A STUDY ON DIVIDEND DECISIONS

 

AT 

KESORAM CEMENT INDUSTRIES Ltd.BASANTHNAGAR, KARIMNAGAR.

 

PROJECT REPORT  

Submitted to the OSMANIA UNIVERSITY

In the partial fulfillment for the

Award of the Degree of

MASTER OF BUSINESS ADMINISTRATIONS   

 

Submitted by 

PRINCETON POST GRADUATE COLLEGEHYDERABAD

(affiliated to Osmania University) (2009-2011)

1

DECLARATION

 

I student of Master of Business

Administration at, PRINCETON P.G. COLLEGE, declare

that the project report on "DIVIDEND DECISIONS" has

been carried out by me for “KESORAM CEMENT

INDUSTRIES Ltd”. This is being submitted in partial

fulfillment of the "MASTERS DEGREE IN BUSINESS

ADMINISTRATION".

I further, declare that this is my original work

and I did not try to duplicate any other’s report. I as a

part of my academic course do this during the year

2008–10.

 

 

 

 

Date:

Place:

 

2

 ACKNOWLEDGEMENT

I express my sincere gratitude to KESORAM

CEMENT INDUSTRIES Ltd., Basanthnagar, for giving

an opportunity to expose myself to the real time

environment through this project. I also express gratitude to

the finance manager, Mr. Saraiah Garu for his

encouraging guidance, who helped me in accomplishing

this project in all possible ways and all the members of the

DEPARTMENT OF BUSINESS ADMINISTRATION

of PRINCETON P.G. COLLEGE for their

encouragement given to me.

I am indebted to Mr. Murali Krishna Assistant

General Manager (IR & HRD) of KESORAM CEMENT

who gives me access to the required details for

accomplishing this.

I like to my immense pleasure and satisfaction in

expressing thanks to my Guide Mrs. Aruna , and also

other faculty membe

3

TABLE OF CONTENTS

CHAPTER CONTENTS PG. NO.

LIST OF TABLES i

LIST OF FIGURES ii

ABSTRACT iii

CHAPTER 1 INTRODUCTION 1-7

1.a INTRODUCTION TO THE TOPIC 1

1.b IMPORTANCE OF THE STUDY 2

1.c NEED FOR THE STUDY 3

1.d OBJECTIVES OF THE STUDY 4

1.e RESEARCH METHODOLOGY 5

1.f LIMITATIONS 7

CHAPTER 2 REVIEW OF LITERATURE 8-40

CHAPTER 3 COMPANY PROFILE 41-50

CHAPTER 4 DATA ANALYSIS & INTERPRETATION 51-63

CHAPTER 5 FINDINGS, SUGGESTIONS & CONCLUSION 64-66

5.a FINDINGS 64

5.b SUGGESTIONS 65

5.c CONCLUSION 66

BIBLIOGRAPHY 67

4

LIST OF TABLES

TABLE

NO.TITLE

PAGE

NO.

4.1 DIVIDEND PER SHARE 52

4.2 EARNINGS PER SHARE 54

4.3 RETURNS PER SHARE 56

4.4 PRICE EARNINGS 58

4.5 PROFIT AFTER TAX 60

4.6 NET WORTH 62

5

LIST OF FIGURES

FIGURE

NO.TITLE

PAGE

NO.

4.1 DIVIDEND PER SHARE 53

4.2 EARNINGS PER SHARE 55

4.3 RETURNS PER SHARE 57

4.4 PRICE EARNINGS 59

4.5 PROFIT AFTER TAX 61

4.6 NET WORTH 63

6

ABSTRACT

The objective of this present study is financial management

that is to use business funds in such a way that the firm’s

earnings are maximized. So chose a study to conduct on the

dividend decision study of KESORAM CEMENT using

ratio in comparison with previous year performance. The

title of the project is study of dividend decisions.

The core objective of this present study is how the

decisions are made over dividends owner for the welfare of

a business. These objectives can be achieved by 1.

Retained earnings 2. Share holders wealth maximization.

The project is covered of profits and shares of

KESORAM CEMENT drawn from annual report of the

company. Ratio analysis is used for evaluating shares and

earnings of KESORAM CEMENT.

In this study an attempt is made to know the growth

of total investment and earnings of Kesoram Cement

Industries for past few years.

7

iii

Chapter-1

INTRODUCTION

8

1.a INTRODUCTION

The term dividend refers to that part of the profits of a company

which is distributed amongst its shareholders. It may therefore be

defined as the return that a shareholder gets from the company, out of

its profits, on his share holdings. "According to the Institute of

Charted Accounts of India" dividend is a "Distribution to shareholder

out of profits or reserves available for this purpose"

The Dividend policy has the effect of dividing its net earnings into

two Parts: Retained earnings and dividends. The retained earnings

provide funds to finance the long-term growth. It is the most

significant source of financing a firm’s investment in practice. A

firm, which intends to pay dividends and also needs funds to finance

its investment opportunities, will have to use external sources of

finance. Dividend policy of the firm. Thus has its effect on both the

long-term financing and the wealth of shareholders. The Moderate

view, which asserts that because of the information value of

dividends, some dividends should be pa-id as it may have favorable

affect on the value of the share.

The theory of empirical evidence about the dividend policy does

not matter if we assume a real world with perfect capital markets and

no taxes. The second theory of dividend policy is that there will

definitely be low and high payout clients because of the differential

personal taxes. The majority of the holders of this view also show

that balance, there will be pre-ponderous low payout clients because

of low capital gain taxes.

9

The third view argues that there does exist an optimum dividend

policy. An optimum dividend policy is justified in terms of the

information in agency costs.

1.b IMPORTANCE OF THE STUDY

The dividend policy of a firm determines what proportion of

earnings is paid 'to shareholders by the way of dividends and what

proportion is ploughed back in the firm reinvestment purposes. If a

Firm's capital budgeting decision is independent of its dividend of its

dividend policy, a higher dividend payment will entail a greater

dependence on external financing. On the other hand, if a firm’s

capital budgeting decision is dependent on its dividend decision, a

higher payment will cause shrinkage of its capital budget and vice

versa. In such a case the dividend policy has a bearing on the capital

budgeting decision.

Any firm, whether a profit making or non-profit

organization has to take certain capital budgeting decision. The

importance and subsequent indispensability of the capital budgeting

decision has led to the importance of the dividend decisions for the

firms.

10

1.c NEED FOR THE STUDY

The principal objective of corporate financial management is

to maximize the market value of the equity shares. Hence the key

question of interest to us in this study is, "What is the relationship

between dividend policy and market price of equity shares?"

Most of the discussion on dividend of dividend policy and

firm value assumes that the investment decision of a firm is

independent of its dividend decision. The need for this study arise

from the above raised question and the most controversial and

unresolved doubts about the relevance of irrelevance of the dividend

policy.

11

1.d OBJECTIVES OF THE STUDY

The basic objective of this study is as fallows:

1. To understand the importance of the dividend decision and their

impact

on the firm's capital budgeting decision.

2. To know the various dividend policies followed by the firm.

3. To understand the theoretical backdrop of the various divided

theories.

4. To compare the various theories of dividend with reference to their

Assumptions and conclusions.

5. To know whether the dividend decisions have an impact on the

market

Value of the firm's equity.

6. To see the various dividend policies of the kesoram cement

industry.

