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Microeconomic
Analysis of
Ballarpur Industries
Limite
“Microeconomics is the study of specific individual units;
particular firms, particular households,
individual industries particular commodities. The microeconomic
theory or price theory thus is the study of individual parts of the
economy. In microeconomic analysis we study the demand
analysis ( derive the market demand for a g
production function and the market structure of an individual
firm”
GROWTH
EXECUTION ANALYSIS REPORT
SUSTAINABILITY 2005-2010
Microeconomic
Analysis of
Ballarpur Industries
Limited
“Microeconomics is the study of specific individual units;
particular firms, particular households, individual prices, wages,
individual industries particular commodities. The microeconomic
theory or price theory thus is the study of individual parts of the
economy. In microeconomic analysis we study the demand
analysis ( derive the market demand for a good), cost analysis,
production function and the market structure of an individual
� � �
�
Submitted By:
ANALYSIS REPORT
2010
November 15
2011
Demand Analysis Cost Analysis Production Analysis
Market Structure
Submitted By: Nipun Goyal
Ist Semester, MBA - Gen
Section A
University Business School
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 1
I�TRODUCTIO�: I�DIA� PAPER
I�DUSTRY
he Indian Paper Industry is a booming industry and is expected to grow in the years
to come. The Indian Paper Industry is among the top 15 global players today, with
an output of more than 6 millions tones annually with an estimated turnover of Rs.
150,000 millions. (approx. USD 3400 million).Paper Industry in India is riding on a strong
demand and on an expanding mood to meet the projected demand of 13 million tonnes by
2020.A large number of expansion programme & expansion of capacities with an outlay of
Rs. 10,000 crores have been announced covering the various sectors like paper, paperboard,
newsprint etc.
The paper industry is regarded as one of the core sectors in India. The industry is estimated to
grow at 7-8% compounded rate until 2010. With over 600 mills in India, only few are
government owned, making it a largely private sector. Currently, the total paper market is
worth around RS 200 billion. Nineteen companies members of Indian Paper Manufacturer's
Association (IPMA), who control over 55% of the total aggregate industry revenue will
conjointly commit Rs 2.5 billion in the next two or three years to expand additional 2 million
tonnes of capacity and improve cost competitiveness.
The new millennium is going to be the millennium of the knowledge. So demand for paper
would go on increasing in times to come. In view of paper industry's strategic role for the
society and also for the overall industrial growth it is necessary that the paper
industry performs well.
Government has completely delicensed the paper industry with effect from17th July, 1997.
The Paper industry is a priority sector for foreign collaboration and foreign equity
participation upto 100% receives automatic approval by Reserve Bank of India. Several fiscal
incentives have also been provided to the paper industry, particularly to those mills which are
based on non-conventional raw material.
The usage of paper cannot be ignored and this awareness is bound to bring about changes in
the paper industry for the better. It is a well known fact that the use of plastic is being
objected to these days. The reason being, there are few plastics which do not possess the
property of being degradable, as such, use of plastic is being discouraged. Excessive use of
non degradable plastics upsets the ecological equilibrium. (Indian Paper Industry/Paper
Watch n.d.)
T
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 2
What keeps the Indian Paper industry
rolling?
n order to keep the Indian Paper industry rolling, the foremost thing which must be kept
in mind is the availability of the raw materials. Every possible effort is to be made to
take India at par with the other paper industries of the world. Application of paper is
varied and one cannot think of a life without paper. The raw materials need to be of good
quality. There should be enough modernized techniques to carry out production. Reducing
costs should be accompanied by low cost of production. Policies should be implemented to
bring about optimum production.
Softwood producing wood fibers make up the main raw material in the manufacturing
process worldwide. China and India are excluded from this category. The reason being wood
products availability is meager. Instead, straw, bagasse which are obtained as residues from
the agriculture industry are used for the production of paper. Indian paper industry uses used
paper for the manufacturing of paper after recycling. It has been estimated that around 40%
of paper used is recycled.
BILT: Ballarpur Industries Limited
allarpur Industries Limited (BILT) is a flagship of the US$ 4 bn Avantha Group and
India's largest manufacturer of writing and printing (W&P) paper. The current
chairman of the company is Gautam Thapar.
BILT's subsidiaries include Sabah Forest Industries (SFI), Malaysia's largest pulp and paper
company, and BILT Tree Tech Limited (BTTL), which runs BILT's farm forestry programme
in several states in India.
BILT has six manufacturing units across India, which give the company geographic coverage
over most of the domestic market. BILT has a dominant share of the high-end coated paper
segment in India. The company accounts for over 50% of the coated wood-free paper market,
an impressive 85% of the bond paper market and nearly 45% of the hi-bright Maplitho
market, besides being India's largest exporter of coated paper.
BILT’s acquisition of SFI in 2007 was a watershed event – it was the first overseas
acquisition by an Indian paper company. This acquisition transformed BILT into a major
regional player, and elevated the company's ranking among the global top 100. (Ballarpur
Industries Limited n.d.)
I
B
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 3
DEMA�D A�ALYSIS
Determinants of Demand for Paper
a) Advent of Global Business Houses: The advent of more and more global business
houses in different sectors has created more and more need of communication needs.
Paper being one of the strongest pillar of any communication, needs have increased
many times. Varied applications of the fine paper for annual reports, CSR reports,
catalogues, brochures, business cards, carry bags and packaging etc, makes this
product extremely important for the corporate world.
b) Changing lifestyles: With improving domestic living standards, demand for
speciality paper (tissue paper, fine art paper, business card paper and greeting card
paper) has increased. Moreover, the bent of young generation towards reading habit
has increased the demand of paper.
c) Increasing presence of modern retail formats: Opening of realty and retail sectors,
have increased the demand of paper and its uses in various type of communication
application. Following reasons have also contributed the growing demand for fine
paper.
• The advent of more and more branded paper.
• The growing acceptance of specialty paper.
d) Government Educational Policies: Demand for writing and printing paper is
expected to grow owing to the opening of more schools and colleges, driven by the
government’s thrust on education sector and overall economic growth. Example:
“Sarva Shiksha Abhiyaan”.
e) Packaging industry: The Indian paper industry has close linkages with economic
growth as higher industrial output leads to increased demand for industrial paper for
packaging, increased marketing spend benefits the newsprint and value-added
segments, and increased education and office activities increase demand for writing
and printing paper.
f) Low per capita consumption: India’s per capita paper consumption grew 10.6% in
2009-10 (from 8.3 kg in 2008-09 to 9.18 kg) compared with 42 kg in China and 350
kg in developed countries (Source: Assocham), implying a large scope for demand.
g) Population growth: According to 2011 census of India, India’s population accounts
for 17.5 % of the world’s population. India added 181 million to its population since
2001 and it is expected to grow at a very high rate. With the increasing population
more paper and paper products will be needed to satisfy the needs of the people.
Moreover the average age per person of India is around 26 years which clearly
indicates that there would be more demand for education which would further boost
the demand for paper.
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 4
h) Level of literacy: According to 2011 census of India, literacy rate increased to a total
of 74.04% from 64.83% in year 2001, which further indicates that with the increased
level of literacy, the demand for paper is expected to rise.
i) Growing economy: With the growing economy of India, there will be more demand
for paper products as consumers will have higher paying capacity.
j) Growing circulation and readership: Owing to the increased level of literacy, the
newspaper circulation and readers are also growing at a very high rate. Thus the
demand for paper is likely to rise.
k) Export opportunity: A number of European and US paper mills are shutting down
owing to overcapacity and cost issues, an attractive export opportunity for Indian
paper mills. Besides, Indian paper manufacturers, utilising agriculture-based raw
material, possess a sustainable growth opportunity on account of growing
environment consciousness.
For more details please refer to the below:
S.�O
PAPER
TYPE USES VARIETIES DEMA�D DRIVERS
1 Writing and printing paper
Writing, printing, stationery
Creamwove, maplitho, paperboard, copier and coated paper
Population growth, level of literacy, public and private spending on education, level of business activity, increasing presence of modern retail formats and growth in the printing industry
2 Paperboard Industrial purpose Kraft paper, recycled board and virgin board
Growth in the packaging industry, industrial production and development in packaging technology and substitution by other materials
3 Speciality paper
Tissue paper, fine art paper, paper for specialised industrial usages such as steel mill kraft, insulation grades, etc
Duplex, grey and white board and MG posters
Consumption of this paper variety is linked to the standard of living as well as per capita income.
4 Newsprint paper
Printing of newspapers and magazines
Glazed and standard paper
Growing economy, growing circulation and readership
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 5
REGRESSIO� A�ALYSIS
egression analysis is a statistical tool for the investigation of relationships between
variables. Regression analysis includes any techniques for modeling and analyzing
several variables, when the focus is on the relationship between a dependent
variable and one or more independent variables. More specifically, regression analysis helps
one understand how the typical value of the dependent variable changes when any one of the
independent variables is varied, while the other independent variables are held fixed.
Regression analysis is widely used for prediction and forecasting, where its use has
substantial overlap with the field of machine learning. Regression analysis is also used to
understand which among the independent variables are related to the dependent variable, and
to explore the forms of these relationships. In restricted circumstances, regression analysis
can be used to infer causal relationships between the independent and dependent variables.
A large body of techniques for carrying out regression analysis has been developed. Familiar
methods such as linear regression and ordinary least squares regression are parametric, in
that the regression function is defined in terms of a finite number of unknown parameters that
are estimated from the data. �onparametric regression refers to techniques that allow the
regression function to lie in a specified set of functions, which may be infinite-
dimensional.
Linear Regression
inear regression is an approach to modeling the relationship between a scalar
variable Y and one or more variables denoted X. In linear regression, data are
modeled using linear functions, and unknown model parameters are estimated from
the data. Such models are called linear models. The various regression equations which can
be used for forecasting exercise are:
Fitting Simple Linear Regression: In this case a straight line is fitted to the data
containing one dependent variable and only one independent variable, e.g.,
Sales = a + b*(Price)
Fitting of the straight line can be done by following methods:
i. Graphical Method
ii. Least Squares Method
i. Graphical Method: In graphical method, we plot the sets of data of the two
variable (dependent and independent variable) on the graph and a line is drawn
through all the points. Thereafter, the movement of the series is assessed and
future values of the variable are forecasted.
R
L
Microeconomic Analysis of Ballarpur Industr
Figure 1.0 shows how to project trend by graphical method, using the figures on sales for
paper products from the numerical example of Ballarpur Industries Limited cited below:
ii. Least Squares Method
the coefficients of a linear function. It is based on the minimisation of squared
deviations between the best fitting line and the original observations given. In this
method, we fit the data on deman
Year
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
1578 1553
2146
400
800
1200
1600
2000
2400
2800
2001 2002 2003
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005
Figure 1.0 shows how to project trend by graphical method, using the figures on sales for
paper products from the numerical example of Ballarpur Industries Limited cited below:
Least Squares Method: Least squares estimation is a powerful tool to estimate
the coefficients of a linear function. It is based on the minimisation of squared
deviations between the best fitting line and the original observations given. In this
method, we fit the data on demand and time in the form of equations and then
Year
Bilt Sales
(In Rs. crs…..)
2001 1578
2002 1553
2003 2146
2004 2280
2005 2011
2006 2085
2007 2376
2008 1050
2009 1076
2010 1,100.00
Figure 1.0 Graphical Trend
2146
2280
20112085
2376
1050
2003 2004 2005 2006 2007 2008
Limited, Year: 2005-2010 6
Figure 1.0 shows how to project trend by graphical method, using the figures on sales for
paper products from the numerical example of Ballarpur Industries Limited cited below:
Least squares estimation is a powerful tool to estimate
the coefficients of a linear function. It is based on the minimisation of squared
deviations between the best fitting line and the original observations given. In this
d and time in the form of equations and then
1076 1100
2009 2010
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 7
project the demand for the future period. These equations are termed as normal
equations and the task of least square method is to find out the values of the
coefficients in these equations.
The Equation of the linear trend is given by: Y =a + b X, where a is the intercept of the
demand curve, b is the slope of the curve (a and b are known as regression coefficients) and
X is the deviation from mean of independent variable. We can find the values of a and b
using the normal equations:
∑Y= n.a + b∑X
∑Y.X= a∑X + b∑X2
Let us explain linear trend projection with the help of a numerical example, data being the
same as taken in the graphical method:
Here n=9, i.e. odd and therefore, we shift the origin to the middle time period, viz., the year
2006.
Computation Of Trend Values (Standalone Data)
Year
(t)
BILT Sales
(In Rs. Crs…)
(Y) X=t - Middle Pt. X2 X*Y
Trend Values
Y= 1740.77 – 118.61x
2002 1553 -4 16 -6212 2215.21
2003 2146 -3 9 -6438 2096.6
2004 2280 -2 4 -4560 1977.99
2005 2011 -1 1 -2011 1859.38
2006 2085 0 0 0 1740.77
2007 2376 1 1 2376 1622.16
2008 1050 2 4 2100 1503.55
2009 1076 3 9 3228 1384.94
2010 1,100.00 4 16 4400 1266.33
∑Y= 15677 ∑X= 0 ∑X2=60 ∑X*Y= -7117
Microeconomic Analysis of Ballarpur Industr
The equation for linear trend is given by Y= a + b
The normal equations for estimating a and b are:
∑Y= na + b∑X and ∑Y.X= a∑X + b∑X
15667= 9a + 0
a= 15667/9
a= 1740.77
Solving the normal equations we get a= 1740.77 and b=
Hence the equation for linear trend is Y= 174
Trend values for the years 2002 to 2010 are obtained on putting the value of X corresponding
to the given year and have been tabulated in the last column of table drawn above.
