Capital BudgetingZuari Cements

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A Study on Financial Position

A STUDY ON

CAPITAL BUDGETING

(With reference to ZUARI CEMENTLtd kadapa)

CHAPTER I

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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

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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 day-

to-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.

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A Study on Financial PositionCapital 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 long-

term 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

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A Study on Financial Positionbasic 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. To do this, a sound procedure to evaluate,

compare, and select projects is needed. This procedure is called capital

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.

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

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A Study on Financial Positionincreases, 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.

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CAPITAL BUDJETING DECISIONS:

Traditional Approach Modern Approach

(Or) (Or)

Non-discounted cash flows Discounted cash flows

Pay back period (PB) Net present value (NPV)

Accounting rate of return (ARR) Internal rate of return (IRR)

Profitability index (PI)

Discounted payable period

NET PRESENT VALUE (NPV)

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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):

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A Study on Financial PositionIt 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 where r=rate return

Reject if r


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A Study on Financial PositionProfitability 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.

PV of cash inflowsPI = -----------------------------

Initial cash out lay

Acceptance rule:

Accept if PI>I

Reject if PI


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A Study on Financial PositionPay 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 investmentPI = ----------------------------

Annual cash flow

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 PositionDiscounted 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 incomeARR = -------------------------------

Average investment

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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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

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A Study on Financial Positionqualified 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 level

Cost reduction plant level

Replacement (50% in India cover this level)

Expansion top management

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Diversification (in India, it is insignificant)

New product marketing department (or) plant manager

Replacing an old

Machine (or)

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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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 Position3. 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. IRR > Hurdle Rate and/orPayback < policy

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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) Benefits from these decisions are received in some

future which is uncertain, unpredictable and associated with risk.

ii) Cost incurred and befits received from capital budgeting

decision occur in different time periods, making comparison difficulty.

iii) 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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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 Position5. 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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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 PositionCement 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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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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CHAPTER-2

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ZUARI CEMENT

The Zuari Agro Chemicals Limited (ZACL) wasconceptualized on 12th May, 1967 with main objective ofManufacturing, Distributing and Marketing of fertilizer andother agricultural inputs. Zuari cement is a division of ZuariIndustries Limited, a company promoted by the Birla and U.S.multinational giant USX, having its registered office at JaiKisaan Bhavan, Zuari Nagar, Goa. The company is a part ofthe 4500 crore Birla Group, having primary interest infertilizers, Agro inputs, cement RTA furniture, engineeringservice, and home furniture etc.,

Zuari Cement is running under the flagship of Zuari AgroChemicals Limited. Zuari Cement is strategies located 6kmsaway from Yerraguntla town of kamalapuram taluka in KadapaDistrict, Andhra Pradesh. Railway line has been laidconnection the Yerraguntla station of Zuari Cement.

Zuari cement formerly known as Texmaco Cement, takeover by Zuari Agro Chemicals Limited in the year 1994. theplant was modernized and upgraded to increase theproduction capacity of 1500tonnes per day to 5500tonnes perday. In 1995 february 7th acquired it for an amount of137.78crores. Texmaco limited commenced its production in1985 with an installed capacity of 1500tpd. The annualcapacity of the plant is 9.7 million tones. The plant is currentlyperforming quite well with the production exceeding its rated

capacity.

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Zuari Group has identified cement as one of the corebusiness to grow. It has therefore, been decided to constitute

a separate corporate entity and hire off the cement business toit. To accelerate the growth and achieve capacity additionsquickly it decided to form a joint venture with a strategicpartner, after careful evaluation the multinational cementsgiant Italcementi Group was identified to be suitable partnerfor pursuing growth.

Zuari and Italcementi Groups has agreed to form a jointventure with 50 -50 equity sharing. The Zuari cement business

will get transferred to the joint venture company viz., ZuariCompany Limited.

It is proposed to have head quarters to have headquarters of Cement Business at Hyderabad. It is proposed toincrease the capacity of 1.7 MTPA in a span of 3 to 4 years.Italcement Group is the largest producer and distributor ofcement is European and one of the leaders in the world makerplace.