7. To derive the empirical evidence for the relevance theories of

dividends WALTER’S MODEL AND GORDON'S MODE

12

1.e RESEARCH METHDOLOGY

Sample of the study:

A sample is a part of the target population, carefully selected to

represent that population. When researchers undertake sampling

studies, they are interested in estimating one or more population

values and/ or testing one or more statistical hypothesis. The sample

of our study consists of the financial data of kesoram cement

industries for the past five financial years.

Sources of data:

The sources of information are classified to two primary data and

secondary data. The data collected by the researcher and agent

known to the researcher, especially to answer the research question,

is known as the primary data. Studies made by others for their own

purposes represent secondary data to the researcher.

Secondary sources can usually be found more quickly and cheaply

than primary data especially when national and international statistics

are needed. Similarly, data about distant places often can be collected

more cheaply through secondary sources.

13

Period of the study

The period of any research is the period which the data has been

collected and analyzed. The period of this study has been limited to

the period from 15-07-2009 to 30-08-2009.

Sampling Designs

The sampling technique selected for conducting this study is

judgment sampling. This is a restricted and non-probabilistic method

of sampling; where the sample consisting of one company has been

selected on basis of the past dividend payment made by the

Company.

Tools of Collecting Data

There are various ways of collecting the data. Some of the most

commonly used ones are telephone interview, personal interview

and, questionnaire administering. These are basically the methods for

collecting the primary data the data required for conducting this

study it has been collected from the various web portals as the data is

basically secondary in nature.

14

1.f LIMITATIONS

Every research conducted has certain limitations. These rise

due to the method of sampling used, the method of data collation

used and the source of the data apart from many other things. The

limitations of this study are as follows:

The data collected is of secondary nature and hence it is difficult

to ascertain the reliability of the data.

a) The scope of the study has been limited to the impact of the

dividend on the market value of the firm's equity. Others factors

affecting the firm's market value have been assumed to have

remained unchanged.

b) The period of the study has been limited to only five years.

c) The method of sampling used is judgment sampling' hence the

Choice of the sample has been left entirely to the choice of the

Researcher. This has led to some amount bias being introduced into

the research process.

15

Chapter-2

REVIEW OF

LITERATURE

16

HISTORY OF INDIAN CEMENT INDUSTRY

By stating production in 1914 the story of story of Indian

cement is a stage of continuous growth. Cement is derived from the

Latin word "cementam".

Egyptians and Romans found the process of manufacturing

cement. In England during the first century the hydraulic cement has

become more versatile building material. Later on, Portland cement

was invented and the invention was usually attributed to Joseph Asp

din of Enland.

India is the world's 4th largest cement produced after China,

Japan and U.S.A. The South Industries have produced cement for the

first time in 1904. The company was setup in Chennai with the

installed capacity of 30 tones per day. Since then the cement industry

has progressing leaps and bounds and evolved into the most basic

and progressive industry. Till 1950-1951, the capacity of production

was only 3.3 million tones. So far annual production and demand

have been growing a pace at roughly 78 million tones with an

installed capacity of 87 million tones.

In the remaining two years of 8th plan an additional capacity

of 23 million tones will actually come up. India is well endowed with

cement grade limestone (90 billion tones) and coal (190) billion

tones). During the nineties it had a particularly impressive expansion

with growth rate of 10 percent.

17

The strength and vitality of Indian Cement Industry can be

gauged by the interest shown and support gives by World Bank,

considering the excellent performance of the industry in utilizing

the loans and achieving the objectives and targets. The World Bank

is examining the feasibility of providing a third line of credit for

further upgrading the industry in varying areas, which will make it

global. With liberalization policies of Indian Government. The

industry is posed for a high growth rates in nineties and the

installed capacity is expected to cross 100 million tones and

production 90 million tones by 2003 AD.

The industry has fabulous scope for exporting its product to

countries like the U.S.A., U.K., Bangladesh Nepal and other several

countries. But there are not enough wagons to transport cement for

shipment.

Cement - The Product:

The natural cement is obtained by burning and crushing the

stones containing clayey, carbonate of lime and some amount of

carbonate of magnesia the natural cement is brown in color and its

best variety is known as "ROMAN CEMENT". It sets very quickly

after addition of water.

It was in the eighteenth century that the most important advances in

the development of cement were which finally led to the invention of

Portland cement.

In 1756, John Smeaton showed that hydraulic lime which can

resist the action of water can be obtained not only from hard lime

stone but from a limestone which contain substantial proportion of

clayey.

in 1796, Joseph Parker found that modules of argillaceous

limestone made excellent hydraulic cement when burned in the usual

18

manner. After burning the product was reduced to a powder. This

started the natural cement industry.

The artificial cement is obtained by burning at a very high

temperature a mixture of calcareous and argillaceous material. The

mixture of ingredients should be intimate and they should be in

correct proportion. The calcined product is known as clinker. A

small quantity of gypsum is added to clinker and it is then pulverized

into very fine powder, which is known as cement.

The common variety of artificial cement is known as normal

setting cement or ordinary cement. A mason Joseph Aspdn of Leeds

of England invented this cement in 1824. He took out a patent for

this cement called it "PORTLAND CEMENT" because it had

resemblance in its color after setting to a variety of sandstone, which

is found a abundance in Portland England.

The manufacture of Portland cement was started in England

around 1825. Belgium and Germany started the same 1855. America

started the same in 1872 and India started in 1904.

The first cement factory installed in Tamil Nadu in 1904 by

South India limited and then onwards a number of factories

manufacturing cement were started. At present there are more than

150 factories producing different types of cements.

Composition of Cement:

The ordinary cement contains two basic ingredients, namely,

argillaceous and calcareous. In argillaceous materials the clayey

predominates and in calcareous materials the calcium carbonate

predominates.

A good chemical analysis of ordinary cement along with

desired range of ingredients.

19

Ingredients Percent Range

Lime (Cao) 62 62-67

Silica (SiO2) 22 17-25

Alumina (Al2 O3) 5 3-8

Calcium soleplate (casO4) 4 3-4

Iron Oxide(Fe2O3) 3 3-4

Magnesia(Mgo) 2 1-3

Sulphur(s) 1 1-3

Alkalis 1 0.2-1

20

Industry Structure and Development:

With a capacity of 115 million tones of large cement plants,

Indian cement industry is the fourth largest in the world. However

per capita consumption in our country is still at only 100Kgs against

300Kgs of developed countries and offers significant potential for

growth of cement consumption as well as addition to cement

capacity. The recent economic policy announcement by the

government in respect of housing, roads, power etc., will increase

cement consumption

Opportunities and Threats

In view of low per capita consumption in India, there is a

considerable scope for growth in cement consumption and creation

of new capacities in coming years.

The cement industry does not appear to have adequately

exploited cement consumption in rural segment where damaged

where damaged growth is possible.

Landed cost of cement (with import duty) continues to be

higher than home market prices but with reduced import duty,

increasing imports, may pose a serious threat to the domestic cement

industry.

Outlook

The recent change in the budget 2001-2002 relating to fiscal

incentives for individual housing and reduction in borrowing cost for

this purpose and with the government reaffirmation to accelerate the

reform process, infrastructure development should logically get

21

priority leading to increase in demand of cement in coming years.

The addition capacity of cement in the pipeline is limited and

therefore the' demand and supply situations is expected to be more

favorable and cement prices are likely to firm up.

Risks and Concerns

Slow down of Indian economy or drop in growth rate of

agriculture may adversely affect the consumption. The recent

increase in railway freight coupled with diesel / petrol price like will

increase the cost of production and distribution, as being bulky,

cement is freight intensive increase in Limestone royalty also adds to

the cost of production, which is considerably higher than

corresponding costs of many other developing countries.