Similarly, we can find the estimate sales of the commodity for 2011 and same will be
obtained on putting X= 5 in * equation, i.e.
Y2011= 1740.77 – 118.61 X 5
2215.21
2096.6
1977.99
500
1000
1500
2000
2500
2002 2003 2004
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005
The equation for linear trend is given by Y= a + b.X
The normal equations for estimating a and b are:
∑Y= na + b∑X and ∑Y.X= a∑X + b∑X2
-7117= 0 + 60b
b= -7117/60
b= -118.61
Solving the normal equations we get a= 1740.77 and b= -118.61
Hence the equation for linear trend is Y= 1740.77 + (-118.61)X
i.e. Y= 1740.77 – 118.61X ---------------
Trend values for the years 2002 to 2010 are obtained on putting the value of X corresponding
e been tabulated in the last column of table drawn above.
Similarly, we can find the estimate sales of the commodity for 2011 and same will be
obtained on putting X= 5 in * equation, i.e.
= 1147.72(Rs. In Crores)
1977.99
1859.38
1740.77
1622.16
1503.55
2004 2005 2006 2007 2008
Limited, Year: 2005-2010 8
7117= 0 + 60b
7117/60
118.61
--------------- *
Trend values for the years 2002 to 2010 are obtained on putting the value of X corresponding
e been tabulated in the last column of table drawn above.
Similarly, we can find the estimate sales of the commodity for 2011 and same will be
1384.94
1266.33
2009 2010
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 9
Ballarpur Industries Ltd. (Consolidated Data)
Linear Regression: Income vs Raw Material
All Figures In Billion Rs…..
Year
Income
(X)
Raw Material Expenses
(Y) X2 X.Y
Trend Values
Y= -3.576 + 0.546 X
2005 20.2 7.4 408.04 149.48 7.4532
2006 21.7 8.1 470.89 175.77 8.2722
2007 25.6 10.3 655.36 263.68 10.4016
2008 31.9 12.8 1017.61 408.32 13.8414
2009 30 13.4 900 402 12.804
2010 40.3 19.2 1624.09 773.76 18.4278
∑X= 169.7 ∑Y= 71.2 ∑X
2= 5076 ∑X.Y= 2173
7.48.1
10.3
12.813.4
19.2
7.45328.2722
10.4016
13.841412.804
18.4278
0
5
10
15
20
25
2005 2006 2007 2008 2009 2010
ACTUAL RAW MATERIAL EXPENSES (Y) TREND LINE : Y= -3.576 + 0.546 X
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 10
Ballarpur Industries Limited (Standalone Data)
Linear Regression: Income vs Raw Material
All Figures In Billion Rs…..
Year
Income
(X)
Raw Material Expenses
(Y) X2 X.Y
Trend Values
Y= -0.6314 + 0.474 X
2001 14.90 5 222.01 74.5 6.4312
2002 14.50 5.03 210.25 72.935 6.2416
2003 19.90 8.7 396.01 173.13 8.8012
2004 20.70 9 428.49 186.3 9.1804
2005 18.20 8.6 331.24 156.52 7.9954
2006 19.10 8.7 364.81 166.17 8.422
2007 21.80 10.20 475.24 222.36 9.7018
2008 10.20 4.6 104.04 46.92 4.2034
2009 10.70 5.1 114.49 54.57 4.4404
2010 10.90 5.12 118.81 55.808 4.5352
∑X= 161 ∑Y= 70 ∑X2= 2765 ∑X.Y= 1209
5 5.03
8.7 98.6 8.7
10.2
4.65.1 5.12
6.4312 6.2416
8.80129.1804
7.99548.422
9.7018
4.2034 4.4404 4.5352
0
2
4
6
8
10
12
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
ACTUAL RAW MATERIAL EXPENSES (Y) TREND LINE: Y= -0.6314 + 0.474 X
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 11
�on Linear Regression
onlinear regression is a form of regression analysis in which observational data are
modeled by a function which is a nonlinear combination of the model parameters
and depends on one or more independent variables. The non linear equation can take
any one of the forms : parabolic, logarithmic, exponential etc. depending on the way the trend
of the dependent variable behaves.
Fitting �on-Linear Regression: Some of the popular methods are the following:
i. Logarithmic Model:
Y= a.bX
Taking logarithm on both sides, we get , Log Y= Log a + X Log
i.e. Y1= A + B.X ,where Y1= Log Y , A= Log a and B= Log b
Normal Equations for estimating A and B are:
∑Y= n.A + B∑X
∑X.Y= A∑X + B∑X2
We solve these equations to get the value of A and B and finally we get, a= antilog A and
b= antilog B.
ii. Parabolic Regression Model: Sometimes we need to fit a curved trend line which by
a change in variable, could not be reduced to a linear form. The curved line can be
second degree polynomial or third degree polynomial etc. Let us assume that it is a
second degree polynomial given by the equation:
Y= a +b.X+c.X2
The normal equations for calculating a, b and c are:
∑Y= na + b∑X+ c∑X2
∑X.Y= a∑X + b∑X2 + c∑X3
∑X2.Y= a∑X2 + b∑X3 + c∑X4
�
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 12
iii. Multiple Regression Analysis: When more than one independent variable is taken in
the regression model, we get multiple regression coefficients and equations. A
multiple regression model, say for sales, may be stated as:
Sales = a*price + b*advertising + c*income + d*rivals price levels + e*personal disposable
income + u, where a, b, c, d and e are the partial regression coefficients which show the
effect of corresponding variables on sales. For example, a represents the percentage change
in sales as a result of 1% change in price, other things remain constant. Similarly b shows the
percentage change in sales as a result of 1% change in advertising outlay and so on. The
constant u represents the effect of all the variables which have been left out in the equation
but have an effect on sales.
In the above equation, sales is the dependent variable and all the variables on the right hand
side of the equation are independent variables. If the expected values of the independent
variables are substituted in the equation, the sales will be forecasted. The main advantage of
this model is that the effect of a large number of variables can be taken into account. Also,
this type of model enables the businessman to experiment with what might happen under
extreme or unlikely conditions. He might for example, like to find out the effect of doubling
of his rivals’ price, or reducing his own advertising outlay on his total sales. He can simply
inject these values into the model and get the required results.
Let us explain multiple regression analysis with the help of a numerical example.
Income = β0 + β1*Sales + β2*Salaries & Wages + β3*Raw Material Expense + β4*Selling
Expense
Year Income Sales Salaries
Raw Material
Expense
Selling & Dist.
Expenses
2005 2026.48 2011.72 105.86 740.54 39.67
2006 2169.56 2130.23 114.3 810.04 37.82
2007 2557.6 2531.5 105.73 1029.52 39.35
2008 3188.62 3052.76 34.89 1285.21 66.51
2009 3009.42 2975.03 49.12 1343.3 70
2010 4031.55 3986.5 52.03 1920.78 162.67
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 13
Using SPSS software, the above written model i.e :
Income = β0 + β1*Sales + β2*Salaries & Wages + β3*Raw Material Expense + β4*Selling
Expense
Will get reduce to
Income = β0 + β1*Sales + β2*Raw Material Expense
Now, putting values in the above equation, we get
Income = -481.441 + 1.627*Sales – 1.020*Raw Material Expense
i.e., we can analyze from the above equation that:
1. If sales are increased by 1 unit, then Income will be increased by 1.627 units.
2. If raw material expenses are increased by 1 unit, then income will be reduced by
1.020 units.
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 14
COST A�ALYSIS
y "Cost" we mean the sacrifice or foregoing that has occurred or has potential to
occur in future measured in monetary terms.
The following elements are included in the cost of production: Purchase of raw machinery,
Installation of plant and machinery, Wages of labour, Rent of Building, Interest on capital,
Wear and tear of the machinery and building, Advertisement expenses, Insurance charges,
Payment of taxes, In the cost of production, the imputed value of the factor of production
owned by the firm itself is also added, The normal profit of the entrepreneur is also included
in the cost of production.
The different types of costs are:
a) Actual Cost: Actual cost is defined as the cost or expenditure which a firm incurs for
producing or acquiring a good or service. The actual costs or expenditures are
recorded in the books of accounts of a business unit. Actual costs are also called as
"Outlay Costs" or "Absolute Costs" or "Acquisition Costs". Examples: Cost of raw
materials, Wage Bill etc.
b) Opportunity Cost: Opportunity cost is concerned with the cost of forgone
opportunities/alternatives. In other words, it is the return from the second best use of
the firms resources which the firms forgoes in order to avail of the return from the
best use of the resources. It can also be said as the comparison between the policy
that was chosen and the policy that was rejected. The concept of opportunity cost
focuses on the net revenue that could be generated in the next best use of a scare
input.
If a firm owns a land, there is no cost of using the land (i.e., the rent) in the firms
account. But the firm has an opportunity cost of using the land, which is equal to the
rent forgone by not letting the land out on rent.
c) Sunk Cost: Sunk costs are those do not alter by varying the nature or level of
business activity. Sunk costs are generally not taken into consideration in decision -
making as they do not vary with the changes in the future. Sunk costs are a part of the
outlay/actual costs. Sunk costs are also called as "Non-Avoidable costs" or
"Inescapable costs". Examples: All the past costs are considered as sunk costs. The
best example is amortization of past expenses, like depreciation.
d) Incremental Cost: Incremental costs are addition to costs resulting from a change in
the nature of level of business activity. As the costs can be avoided by not bringing
any variation in the activity in the activity, they are also called as "Avoidable Costs"
or "Escapable Costs". More ever incremental costs resulting from a contemplated
change is the Future, they are also called as "Differential Costs"
Example: Change in distribution channels, adding or deleting a product in the
product line.
e) Explicit Cost: Explicit costs are those expenses/expenditures that are actually paid
by the firm. These costs are recorded in the books of accounts. Explicit costs are
B
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 15
important for calculating the profit and loss accounts and guide in economic
decision-making. Explicit costs are also called as "Paid out costs" Example: Interest
payment on borrowed funds, rent payment, wages, utility expenses etc.
f) Implicit Cost: Implicit costs are a part of opportunity cost. They are the theoretical
costs i.e., they are not recognized by the accounting system and are not recorded in
the books of accounts but are very important in certain decisions. They are also called
as the earnings of those employed resources which belong to the owner himself.
Implicit costs are also called as "Imputed costs". Examples: Rent on idle land,
depreciation on dully depreciated property still in use, interest on equity capital etc.
g) Book Cost: Book costs are those business costs which don't involve any cash
payments but a provision is made in the books of accounts in order to include them in
the profit and loss account and take tax advantages, like provision for depreciation
and for unpaid amount of the interest on the owners capital.
h) Out Of Pocket Costs: Out of pocket costs are those costs or expenses which are paid
to the outsiders of the firm. All the explicit costs fall into the category of out of
pocket costs. Examples: Rent Paid, wages, salaries, interest etc.
i) Accounting Costs: Accounting costs are the actual or outlay costs that point out the
amount of expenditure that has already been incurred on a particular process or on
production as such accounting costs facilitate for managing the taxation need and
profitability of the firm. Examples: All Sunk costs are accounting costs.
j) Economic Costs: Economic costs are related to future. They play a vital role in
business decisions as the costs considered in decision - making are usually future
costs. They have the nature similar to that of incremental, imputed explicit and
opportunity costs.
k) Direct Cost: Direct costs are those which have direct relationship with a unit of
operation like manufacturing a product, organizing a process or an activity etc. In
other words, direct costs are those which are directly and definitely identifiable. The
nature of the direct costs are related with a particular product/process, they vary with
variations in them. Therefore all direct costs are variable in nature. It is also called as
"Traceable Costs" Examples: In operating railway services, the costs of wagons,
coaches and engines are direct costs.
l) Indirect Costs: Indirect costs are those which cannot be easily and definitely
identifiable in relation to a plant, a product, a process or a department. Like the
direct costs indirect costs, do not vary i.e., they may or may not be variable in nature.
However, the nature of indirect costs depend upon the costing under consideration.
Indirect costs are both the fixed and the variable type as they may or may not vary as
a result of the proposed changes in the production process etc. Indirect costs are also
called as Non-traceable costs. Examples: The cost of factory building, the track of a
railway system etc., are fixed indirect costs and the costs of machinery, labour etc.
m) Controllable Costs: Controllable costs are those which can be controlled or
regulated through observation by an executive and therefore they can be used for
assessing the efficiency of the executive. Most of the costs are controllable.
Example: Inventory costs can be controlled at the shop level etc.
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 16
n) �on Controllable Costs: The costs which cannot be subjected to administrative
control and supervision are called non controllable costs. Example: Costs due
obsolesce and depreciation, capital costs etc.
o) Historical Costs and Replacement Costs: Historical cost or original costs of an
asset refers to the original price paid by the management to purchase it in the past.