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 quartersin Bermago, Italy, Currently the group has 54 plants with aninstalled capacity of 40 MTPA clinkers, which translate tocement capacity of above 50 MTPA spread over 13 countries.

The group has also has 500 RMC plants all over the world. Theconsolidated group turnover in 1998 was 3.4 billion US$. Thegroup has excellent R & D and Machine design facilitates headquartered at Bermago, Italy, which renders technical supportto all over the group plants.

The main raw materials required for the cementmanufacture are limestone, iron ore, bauxite and literate

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gypsum. The limestone is begin excavated from limestonemines, which are located at a distance of half a km away fromthe plant within the lease area. The coal is being sourced from

Singareni Collienried Limited, Western coalfields and fromopen market. A colony accommodation for 125 employees islocated near the plant site. The water requirement for theprocess is being met from in Hanumangutty riverbed and borewell in plant side.

RAW MATERIALS

LIMESTONE:

Limestone is the major raw material for the cementindustry. Limestone constitutes 60 to 70 percent of the totalraw material costs. Nearly 1.5 1.6 tons of limestone isrequired for producing one ton of cement clinker limestone(calcium carbonate) is a rock of either sedimentary ormetamorphic origin with calcium oxide as its main constituent.In India limestone occurs mainly as sedimentary rocks andconstitutes 30 percent of the total sedimentary rocks in thecountry. Cement grade limestone is available in 21 states inthe country. About 65 percent of the cement plants in Indiauses sedimentary limestone and 20 percent use metamorphiccrystalline limestone. India has 85,980 million tones of cementgrade limestone deposits, which is enough to produce 100

million tones of cement for the next 500 years.

Total reserveNo. Of years limestone reserve would last =-------------------------------------

Avg,limestoneConsumption

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

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97.5million tons

= 922.02years

It is quite clear that Indias limestone reserves areadequate for the next several years. More over new reserveswould be discovered every year Limestone is mixedextensively in India and ranks second in production next tocoal mining. Major portion of limestone mining portion oflimestone 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 aregenerally located in close proximity of limestone deposits inMadhya Pradesh, Andhra Pradesh, Tamil Nadu, Karnataka,Rajasthan, and Gujarat.

The quality of required for the cement production shouldhave the following composition.

Lime : 50%Silica : 3%Alumina : 4%Iron oxide : 0.50%Magnesia : 0.50%Loss on Ignition : 43%

Total : 100%

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

GYPSUM:

Gypsum is another important required material for

cement manufacturing, constitutes about 5 percent of theweight of the cement. Gypsum is added in required quantity at

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the time of grinding of clinker. The clinker and the requiredamount of the Gypsum is added to control the setting time ofthe 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 flyash are also required for the manufacture of the cement. Blastfurnace slag is a waste product obtained from iron smeltingfurnace whereas fly ash is the left over ash from thermalpower station.

INPUTS:

Although limestone is the major raw material for cementindustry, the critical raw material is energy. How well thecompany uses coal and electricity and how much it costs willdetermine the success ratio for cement manufacturers. Majorinputs in cement manufacturing include coal, power andfreight.

COAL:

In India coal I am being used as the fuel for themanufacturing of cement. Else where in the world lignite,nature gas and oil are also used. They are not used in India ascontinuous supply of natural gas is not assured used by plantsin southern plants ogf India, like Dalmia Cement, Chettinadcement etc., as a supplement to coal which compensates the

storage for coal in this area. Non cooking coal of lower ashcontent is required by cement plants. It should be less than30%. A useful heat of 4500 kilocalories per kg of coal. Coal oflower 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 cementplants are located close to the limestone deposits, which maynot have coal deposits nearby.

POWER:

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Power constitutes about 10% of the total cementproduction costs. About 3 percent of the total power generatedin the country is used by cement industry. The average

consumption of power in the dry process kilns is around 125units per million tons of clinker.