In our country there is a need to under take a massive

programmed of house construction activity into the rural and urban

areas? It is impossible to construct a house without cement and steel,

in other words, cement is one of the basic construction materials and

therefore it is one of the vital elements for the economic development

of the nation.

India in spite of being the 4th biggest producer of cement in

the world has still a very low per capital consumption of cement.

Cement Companies 5l Nos

Cement Plant 99 Nos

Installed Capacity 64.8mt

Total investment (approx)Rs. 10,000

cores Total Manpower Over 1.25 Lakh

22

DIVIDEND DECISIONS-

THEORITICAL

FRAME WORKS

Dividend refers to that portion of a firm's net earnings, which

are paid out to the shareholders. Our focus here is on dividends paid to

the ordinary shareholders because holders of preference shares are

entitled to a stipulated rate of dividend. Moreover, the discussion is

relevant to widely held public limited companies, as the dividend issue

does not pose a major problem for closely held private limited

companies, since dividends are destroyed out of the profits, the

alternative to the payment of dividends is the retention of earning prof-

its. The retained earning constitutes an accessible important source and

financing the investment requirements of firms. There is, thus a type of

inverse relationship between retained earnings and cash dividends:

larger retentions, lesser dividends smaller retentions, larger dividends.

Thus, the alternative uses of the not earnings dividends and retained

earnings are competitive and conflicting.

A major decision of financial management is the dividend

decision in the sense that the firm has to choose between distributing

the prof-it’s to the shareholders and plugging them back into the

business. The choice would obviously hinge on the effect of the

23

decision on the maximizations of shareholders wealth. Given the

objective of financial management of maximizing present values, the

firm should be guided by the considerations as to which alternative use

is consistent with the goal of wealth maximization. That is, the firm

would be well advised to use the net prof-its for paying dividends to the

shareholders if that payment will lead to the maximization of wealth of

the owners. If not, the firm should rather retain theme to finance

investment programmers. The relationship between dividends and

value of the firm should therefore, be the decision criterion.

There are however, conflicting opinions regarding the impact of

dividends on the valuation of a firm. According to one school of

thought; dividends are irrelevant so that the amount of dividends paid

has no effect on the, valuation of a firm. . .

On the other hand, certain theories consider the dividend

decision as relevant to the value of the firm measured in terms f the

market price of the shares.

The purpose of thus report is, therefore, to present a critical

analysis of some important theories representing these two schools of

thought with a view to illustrating the relationship between dividend

24

policy and the valuation of a firm. The theories, which support the

relevance hypothesis, examined in the report.

IRRELEVANCE OF DIVIDEDS:

MODIGLIANI AND MILLER MODEL:

The crux of the argument supporting the irrelevance of dividends to

Valuation is that the dividend policy of a firm is a part of its financing

decision. As a part of the financing decision, the dividend policy of the

firm is a residual decision and dividends are passive residuals

Crux of the Argument:

The crux of the MM position on the irrelevance of

dividend is the arbitrage argument. The arbitrage process, involves a

swathing and balancing operation. In other words, arbitrage refers to

entering simultaneously y into two transactions here are the acts .of

25

paying out dividends and raising external funds either through the sale

of new shares or raising additional loans-to finance investment

programmers. Assume that a Firm has some investment opportunity.

Given its investment decision, the firm has two alternatives:

(i) it can passiceretain is earnings to finance the

investment programmed; (ii) or distribute the earnings to he

shareholders as dividend and raise an equal amount externally through

the sale of new shares/bonds for the purpose. If the firm selects the

second -alternative, arbitrage process is involved, in that payment of

dividends is associated with raising funds through other means of

financing, the effect of dividend payment on Shareholder’s wealth will

be exactly offset by the effect of raising additional share capital.

When dividends are paid to the shareholders, the market

price of the shares will decrease. What the investors as a result of

increased dividends gain will be neutralized completely vie the

reduction in the terminal value of the shares. The market price before

and after the payment of dividend would be identical. The investors

according to Modigliani and Miller, would, therefore, be indifferent

between dividend and retention of earnings. Since the shareholders are

indifferent, the wealth would not be affect by current and future

dividend decisions of the firm. It would depend entirely upon the

expected future earnings of the firm.

26

There would be no difference to the validity of the mm premise, if

external funds were raised in the form of debt instead of equity capital.

This is because of their indifference between debt and equity witty

retest to leverage. The cost of capital is independent of leverage and

the cost of debt is the same as the real cost of equity.

Those investors are indifferent between dividend and retained

earnings imply that the dividend decision is irrelevant. The arbitrage

process also implies that the total market value plus current dividends

of two firms, which are alike in all respects except D/P ratio, will be

identical. The individual shareholder can retain and invest his own

earnings as we as the firm would. With dividends being relevant, a

firm's cost of capital would be independent of its D/P ratio.

Finally, the arbitrage process will ensure that-under conditions of

uncertainty also the dividend policy would be irrelevant. When two

firms are similar in respect of business risk, prospective future earnings

and investment policies, the market price of their shares must be the

same. This, mm argues, is wealth to less wealth. Differences in current

and future dividend policies cannot affect the market value of the two

firms as the present value of prospective dividends plus terminal value

is the same.

27

A Critique:

Modigliani and Miller argue that the dividend decision of

the firm is irrelevant in the sense that the vale the firm is independent

of it. The crux of their argument is that the investors are indifferent

between dividend and retention of earnings. This is mainly because of

the balancing natures internal financing (retained earnings) and

external financing (rising of funds externally) consequent upon

distribution earnings to finance investment program's. Whether the

mm hypotheses provides a satisfactory framework for the theoretical

relationship between dividend decision and valuation will depend, in

the ultimate analysis on whether external and internal financing really

balance each other. This in turn, depends upon the critical

assumptions stipulated by them. Their conclusions, it may be noted,

under the restrictive assumptions, a logically consistent and

intuitively appealing. But these assumptions are unrealistic and

untenable in practice As a result, the conclusion that dividend

payment and other methods of financing exactly offset each other

and, hence, the irrelevance of dividends is not a practical proposition'

it is merely of theoretical relevance.

The validity of the MM Approach is open to question on two Coutts:

(i) Imperfection of capital market,

(ii) Resolution of uncertainty

28

Market Imperfection: Modigliani and Miller assume that capital

markets are perfect. This implies that there are no taxes; flotation costs

do not exist and there is absence of transaction costs. These

assumptions ate untenable in actual situations.

A. Tax Effect:

An assumption of the mm hypothesis is that there are no taxes.

1t implies that retention of earnings (internal financing) and payment

of dividends (external financing) are, from the viewpoint of law

treatment, on an equal footing the investors would find both forms of

financing equally desirable. The tax liability of the investors, broadly

speaking. is of two types: i tax on dividend income, and capital gains.

While the first type of tax is payable by the investors when the firm

pays dividends, the capital gains tax is related to retention of earnings.

From an operational viewpoint, capital gains tax is (i) lower thebe the

tax or dividend income and (ii) it becomes payable only sheen shares

are actually sold, than is, it is a differed till the actual sale of the shares.