Whereas replacement costs refers to the cost that a firm incurs to replace or acquire
the same asset now. The distinction between the historical cost and the replacement
cost result from the changes of prices over time. In conventional financial accounts,
the value of an asset is shown at their historical costs but in decision-making the firm
needs to adjust them to reflect price level changes. Example: If a firm acquires a
machine for $20,000 in the year 2000 and the same machine costs $40,000 now. The
amount $20,000 is the historical cost and the amount $40,000 is the replacement cost.
p) Shutdown Costs: The costs which a firm incurs when it temporarily stops its
operations are called shutdown costs. These costs can be saved when the firm again
start its operations. Shutdown costs include fixed costs, maintenance cost, layoff
expenses etc.
q) Abandonment Costs: Abandonment costs are those costs which are incurred for the
complete removal of the fixed asset from use. These may occur due to obsolesce or
due to improvisation of the firm. Abandonment costs thus involve problem of
disposal of the asset.
r) Urgent Costs and Postponable Costs: Urgent costs are those costs which have to be
incurred compulsorily by the management in order to continue its operations. If
urgent costs are not incurred in time the operational efficiency of the firm falls.
Example: Cost of material, labour, fuel etc.
Postponable costs are those which if not incurred in time do not effect the operational
efficiency of the firm. Examples are maintenance costs.
s) Business Cost and Full Cost: Business costs include all the expenses incurred by
the firm to carry out business activities. Costs Include all the payments and
contractual obligations made by the firm together with the book cost of depreciation
on plant and equipment. Full costs include business costs, opportunity costs, and
normal profits. Opportunity costs is the expected return/earnings from the next best
use of the firms resources like capital, land and building, owners efforts and time.
Normal profits is necessary minimum earning in addition to the opportunity costs,
which a firm must receive to remain in its present occupation.
t) Fixed Costs: Fixed costs are the costs that do not vary with the changes in output. In
other words, fixed costs are those which are fixed in volume though there are
variations in the output level.. If the time period in volume under consideration is
long enough to make the adjustments in the capacity of the firm, the fixed costs also
vary. Examples: Expenditures on depreciation costs of administrative, staff, rent,
land and buildings, taxes etc.
u) Variable Costs: Variable Costs are those that are directly dependent on the
output i.e., they vary with the variation in the volume/level of output. Variable costs
increase in output level but not necessarily in the same proportion. The
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 17
proportionality between the variable costs and output depends upon the utilization of
fixed facilities and resources during the production process. Example: Cost of raw
materials, expenditure on labour, running cost or maintenance costs of fixed assets
such as fuel, repairs, routine maintenance expenditure.
v) Total Cost, Average Cost and Marginal Cost: Total cost (TC) refers to the money
value of the total resources/inputs required for the production of goods and services
by the firm. In other words, it refers to the total outlays of money expenditure, both
explicit and implicit, on the resources used to produce a given level output. Total
cost includes both fixed and variable costs and is given by:
TC = VC + FC
Average Cost (AC) , refers to the cost per unit of output assuming that production of
each unit incurs the same cost. It is statistical in nature and is not an actual cost. It is
obtained by dividing Total Cost (TC) by Total Output (Q)
AC= TC/Q
Marginal costs(MC), refers to the additional costs that are incurred when there is an
addition to the existing output level of goods and services. In other words, it is the
addition to the Total Cost (TC) on account of producing additional units.
w) Short Run Cost and Long Run Cost: Both short run and long run costs are related
to fixed and variable costs and are often used in economic analysis.
Short Run Cost: The costs which vary with the variation in the output with size of the firm
as same. Short run costs are same as variable costs. Broadly, short run costs are associated
with variable inputs in the utilization of fixed plant or other requirements.
Long Run Cost: The costs which are incurred on the fixed assets like land and building,
plant and machinery etc., Long run costs are same as fixed costs. Usually, long run costs are
associated with variations in size and kind of plant.
For the cost analysis, the consolidated data of the expenses and income statements of the
company for the previous six years has been taken.
The expenses have been divided on various bases such as
� Raw material expenses
� Marketing expenses
� Compensation to employees
� Rent and lease rent
� Taxes
� Power, Fuel & Water expenses
� Selling and Distribution Expenses
� Repair & Maintenance Expenses
These are the major heads under which expenses are found.
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 18
The income has been divided on various bases such as
� Income from financial services
� Income from non-financial services
� Interest
� Dividends
� Treasury operations
� Other Income
� Prior period income and extraordinary income
� Industrial Sales
Ballarpur Industries Ltd. 2005 2006 2007 2008 2009 2010
(all figures in Rs. Crores……)
Total income 2026.48 2169.56 2557.6 3188.62 3009.42 4031.55
Sales 2011.72 2130.23 2531.5 3052.76 2975.03 3986.5
Industrial sales 1877.28 2130.17 2531.32 3052.28 2974.45 3985.67
Income from non-financial services 134.44 0.06 0.18 0.48 0.58 0.83
Income from financial services 8.21 14.52 15.12 84.99 20.93 33.62
Interest 5.6 14.52 15.12 84.99 20.88 22.76
Dividends 0 0 0 0 0 0
Treasury operations 2.61 0 0 0 0.05 10.86
Other income 2.77 6.4 9.87 12.71 8.27 10.09
Prior period income & extraordinary income 3.78 18.41 1.11 38.16 5.19 1.34
Change in stock 4.7 5.58 -19.96 2.13 47.44 12.92
Total expenses 1863.05 1961.1 2282.54 2887.13 2868.98 3804.06
Raw material expenses 740.54 810.04 1029.52 1285.21 1343.3 1920.78
Purchase of finished goods 119.48 92.36 49.47 12.42 41.76 56.67
Power, fuel & water charges 225.17 246.81 326.35 446.17 441.85 546.49
Compensation to employees 123.69 128.32 140.8 207.34 219.11 248.3
Indirect taxes 211.41 215.41 207.79 198.22 120.67 104.7
Lease rent & other rent 8.61 3.23 3.32 1.77 1.33 1.17
Repairs & maintenance 51.28 54.2 53.55 62.46 37.67 56.69
Insurance premium paid 6.41 6.04 5.85 4.99 7.83 8.77
Outsourced mfg. jobs (incl. job works, etc.) 4.28 8.29 8.23 11.06 11.01 9.03
Selling & distribution expenses 39.67 37.82 39.35 66.51 70 162.67
Miscellaneous expenses 13.01 19.09 43.65 32.88 37.99 47.17
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 19
Ballarpur Industries Limited (Consolidated Data)
Cost Analysis: Raw Material Cost to Income
Year Income Raw Material Cost Raw Material Cost
Income Percentage
2005 2026.48 740.54 0.365431684 36.54316845
2006 2169.56 810.04 0.373366028 37.33660281
2007 2557.6 1029.52 0.402533625 40.25336253
2008 3188.62 1285.21 0.403061513 40.30615125
2009 3009.42 1343.3 0.44636508 44.63650803
2010 4031.55 1920.78 0.476437102 47.64371024
36.54 37.34
40.25 40.31
44.64
47.64
0
5
10
15
20
25
30
35
40
45
50
0
500
1000
1500
2000
2500
3000
3500
4000
4500
2005 2006 2007 2008 2009 2010
Income RAW MATERIAL COST Ratio: Raw Material Cost to Income(in %)
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 20
The cost/income ratio is (operating expenses/operating income). The cost income ratio is
most commonly used in the financial sector. It is useful to measure how costs are changing
compared to income - for example, if a bank's interest income is rising but costs are rising at
a higher rate looking at changes in this ratio will highlight the fact. The cost-to-income ratio
shows a company's costs in relation to its income. To get the ratio, divide the operating costs
(administrative and fixed costs, such as salaries and property expenses, but not bad debts that
have been written off) by operating income. The ratio gives investors a clear view of how
efficiently the firm is being run - the lower it is, the more profitable the organization will be.
Changes in the ratio can also highlight potential problems: if the ratio rises from one period
to the next, it means that costs are rising at a higher rate than income, which could suggest
that the company has taken its eye off the ball in the drive to attract more business.
� From the data, we can clearly see that the Raw Material Cost w.r.t. Income of the
company is increasing at a very excessive or exorbitant rate. The raw material cost for
the year 2005 accounts for around 36.5% of the total Income of the company and
accounts for around 37.3% for the year 2006. This increase in percentage tells us that
the raw material costs are increasing at a higher rate than income. Similarly, for the
year 2007 & 2008, the cost/income ratio (in %) is 40.25% & 40.3% i.e. for the period
from 2007 to 2008 the cost/income ratio is almost constant. The cost/income ratio for
the year 2009 (44.63%) is increasing at a very high rate as compared to previous
years. From the year 2008-2009 the cost/income ratio increased from 40.3% to
44.63%, showing around 11% increase in the cost to income ratio and in the year
2010 the cost/income ratio again increased from 44.63% to 47.64%.
Therefore, considering the above figures, we can conclude that the company has taken its
eye off the ball and there is a need to control the raw material costs of the company
because the income is not growing/increasing at the same rate as costs are.
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 21
Ballarpur Industries Limited (Consolidated Data)
Cost Analysis: Power/Fuel/Water costs to Income
Year Income Power, Fuel &
Water Charges
Power/Fuel/Water Costs
Income Percentage
2005 2026.48 225.17 0.111113853 11.11138526
2006 2169.56 246.81 0.113760394 11.37603938
2007 2557.6 326.35 0.127600094 12.76000938
2008 3188.62 446.17 0.139925736 13.99257359
2009 3009.42 441.85 0.146822311 14.68223113
2010 4031.55 546.49 0.135553323 13.55533232
11.11 11.38
12.76
13.9914.68
13.56
0
2
4
6
8
10
12
14
16
0
500
1000
1500
2000
2500
3000
3500
4000
4500
2005 2006 2007 2008 2009 2010
Income(in Rs. crs...) Power, Fuel & Water Charges(in Rs. crs.....)
Ratio: Power,Fuel & Water costs to Income (in %)
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 22
From the data given on the previous page, we can analyze that the Power, Fuel & Water Cost
w.r.t. Income of the company is increasing at a moderate/reasonable rate. From year 2005-
2009 the Power, Fuel & Water cost w.r.t. Income increased from 11.11% to 14.68% which
shows percentage increase of around 32%. From year 2008 to 2009, the company took some
effective measures that resulted in decrease in power, fuel and water costs from Rs. 446.17
crs to Rs. 441.85 crs. Some of the measures taken by the company, during the period 2008-
2009, to reduce the power, fuel and water costs are:
� Installation of VFD's at various locations. � Installation of energy efficient pumps. � Installation of energy efficient motors. � Installation of electronic chokes in place of conventional chokes in lighting system of
mills, CFLs in place of incandescent lamps and Metal Halide Lamps in street lighting system of mills & colony.
� Power Sensors in street Lighting � VFDs in various equipment. � Optimisation in water consumption by optimising the operation of Disc Filter at PM 1
for recycling of base water. � Optimising water consumption across the mill for reduction in intake pump operating
hours. � Improvement in power factor 0.999 by addition of capacitors. � Reduction in the idle running hrs of equipments. � Maximisation of the utilization of bamboo dust consumption in boiler to save the coal. � Use of CFL to conserve the lighting energy. 13.0ptimize the thermal losses by
promptly attending the steam/condensate leakages. From year 2009-2010, the power, fuel, water costs increased from Rs. 441.85 crs to Rs.546.49 crs, showing increase of 23.7% and Income increased around 34% which resulted in decrease, in the power, fuel, water costs to income ratio, from 14.68% to 13.56%. Therefore, considering the above figures, we can conclude that the company has taken
effective measures to control the power, fuel and water costs of the company during the
period from 2008-2009 but has taken its eye off the ball during the period 2009-2010. So
there is a need to control the power, fuel and water costs of the company which would
gradually result in increase in Income of the company.
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 23
Ballarpur Industries Limited (Consolidated Data)
Cost Analysis: Indirect Taxes to Income
Year Income Indirect Taxes Indirect Taxes
Income Percentage
2002-2003 1699.14 116.5 0.068564097 6.856409713
2003-2004 2281.43 173.02 0.0758384 7.58383996
2004-2005 2300.59 195.2 0.0848478 8.484779991
2005-2006 2026.48 211.41 0.104323754 10.43237535
2006-2007 2169.56 215.41 0.099287413 9.928741312
2007-2008 2557.6 207.79 0.081244135 8.124413513
2008-2009 3188.62 198.22 0.062164824 6.216482365
2009-2010 3009.42 120.67 0.040097427 4.009742741
2010-2011 4031.55 104.7 0.02597016 2.597016036
Indirect taxes w.r.t. income are continuously increasing from the period 2002-03 to 2005-06
and then it is continuously decreasing from the period 2005-06 to 2010-11.
6.86
7.58
8.48
10.439.93
8.12
6.22
4.01
2.60
0
2
4
6
8
10
12
0
500
1000
1500
2000
2500
3000
3500
4000
4500
2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Income (in Rs. crs) Indirect Taxes (in Rs. crs) Ratio: Indiect Taxes to Income (in %)
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 24
Ballarpur Industries Limited (Consolidated Data)
Cost Analysis: Marketing Expenses to Income
Year Income Marketing
Expenses
Marketing Expenses
Income Percentage
2002-2003 1699.14 28.42 0.016726109 1.67261085
2003-2004 2281.43 37.66 0.016507191 1.650719067
2004-2005 2300.59 40.4 0.017560713 1.756071269
2005-2006 2026.48 22.85 0.01127571 1.12757096
2006-2007 2169.56 5.57 0.002567341 0.256734084
2007-2008 2557.6 18.93 0.00740147 0.740147013
2008-2009 3188.62 37.95 0.0119017 1.190170042
2009-2010 3009.42 39.19 0.013022443 1.302244286
2010-2011 4031.55 106.45 0.026404237 2.640423658
1.67 1.651.76
1.13
0.26
0.74
1.191.30
2.64
0
0.5
1
1.5
2
2.5
3
0
500
1000
1500
2000
2500
3000
3500
4000
4500
2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Income (in Rs. crs) Marketing Expenses (in Rs. crs) Ratio: Marketing Expenses to Income (in %)
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 25
From the data, we can clearly see that the Marketing Expenses (which includes commissions,
rebates, discounts, sales promotional, expenses on direct selling agents & entertainment
expenses) w.r.t. Income of the company is increasing at a very moderate rate from year 2002-
03 to 2004-05. Then from year 2004-05 to 2007-08, there is a fall in the Marketing
Expenses/Income ratio and accounts for around 57.71%. The reason is quite obvious that
between this period company reduced the manpower, due to which company was able to cut
on the commission expenses and expenses on direct selling agents.