FREIGHT:

Freight constitutes a very significant part of the coststructure of cement units in India. On an average freight fortransporting finished product alone forms 13.85% of the cost ofproduction of large cement plants. The main areas of freightcoast for the cement industries are

i. Transporting coal from the coal fields to the cementfactories.

ii. Transporting cement from the plants to their markets.

Limestone transport would be even costlier than

transporting coal or cement. Hence cement plants are locatedin cluster near limestone deposits. Indian railway is moving upto 60% of the total cement production.

PRODUCTION PROCESS:

Cement can be manufacture either by the wet process orby dry process. Many of the Indian cement plants use the wetprocess technology. However, the dry process is gainingmomentum and enjoys d definite advantage, as it is moreenergy efficient. Today many plants are switching over to dryprocess. In AP all cement manufactures are using the dryprocess technology.

Below table is presented to disclose information relatingto production capacity and actual production of cement

industry less than five year plans.

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PRODUCTION & PRODUCTION OF CEMENT:

Year Production Capacity(in million tones)

Production

1942 1.89 1.761947 2.22 1.481950-51(before plan) 2.28 2.221955-56(by the end of 1st

plan)5.02 4.60

1960-61(by the end of 2

nd

plan) 9.30 7.97

1965-66(by the end of 3rd

plan)12 10.97

1973-74(by the end of 4th

plan)19.76 14.66


plan)22.58 14.66


plan)42 30.13

1989-90(by the end of 7thplan)

61.56 45.41


plan)105.25 76.22

1999-2001 105.5 93.5

Source: Annual reports of Zuari Cement Ltd.,

TYPE OF ORGANISATION:

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Zuari Agro Chemicals Limited was incorporated in theyear 1967 as a public limited company under the CompanysAct. The main objective of the company was to manufacture

and sell nitrogenous and phosphatic fertilizers. Since 1990 thecompany diversified into manufacture and sale of cement andmarketing of bio fertilizers, bio pesticides and pesticides. Asthe name Zuari Agro Chemicals did not represent otheractivities mentioned above, it was decided to change the nameto Zuari Industries Limited. The change in the name wasapproved by the shareholders by the extra ordinary generalmeeting held on 9th February 1998, consequently the name ofthe company was changed to Zuari Industries Limited witheffect from 12th February 1998.

BUSINESS OPERATIONS:

Zuari Cements manufactures and sells cement andclinker. The selling activity is concentrated solely South India.

The business operations are controlled and managed by itsfour branch offices, which are located at Chennai, Cochine,Hyderabad and Banglore.

FUTURE PROSPECTS AND GROWTH:

The production capacity has increased form 5lakhtones per annum to 17lakh tones per annum. In the lastbefore year Zuari Cement has entered into joint ventureagreement with Italcementi Group, which is a multinationalcompany. The joint venture is for the manufacture and sale ofcement.

RAW MATERIALS AND REQUIRMENT:

Limestone, Iron ore, Bauxite, Gypsum and Coal are thebasic raw materials used in the manufacturing process ofcement. The average consumption of various raw materials isshown in the table.

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REQUIREMENTS OF RAWMATERIAL

S. No Raw material Tones perday

Consumption pertones of Cement

1 Limestone 7200 1.4 to 1.52 Additives 375 0.06 to 0.753 Bauxite iron ore coal 773 1.16 to 0.204 Gypsum 200 0.04 to 0.055 Product clinker 500 ------

Source: Annual reports of Zuari Cements Limited.,

NOTEDue to change in the quality of lime stone and coal, the

consumption of additives has been changed accordingly.

MATERIAL BALANCE:

Limestone + Additives Raw material

Raw material (1.46%) +coal Calcinations clinker

Clinker + Gypsum Ordinary Portland cement

Clinker + Fly ash Pozzoland Portland

NOTE:

Depending upon quality of raw materials the aboveconsumption may value.

PRODUCT PROFILE

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Zuari Cement manufactures and distributes its ownmain product lines of cement. It aims to optimize productionacross all the marketers, providing a completer solution for

customers needs at the lowest possible cost, an approachknown as strategic Integration of Activities. Cement is madefrom a mixture of 80 percent limestone and 20 percent clay.