The types of` taxes, MM position would imply otherwise. The different

tax treatment of div dined and capital gains means that with the

retention of earnings the shareholders. For example, a firm pays

dividends to the shareholders out of the retained earnings; to finance its

investment program's it issues rights shares. The shareholders would

29

have to pay tax on the dividend income at rates appropriate to their

income bracket. Subsequently, they would purchase the shares of the

firm. Clearly, than tax could have been avoided if, instead of paying

dividend, the earnings were -retained if, however the investors required

funds, they could sell a part of their investments, in which case they

will pay tax (capital gains) at a lower rate. There is a definite

advantage to the investors Owing to the tax differential in dividend and

capital gains tax and , therefore, they can be expected to prefer

retention of earnings.

B. Flotation costs:

Another assumption of a perfect capital market underlying

the MM Hypothesis is dividend irrelevance is the absence of

flotation costs. The term `flotation cost' refers to the cost involved in

raising capital from the market for instance, underwriting

commission, brokerage and other expenses. The presence of

flotation costs affects the balancing nature of internal retained

earnings) and external (dividend payments) Financing. The MM

position, it may be recalled, agues that given the investment

decision of the firm, external funds would have to be raised, equal

to the amount of dividend, through the sale of new share to finance

the investment programmed. The two methods of financing are not

30

perfect substitutes because of flotation costs. The introduction of

such costs implies that the net proceed from the sale of new shares

would be less than the face valid of the shares, depending upon their

size.8 it means tat to be able to make use of external funds,

equivalent to the dividend payments, the firms would have to sell

shares for an amount in excess of retained earnings. In other words,

external financing through sale of shares would be costlier than

internal financing via retained earnings. The smaller the size of the

issue, the greater is the percentage flotation cost. 9 To illustrate

suppose the cost of flotation is 10 percent and the retained earnings

are Rs.900, In case dividends are paid, the firm will have to sell

shares worth Rs.100/- to raise funds are paid, the firm will have to

sell shares worth Rs.1000/- to raise funds equivalent or the retained

earnings. That external financing is costlier is another way ol'

saying that firms would prefer to retain earnings rather tab pay

dividends and then raise funds externally.

C. Transaction and Inconvenience Costs :

Yet another assumption, which -is open to question, is that

there are no transaction costs in the capital market. Transaction costs

refer to costs associated with the sale of securities by the shareholder-

investors. The no-transaction costs postulate implies that if dividends

are not paid (or earnings are retained), the investors desirous of current

31

income to meet consumption needs can sell a part of their holdings

without incurring any cost, like brokerage and so on. This is obviously

an unrealistic assumption.

Since the sale of securities involves cost, to get current

income equivalent to the dividend, if paid, the investors would have to

sell securities in excess of the income that they will receive. Apart

from the transaction cost, the sale of securities, as an alternative to

current income, is inconvenient to the investors. Moreover, uncertainty

is associate with the sale of securities. For all these reasons an investor

cannot be expected, as MM assume, to be indifferent between dividend

and retained earnings.

The investors interested in current income would certainly

prefer dividend payment to plugging back of profits by the firm.

32

D. Institutional Restrictions :

The dividend alternative is also supported by legal

restrictions as to the type of ordinary shares in which certain investors

can invest for instance, the Life Insurance Corporation of India is

permitted in terms of clauses I(a) to 1(g) of section 27-A of the

Insurance Act, 1938, to invest in only such equity shares on which a

dividend of not less than 4 per cent including bonus has been paid for S

years out of 7 years immediately preceding. To be eligible for

institutional investment, the companies should pay dividends. These

legal impediments therefore, favor dividends to retention of earning. A

variation of the legal requirement to pay dividends is to be found in the

case of the Unit Trust of India (UTI). The UTI is required in terms of

the stipulations governing its operation, to distribute at least 90 percent

of its net income to unit holder. It cannot invest more than S per cent of

its inventible fund under the unit schemes 1964 and 1971, in the shares

of new industrial undertakings. The point is that the eligible securities

for investment by the UTI are assumed to be those that are on the

dividend payment list.

To conclude the discussion of market imperfections there are

four factors, which dilute the difference of investors between dividends

and retained earnings. Of these, flotation costs seem to favor retention

of earnings on the other hand, the desire for current income and, the

33

related transaction and inconvenience costs, legal restrictions as

applicable to the eligible securities for institutional investment and tax

example of dividend income imply a preference of payment of

dividends. In sum, therefore, market importer implies that investors

would like the company to retain earnings to finance

investment .programs. The dividend policy is not irrelevant.

Resolution of Uncertainty:

A part from the market imperfection, the validity of the

mm hypothesis, insofar as it argues that dividends are irrelevant, is

questionable under conditions of uncertainty. MM hold, it would be

recalled, the at dividend policy is as irrelevant under conditions of

uncertainty as, it is when prefect certainty is assumed. The MM

hypothesis, however, not tenable as investors cannot between

dividend and retained earnings under conditions of uncertainty. This

can be illustrated with reference to four aspects: (i) near vs. distant

dividend; (ii) informational content of dividends; (in) preference for

current income; and (iv) sale of stock at uncertain price/under pricing.

I. Near Vs Distant Dividend:

One aspect of the uncertainty situation is the payment of dividend

now or at a later data. If the earnings are used to pay dividends to the

investors, they get immediate or neat dividend if however, the net

earnings are retained, and the shareholders would be entitled to receive

34

a return after some time in the form of an increase in the price of shares

(Capital gains) or bonus shares and so on. The dividends may then, be

referred to as `distant-or-future' dividends. The crux of the problem is:

are investors indifferent between immediate and future dividends.

According to Gordon" investors are not indifferent; rather, they would

prefer near dividend to distant dividend the when it would be payment

of the investors cannot be precisely forecast. The longer the distance

in future dividend payment, the higher is the uncertainty to the

shareholders

The uncertainty increases the risk of the investors. The payment

of immediate dividend resolves uncertainty. The argument that

near dividend is preferred over the distant dividends involves the

"bird-in-hand' argument. This argument is developed in some

detail in the later part of this report. since current dividends are

less risky than future/distant dividends, shareholders would favors

dividends to retained earnings.

II. Informational Content of Dividends:

Another aspect of uncertainty, very closely related to the first

(i.e.

Resolution of uncertainty or the -bird-in-hand' argument) is the

informational content of dividend argument. According to the latter

35

argument, as the name suggests, the dividend contains some

information vital to the investors. The payment of dividend conveys

to the shareholders information relating to profitability of the

firm.The international content .argument finds support in some

empirical evidence. IT id contended that changes in dividends

convey more significant information than what earnings

announcements do. Further, the market reacts to dividend changes-

prices rise in response to a significant increase in dividends and fall

when there is a significant decrease or omission.

III. Preference for Current Income:

The Third aspect of the uncertainty question to dividends is based

on the desire of investors for current income to meet consumption

requirements. The MM hypothesis of irrelevance of dividends

implies that in case dividends are not paid, investors who prefer

current income can sell a part of their holdings in the firm for the

purpose. But, under uncertainty conditions, the two alternatives are

36

not on the same footing because (i) selling a small fraction of

holdings periodically is inconvenient. that selling shares to obtain

income, as an alterative to dividend, involves uncertain price and

inconvenience, implies that investors are likely to prefer current

dividend. The MM proposition would, therefore, not be valid because

investors are not indifferent.

IV. Under Pricing:

Finally the MM hypothesis would also not be valid when conditions

are assumed to be uncertain because of the prices at which the firms

can sell shares to raise funds to finance investment program's

consequent upon the distribution of earnings to the shareholders The

irrelevance argument would valid provided the firm is able to sell

shares to replace dividends at the current price. Since the shares would

have to be offered to bedew investors, the firm can sell the shares only

at a price below the prevailing price.