From year 2007-08 to 2009-10, the marketing expenses/income ratio again increased from
0.74% to 1.30%, showing around 75.67% increase in the marketing expenses to income ratio.
And from year 2009-10 to 2010-11, the marketing expenses to income ratio almost doubled.
As income and marketing expenses are directly proportional to each other. Therefore,
considering the above figures, we can conclude that the company has taken the effective
measures to control the perks and the commissions given to the employees.
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 26
Ballarpur Industries Limited (Consolidated Data)
Cost Analysis: Rent Expense to Income
Year Income Rent & Lease Rent Rent Expense
Income Percentage
2002-2003 1699.14 12.47 0.007339007 0.733900679
2003-2004 2281.43 18.4 0.008065117 0.806511705
2004-2005 2300.59 17.78 0.007728452 0.772845227
2005-2006 2026.48 8.61 0.004248747 0.42487466
2006-2007 2169.56 3.23 0.001488781 0.148878114
2007-2008 2557.6 3.32 0.001298092 0.129809196
2008-2009 3188.62 1.77 0.000555099 0.055509907
2009-2010 3009.42 1.33 0.000441946 0.044194562
2010-2011 4031.55 1.17 0.000290211 0.029021096
We can conclude from the above graph that the company has taken the effective measures
to control the rent expense of the company. Rent Expense as a percentage of income is
continuously decreasing from period 2002-03 to 2010-11.
0.73
0.810.77
0.42
0.15 0.13
0.06 0.04 0.03
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
0
500
1000
1500
2000
2500
3000
3500
4000
4500
2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Income (in Rs. crs) Rent Expense (in Rs. crs) Ratio: Rent Expense to Income (in %)
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 27
Ballarpur Industries Limited (Consolidated Data)
Cost Analysis: Repair & Maintenance Cost to Income
Year Income
Repair &
Maintenance
Costs
Repair & Maintenance Costs
Income Percentage
2002-2003 1699.14 46.9 0.027602199 2.760219876
2003-2004 2281.43 50.31 0.022051959 2.205195864
2004-2005 2300.59 51.43 0.022355135 2.235513499
2005-2006 2026.48 51.28 0.025304962 2.53049623
2006-2007 2169.56 54.2 0.024982024 2.4982024
2007-2008 2557.6 53.55 0.020937598 2.093759775
2008-2009 3188.62 62.46 0.019588411 1.958841129
2009-2010 3009.42 37.67 0.012517362 1.251736215
2010-2011 4031.55 56.69 0.014061589 1.406158922
We can conclude from the above graph that the company has taken the effective measures to
control the repair and maintenance cost of the company. Repair & Maintenance costs as a
percentage of income is continuously decreasing except for the period 2004-05 and 2005-06.
2.76
2.21 2.24
2.53 2.50
2.091.96
1.251.41
0
0.5
1
1.5
2
2.5
3
0
500
1000
1500
2000
2500
3000
3500
4000
4500
2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Income (in Rs. crs) Repair & Maintenance Costs (in Rs. crs)
Ratio: Repair & Maintenance Costs to Income (in%)
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 28
Ballarpur Industries Limited
Cost Analysis: Salary & Wages to Income Ratio
Year Income Salaries & Wages Salaries & Wages
Income Percentage
2005 2026.48 105.86 0.052238364 5.223836406
2006 2169.56 114.3 0.052683493 5.268349343
2007 2557.6 105.73 0.041339537 4.133953707
2008 3188.62 34.89 0.010942038 1.094203762
2009 3009.42 49.12 0.016322082 1.6322082
2010 4031.55 52.03 0.012905706 1.290570624
5.22 5.27
4.13
1.09
1.63
1.29
0
1
2
3
4
5
6
0
500
1000
1500
2000
2500
3000
3500
4000
4500
2005 2006 2007 2008 2009 2010
Income (in Rs.crs) Salaries & Wages (in Rs. crs) Salaries & Wages costs w.r.t. Income (in %)
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 29
From the graph, we can analyze that salaries and wages w.r.t. income is decreasing at a very
high rate. Salary and wages of the employees in the year 2005 accounts for 5.22% of the total
income of the company and accounts for 5.27% of the total income in the year 2006. From
year 2006 to 2007, the salary expense/income ratio decreased from 5.27% to 4.13% showing
around 21.6% decrease in the salary/income ratio and the ratio further decreased from 4.13%
to 1.09% from the year 2007 to 2008, which accounts for around 73.6% decrease in the
salary/income ratio (Reason: the employee strength of the company in the year 2007 was
6000 and in the year 2008, the employee strength was reduced to 2000 which resulted in the
sharp decline in the salary/income ratio). From the year 2008 to 2010, the salary
expense/income ratio is increasing at a very moderate rate.
Therefore, considering the above figures, we can conclude that the company has taken
effective measures to control the salary and wages expense.
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 30
Ballarpur Industries Limited
Cost Analysis: Selling & Dist. Expenses to
Income Ratio
Year Income
Selling &
Distribution
Expenses
Selling & Distribution Expenses
Income Percentage
2005 2026.48 39.67 0.019575816 1.957581619
2006 2169.56 37.82 0.017432106 1.743210605
2007 2557.6 39.35 0.015385518 1.538551767
2008 3188.62 66.51 0.020858553 2.085855323
2009 3009.42 70 0.023260296 2.3260296
2010 4031.55 162.67 0.040349245 4.034924533
1.961.74
1.54
2.092.33
4.03
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
0
500
1000
1500
2000
2500
3000
3500
4000
4500
2005 2006 2007 2008 2009 2010
Income (in Rs. Crs) Selling & Dist. Expenses (in Rs. crs)
Selling & dist. Expenses w.r.t. Income (in %)
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 31
Distribution expense is a part of selling expense. It comes under the heading of selling
expense. Selling expense includes various other heads like advertisement expense,
distribution expense, packing expense, octroi, sales tax, hidden profit, cost of product etc.
while distribution expense is the expense occured by the producer of the goods in the form of
transportation cost barred by him for making the goods reach the retailers, wholesalers.
� From the above data, we can clearly see that the Selling & Distribution expenses w.r.t.
Income of the company is decreasing at a very moderate rate in the beginning from
year 2005 to 2007. This decrease in percentage tells us that the income is increasing at
a higher rate than selling and distribution expenses. From 2007-2010, the selling and
distribution expenses/income ratio are increasing at a very high rate. From the year
2007-2010 the selling & dist. expenses/income ratio increased from 1.53% to 4.03%,
showing around 163.4% increase in the selling and distribution expenses w.r.t.
income.
Therefore, considering the above figures, we can conclude that the company has taken its
eye off the ball and there is a need to control the selling and distribution expenses of the
company because the income is not growing/increasing at the same rate as expenses are.
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 32
PRODUCTIO� A�ALYSIS
he production function for Ballarpur Industries Limited has to be calculated. The
various factors which are required in the production analysis are: -
� Output: - The output for the company is being depicted by the total income of the
company.
� Labour Cost: - The total labour cost is being taken as the total compensation that is
paid to the employees of the company.
� Capital: - The total capital cost that is taken into the company is the sum of
authorised equity capital, issued equity capital and reserves.
The data is taken for the last six years (all figures in Rs. Crores….)
Year Total
Income Employee Expenses
Authorised Equity Capital
Issued Equity Capital Reserves
Total Capital
Employee Expense / Total Income (In
%)
Total Capital / Total Income
(In %)
2005-06 2026.48 123.69 297.5 162.72 1330.67 1790.89 6.103687182 88.37442264
2006-07 2169.56 128.32 297.5 163.52 1471.12 1932.14 5.914563322 89.05676727
2007-08 2557.6 140.8 297.5 186 1801.58 2285.08 5.505161089 89.34469815
2008-09 3188.62 207.34 297.5 111.1 1664.28 2072.88 6.502499514 65.00868714
2009-10 3009.42 219.11 297.5 186 1719.21 2202.71 7.280804939 73.19383802
2010-11 4031.55 248.3 297.5 206 2112.27 2615.77 6.158921507 64.88248937
Now we plot the function of labour/output and capital/output:
a) Labour/ Output (in%) : The Value of Total Labour i.e. Employee expenditure and
the output i.e. total income is given in the above table taken from the yearly report of
BILT for 2005-06 to 2010-11. The net percentage value of Labour/Income is
calculated and then plotted in the graph as shown on the next page.
T
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 33
Analysis: From the above chart, we observe that the ratio has been fluctuating over the years
but on an average the ratio is constant over the years.
Now, we observe the pattern for capital/output.
b) Capital/ Output % : The Value of Total Capital i.e. (Sum of authorized equity
capital, issued equity capital and reserves) and the output i.e. total income is
mentioned in the table taken from the yearly report BILT for 2005-06 to 2010-11.
The net percentage value of Capital/Output is calculated and then plotted in the graph
as shown below:
Analysis: We see that the ratio capital/output has decreased over the time. The reason is
though company has increased the capital spending over the time but the income has also
increased over the subsequent years.
88.37 89.06 89.34
65.01
73.19
64.88
0
10
20
30
40
50
60
70
80
90
100
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Capital/ Output (in %)
Capital/ Output (in %)
6.10 5.915.51
6.50
7.28
6.16
0
1
2
3
4
5
6
7
8
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Labour/ Output (in %)
Labour/ Output (in %)
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 34
Now, we find the output as function of labour and capital using the function
Output = f(L,K), where L is the labour cost and K is the capital cost.
We define: O = A.KαL
β
where α, β are the constants. A is the technological parameter, α is the elasticity of output
with respect to capital and β is the elasticity of output with respect to labour.
To obtain the values of α,β we will use regression analysis. To do so we take log on both the
sides, which will give us equation:
Log O =Log A + α Log K + β Log L
The various logarithmic values for income, labour and capital are calculated. Then we use
regression analysis to calculate the values of α, β thereof.
Year Total Income Employee
Expense Total Capital
2005-06 10.30674232 9.09233459 10.25306891
2006-07 10.33637167 9.108294351 10.28603859
2007-08 10.40783262 9.148602655 10.35890141
2008-09 10.50360277 9.316683094 10.31657416
2009-10 10.4784828 9.340662199 10.34295732
2010-11 10.60547205 9.39497672 10.41759955
Using SPSS software we get the values of A, alpha and beta. The values observed are as
follows.
A = -2.001
α = 0.677
β = 0.590
α+ β = 1.267
so, we get the production function as:
O= -2.001* K0.677
*L0.590
So, we observe that the value of α+ β is more than 1, therefore the production function
exhibits increasing returns to scale because increase in output i.e. total income is more than
proportionate increase in inputs i.e. capital and labour.
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 35
MARKET STRUCTURE: I�DIA� PAPER
I�DUSTRY
he Indian Paper Industry is a booming industry and is expected to grow in the years
to come. The Indian Paper Industry is among the top 15 global players today, the
industry offers an output of nearly six million tonnes, and the industry is working
towards the objective of attaining a production capacity of 13 million tonnes by the end of
the year 2020.Indian paper industry is poised to grow and touch 11.5 million tonnes from
9.18 million tonnes in the year 2011-12 from 2009-10 at the rate of 8% per annum.
According to ASSOCHAM paper on “Growth of Paper Industry in India“, per capita paper
consumption increased to 9.18 kg in 2009-10 as compared to 8.3 kg during 2008-09. Still,
the figure is low (9.2 kg) compared to 42 kg in China and 350 kg in developed countries.
India has emerged as the fastest growing market when it comes to consumption, posting
10.6% growth in per capita consumption of paper in 2009-10.
India produces many varieties of papers, namely, printing and writing paper, packaging
paper, coated paper and some speciality paper. Varieties under printing and writing paper are
creame wove paper, super printing paper, maplitho paper (non-surface and surface size),
copier paper, bond paper and coating base paper and others. The varieties under packaging
paper are kraft paper, boards, poster paper and others. The other varieties under coated paper
are art paper/board, chromo paper/board and others. There are approximately 600 paper
mills in India, with capacity ranging from 3 to 700 TPD, of which sixteen are major players.
Market Structure Seller
�umber
Seller Entry
Barriers �ature Of Product
Buyer
�umber
Buyer Entry
Barriers
Perfect Competition
Very
Large No Homogeneous
Very
Large No
Monopolistic competition Many No Heterogeneous Many No
Oligopoly Few Yes
Homogeneous
or Heterogeneous Few No
Monopoly One Yes Unique Many No
Monopsony Many No
Homogeneous
or Heterogeneous One Yes
T
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 36
Market Structure Comparison
�umber
of firms
Market
power
Elasticity
of
demand
Product
differenti
ation
Excess
profits Efficiency
Profit
maximization
condition
Pricing
power
Perfect Competition Infinite None
Perfectly elastic None No Yes P=MR=MC
Price taker
Monopolistic competition Many Low
Highly elastic
(long run) High
Yes/No (Short/Long) No MR=MC
Price setter
Monopoly One High Relatively inelastic
Absolute (across
industries) Yes No MR=MC Price setter
Indian Paper Industry is Monopolistic competitive market, where there are a large
number of firms, each having a small proportion of the market share and slightly
differentiated products.