These are crushed and ground to provide the raw meal, apale, flour like powder. Heated to around 1450o C (2642o F)rotating kilns, the meal undergoes complex chemicalchanges and is transformed into clinker. Fine grinding theclinker together with a small quality of gypsum producescement. Adding other constituents at this stage producescements for specialized uses.

PRESENTLY THE PLANT PRODUCES THREE TYPES OFPRODUCTS

1. 43 Grade Cement

2. 56 Grade Cement

3. Pozzoland Portland Cement

ADVANTAGES:

Here are five of the many reasons why Zuari 53 Gradeand 43 Grade cement edges out its competitors.

High compressive strength

Low heat of hydration

Better soundness

Lesser consumption of cement for M-20 Concreate Gradeand above

Faster de shuttering of formed work

Reduced construction time with a superior and widerange of cement catering to every conceivable building

need, Zuari Cement is a formidable player in the cementmarket.

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Here are just reasons why Zuari Cement is chosen bybillions of people

Ideal raw material

Low lime and magnesia content and high proportion ofsilicates

Greater fineness

Slow initial and fast final setting

Wide range of applications

Quality customer services

LIST OF BOARD OF DIRECTORS

S.No

NAME DESIGNATION

1 Shri K.K. Birla Chairman

2 Shri H.S. Bawa Director

3 Shri Maurizio canepple Executive Director

4 Shri R.Danielli Director

5 Shri O.P.Jagetiya Whole Time

Director6 Shri M.Lefebvre Director

7 Shri Y.R. Nanot Director

8 Shri S.K. Poddar director

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CHAPTER-3

PREAMBLE

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In India the cement industry is one of the major andoldest, 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 constitutesbasic 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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INTRODUCTION:

Cement is a key infrastructure industry. It has beendecontrolled from price and distribution on 1st march, 1989 anddeli censed on 25th July, 1991. However, the performance ofthe industry and prices of cement are monitored regularly. Theconstraints faced by the industry are reviewed in theInfrastructure Coordination Committee meetings held in theCabinet Secretariat under the Chairmanship of Secretary(Coordination). Its performance is also reviewed by the CabinetCommittee on Infrastructure.

CEMENT INDUSTRY HISTORICAL PERSPECTIVE

Cement like steel is one of the basic materials for thetechnical development of the country. Cement, as a buildingmaterial has been known in one from or another since the timeof ancient Sindh Civilization at Civilization at Mohenjadaro inIndia. Though it has a long history of its manufacturing isrelatively of recent origin. Cement industry is one the major

and oldest established manufacturing industries in the modernsector of the Indian economy. It is an indigenous industry inwhich the company is well endowed with all the necessary rawmaterials, skilled manpower, equipments, and a machinerytechnology. It produces a commodity that enters into variousconstruction, investment and welfare activities in almost everysegment of the economy.

Cement is required by firms, bridges, buildings, watersupply projects, dams, roads, hydroelectric power projects,

seaports, airports, and irrigation schemes. Thus this industryplays a crucial part in the economic development of thecountry. Thus it regards, as major nation building industrywhose importance in a developing economy can never be overemphasized. The information about the preparation and use ofthe cement before 18th century was scantly. Egyptians areknown as the first users of cement. The Greek civilization usedsome of mortar but Romans has developed it. When onespeaks about the cement industry, it invariably refers toPortland cement, which has its origin in England, but until the

19th century a mixture of limestone with pozland of volcanicearth was known as cement. The first cement factory was

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established around 1890 in both Canada and Australia, while itwas invented in 1884 in New Zealand.

The cement industry occupies a position of predominancenot only in an infrastructure for development but also it is eightlargest in the world, which directly employs about millions ofpersons.

