07 2005-06
2004-05 2003-04 2002-03

Share holders funds 65444 41605 31715 34848 33878 33882 36492 34869

Total assets 20022 13825 12304 11345 11264 11265 11799 87469

Proprietary ratio 0.32 0.30 0.25 0.30 0.30 0.30 0.31 0.39

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INTERPRETATION: The percentage of shareholders funds to total assets is show in a considerably lesser figure, which needs to be improved in order to ensure a good solvency position.

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CONCLUSION & SUGGESTIONS

CONCLUSIONS:-

It is observed that the turnover of financial assets has not improved much during the years 2005-06 & 2007-08. There is a significant increase in net fixed assets during the years 2005-06 & 2006-07, however there is no significant increase in the fixed assets turnover ratio during both of the years 2008-09 and 200910.

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SUGGESTIONS: The level of investment in fixed assets needs proper scrutiny and analysis to ensure efficient utilization of the same. There is a surge in the investment in fixed assets in the range of more than 17,000 lacks in 2005-06 & 36000 lacks in 2006-07. This requires close scrutiny & efficient management to result in effective generation of turnover out of the investment made in fixed assets. Commensurate to the investment in fixed assets during the are subject to should be further improved. years

2008-09 & 2009-10, the level of scrutiny to which these investments

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ABBREVIATIONS

PI CB CFS CCFS EAT EBIT CFAT PVS PVIF PBP ARR NPV IRR B/C

Profitability index. Capital budgeting Cash flows. Cumulative cash flows. Earnings after tax. Earnings before investment and tax. Cash flows after tax. Present value of cash flows. Present value of inflows. Pay back period. Average rate return. Net present value. Internal rate return. Benefit cost ratio.

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BIBLIOGRAPHY

AUTHOR NAME

TITLE OF THE BOOK Financial Management.

PUBLISHER

EDITION 3rd edition.

I. M. Pandey.

Vikas Publishers.

Prasanna Chandra. M.Y. Khan

Financial Management. & Financial Management.

Tata McGraw hill.

5th edition.

Tata Mc Grawhill.

8th edition.

P.K. Jain.

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S.P. Jain & K.L. Financial Narang. Management.

A Study on Financial Position Kalyani 3rd edition. Publishers.

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