Monopolistic competition is a market situation in which there are many sellers of a particular
product, but the product of each seller is in some way differentiated in the minds of
consumers from the product of every other seller.
Examples of Monopolistic Competition:
For example, BILT supplies branded goods like Sunshine Super Printing, BILT Classic,
Magna Print, Wisdom Print, BILT TA NSD and Easy Print. The copier paper is available as
BILT Copy Power, BILT Image Copier, BILT Matrix and BILT Ten on Ten. There are many
other firms in the market which sell similar paper products (not identical) with different brand
names like:
Company Product �ame
ITC PSPD Digi Art, Perma White, HiZine, Alfa Zap
JK PAPER LIMITED Notepad, JK Printerblank, JK Prisitne Cote, JK IV Board, JK Endura, Cedar
TAMIL NEWSPRINT Ace Marvel, Perfect Copier, Commander A4
CENTURY PULP & PAPER Century Green, Century Elanza,
AP PAPER MILLS Andhra Royal Silk, Andhra Primavera, Andhra Starwhite & Reflection
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 37
Major Players
�ame Market
Capital Total
Assets �et
Worth Investments Income Total
Expenses Sales
Turnover �et
Profit
Ballarpur Ind 1,638.81 2,513.39 1,651.30 1,151.03 1,092.25 875.03 1,059.12 30.16
Tamil Newsprint 680.69 2,403.88 915.79 1.14 1,251.12 888.36 1,184.45 148.99
AP Paper Mills 638.11 996.3 502.94 16.64 634.98 484.21 792.64 44.94
Rainbow Papers 575.2 702.38 285.01 0 388.63 299.47 394.99 37.1
JK Paper 549.1 1,127.26 588.90 82.77 1,377.95 1,112.18 1,233.29 106.42
West Coast Paper 427.32 1,882.94 670.48 46.71 1,082.01 836.70 1,068.59 90.08
Seshasayee Paper 231.19 680.61 283.05 23.23 577.06 460.35 574.52 65
Sirpur Paper 75.03 504.68 223.49 0 366.95 327.41 367.61 -15.32
Pudumjee Pulp 69.5 156.9 111.9 9.95 235.28 216.14 226.68 8.11
Rama Newsprint 60.78 317.61 81.14 0.02 299.32 305.52 320.45 -
140.29
Star Paper 39.1 141.51 126.31 35.79 274.7 276.36 269.26 -10.15
Pudumjee Ind 29.52 81.26 40.28 17.68 114.12 111.15 100.22 -1.56
Shreyans Ind 27.23 101.47 66.1 0.22 260.67 243.33 255.81 4.72
Malu Paper 19.7 122.21 38.11 0.11 153.69 137.35 168.83 -2.98
Ruchira Papers 19.28 199.52 58.51 0 200.55 180.56 254.02 4.01
Magnum Ventures 17.11 368.48 83.58 0 134.08 118.07 173.1 -28.44
TOTAL 5,097.67 12,300.40 5,726.89 1,385.29 8,443.36 6,872.19 8,443.58 340.79
4ote: Above data is taken from www.moneycontrol.com as on October 15, 2011.
There are approximately 600 paper mills in India, with capacity ranging from 3 to 700
TPD, of which above mentioned sixteen are major players.
Microeconomic Analysis of Ballarpur Industr
Characteristic
(i) A fairly large number of sellers
competition is fairly large. Each firm produces a small portion of industry, output; each buyer
also purchases a very small part of the industry output.
relatively competitive with very little market control over price or quantity.
produces or sells a close substitute for the product of other firms in
industry.
There are approximately 600 paper mills in India
Market Capital: BILT vs Others
11%
11%
8%
5%
1%1%
1%1%
1%
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005
Characteristics Of Monopolistic Competition
(i) A fairly large number of sellers and buyers: The number of firms in
Each firm produces a small portion of industry, output; each buyer
also purchases a very small part of the industry output. This ensures that all firms are
relatively competitive with very little market control over price or quantity.
or sells a close substitute for the product of other firms in the product group or
There are approximately 600 paper mills in India, of which sixteen are major players.
32%
68%
Market Capital: BILT vs Others
32%
13%
13%
1%
0%
0%0%
Market Capital
Limited, Year: 2005-2010 38
Of Monopolistic Competition
The number of firms in monopolistic
Each firm produces a small portion of industry, output; each buyer
This ensures that all firms are
relatively competitive with very little market control over price or quantity. Each firm
the product group or
which sixteen are major players.
BILT
Others
BILT
Tamil Newsprint
AP Paper Mills
Rainbow Papers
JK Paper
West Coast Paper
Seshasayee Paper
Sirpur Paper
Pudumjee Pulp
Rama Newsprint
Star Paper
Pudumjee Ind
Shreyans Ind
Malu Paper
Ruchira Papers
Magnum Ventures
Microeconomic Analysis of Ballarpur Industr
It is quite evident from the chart representing market capital of the
there are very large number of firms producing the same product i.e. paper, with each firm’s
product a fairly close substitute for the products of the other firms in the same product group.
Since numbers of sellers are very large
the market capital of Indian Paper Industry, it can be clearly seen from the chart that BILT,
which accounts for 32% of the total market capital, dominates all the other companies/firms.
On the other hand, buyers are also very large in number.
products/goods are being offered, where the goods are being sold, all differentiating
characteristics of the goods, the good's price, whether a firm is making a profit and if
much. It can be clearly seen that the sales of the companies like BILT (Rs. 1059.12 crs),
Tamil Newsprint (Rs. 1184.45 crs), JK Paper (1233.29 crs) and West Coast Paper
(Rs. 1068.59) are almost uniformly distributed i.e. buyer’s/consum
among these companies. If a particular company decides to charge a price higher than the
existing market price, its demand will certainly decline because the products are slightly
differentiated which makes consumers indifferent
companies as the consumer is price conscious.
7%
4%
3%
4%
BILT
JK Paper
Pudumjee Pulp
Shreyans Ind
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005
It is quite evident from the chart representing market capital of the Indian Paper Industry that
there are very large number of firms producing the same product i.e. paper, with each firm’s
product a fairly close substitute for the products of the other firms in the same product group.
Since numbers of sellers are very large, there is competition among all the firms. Comparing
the market capital of Indian Paper Industry, it can be clearly seen from the chart that BILT,
which accounts for 32% of the total market capital, dominates all the other companies/firms.
On the other hand, buyers are also very large in number. Buyers know exactly what
goods are being offered, where the goods are being sold, all differentiating
characteristics of the goods, the good's price, whether a firm is making a profit and if
It can be clearly seen that the sales of the companies like BILT (Rs. 1059.12 crs),
Tamil Newsprint (Rs. 1184.45 crs), JK Paper (1233.29 crs) and West Coast Paper
(Rs. 1068.59) are almost uniformly distributed i.e. buyer’s/consumers are equally distributed
among these companies. If a particular company decides to charge a price higher than the
existing market price, its demand will certainly decline because the products are slightly
differentiated which makes consumers indifferent towards the products offered by different
companies as the consumer is price conscious.
13%
14%
9%
5%
15%
13%
3%
4%
3%
1%3%
2%
3%
2%Sales Turnover
Tamil Newsprint AP Paper Mills Rainbow Papers
West Coast Paper Seshasayee Paper Sirpur Paper
Rama Newsprint Star Paper Pudumjee Ind
Malu Paper Ruchira Papers Magnum Ventures
Limited, Year: 2005-2010 39
Indian Paper Industry that
there are very large number of firms producing the same product i.e. paper, with each firm’s
product a fairly close substitute for the products of the other firms in the same product group.
, there is competition among all the firms. Comparing
the market capital of Indian Paper Industry, it can be clearly seen from the chart that BILT,
which accounts for 32% of the total market capital, dominates all the other companies/firms.
uyers know exactly what
goods are being offered, where the goods are being sold, all differentiating
characteristics of the goods, the good's price, whether a firm is making a profit and if so how
It can be clearly seen that the sales of the companies like BILT (Rs. 1059.12 crs),
Tamil Newsprint (Rs. 1184.45 crs), JK Paper (1233.29 crs) and West Coast Paper
ers are equally distributed
among these companies. If a particular company decides to charge a price higher than the
existing market price, its demand will certainly decline because the products are slightly
towards the products offered by different
Rainbow Papers
Sirpur Paper
Pudumjee Ind
Magnum Ventures
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 40
(ii) Differentiation in products or Heterogeneous Products: Under monopolistic
competition, the firms sell differentiated products. Product differentiation may be real or
imaginary. Real differentiation is done through differences in the materials used, design,
color etc. Imaginary differences may be created through advertisement, brand name, trade
marks etc. The firms producing similar products in .this imperfectly competitive world cannot
raise the price of product much higher than their rivals. If they do so, they will lose much of
their sale, but not all the sale. In case, they lower the price, the total sale can be increased to a
certain extent. How much will the sale increase or decrease by lowering or raising the price
will depend upon the product differentiation of the different firms.
If the product of the various firms are very close substitutes of one another and no imaginary
or real difference exists in the mind of the buyers, then a slight rise or fall in the price of the
product of one firm will appreciably decrease or increase the demand for the product. If the
product of one firm differs from that of other firm, (though the difference may be an
imaginary one) a slight rise in the price of the product of one firm will not drive away all its
customers. A few faithless buyers may be attracted by the low price of the other rival product
but not all the buyers.
COMPA�Y PRODUCT �AME
BILT
Sunshine Super Printing, BILT Classic, Magna Print, Wisdom Print, BILT TA NSD, Easy Print, BILT Copy Power, BILT Image Copier, BILT Matrix and BILT Ten on Ten
ITC PSPD Digi Art, Perma White, HiZine, Alfa Zap
JK PAPER LIMITED Notepad, JK Printerblank, JK Prisitne Cote, JK IV Board, JK Endura, Cedar
TAMIL NEWSPRINT Ace Marvel, Perfect Copier, Commander A4
CENTURY PULP & PAPER Century Green, Century Elanza,
AP PAPER MILLS Andhra Royal Silk, Andhra Primavera, Andhra Star White & Reflection
The names of the firms/sellers/producers mentioned in the above table produces the same
generic product i.e. “Paper”, but they differentiate their product on the basis of design, color,
packaging, quality, brand name and advertising etc.
For example:
� ITC launched the product called Alfa Zap: a woodfree paper with unique shade and
higher opacity
� BILT launched the new shades in sack craft paper and it also introduced the retail
segment products like colored matrix grades in 5 colors.
Microeconomic Analysis of Ballarpur Industr
(iii) Selling Costs: Every producer or
types of expenditures, such as attractive packaging, higher commission to distributors, sales
promotion, advertisements, and other incentives.
occupies almost the position of a monopolist. It is, thus, in a position to raise
product without losing its customers.
41%
9%
13%
0%
0%
0%
0%0%
0%
Selling & Admin Expenses
79%
Selling & Admin Expenses: BILT vs Others
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005
Every producer or seller tries to promote its own product through different
types of expenditures, such as attractive packaging, higher commission to distributors, sales
promotion, advertisements, and other incentives. When it succeeds in its object
most the position of a monopolist. It is, thus, in a position to raise
product without losing its customers.
21%
0%
11%
0%41%
0%
0%
2%
1% 2%
Selling & Admin Expenses
21%
79%
Selling & Admin Expenses: BILT vs Others
Limited, Year: 2005-2010 41
seller tries to promote its own product through different
types of expenditures, such as attractive packaging, higher commission to distributors, sales
When it succeeds in its objective, the firm
most the position of a monopolist. It is, thus, in a position to raise-the price of the
BILT
Tamil Newsprint
AP Paper Mills
Rainbow Papers
JK Paper
West Coast Paper
Seshasayee Paper
Sirpur Paper
Pudumjee Pulp
Rama Newsprint
Star Paper
Pudumjee Ind
Shreyans Ind
Malu Paper
Ruchira Papers
Magnum Ventures
Selling & Admin Expenses: BILT vs Others
BILT
Others
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 42
The charts on the previous page shows us the distribution of Selling & Administration
Expenses across Indian Paper Industry. Selling & Administration expenses includes the
advertising expense, marketing expense and distribution expense. It is quite evident from the
charts that many of the firms do not spend on the advertising and marketing operations.
Whereas the top leaders in the industry spent considerable amount on the advertising and the
marketing operations of the firm which resulted in the overall peak performance in sales
turnover as compared to the other players in the industry.
Above figures in the chart tells us that the JK Paper spent Rs. 152.59 crs on the advertising,
marketing and distribution operations of the company which resulted in the overall sales
turnover of Rs. 1233.29 crs, and is clearly dominating the whole industry in terms of sales. In
monopolistic competition, the firms make every effort to win over the customers. Other than
price cutting, the firms may offer after sale service, a gift scheme, discount etc.
iv) Free entry and exit: In the long run there is free entry and exit. There are numerous
firms waiting to enter the market each with its own "unique" product or in pursuit of positive
profits and any firm unable to cover its costs can leave the market without incurring
liquidation costs. This assumption implies that there are low start up costs, no sunk costs and
no exit costs.