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 tothe 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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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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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 of20th century. In fact the cement era in India commenced withthe establishment of a small cement factory atWASHERMANPET in 1904 by South India industry Ltd. acompany that dates to 1879. The potential capacity of thisplant was only 10,000 metric tones per annum. This was thefirst attempt of manufacturing Portland cement with catcarious seashells as a principal raw material. There wassufficient demand for that product, but because oftechnological 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 incement production. Yet the per-capital consumption of cementin India however low at 70 to 80 kgs against the world averageof around 220kgs.

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 presentindustry was laid in the year 1942, when a small factory was

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established Porbandar in Kaythiwar by India Cement Limited.This factory commenced its production in 1914 at the rate of199 metric tones per day. This company adopted dry

process. This plant had easy access of limestone quarries ofPorbandar. This initial attempt could cause the attempt of twoor more factories. One at Kanthi (MP) another at Lakhier(Rajasthan) Kanthi Cement Limited and Bundi Portland CementLimited respectively in January 1915 and December 1916. Theadvent of the First Worland War gave fillip to this industry andthe output of the plants was under government control. Thegovernment control was lifted immediately after the world warand the boom period of the industry started. The demand forcement increased very steadily as the cement was used not

only for housing but also for dams, roads, bridges and otherdeveloped activities.

The analysis of the data concerning cement dispatchshowed that the demand for cement rising particularly in theNorthern states, ASS, L&T, Grasim, ZUARI, Centurty, Euka andmany others who have plants in Northern states had reportedincrease in capacity utilization.

As selling prices remained low and the output not beraised the desired rate. There was unsatisfied demand for thematerials. On February 28th 1982 when government of Indiaannounced the decontrol of cement it made

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

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The demand for cement would go up significantly withthe acceleration in the economic growth. Cement industry

would likely to grow at the rate of 8 to 10 percent annually tosatisfy the increasing needs of domestic demand as well asgrowing export market. The industry has a turnover of aroundRs.19, 500Crores and accounts for direct and indirectemployment of 110 million persons. Private sectors contributeover 85 percent of cement output in the country. India has165 large cement plants and more than 315 mini cementplants. Cement industry has made a tremendous progr3ess inboth capacity addition and production. There is a slow down ininfrastructure and real estate projects. Hence, cement market

is depressed since growth of the economy is leasing toinvestments in infrastructure and housing sector and as thecement industrys growth in seen to and linked with growth ofthe economy. Cement companies are planning, expansion,integration and diversification.

A new impetus to the cement industry was providedduring 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 Limitedwas established a cement factory at Portland. Andhra Pradeshis the second largest cement production state in India, onethird 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 Limitedand another in Krishna Cement Factory. One is on the side ofKrishna Cement Factory. One is on the side of Krishna Riverand another is in between Krishna and Guntur districtsrespectively. In 1995, one more factory was established at

Panyam in Kurnool Dist., named as Panyam Cement andmineral industries. At the same time one more factory has

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been established at Maacherla in Guntur district. At the end ofJuly 1985 the total capital invested on cement industry wasRs.427.81lakhs and provided employment for 1262 persons

and 19 factories were functioning with a production of 85lakhtones.

Today there are 18 large scale cement plants and 18 minicement plants in the state, with the total capacity of 1.80croretones per annum and it is expected to rise to 2.15crore tonesper annum in the year 1989-90. Our state consumes 217lakhsof cement per annum. The remaining production is distributedto other states. Power cut is the main reason for low

production in Andhra Pradesh. During to their heavy coalprices, railway freight, etc., it is very difficult to service thecement industry in Andhra Pradesh.

Today, Portland cement is an essential commodity onwhich our modern standard of living is greatly dependent.Buildings, water supply projects, dams, bridges, roads hydroelectric power project, seaports, airports, irrigation schemesetc., a;; demand cement.

Cement is manufactured either by Wet Process or DryProcess. Wet process is remained popular for many years.With the modern development of the technique of dry missingof powered materials using compressed air, the dry processgained momentum. Nowadays in most of the plants cement isbeing manufacture by dry process.