37

RELEVANCE OF DIVIDENDS

In sharp contrast to the MM position, there are some theories that

consider dividend decisions to be an active variable in determining the

value of a firm. The dividend decision is, therefore, relevant. We

critically examine below two theories representing this notion:

1) WALTERS MODEL

2) GORDON'S MODEL

WALTER'S MODEL

Proposition Walter’s models support the doctrine that dividends are

relevant. The investment policy of a firm cannot be separated from its

dividends policy and both are according to Walter interlinked. The

choice appropriate dividend policy affects the value of an enterprise.

The key argument in support of the relevance proposition of

Walter’s model is the relationship between the return on a Firm's

investment or its internal rate of return (r) and its cost of capital or the

required rate of return (Ke) The firm would have an optimum dividend

policy, which will be determined y the relationship of r and k. In other

words, if the return on investments exceeds the cost of capital, the firm

should refrain the earnings, whereas it should distribute the earnings to

the shareholders in case the required rate of return exceeds the

38

expected retune on the firm's investments. The rationale is that if r >

ke, the firm is able to earn more than what the shareholders could by

reinvesting, if the earnings are paid to them. The implication of r < ke

is that shareholders can earn-a higher return by investing elsewhere.

Walter's model, thus, relates the distribution of dividends

(retention of earning) to available investment opportunities. If a firm

has adequate profitable investment opportunities. It will be able to earn

more than what the investors expect so that r > ke. Such firms may be

called growth firms. For growth Firms, the optimum dividend policy

would be given by a D/P ratio of zero.

That is to say the firm should plough back the entire earnings

within the firm. The market value of the shares will be maximized as a

result. In contrast, if a firm does not have profitable investment

opportunities (when r<ke,) the shareholders will be better off if

earnings are paid out to them so as to enable them to earn a higher

return by using the funds elsewhere. In such a case, the market price of

shares will be maximized by the distribution of the entire earnings as

dividends. A D\P ratio of 100 would give an optimum dividends

policy. .

39

Finally, when r= k (normal firms), it is a matter of indifference

whether earnings are retained or distributed. This is so because for a4l

D/P ratios (ranging between zero and 100) the market price of shares

will remain constant. For such firms, there is no optimum dividend

policy (D/P ratio.)

Assumptions:

The critical assumptions of Walter's Model are as follow:

1. All financing is done through retained earnings:

External sources of funds like debt or new equity capital are not

used.

2. With additional investments undertaken, the firm's business, risk

does not change.

It implies that r and k are constant. .

3 There is no change in the key variable, namely, beginning earnings

per share, E.

And dividends per share, D. The values of D and E may be changed

in the model to

determine results, but any given value of E and D are assumed to

remain constant in

determining? Given value.

4. The Firm has perpetual (or very long) life.

40

Limitations:

The Walter's model, one of the earliest theoretical models,

explains the relationship between dividend policy and value of the firm

under certain simplified assumptions. Sonic of the assumptions do not

stand critical evaluation. IN tile first place, the Walter's model assumes

that exclusively:-retained earnings Finance the firm's investment; no

external financing is used. The model would be only applicable to all

equity firms. Secondly, the model assumes that r is constant. This is

not a realistic assumption because when the firm makes increased

investments are also changes. Finally as regards the assumption of

constant risk complexion of firm has a direct bearing on it. By

assuming a constant Ke Walter’s model ignores the effect of risk on

the value of the firm.

41

GORDON'S MODEL

Another theory, which contends that dividends are relevant, is

Gordon's model. This model, which opines that dividend policy of a

firm affects its value, is based on the following assumptions:

Assumptions:

1. The firm is an all-equity firm. No external financing is used and

exclusively retained earnings Finance investment program's.

2. r and ke are constant.

3. The firm has perpetual life

4. The retention ratio, once decided upon, is constant. Thus, the

growth rate, (g=br) is. Also constant.

5. Kc > br.

42

Arguments:

It can be seed from the assumption of Gordon's model that they are

similar to those of Walter's model. As a result, Gordon's model, like

Walter's contends that dividend policy of the firm is relevant and that

investors put a positive premium on current incomes/ dividends. The

crux of Got-don's arguments is a two-fold assumption: (i) investors are

risk averse. And (ii) they put a premium on a certain return and

discount/ penalize uncertain returns.

As investors are rational, they want to avoid risk. The term risk

refers to the possibility of not getting a return on investment. The

payment of current dividends ipso facto completely removes any

chance of risk. If, however, the firm retains the earnings (i.e. current

dividends is uncertain, both with respect to the amount as well as the

timing. The rational investors can reasonably be expected to prefer

current dividend. In other words, they would discount dividends that

are they would placeless importance on it as compared to current

dividend. The investors evaluate the retained earnings as a risky

43

promise. In case the earnings are retained, therefore the-market price of

the shares would be adversely affected.

The above argument underlying Gordon's model of dividend

relevance is also described as a bird-in-the-hand argument. "That a

bird in hand is better than two in the bush is based to the logic that

what is available: at present is preferable to what may be available in

the future. Basing his model on this argument, Gordon argues that the

futures are uncertain and the more distant the future is, the more

uncertain in it is likely to be. If, therefore, current dividends are

withheld to retain profits, whether the investors would at all receive

them later is uncertain. Investors would naturally like to avoid

uncertainty. In fact, they would be inclined to pay a higher price for

shares on which current dividends are paid. Conversely, they would

discount the value of shares of a firm, which Postpones dividends.

The discount rate would vary, as shown if figure with the retention

rate or level of retained earnings. The term retention ratio means the

percentage of earnings retained. It is the inverse of D/P ratio. The

omission of dividends, or payment of low dividends, would lower the

value of the shares.

44

45

Dividend Capitalization Model:

According to Gordon, the market valued of a share is equal to

the present value of future streams of dividends. A simplified version

of Gordon's model can be symbolically 18 expressed as

E(1-b)

Ke-br

Where p = price of a share

E= Earnings per share

b= Retention ratio or percentage of earnings retained.

1-b=D/P ratio or percentage of earnings distributes as

dividends

Ke= Capitalization rate/cost of capital

Br=g=Growth rate= rate of return on investment of an equity

firm.

DIVIDEND POLICIES:

In the light of the conflicting and contradictory viewpoints

as also the available empirical evidence there appears to be a case for

the proposition that dividend decisions are relevant in the sense that

investors prefer them over retained earnings and they have a bearing on

the firm's objective of maximizing the shareholder's wealth.

46

FACTORS DETERMINIG THE DIVIDEND POLICIES

The factors determining the dividend policy of a firm may, for

purpose of exposition, be classified into: (a) Dividend payout (D/P)

ratio, (b) Stability of dividends, (c) Legal, contractual and internal

constraints and restrictions, (d) owners considerations, (e) Capital

market considerations. And (f) Inflation.

A. Dividend Payout (D/P) RATIO:

A major aspect of the dividend policy of a firm is its dividend

payout (D/P) ratio, that is, the percentage share of the net earnings

distributed to the shareholders as dividends. The relevance of the D/P

ratio, as a determinant of the dividend policy of a firm, has been

examined at some length in the preceding chapter. It is briefly

recapitulated here.