792.64 1059.12 1233.29 574.52 1068.59
42.79
80.65
152.59
47.9
33.03
0
20
40
60
80
100
120
140
160
180
0
200
400
600
800
1000
1200
1400
AP Paper
Mills
BILT JK Paper Seshasayee
Paper
West Coast
Paper
Sales (in Rs. crs)
Selling & Administration Expenses
Microeconomic Analysis of Ballarpur Industr
v) Independent decision making
for its product. The firm gives no consideration to what effect its decision may have on
competitors. The theory is that any action will have such a negligible effect on the overall
market demand that an MC firm can act without fear of prompting heightened competition. In
other words each firm feels free to set prices as if it were a monopoly
oligopoly.
Net Profit:BILT vs Others
30.16
148.99
44.9437.1
106.42
90.08
-145
-95
-45
5
55
105
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005
Independent decision making: Each MC firm independently sets the terms of exchange
for its product. The firm gives no consideration to what effect its decision may have on
competitors. The theory is that any action will have such a negligible effect on the overall
market demand that an MC firm can act without fear of prompting heightened competition. In
other words each firm feels free to set prices as if it were a monopoly
9%
91%
Net Profit:BILT vs Others
90.08
65
-15.32
8.11
-140.29
-10.15-1.56
4.72
-2.98
�et Profit
Limited, Year: 2005-2010 43
Each MC firm independently sets the terms of exchange
for its product. The firm gives no consideration to what effect its decision may have on
competitors. The theory is that any action will have such a negligible effect on the overall
market demand that an MC firm can act without fear of prompting heightened competition. In
other words each firm feels free to set prices as if it were a monopoly rather than an
BILT
Others
4.01
-28.44
Net Profit
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 44
CO�DUCT
onduct means what firms do to compete with each other. It includes pricing,
advertising, research and development investment, decisions on product dimensions,
merger and acquisition, etc. Conduct also can include collusion both explicit or tacit.
Conduct is influenced by market structure since firm strategies differ with competition.
Inversely, conduct can influence market structure because firms can make entry cost
endogenous by choosing different levels of quality, advertising and so on, thus affect the
potential entrant number. Conduct is related to performance. For example, advertising
expenditure is usually higher in highly profitable industries, because firms with more profits
can afford higher advertising costs, and in order to keep their profits and prevent new entrants
into the profitable market, these firms would use advertising investments as endogenous sunk
costs. Econometric studies linking profit to market structure often conclude that measured
profitability is correlated with the advertising-to-sales ratio and with the R&D expenditures-
to-sales ratio. Following are the major parameters on the basis of which conduct of BILT:
Ballarpur Industries Limited can be studied:
1. Slogan: “Growth, Execution and Stability”.
2. Vision: “Our aspiration is to become a leading creator of Shareholder Value in the Paper
Industry”.
3. Mission: “To consistently outperform expectations and deliver superior value to both our
Customers and Stakeholders”.
4. Objective: At BILT, management has adopted a well calibrated growth strategy that lays
equal stress on revenue growth and profit growth. Over the last few years, company has
focused on acquisitions; on systematically growing capacities; on strengthening the
balance sheet; and on organizing production facilities to maximize value addition. While
stressing on these objectives two critical elements has become inherent to company’s
operations. These are: The stress on in Productivity: In an industry like pulp and paper,
which is highly commoditized across segments, cost competitiveness is critical. In this
endeavour, while there are some big ticket gains, the challenge is to continuously focus
on innovations and productivity improvement programmes that keep generating
incremental benefits. There has been a focused change initiative on this front over the last
few years and it has become an integral part of the operational culture at BILT across its
units. The stress on going up the value: BILT continued to find opportunities to provide
value addition across the pulp and paper value chain. In some cases, being the market
leader, these initiatives centre on creating new market segments for value added products.
It is this focus that has made BILT, India's leading player in the coated segment. The
Company's foray into the retail business is also a prime example of a stress on grabbing
opportunities for value addition in an industry that is otherwise highly commoditized.
During 2008-09, there were several developments on this front where the product mix
was altered to meet the demands of the market with products that offer better margins.
C
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 45
5. Forestry Project: BILT has always focused on being a good corporate citizen stressing
on sustainable growth and community development. While this is a key element of the
Company's value system, it is also important for its business given that units are located
in deep hinterlands and use natural resources like wood. 2008-09 has been a landmark
year in terms of recognition of BILT's focus on business practices that promote
'sustainability'. As a recognition of its efforts on sustainable use of forest resources, BI LT
became the first Indian paper Company to receive the Forest Stewardship Council-Chain
of Custody (FSC-COC) certification for three of its manufacturing units at Ballarpur,
Bhigwan and Ashti. This certification recognizes BILT's commitment to environmentally
appropriate, socially beneficial and economically viable management of the world's
forests. This allowed BILT to use the FSC label for its products that gives it a credible
link between responsible management of forests and the production, manufacturing and
marketing of wood-based products, including pulp and paper. This differentiated BILT in
the market place and aid consumers and businesses to make purchasing decisions with a
view on how it benefits people and the environment. The Company is in the process of
extending the above certification to remaining Indian units.
6. Value Proposition: BILT goal is to enhance long-term value for their shareholders
through the following initiatives: Integrated manufacturing that matches economies of
scale with an efficient capital structure, the effective integration of cutting-edge
technologies and operational discipline, a wide range of products to meet varied customer
requirements, a widespread distribution system to reach customers with speed, a
pioneering branding emphasis leading to a distinct differentiation in the marketplace, a
far-sighted investment in people and competencies to create a knowledge-led work place,
a responsible commitment to society and environment.
7. Corporate Social Responsibility: BILT has always focused on delivering value to all its
stakeholders and strived to be a marquee corporate citizen. A key element of this
endeavour is the Company’s structured corporate social responsibility (CSR) programme,
which is intrinsic to its business strategy. As the Indian economy grows rapidly, the
critical challenge is to create inclusive development. To meet this challenge, it is very
important to provide equal opportunities to all the country’s citizens. As stakeholders in
the economic prosperity of the country, the Indian corporate sector has to play a vital role
in this very crucial task. In this light, BILT has focused on ‘affirmative action’ as a key
element of its CSR programme. ‘Affirmative action’ is about giving everybody the equal
opportunity to achieve their potential without any discrimination. BILT’s operations are
located in remote and backward areas of the country where access to resources is very
limited. Most people in the community around these operations come from marginalised
backgrounds – a large number of whom belong to Schedule Castes and Tribes. As the
Company’s CSR activities are largely focused on these communities, there is
considerable scope of ‘affirmative action’. BILT recognises that the empowerment based
model of development needs strong community institutions to sustain the initiatives.
Keeping this in view, Self Help Groups (SHGs) of women belonging to the
underprivileged sections of society both in the rural areas as well as slum pockets in the
urban areas have formed the base of all the Company’s CSR activities. So far, 622 SHGs
have been created, which have worked directly with more than 9,500 women.
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 46
Adolescents, especially girls, are an important group as they are the country’s future
generation. BILT has always been working with the youth since the inception of its
structured CSR programme. More than 100 youth groups have been engaged in the
process. 8. Employee Training Programs: BILT conducted a series of training and capacity
building programmes to enable these community based organisations (CBOs) to take up a
larger role. These include vocational training and entrepreneurship training on various
skills. Training to the youth included skills related to motor driving, electrical repair,
motor winding, screen printing and plumbing. These trained youth have secured gainful
employment and are earning incomes ranging from Rs. 1,500 per month to Rs. 7,500 per
month. Rural girls have undergone full time training on tailoring and embroidery (both
hand and machine). This enabled them to supplement their family incomes. BILT
conducted employability training to the urban youth in the new emerging sectors of the
economy. Specifically, training was provided to more than 600 educated youth in the
areas of retail marketing in BPO sector, customer relations service in the retail marketing
sector and hospitality management in the service sector industries. The employability
training programme called ‘Ek Mouka’ for the unemployed SC and ST youth was
undertaken through 2009-10.
9. Farmer’s Training Program: Most of the areas where BILT is working follow
traditional agricultural practices. To bring a positive change in socio-economic conditions
of the rural population it is important to expose farmers to improved agricultural
practices. BILT provided these farmers with training on improved agricultural practices
through exposure visits, demonstration plots, classroom/ field trainings on crop/ variety
selection, crop rotation, agronomic practices (fertilizer, pesticide, irrigation, inter-cultural
operations), kitchen gardening, mushroom cultivation, fruit and vegetable crop
cultivation, fodder cultivation and organic farming (vermi-composting, cow urine
application, etc). A total of 1,686 farmers have been trained and provided inputs in
improved agricultural practices.
10. Educational Initiatives: BILT has been working very closely with the local
communities, partner NGOs and the Government Education Department for augmenting
the quality and reach of education, especially in rural areas and slum pockets. There are
community based education centres, which focus on enhancing the reach, quality and
ownership of the initiative by the community. Through this, quality education has been
provided and more than 1000 children who would have otherwise dropped out have been
mainstreamed into formal system. Computer literacy campaign though mobile computer
labs is an innovative way of reaching the remotest area, without having to worry about
issues like electric supply and availability of qualified teachers. This campaign reached
out to more than 40 government schools with buses that are fitted with computers. The
initiative has helped in arresting the dropout rates after 5th grade.
11. Health Initiatives: 104 community health workers have been trained to identify and treat
early signs of high risk pregnancies, neonatal morbidity, and provide health education on
various issues. BILT runs two Antiretroviral Therapy (ART) centres at Ballarpur and
Koraput. These centres were started under Public Private Partnership model where BILT
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 47
is partnering with National AIDS Control Organization (NACO), New Delhi and
technical support is provided by CII, New Delhi.
12. Mergers & Acquisitions: The company has grown over the past few years organically as
well as inorganically. It acquired and subsequently merged BILT Graphic Papers in 2003.
Further, in April 2006, the company merged APR Packaging which is engaged in writing
and printing paper. The merger increased BILT's paper capacity by 55,000 tonnes per
annum. In June 2006, the company acquired 80 per cent stake in Sabah Forest Industries
(SFI), Malaysia's largest pulp and paper mill from Lion Forest Industries for USD 261
million. This acquisition was a strategic fit into the company's growth plans. SFI has
paper and pulp capacity of 1.4 lakh tonnes and 1.2 lakh tonnes per annum, respectively. It
provided the company with huge forest land of 289 thousand acres that can be used
captively for fibre requirement. Besides securing future supplies of raw material through
this acquisition, the company also created an entry into the rapidly growing South--East
Asian markets.
13. Composition of Board of Directors: As on 30 June 2010, the Company had a nine
member Board of Directors. The Chairman, Mr. Gautam Thapar is a non Executive and
Promoter Director. The Company has two Executive Directors - Mr. R. R. Vederah
(Managing Director) and Mr. B. Hariharan (Group Director-Finance). The six Non-
Executive, Independent Directors are Mr. Sanjay Labroo, Mr. R. K. Ahooja, Mr. A. S.
Dulat, Dr. Pramath Raj Sinha, Mr. Ashish Guha and Mr. A.P. Singh {Nominee Director
of the Life Insurance Corporation of India (LIC)}. The Directors are eminent personalities
and experienced professionals in business, law, finance and corporate management.
14. Retail Outlets: 2008-09 saw the expansion of the modern trade distribution channel for
tissues. In this channel, tissue and hygiene is the fastest growing category with almost 45
per cent growth rate annually. Successful business tie-ups with some of the large Indian
retailers like Big Bazaar and Spencer helped positioning BILT's products as niche
products for the modern Indian consumer. During 2008-09, the Company's business
products were promoted through a series of brand campaigns, road shows, customer
contact programmes, direct mail marketing and outlet merchandising like shop-in-shop
dispensers which exclusively displayed BI LT products. To further enhance this business
segment, BILT entered the Office Supply Retailing Business with the launch of its first
store called P3 (Paper, Print and Pens) in June 2008. These stores retail a complete suite
of office supplies vide a B2B and B2C platform. BILT's one-stop paper and office
supplies store - P3, answers all office needs ranging from stationery, technology,
corporate gifting to print solutions. With a range of 6,000 SKUs, the impressive P3 line of
products and services would go a long way in establishing BILT as a pan India one stop
solution for office supplies in the years to come. Its footprint has expanded significantly
on the B2C side; and is present in Delhi-NCR and Bangalore with 7 stores in the first year
of operation. On the B2B front, it services leading corporates and the total client list
exceeds 300. The brand P3 lives up to the promise of the "Choice of the Professional" by
providing the highest levels of customer service, satisfaction and enduring value.
15. Recruitment Process: 2008-09 has been a challenging year. BI LT continues to focus on
managing talent and increasingly systematising the HR processes. Given the economic
downturn, 'doing more with less' is a natural objective. HR played a key role of strategic
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 48
influencer, and in alignment with business goals, delivered on numerous initiatives. The
Performance Management process was given additional focus with an aim to increase
productivity, to ensure that employees stretch their potential and to build on a culture of
continuous improvement. At BILT, management believe that employees engagement with
higher expectations leads to maximum contributions. The web-based tool aligning
individual and company goals has given us exemplary results. Acquisition and retention
of talent continues to be a major thrust area and several business leaders are engaged in
the process of hiring, training, developing and retaining our key resources. As a regular
practice, BI LT visits various reputed colleges and universities for campus recruitments.
BILT recruited over 40 Management Trainees and GETs directly from campuses.