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

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The raw materials consist of limestone, iron ore andbauxite or literate, in the correct proportions are fed into agrinding mill where they are reduced to a very fine of

compressed air. The power from the storage ribs is fed intorotary kiln; the material is subjected to a temperature of about1500 C. chemical reaction takes place between the variousmaterials resulted in the formation of cement compounds liketri calciyum silicate (about 24%), decalcium silicate (about20%), tri calcium aluminate (about 7 to 10%), tetra calciumalumino ferrite (about 10 to 12%).

CAPACITY AND PRODUCTION:

The cement industry comprises of 125 large cementplants with an installed capacity of 148.28 million tones andmore than 300 mini cement plants with an estimate capacityof 11.10 million tones per annum. The cement Corporation of

India, which is a Central Public Sector Undertaking, has 10units. There are 10 large cement plants owned by variousState Governments. The total installed capacity in the countryas a whole is 159.38 million tones as against a production of106.90 million tones in 2001-02, registering a growth rate of8.84%.

Keeping in view the trend of the growth of the industry inprevious years, a production target of 126 million tones hasbeen fixed for the year 2003-04. During the period April June

2003, a production (provisional) was 31.30 million tones. Theindustry has achieved a growth rate of 4.86 percent during thisperiod.

EXPORTS:

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Apart from meeting the entire domestic demand, theindustry is also exporting cement and clinker. The export ofcement during 2001 -02 and 2003 04 was 5.14 million tones

and 6.92 million tones respectively. Export during April May2003, was 1.35 million tones. Major exporters were GujaratAmbuja Cements Ltd., & L&T Ltd.,

RECOMMENDATIONS ON CEMENT INDUSTRY:

For the development of the cement industry WorkingGroup on Cement Industry was constituted by the planning

commission for the formulation of X five year plan. Theworking groups has projected a growth rate of 10% for thecement industry during the plan period and has projectedcreation of additional capacity of 40-62 million tones mainlythrough expansion of existing plants. The Working Group hasidentified following thrust areas for improving demand forcement:

I. Further push to housing development programs;

II. Promotion of concrete Highways and roads; and

III. Use of ready mix concrete in large infrastructureprojects.

Further, in order to improve global competitiveness ofthe Indian Cements Industry, the department of industrial

policy & Promotion commissioned a study on the globalcompetitiveness of the Indian Industry through an organizationof international repute, viz KPMG Consultancy Pvt., The reportsubmitted by the organization has made severalrecommendations for making the Indian Cement Industry morecompetitive in the international market. The recommendationis under consideration.

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TECHNOLOGICAL CHANGE:

Cement industry has made tremendous strides intechnological up gradation and assimilation of latesttechnology. At present 93 percent of the total capacity in theindustry in based on modern and environment friendly dryprocess technology and only 7 percent of the capacity is basedon old wet and semi-dry process technology. There istremendous scope for waste heat recovery in cement plantsand thereby reduction in emission level. One project for co-generation of power utilizing waste heat in an Indian cementplant is being implemented with Japanese assistance underGreen Aid Plan. The induction of advanced technology hashelped the industry immensely to conserve energy and fueland to save materials substantially. India is also producingdifferent varieties of cement like Ordinary Portland Cement

(OPC), Portland Pozzaland Cement (PPC), Portland BlastFurnace Slag Cement (PBFS), Oil Well Cement, RapidHardening Portland Cement, Sulphate Resisting PortlandCement, While Cement etc. Production of these varieties ofcement conforms to the BIS specifications. It is worthmentioning that some cement plants have set up dedicated

jetties for promoting bulk transportation and export.

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CHAPTER 4

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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 oralplanning. 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.

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A Study on Financial PositionThus 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 pre-

investment 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

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A Study on Financial Positionpresented 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 PositionPROJECT 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 within the frame work of animal budget. The plan finance division and the bureau

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A Study on Financial Positionof 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 costsare 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

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A Study on Financial Positionbased 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 satisfieshimself on the validity of the data.