Dividend policy involves the decision to pay out earnings or to

retain them for reinvestment in the firm. The retained earnings

47

constitute a source of financing. The payment of dividends result in the

reduction of cash adds, therefore, in a depletion of total assets. In order

to maintain the asset level, as well as finance investment opportunities,

the firm must obtain funds from the issue of additional equity or debt.

If the firm is unable to raise external funds, its growth would be

affected. Thus, dividend imply outflow of cash and lower future

growth. In other words, the dividend policy of the firm affects both the

shareholders' wealth and the long term growth of the firm. The

optimum dividend policy should strike the balance between current

dividends and future growth which maximizes the price of the firm's

shares. The D/P ratio of a firm should be determined with reference to

two basic objectives-maximizing the wealth of the firm's owners and

providing sufficient funds to finance growth. These objectives are not

mutually exclusive, but interrelate.

Given the objective of wealth maximization, the firm's dividend

policy (D/P ratio) should be one, which can maximize the wealth of its

owners in the `long run'. In theory, it can be expected that the

shareholders take into account the long-run effects of D/P ratio that is,

if the firm is paying low dividends and having high retentions, they

recognize the element of growth in the level of future earnings of the

firm. However, in practice, they have a clear-cut preference for

dividends because of uncertainty and imperfect capital markets. The

48

payment of dividends can therefore, be expected to affect the price of

shares: a low D/P ratio may cause a decline in share prices, while a

high ratio may lead to rise in the' market price of the shares.

Making a sufficient provision for financing growth can be

considered a secondary objective of dividend policy. Without

adequate funds to implement acceptable projects, the objective of

wealth maximization cannot be achieved. The firm must forecast its

future needs for funds, and taking into account the external

availability of funds and certain market considerations, determine

both The amount of retained earnings needed and the amount of

retained earnings available after the minimum dividends have been

paid. Thus; dividend payments should not be viewed as a residual,

but rather a required outlay after which any remaining funds can be

reinvested in the firm.

B. Stability of Dividends:

The Second major aspect of the dividend policy of a firm is

the stability of dividends. The investors favors stable dividend as much

as they favors the payment of dividends (D / P ratio).

The term dividend stability refers to the consistency or lack of

variability in the stream of dividends. In more precise terms. it means

49

that a certain minimum amount of dividend is paid out regularly. The

stability of dividends can take any of the following three forms: (i)

constant dividend per share, (ii) constant/stable /P ratio, and (iii)

constant dividend per share plus extra dividend.

i. Constant dividend per Share :

According to this form of stable dividend policy, a company

follows a policy of certain fixed amount per share as dividend. For

instance, on a share of face value of Rs 10, firm may pay a fixed

amount of, say Rs 2-5O as dividend. This amount would be paid year

after year, irrespective of ht level of earnings. In other words,

fluctuations in earnings would not affect the dividend payments. In

fact, when a company follows such a dividend policy, it will pay

dividends to the shareholder even when it suffers losses. A stable

dividend policy in terms of fixed amount of dividend per share does

not, however, mean that the amount of dividend is fixed for all times to

come. The dividends per share are increased over the years when the

earnings of the firm increase and it is Expected that the new level of

earnings can be maintained .Of course, if the increase to be temporary,

the annual dividend remains at the existing level It can, thus, be seen

that while the earnings may fluctuate from year to year, the dividend

per share is constant - To be able to pursue such a policy, a firm whose

50

earnings are not stable would have to make provisions in years when

earnings are higher for payment of dividends in lean years. Such firms

usually create a reserve for dividends equalization. The balance

standing in this fund is normally invested in such assets as can be

readily converted into cash.

ii. Constant Payout Ratio:

With constant/target payout ratio, a firm pays a constant

percentage of net earnings as dividend to the shareholders. In other

words, a stable dividend payout ratio implies that the percentage of

earnings paid out each year is fixed. Accordingly, dividends would

fluctuate proportionately with earnings and are likely to be highly

volatile in the wake of wide fluctuations in the earnings of the

company .As a result, when the earnings of a firm decline substantially

or there is a loss in a given period, the dividends, according to the

target payout ratio, would be low or nil. To illustrate, if affirm has a

policy of SO percent target payout ratios, its dividends will range

between Rs Sand zero per share on the assumption that the earnings

per share are Rs 10 and zero respectively. The relationship between the

earnings per share (EPS) and dividend per share (DPS) under the

policy of constant payout ratio.

51

iii. Stable Rupee Dividend plus Extra Dividend:

Under this policy, a firm usually pays a fixed dividend to the

shareholders and in years of marked prosperity; additional or extra

dividend is paid over and above the regular dividend. As soon a normal

conditions return, the firm cuts extra dividend and pays the normal

dividend per share. The policy of paying sporadic dividends may not

find favor with them. The alternative to the combination of a small

regular dividend and an extra dividend is suitable for companies whose

earnings fluctuate widely. With this method, a firm can regularly pay a

fixed, though small, amount of dividend so that there is no risk of

being able to pay dividend to the shareholders. At the same time, the

investors can participate in the prosperity of the firm. By calling the

amount by which the dividends exceed the normal investments as

extra. The Firm, in effect, cautions the investors-both existent as well

as prospective- they should .not consider it as a permanent increase in

dividends. It may, therefore, be noted that from the investor's

viewpoint, the extra dividend is of a sporadic nature. What the

investors expect is that they should get an assured fixed amount as

dividends, which should gradually and consistently increase over the

years. The most commendable from of stable dividend policy is the

52

constant dividend per share policy. There are several reasons why

investors why investors would prefer a stable dividend policy. There

ate several reasons why investors would prefer a stable dividend policy

and pay a higher price for a firm's shares which observe stability in

dividend payments.

Desire for Current Income:

A factor favoring a stable policy is the desire for current income by

some investors. Investors such as retired persons and windows, for

example, view dividends as a source of funds to meet their current

living expenses. Such expenses are fairly constant from period to

period. Therefore, a fall in dividend will necessitate selling shares to

obtain funds to meet current expenses and, conversed, reinvestment of

some of the dividend income if dividends rise significantly. For one

thing, many of the income-conscious investors may not like to dip into

their principal' for current consumption. Moreover, either of the

alternatives involves, inconvenience apart, transaction costs in terms of

brokerage, and other expenses. These costs are avoided if the dividend

stream is stable and predictable. Obviously such a group of investors

may be willing to pay a higher share price to avoid the inconvenience

53

of erratic dividend. Payments, which disrupt their budgeting. They

would place positive utility on stable dividends

Information content

Another reason for pursing a stable dividend policy is that

investor's are thought to use dividends and changes in dividends as a

source of information about the firm's profitability. If investors know

that the firm will change dividends only if the management foresees a

permanent earnings change, then the level of dividends informs

investors about the compacts expected earnings. Accordingly the

market views the changes in the dividends of such a cornpai7ti- as of a

semi-permanent nature. A cut in dividend implies poor earnings

expectation; no change, implies earnings stability; and a dividend

increase, signifies the managements optimism about earnings. On the

other hand, a company that pursues an erratic dividend payout policy

does not provide any such information, thereby increasing the risk

associated with the shares. Stability of dividends, where such dividends

are based upon long-run earning power of the company, is, therefore, a

means of reducing share-riskiness and consequently increasing share

value to investors.

Requirements of Institutional Investors:

54

A third factor encouraging stable dividend policy is the

Requirement of institutional investors , like Life Insurance Corporation

of India and General Insurance Corporation of India (insurance

companies) and Unit Trust of India (mutual funds) and so on, to invest

in companies which have a record of continuous and stable dividend.