Towards long-term leadership and management development, BI LT has begun several
programmes and engages employees to upgrade their knowledge/skills in line with the
Company's goals. In 2008-09, BI LT focused on rationalizing human resources in several
units and over 600 employees availed the Voluntary Retirement Scheme. BILT has
excellent industrial relations across all plants and strongly believe that the unions and
workers will continue to work towards a profitable and productive Company. At the end
of 2008-09, BILT had 2708 permanent employees on its rolls. The Company will
continue to balance short-term workforce rationalisation with long-term business results.
16. Research & Development: BILT's Research and Development (R&D) programmes
focus on product and process development, and improvements along with issues
regarding environment management and cost reduction. The details of major R&D
programmes undertaken by Company are as follows:
a) Study on removal of calcium from wood chips during pulping.
b) Study on removal of calcium in prebleaching and bleaching operations. - Finding
most suitable bleaching sequence for APR.
c) Study of D stage bleaching with and without H2S04.
d) Introduction of synthetic thickener in pre-coat formulation.
e) Alkaline sizing: study on ASA sizing.
f) Critical evaluation of raw material storage practice, study on changes of moisture and
cellulosic component in wood and bamboo during storage.
g) Improvement in pulp brightness and whiteness.
h) Colour control in enzymatic starch size press dispersion.
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 49
PERFORMA�CE
he performance of an industry or firm is measured by profitability. Profit is the
difference between revenue and cost, and revenue is determined by price. Thus
performance can be influenced through changing costs or prices. Profitability can
also be affected by a firm’s agility (i.e. ability to adjust to things like changes in market
demand). Research and development, and availability of capitol and resources are factors that
greatly influence whether or not a firm is agile. The ability to measure performance between
industries is important in understanding the SCP(Structure-Conduct-Performance)
relationships. For example, if an industry is dominated by one firm or cartel does not see
higher costs than a competitive industry yet has monopoly prices, then that non-competitive
industry will see higher profits, whereas if costs increase, then profitability levels will be
relatively similar. This comparison is the driving force behind anti-trust legislation. SCP
predicts that performance increases with concentration of the industry. This is in contrast with
the efficiency hypothesis that states that a firms performance is based on how well and
efficiently it produces its product for the consumer. Here in this section performance will be
measured by doing the financial analysis of BILT i.e. ratio analysis, trend analysis, vertical
analysis and horizontal analysis.
Consolidated highlights
Sales Profit before Tax (PBT) Increased by 2.4 per cent from Rs. 1076.3 Decreased by 38.6 per cent from Rs.142.23
crore in 2009-10 to Rs. 1102.17 crore in crore in 2009-10 to Rs. 87.4 crore in
2010-11. 2010-11.
Total Income Profit after Tax (PAT)
Increased by 1.6 per cent from Rs.1110.2 Decreased by 53.5 per cent from Rs.125.39
Crore in 2009-10 to Rs.1127.79 crore in crore in 2009-10 to Rs.58.28 crore in
2010-11. 2010-11.
T
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 50
BILT’s Accounting Policy
Fixed Assets –Tangible
� Fixed Assets are stated at cost net of Value Added tax, rebates, less accumulated
depreciation and impairment loss, if any.
� All costs, including financing costs till commencement of commercial production, net
charges on foreign exchange contract and adjustments arising from exchange rate
variations attributable to fixed assets are capitalized.
� Preoperative expenditure : Indirect expenditure incurred during construction period is
capitalized under the respective asset head as a part of the indirect construction cost,
to the extent to which the expenditure is indirectly related to the assets head. Other
indirect expenditure incurred during the construction period, which is not related to
the construction activities or which is not incidental thereto is written off in the profit
and loss account.
Depreciation Method
Depreciation on Fixed Assets is provided on Straight Line Method on certain Assets and on
Written down Value Method on other Assets in accordance with Schedule XiV of the
companies Act, 1956, except in case of improvements to leased premises which are amortised
over the period of lease. Land is not depreciated. Depreciation on revalued portion of fixed
Assets, as applicable, is appropriated and adjusted out of Revaluation Reserve if available
with the company, on a global pooling basis and the balance is charged off in Accounts.
Fixed Assets –Intangible
Assets identified as intangible assets are stated at cost including incidental expenses thereto,
and are amortised over a predetermined period.
Inventory Valuation Method
Raw Materials, Stores, Spare parts, chemicals etc., are valued at cost, computed on weighted
average basis. Finished goods and work in process are valued at cost or net realisable
value, whichever is lower. In the case of finished goods and work in process cost comprises
of material, direct labour and applicable overhead expenses. The cost of finished goods also
includes applicable excise duty.
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 51
Investments
i. Investments made by the company in various securities are primarily meant to be held
over a long–term period.
ii. Holding of certain investments is of strategic importance to the company and
therefore, the company does not consider it necessary to provide for decrease in the
Book Value of such investments, till continuation of the relationship of strategic
importance with the investee company, namely that of a Subsidiary, Associate,
company under the same management, Foreign Joint Ventures and/or company
associated with Avantha Group. However, appropriate provisions are made to
recognise decrease in the Book Value of investments in companies of Strategic
importance also, as and when the investee company either wound up or goes into
liquidation or where the operations cease or are taken over by Receiver by Operation
of Law.
iii. Investments in Government Securities are shown at cost and investments, other than
that of Strategic importance to the company are shown in the books at lower of cost or
fair market value.
iv. As a conservative and prudent policy, the company does not provide for increase in
the Book Value of individual investments held by it on the date of Balance Sheet.
Revenue Recognition
As per the requirement of the companies (Amendment) Act, 1988, all expenses and income
were accounted for on accrual basis.
Retirement Benefits
Short term employee benefits are charged off in the year in which the related services are
rendered. Post employment and other long term employee benefits are charged off in the year
in which the employee has rendered services. the amount charged off is recognized at the
present value of the amount payable determined using actuarial valuation techniques.
Actuarial gain and losses in respect of post employment and other long term benefits are
charged to profit & Loss Accounts.
Income From Investments
Income from investments, where appropriate, is taken to revenue in full on declaration or
receipt and tax deducted at source thereon is treated as advance tax.
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 52
Advance License, Import Entitlements
Advance license ,import entitlements are recognized at the time of export and the benefit in
respect of advance License received by the company against export made by it are
recognized as and when goods are imported against them.
Taxation
Provision for current tax is made on the basis of estimated taxable income for the relevant
accounting year in accordance with the income tax Act, 1961. The deferred tax liability on
account of timing differences between the book profits and the taxable profits for the year is
accounted by applying the tax rates as applicable as on the balance sheet date. Deferred tax
assets arising from timing differences are recognised on the principles of virtual certainty that
these would be realised in future.
Impairment Of Assets
The company applies the test of impairment of certain assets as provided in Accounting
Standard (AS) – 28 “impairment of Assets”.
Provision And Contingencies
The company shall create a provision when there is a present obligation as a result of past
events that probably require an outflow of resources and a reliable estimate can be made of
the amount of obligation. A disclosure for a contingent liability is made, when there is a
possible obligation or a present obligation that probably will not require an outflow of
resources or where a reliable estimate of the obligation cannot be made.
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 53
Financial statement analysis
inancial statement analysis is defined as the process of identifying financial strengths
and weaknesses of the firm by properly establishing relationship between the items of
the balance sheet and the profit and loss account or Financial statement analysis is a
process that examines past and current financial data for the purpose of evaluating
performance and estimating future risk and potentials. Financial statement analysis is used by
investors, creditor, security analysts, bank lending officers, managers, governmental
agencies, suppliers, and many other parties who rely on financial data for making economic
decisions about a company. These statements play a dominant role in setting the framework
of managerial decisions. But the information provided in the financial statements is not an
end in itself as no meaningful conclusions can be drawn from these statements alone.
However, the information provided in the financial statements is of immense use in making
decisions through analysis and interpretation of financial statements.
There are various methods or techniques that are used in analyzing financial statements. The
most commonly used analytical techniques are:
� Ratio Analysis
� Horizontal Analysis
� Vertical Analysis
� Trend Analysis
1. Ratio Analysis: The ratios analysis is the most powerful tool
of financial statement analysis. Ratio analysis helps in identifying significant
relationships between financial statement items for further investigation. Commonly
used financial ratios are discussed below:
Using Financial Ratios
A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical
values taken from an enterprise's financial statements. Financial ratios quantify many aspects
of a business and are an integral part of the financial statement analysis. Financial ratios are
categorized according to the financial aspect of the business which the ratio measures.
Financial ratios are used to evaluate profitability, liquidity, solvency and capital market
strength. Liquidity ratios measure the availability of cash to pay debt. Activity ratios measure
how quickly a firm converts non-cash assets to cash assets. Debt ratios measure the firm's
ability to repay long-term debt. Profitability ratios measure the firm's use of its assets and
control of its expenses to generate an acceptable rate of return. Market ratios measure
investor response to owning a company's stock and also the cost of issuing stock. These are
concerned with the return on investment for shareholders, and with the relationship between
return and the value of an investment in company’s shares.
F
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 54
Profitability Ratios
rofitability ratios measure the company's use of its assets and control of its expenses
to generate an acceptable rate of return or in other words it is the degree of operating
success of a company. The commonly used ratios to evaluate profitability are:
i. Profit Margin Ratio: The net income divided by sales, often expressed as a
percentage. This number is an indication of how effective a company is at cost
control.
PROFIT MARGI� = PROFIT AFTER TAX
SALES
Below is the computation of profit margin ratio of Ballarpur Industries Limited:
All figures in Rs. Crores 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06
Net Profit 58.28 125.39 129.45 250.77 212 168.1
Sales 1102.17 1076.32 1049.67 2,375.92 2,085.34 2,011.59
Net Profit Margin (%) 5.29 11.65 12.33 10.55 10.17 8.36
Analysis: The ratio shows that the profit margin decreased from 12.33% in the year 2008-09
to 5.29% in the year 2010-11. The profit margin ratio provides some indication of the cushion
available to the company in the event of an increase in costs, drop in selling prices in the face
of a recession or greater competition. Profit margin was 8.36% in the year 2005-06 and
inched up to 12.33% in the year 2008-09, but has fallen since then.
ii. Asset Turnover Ratio: This ratio is more useful for growth companies to check if in
fact they are growing revenue in proportion to sales. Companies with low profit
margins tend to have high asset turnover, those with high profit margins have low
asset turnover – it indicates pricing strategy.
ASSET TUR�OVER = SALES
AVERAGE TOTAL ASSETS
Using the sales data and total assets data, we can compute the asset turnover ratio of
Ballarpur Industries Limited as follows:
P
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 55
All figures in Rs. crores 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06
Sales 1102.17 1076.32 1049.67 2,375.92 2,085.34 2,011.59
Average Total Assets 2,934.90 2,693.32 3,347.07 3,850.10 3,445.73 3,229.96
Asset Turn Over 0.38 0.40 0.31 0.62 0.61 0.62
Analysis: In year 2005-06, BILT had sales of about Rs. 0.62 per rupee of investment in
assets as compared to Rs. 0.31 in 2008-09. The decrease of 31 paise in sales rupee of
investment indicates significant deterioration in utilization of assets between this period. This
decrease in asset turnover could be because of excess capacity, frequent equipment
breakdown, non- availability of raw materials or power etc. However had been able to
recover its asset turnover ratio, as is evident from the above chart, showing sales of about Rs.
0.31 per rupee of investment in assets in the year 2008-09 as compared to Rs. 0.38 in 2010-
2011.
iii. Return on Assets or Return on Investment – ROA/ROI: An indicator of how
profitable a company is relative to its total assets. ROA gives an idea as to how
efficient management is at using its assets to generate earnings.
ROA = PROFIT AFTER TAX
AVERAGE TOTAL ASSETS
Analysis: There is a significant decrease in BILT’s ROA from the year 2007-08 to 2010-
11, which indicates deterioration in the company’s overall profitability. Therefore we can say
that company’s is not better at converting its investment into profit. Here management's most
important job is to make wise choices in allocating its resources.
iv. Return on Equity: The Return on Equity ratio is perhaps the most important of all
the financial ratios to investors in the company. It measures the return on the money
the investors have put into the company. This is the ratio potential investors look at
when deciding whether or not to invest in the company. Net Profit comes from the
All figures in Rs. crores 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06
Profit after tax 58.28 125.39 129.45 250.77 212 168.1
Average Total Assets 2,934.90 2,693.32 3,347.07 3,850.10 3,445.73 3,229.96
Return on Assets (%) 1.986 4.656 3.868 6.513 6.153 5.204
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 56
income statement and stockholder's equity comes from the balance sheet. In general,
the higher the percentage, the better it is with some exceptions, as it shows that the
company is doing a good job using the investors' money.
ROE = PROFIT AFTER TAX
AVG. SHAREHOLDER'S EQUITY
All figures in Rs. crores 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06
Profit after tax 58.28 125.39 129.45 250.77 212 168.1
Average Share holder's
equity 1,500.54 1,308.88 1,634.21 1,816.85 1,563.55 1,455.13
Return on Equity (%) 3.88 9.58 7.92 13.80 13.56 11.55
Analysis: ROE is one measure of how efficiently a company uses its assets to produce
earnings. A healthy company may produce an ROE in the 13% to 15% range. A steadily
increasing ROE from the year 2005-06 to 2006-07, is a hint that management is giving
shareholders more for their money, which is represented by shareholders' equity. This
indicates how well management is employing the investors' capital invested in the company.