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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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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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PERCENTAGE OF NET FIXED ASSETS (Rs in crores)

Formula of net fixed assets ratio = net fixed assets / total assets X 100

Years Net fixed

assets

Total assets Percentage

2010-11 110519 200218 55.12

2009-10 74322 138205 53.78

2008-09 57148 123031 46.45

2007-08 56993 113444 50.24

2006-07 58955 112637 52.34

050000

100000150000200000

250000

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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INCREASE IN NET FIXED ASSETS (Rs. in crores)

Year Chang in netfixed assets

Last year net fixedassets

Percentage

2010-11 36197 74322 48.7

2009-10 17174 57148 30.1

2008-09 155 56993 .263

2007-08 -1962 58955 -3.33

2006-07 -3609 62564 -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)

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Current year net fixed assets / base year net fixed assets

YearCurrent year

net fixedassets

Base yearnet fixedassets

Percentage

2010-11 110519 58955 187.46

2009-10 74322 58955 126.07

2008-09 57148 58955 96.93

2007-08 56993 58955 96.67

2005-06 58955 58955 100

0

20000

40000

60000

80000

100000

120000

Current yearnet fixed

assets

Base year net

fixed assets

percentage

INTERPRETATION:

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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 [2006-

07 = 100] after slightly decreasing between theyear2007-08 and 2008-09.

INVESTMENT (Rs in crores)

YEAR Current yearinvestment

Base yearinvestment

Percentage

2010-11 2887 3968 72.76

2009-10 2902 3968 73.14

2008-09 2819 3968 71.04

2007-08 2499 3968 63

61


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5860

62646668707274

percentage

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 Current year total

assets

Base year total

assets

Percentage

2010-11 200218 112637 177.76

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A Study on Financial Position2009-10 138205 112637 122.7

2008-09 123031 112637 109.23

2007-06 113444 112637 100.72

2006-07 112637 112637 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 Net sales Net fixed assets Net Sales/NetFixed Asset

2010-11 220410 110519 1.99

2009-10 161412 74322 2.17

2008-09 140396 57148 2.45

2007-08 129193 56993 2.27

2006-07 113708 58955 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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DEBT AND EQUITY RATIO (Rs in lack)

Formula of debt and equity ratio = long term funds/share holders funds.

66

Years Long term funds Share holder funds D / E ratio

2009-10 87280 65444 1.33

2008-09 62136 41605 1.49

2007-08 50455 31715 1.59

2006-07 44663 34848 1.20

2005-06 44090 33879 1.30

2004-05 48828 33882 1.44

2003-04 60958 36192 1.67

2002-03 43124 34870 -


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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 theshareholders 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 Share holders funds Total assets Proprietary ratio

2009-10 65444 20022 0.32

2008-09 41605 13825 0.30

2007-08 31715 12304 0.25

2006-07 34848 11345 0.30

2005-06 33878 11264 0.30

2004-05 33882 11265 0.30

2003-04 36492 11799 0.31

2002-03 34869 87469 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 2009-

10.

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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 years

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

are subject to should be further improved.

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ABBREVIATIONS

PI Profitability index.

CB Capital budgeting

CFS Cash flows.

CCFS Cumulative cash flows.

EAT Earnings after tax.

EBIT Earnings before investment and tax.

CFAT Cash flows after tax.

PVS Present value of cash flows.

PVIF Present value of inflows.

PBP Pay back period.

ARR Average rate return.

NPV Net present value.

IRR Internal rate return.

B/C

Benefit cost ratio.

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BIBLIOGRAPHY

AUTHOR NAME TITLE OF THEBOOK

PUBLISHER EDITION

I. M. Pandey. Financial

Management.

Vikas Publishers. 3rd edition.

Prasanna

Chandra.

Financial

Management.

Tata McGraw hill. 5th edition.

M.Y. Khan &

P.K. Jain.

Financial

Management.

Tata Mc Grawhill. 8th edition.

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A Study on Financial PositionS.P. Jain & K.L.

Narang.

Financial

Management.

Kalyani

Publishers.

3rd edition.

Date post:	04-Apr-2018
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