These financial institutions owing to the large size of their inventible

funds, re(resent a significant force in the financial markets and their

demand for the company's securities can have an financial markets and

their demand for the company's securities cha have an er4hancing

Effect on its price and,

there by on the shareholder's wealth. A stale dividend policy is a

prerequisite to attract the inventive funds of these institutions. One

consequential impact of the purchase of shares nay them is that there

may be an increases in the general demand for the company's shares.

Decreased marketability risk, coupled with decreased financial risk,

will have a positive effect on the value of the firm's shares.

A part from theoretical postulates for the desirability of stable

dividends, there are also Manu empirical studies classic among them

being that of limner5. To support the viewpoint that companies purser

a stable dividend policy. In other words, companies, while taking

decisions on the payment of dividend, bear mind the dividend below

55

the amount paid in previous years. Actually, most firms seem to favor

a policy of establishing a non-decreasing dividend per share above a

level than can safely be sustained in the future. These cautious creep up

of dividends per share results in stable dividend per share pattern

during fluctuant earnings per share periods, and a rising the function

pattern of dividends per share during increasing earnings per share

periods.

Chapter-3

56

COMPANY

PROFILE

KESORAM CEMENT

One among the industrial giants in the country today, serving

the nation on the industrial front Kesoram Industries Limited has a

chequered and eventful history is dating back to the Twenties when

the Industrial House of Birlas acquired it. With only a Textile Mill

under it banner in 1924, it grew from strength to strength and spread

57

its activities to never fields like Rayon, Pulp, transparent paper, Spun

pipes and Refractoriness, Tires, Oil Mills and Refinery Extraction.

Looking to the wide gap between demand and supply, of a vital

commodity, cement, which plays an important role in nation - building

the Government of India de-licensed the Cement Industry in- the year

1966 with a view to attract private entrepreneurs to augment the

cement product Kesoram rose to the occasion and decided to set up a

few cement plants in the country.

The first Cement Plant of Kesoram with a capacity of 2.5 lack

tones per annum based on dry process, was established in 1969 at

Basanthnagar a backward area in Karimnagar District, Andhra

Prudish, and christened it Kesoram Cement. The second unit

followed suit, which added a capacity of 2.00 lack tones in 1971. The

plant was further expanded to 9.00 lack tones by adding 2.5 lack

tones in August 1978. 1.14 lack tones in January, 1981 and 0.87 lack

tones in September, 1981.

Kesoram Cement has outstanding track record of performance

and distinguished itself among all the Cement factories in India by

bagging the coveted National Productivity Award for two successive

58

years, i.e., in 1985 and 1986, so also the National Awards for Mines

Safety for two year 1985-86 and 1986-87. Kesoram also bagged

NCBM's (National Council for Cement and Building Materials)

National Award for Energy Conservation for the year 1989-90.

Kesoram got the prestigious State Award "Yajamanya Ratna"

& "Best Management Award" for the year 1989,so also the FAPCCI

(Federation of Andhra Pradesh Chamber of Commerce and Industry)

Award for Best Family Planning effort in the State. For the year 1987-

88, Kesoram also got the FAPPCI Award for Best Industrial Promotion

/ Expansion effort in the State. In the year 1991 Kesoram also got the

May day Award of the Government of Andhra Pradesh for "Best

Management" and "Pundit Jawaharlal Nehru Silver Rolling Trophy for

Best productivity effort in the State, sponsored by FAPCCI, for 1993

Kesoram got the Best.

Management Award of the Government of Andhra Pradesh.

Kesoram is also conscious of its social responsibilities. Its rural and

community development programmers include adoption of two nearby

villages, running an Agricultural Demonstration Farm, a Model Dairy

Farm etc., Impressed by these activities, FAPCCI choose Kesoram to

confer the Award for "Best efforts of an Industrial Unit in the State to

Develop Rural Economy" twice, in the year 1994 as well as in 1998.

Kesoram also has to its credit the National Award (Shri S.R. Rangta

59

Award for Social Awareness) for the year 1995-1996, for the Best

Rural Development Efforts made by the Company. In the same year

Kesoram also got the FAPCCI Award for "Best Workers Welfare"

Kesoram got the First Prize for Mine Environment and Pollution

Control for year 1999 too, for the 3rd year in succession in July, 2001

Kesoram annexed the "Vana Mithra" Award from the Government of

Andhra Pradesh.

Quality conscious and progressive in its outlook, KESORAM

CEMENT is an OHSAS 08001 Company and also joined the select

brand of IS09001-2000 Companies.

Performance:

The performance of Kesoram Cement industry had been

outstanding achieving over cent per cent capacity utilization although

despite many odds like power cuts and which most 40% was waste due

to wagon shortage etc.

The company being a continuous process industry works round the

clock and has an excellent record of performance achieving over 100%

capacity utilization.

60

Kesoram has always combined technical progress with

industrial performance. The company had a glorious track record for

the last 27 years in the industry.

Technology:

Kesoram Cement uses most modern technology and the

computerized control in the plant. A team of dedicated and well-

experienced experts manages the plant. The quality is maintained much

above the bureau of Indian Standards. The raw materials used for

manufacturing cement are:

• Lime stone

• Bauxite

• Hematite

•Gypsum

61

History

The first unit was installed at Basanthnagar with a capacity of 2.5 lack

TPA (tones per annum) incorporating humble supervision, preheated

system, during the year 1969.

The second unit followed suit with added a capacity of 2 lack

TPA in 1971.

The plant was further expanded to 9 lack by adding 2.5 lack

tones in August, 1978, 1.13 lack tones in January, 1981 and 0.87 lack

tones in September, 1981.

Power

Singareni Collieries makes the supply of coal for this industry

and the power was obtained from AP TRANSCO. The power demand

for the factory is,. about 21 MW. Kesoram has got 2 diesel generator

sets of 4 MW each installed in the year 1987.

Kesoram cement now has a 1 S KW, captive power plant to

facilitate for un interrupted power supply for manufactured of cement.

62

Environmental and Social Obligations

For environmental promotion and to keep-up the ecological

balance, this section has undertaken various social welfare programs

by adopting ten nearly villages, organizing family welfare camps,

surgical camps, children immunization camps, animal health camps,

blood donation camps, distribution of fruit bearing trees and seeds,

training for farmers etc., were arranged.

Welfare and Recreation Facilities ,

II

For the purpose of recreation facility to auditoriums were

provided for playing indoor games, cultural function and activities like

drama, music and dance etc.

The industry has provided libraries and reading rooms. About

1000 books are available in the library. All kinds of newspaper,

magazines are made available. Canteen is provided to cater to the

needs to the employees for supply snacks, tea, coffee and meals etc.

One English medium and one Telugu medium school are provided

to meet the educational requirements.

63

The company has provided a dispensary with a qualified

medical office and paramedical staff for the benefit of the employees.

The employees covered under ESI scheme have to avail the medical

facilities from the ESI hospital. Competitions in sports and games are

conducted every year for August 15, Independence day and January

26, Republic Day among the employees.

Electricity:

The power consumption per ton for cement has come down to

108 units against 113 units last year, due to implementation of various

energy saving measures. The performance of captive power plant of

this section continues to be satisfactory. Total power generation during

the years was 84 million units last year. This captive power plant is

playing a major role in keeping power costs with in economic levels.

The management has introduced various HRD programs for

training and development and has taken various other measures for the

betterment of employee’s efficiency / performance.