But from the year 2007-08 to 2010-11, ROE declined sharply from 13.8% to 3.88%, possibly
because it could not find oppurtunities that would yield higher returns.
v. Earnings per Share: Earnings per share ratio (EPS Ratio) is a small variation
of return on equity capital ratio and is calculated by dividing the net profit after taxes
and preference dividend by the total number of equity shares.
All figures in Rs. Crores 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06
Profit after tax 58.28 125.39 129.45 250.77 212 168.1
Weighted avg no of
Equity shares (in crores) 66 56 56 19 16 16
Earnings per Share (in
Rs.) 0.89 2.26 2.33 13.50 12.98 10.35
Analysis: There is constant decrease in the BILT’s EPS which indicates that the earning
power of the company is decreasing.
EPS = �ET PROFIT AFTER TAX
TOTAL EQUITY SHARES
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 57
Liquidity Ratios
hese ratios are used to determine a company's ability to pay off its short-terms
obligations when they fall due. Generally, the higher the value of the ratio, the larger
is the margin of safety that the company possesses to cover short-term debts. The
commonly used ratios to evaluate liquidity are:
i. Current Ratio: A liquidity ratio that measures a company's ability to pay short-term
obligations. A ratio under “one” suggests that the company would be unable to pay
off its obligations if they came due at that point. While this shows the company is not
in good financial health, it does not necessarily mean that it will go bankrupt - as there
are many ways to access financing - but it is definitely not a good sign. Current ratio
can give a sense of the efficiency of a company's operating cycle or its ability to
turn its product into cash. Companies that have trouble getting paid on their
receivables or have long inventory turnover can run into liquidity problems because
they are unable to alleviate their obligations.
CURRE�T RATIO = CURRE�T ASSETS
CURRE�T LIABILITIES
Below is the computation of profit margin ratio of Ballarpur Industries Limited:
All figures in Rs. crores 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06
Current assets 911.31 714.85 939.84 1326.6 1377.44 875
Current liabilities 525.02 373.4 359.10 440.94 372.01 345.99
Current Ratio (in ratio) 1.74 1.91 2.62 3.01 3.70 2.53
Analysis: It can be clearly seen from the above figure that BILT has more current assets per
rupee of current liabilities i.e. it may be able to pay its current liabilities using its current
assets. In other words, its operation would not be disrupted. The constant decrease in the
current ratio of BILT represents deterioration in the liquidity position of the firm.
ii. Quick Ratio: The quick ratio or the acid-test ratio - is a liquidity indicator that further
refines the current ratio by measuring the amount of the most liquid current assets
there are to cover current liabilities.
QUICK RATIO = (CURRE�T ASSETS – I�VE�TORIES)
CURRE�T LIABILITIES
T
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 58
All figures in Rs. Crores 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06
Quick assets 470.88 355.77 653.52 908.88 1012.01 557.87
Current liabilities 525.02 373.4 359.10 440.94 372.01 345.99
Quick Ratio (in ratio) 0.90 0.95 1.82 2.06 2.72 1.61
Analysis: The increase in the quick ratio from 2005-06 to 2006-07 is in line with current
ratio. The decrease in the quick ratio is again in line with the current ratio over five years
period i.e. from 2006-07 to 2010-11. When used along with Current ratio it gives a clearer
picture of business's liquidity position. Rule of thumb for acid test ratio is 1: 1 i.e., if business
liquid assets are 100 percent of its current liabilities it is considered to be having fairly good
current financial position. But in the case of BILT, quick ratio indicates that financial position
of the company is not good.
iii. Debtors Turnover Ratio: This ratio indicates the efficiency of the concern to collect
the amount due from debtors. It determines the efficiency with which the trade
debtors are managed. Higher the ratio, better it is as it proves that the debts are being
collected very quickly.
DEBTORS TUR�OVER RATIO = SALES
AVERAGE DEBTORS
Analysis: In the initial years, company’s higher debtor turnover ratio clearly indicates that
company was able to convert the debtors into cash and the quality of the company’s portfolio
of debtors was good in that period. However, in the subsequent years i.e. from 2005-06 to
2010-11, there is continuous decline in the debtors turnover ratio, implies inefficient
management of debtors or less liquid debtors.
All figures in Rs. crores 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06
Sales 1102.17 1076.32 1049.67 2,375.92 2,085.34 2,011.59
Average debtors 367.03 317.55 427.015 527.57 446.715 404.444
Debtor turnover ratio (in
ratio) 3.00 3.39 2.46 4.50 4.67 4.97
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 59
iv. Inventory Turnover Ratio: This ratio is a relationship between the cost of goods
sold during a particular period of time and the cost of average inventory during a
particular period. It is expressed in number of times.Inventory turn over ratio indicates
the number of time the stock has been turned over during the period and evaluates
the efficiency with which a firm is able to manage its inventory. This ratio indicates
whether investment in stock is within proper limit or not.
Using the information available on cost of goods sold and inventories, we calculated the
inventory turnover ratio as follows:
All figures in Rs. crores 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06
Cost of goods sold 1,000.88 945.11 885.12 1,967.56 1,758.29 1,718.52
Average inventories 154.17 132.23 223.435 308.24 292.15 281.5275
Inventory turnover 6.49 7.15 3.96 6.38 6.02 6.10
Analysis: The inventory turnover ratio for BILT has been very good but has not been
following a consistent trend i.e. it is fluctuating b/w different time periods. A
low inventory turnover ratio in the year 2008-09 indicates an inefficient management
of inventory and further implies over-investment in inventories, dull business, poor quality of
goods, stock accumulation, accumulation of obsolete and slow moving goods and low profits
as compared to total investment. Whereas high inventory turnover in the year 2009-10
indicates efficient management of inventory because more frequently the stocks are sold, the
lesser amount of money is required to finance the inventory. A high inventory turnover ratio
may also be due to under-investment in inventories.
Solvency Ratios
hese ratios are used to measure a company's ability to meet long-term obligations.
The solvency ratio measures the size of a company's after-tax income; excluding
non-cash depreciation expenses, as compared to the firm's total debt obligations. It
provides a measurement of how likely a company will be to continue meeting its debt
obligations. The commonly used ratios to evaluate liquidity are:
T
I�VE�TORY TUR�OVER = COST OF GOODS SOLD
AVERAGE I�VE�TORIES
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 60
i. Debt to Equity Ratio: A measure of a company's financial leverage calculated by
dividing its total liabilities by stockholders' equity. It indicates what proportion of
equity and debt the company is using to finance its assets. A high debt/equity ratio
generally means that a company has been aggressive in financing its growth with
debt. This can result in volatile earnings as a result of the additional interest expense.
If a lot of debt is used to finance increased operations (high debt to equity), the
company could potentially generate more earnings than it would have without
this outside financing. If this were to increase earnings by a greater amount than the
debt cost (interest), then the shareholders benefit as more earnings are being spread
among the same amount of shareholders. However, the cost of this debt financing
may outweigh the return that the company generates on the debt through investment
and business activities and become too much for the company to handle. This can lead
to bankruptcy, which would leave shareholders with nothing.
Debt to equity ratio of BILT is computed as follows:
Analysis: The debt to equity ratio for the year 2005-06 is 0.80 or we can say 4:5, it means
that for every four rupee worth of the creditors investment the shareholders have invested five
rupee. Debt to equity ratio indicates the proportionate claims of owners and
the outsiders against the firms assets. The debt to equity ratio of 0.52 for the year 2010-11
indicates that the owners of the company want to do the business with maximum of outsider's
funds in order to take lesser risk of their investment and to increase their earnings (per share)
by paying a lower fixed rate of interest to outsiders. The outsiders (creditors) on the other
hand, want that shareholders (owners) should invest and risk their share of proportionate
investments.
ii. Liabilities to Equity Ratio: It Is a Variant of Debt to Equity Ratio where numerator
not only includes debt but also current liabilities and deferred tax liability in order to
get the firm’s total liabilities. The ratio is computed as follows:
All figures in Rs. crores 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06
Secured + Unsecured loans 861.06 887.75 938.06 1,332.64 1453.6 1,188.90
Shareholder's equity 1,651.30 1,349.77 1,267.99 2,000.42 1,633.27 1,493.82
Debt to Equity Ratio (in ratio) 0.52 0.66 0.74 0.67 0.89 0.80
DEBT TO EQUITY RATIO = SECURED LOA�S + U�SECURED LOA�S
SHAREHOLDER’S EQUITY
LIABILITY TO EQUITY RATIO = ALL LIABILITIES
SHAREHOLDER’S EQUITY
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 61
All figures in Rs. crores 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06
Debt + Current liabilities 1,499.63 1,369.10 1,399.77 2,025.96 2,040.54 1,723.83
Shareholder's equity 1,651.30 1,349.77 1,267.99 2,000.42 1,633.27 1,493.82
Liabilities to Equity Ratio (in
ratio) 0.91 1.01 1.10 1.01 1.25 1.15
iii. Interest Coverage Ratio: A ratio used to determine how easily a company can pay
interest on outstanding debt. The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses.
I�TEREST COVER = PBIT
I�TEREST EXPE�SE
The interest coverage ratio for BILT is computed as follows:
All figures in Rs. crores 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06
Profit before interest & tax 130.36 186.45 277.20 420.24 369.14 312.57
Interest expense 42.96 44.22 103.07 96.62 103.93 105.45
Interst Cover (in times) 3.03 4.22 2.69 4.35 3.55 2.96
Analysis: The interest coverage ratio is very important from the lender's point of view.
Throughout the period from 2005-06 to 2010-11, company has been able to achieve the
interest coverage ratio above 1.5 which is a clear assurance to the lenders a regular and
periodical interest income.
Capital market ratios
Capital market ratios relate the market price of a company’s share to the company’s earnings
and dividends. The commonly used ratios to evaluate liquidity are:
i. Price – Earnings Ratio: Price earnings ratio (P/E ratio) is the ratio between market
price per equity share andearning per share. The ratio is calculated to make an
estimate of appreciation in the value of a share of a company and is widely used
by investors to decide whether or not to buy shares in a particular company.
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 62
Analysis: Price earnings ratio helps the investor in deciding whether to buy or not to buy the
shares of a particular company at a particular market price. Generally, higher the
price earning ratio, the better it is. If the P/E ratio falls, the management should look into the
causes that have resulted into the fall of this ratio. In case of BILT, figure are quite favouring
the company and make it a favourite destination to invest in. There is constant increase in the
price earning ratio from 2.08 times in the year 2005-06 to 28.54 times in the year 2010-11,
indicates the market’s high faith in the future of BILT.
ii. Dividend Yield: Dividend yield ratio is the relationship between dividends per
share and the market value of the shares. Share holders are real owners of a
company and they are interested in real sense in the earnings distributed and paid to
them as dividend. Therefore, dividend yield ratio is calculated to evaluate the
relationship between dividends per share paid and the market value of the shares.
The dividend yield for BILT is shown below:
All figures in Rs. 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06
Dvidend per share 0.5 0.5 0.7 3 2.75 2.5
Average stock price 25.40 24.4 20.8 35 22 21.5
Dividend Yield (in %) 1.97 2.05 3.37 8.57 12.50 11.63
All figures in Rs. 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06
Average stock price 25.40 24.4 20.8 35 22 21.5
Earning per share 0.89 2.26 2.33 13.5 12.98 10.35
Price Earning Ratio (in times) 28.54 10.80 8.93 2.59 1.69 2.08
PRICE EAR�I�GS RATIO = AVERAGE STOCK PRICE
EAR�I�GS PER SHARE
DIVIDE�D YIELD = DIVIDE�D PER SHARE
AVERAGE STOCK PRICE
Microeconomic Analysis of Ballarpur Industries Limited, Year: 2005-2010 63
Analysis: This ratio helps as intending investor in knowing the effective return he is going to
get on the proposed investment. In case of BILT, the dividend yield is constantly decreasing,
indicating that the cash return on the shares went down.
iii. Price to Book Ratio: This measure compares a company’s stock price with the book
value. Book value is the amount of shareholders’ equity divided by the number of
shares.
The price to book ratio for BILT is as follows:
All figures in Rs. 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06
Market price per share 25.40 24.4 20.8 35 22 21.5
Book value per share 25.19 24.3 22.83 107.72 100.03 91.63
Price to book Ratio (in
times) 1.01 1.00 0.91 0.32 0.22 0.23
Analysis: In year 2010-11 & 2009-10 the P/B ratio of more than 1 indicates that market
expects the stock to earn at a rate higher than the required one.
2. Horizontal Analysis: Quite simply, the horizontal analysis is the financial statements
of a company of successive years presented side-by-side. The goal of horizontal
analysis is to compare the figures of the current period with that of the past period.
This helps the company and its shareholders analyze their performance and find out
areas of improvement. Horizontal analysis is done for both income statements
and balance sheets. The idea is the same. The figures for the different heads under the
income statements and the balance sheets are placed side-by-side so that the reader
can compare the two and understand how the company is doing. The horizontal
analysis also includes two more columns: the column denoting actual numerical
change over two periods and another denoting percentage change over the two
periods. The first column gives the difference between the past period and the current
period, while the percentage column shows what percentage of the past figure is the
figure denoting the change.
Horizontal analysis is an important part of the financial statements and annual reports. It
places the facts very simply in front of the shareholder and makes the job of analyzing the
improvements or the lack of it very simple for the shareholder. Horizontal analysis helps the
shareholder understand the change and the percentage change.
PRICE TO BOOK RATIO = MARKET PRICE PER SHARE
BOOK VALUE PER SHARE