The section has installed adequate air pollution control systems

and equipment and is ISO 14001 such as Environment Management

System is under implementation.

64

Production

Last 23 years production of Kesoram cements industry, Basanthnagar.

Year Production (in

tones)

1985-86 749197

1986-87 761581

1987-88 1805921

1988-89 760708

1989-90 550254

1990-91 601453

1991-92 643307

1992-93 643663

1993-94 748258

1994-95 685596

65

1995-96 731177

1996-97 784555

1997-98 782383

1998-99 731049

1999-2000 746474

2000-2001 688305

2001-2002 777092

2002-2003 692424

2003-2004 727447

2004-2005

2006-2007

2007-2008

735012

1046166

1056742

2008-09 1199445

2009-10 1378833

2010-11 1150486

2011-12 1074233

Note: Production including internal consumption also.

66

Cement and clinker production were lower than the previous

year mainly because of lower dispatches of cement due to recession

prevailing in cement industry with slow down in demand during the

year under review. This section had to curtail production due to

accumulation of large stocks of clinker. However, sales realization

during the second half of the year has improved and it is hoped that

prices will stabilize at some reasonable levels.

Directors of Kesoram Industries Limited

Chairman

• Syt. B.K. Birla

Directors

• Smt. K.G. Maheshwari

• Shri. Pramod Khaitan

• Shri B.P. Bajoria

• Shri P.K. Chokesy

• Smt. Neeta Mukerji

• (Nominee of I.C.I.C.I.)

• Shri D.N. Niishra

• (Nominee of L.I.C.)

• Shri Amitabha Gosh

• (Nominee of U.T.I.)

• Shri P. K. Ivlalik

• Smt Manjushree Khaitan

Secretary

• Shri S.K. Parik

67

Senior Executives

• Shri K.C. Jain (Manager of the Company)

• Shri J.D. Poddar

• Shri O.P. Poddar

• Shri P.K. Goyenka

• Shri D. Tan don

Auditors

•Messrs Price Waterhouse Subsidiary Companies of Kesoram

Industries

•Bharat General & Textile Industries Limited

•KICM Investment Limited

• Assam Cotton Mills Limited Soft shree Estates Limited.

68

Chapter-4

DATA ANALYSIS

&69

INTERPRETATION

DIVIDEND DECISIONS IN

KESORAM

CEMENT INDUSTRY

The various modes of dividend theories, which have been

discussed earlier, the sample of the kesoram cement industry

selected. And analyzed to empirical evidence for the two theories

supporting the relevance of dividend policies Walter's model and

Gordon's model.

We shall classify the kesoram cements industry into these six

categories basing on the explain the Dividend per share, Earning per

share, Return per share, Price Earning, Profit after Tax, Net worth.

These are explaining based on last six financial years’ data.

Since 2003-04 to 2008-09 collected the data in kesoram

cement industries. At Basanthnagar.

70

COMPARISION OF DIVIDEND PER

SHARE

OF THE KESORAM CEMENTS

TABLE 4.1

YEARDIVIDEND

PERSHARE

2005-06 2.50

2006-07 3.00

2007-08

2008-09

4.00

5.50

2009-10 2.25

2010-11 3.25

2011-12 1.00

71

DIVIDEND PER SHARE

FIGURE 4

72

Interpretation:

The dividend Per Share of kesoram Cement ltd., is Rs 2.50 in

the year of 2005-06. The dividend per share for the next two

financial year is 3.00 and 4.00 respectively.

When it is compared with the year 2005-06 the dividend per share in

the year 2008-09 it is increased at the rate of 120% and 30% in the

year of 2010-2011.

COMPARISION OF EARNING PER

SHARE

OF THE FIRM FOR THE LAST FIVE

YEARS

TABLE 4.2

73

EARNING PER SHARE

74

YEAR EARNING PERSHARE

2006-07 58.08

2007-08

2008-09

83.80 82.80

2009-10 51.88

2010-11 -45.95

2011-12 -83.02

FIGURE 4.2

Interpretation:

The Earning per share of the firm is moderate in the year 2006-

07. The Earning per share fluctuated slightly during the financial

years 2006-07 , 2007-08 and 2008-09.

However, there is massive decrease reported ( about 200% of

2008-09 in the year 2011-12)

COMPARISION OF PROFIT AFTER TAX

OF THE KESORAM CEMENTS

75

TABLE 4.5

PROFIT AFTER TAX

FIGURE 4.5

76

YEAR PAT (in Rs)

2006-07 265.68

2007-08

2008-09

383.35 378.74

2009-10 237.34

2010-11 -210.21

2011-12 -379.74

Interpretation :

The profit after tax of kesoram cement limited had moderate

at 2006-07 and next year was increased. After 2006-07 increased

highly. That is 383.35 and then decreases continuously till 2011-12

i.e to -379.74.

COMPARISION OF NET WORTH

OF THE KESORAM CEMENTS

TABLE 4.6

77

NET WORTH

FIGURE 4.6

Interpretation :

78

YEAR Net worth

2006-07

2007-08

654.46

981.92

2008-09 1,330.10

2009-10 1,540.24

2010-11 1,300.25

2011-12 915.01

There is a gradual increased in the net worth of the firm

subject to 2006-07 up to 2009-10 then a gradual decrease till 2011-

12.

Declaration of dividends

Announcement DateEffective

DateDividend

TypeDividend

(%)

30/04/2012 28/06/2012 Final 10%

28/04/2011 17/06/2011 Final 32.5%

10/11/2010 24/11/2010 Interim 22.5%

29/04/2010 14/06/2010 Final 32.5%

03/11/2009 16/11/2009 Interim 22.5%

04/05/2009 09/06/2009 Final 32.5%

03/11/2008 17/11/2008 Interim 22.5%

05/05/2008 09/06/2008 Final 55%

06/03/2007 20/03/2007 Interim 40%

03/05/2006 13/06/2006 Final 30%

79

Chapter-5

FINDINGS, SUGGESTIONS &

CONCLUSION

5.a FINDINGS:

After analyzing the financial position of Kesoram Cement

Industries and evaluating its Fixed Assets Management or Capital

Budgeting Techniques in respect of Components analysis. Trend

80

analysis and Ratio analysis. The following conclusions are drawn

from the project preparation.

1) Regarding the dividend per share of the Keshoram Cement, it

has observed that it has been increased.

2) Regarding the earning per year of the firm, it has observers

that it has been increased massively.

3) Regarding the return per share of the firm, it has observed

that it has been increased.

4) Regarding the Price earning value of the firm's share, it has

observed that in the financial year 2008-09, it got decreased

when compared with the financial years 2006-07 and 2007-

08.

5) Regarding the profit after tax of the firm, it has observed that

it has been increased highly in the financial year 2008-09.

6) Regarding the Net worth of the firm, it has observed that

There is a gradual increased in the net worth of the firm

subject to very high in the financial year 2007-08.

5.b SUGGESTIONS:

81

The following Suggestions are being provided to the kesoram

cement industry.

1) Investors always prefer the dividend payment for Capital

appreciation. Hence some amount of Dividend must be

paid regularly. Unless the Payment will reduce the net worth

of the industry.

2) The industry should improve the dividend per share.

3) The industry should follow stable dividend policy.

4) The industry should maintain high per share.

5) The industry must improve and maintain high ratio.

6) When the industry get the price earning highly, That

industry will

Grow.

7) The industry Net worth is very good. The industry has to

maintain this type of Net worth.

82

5.c CONCLUSION :

From the analysis of the company from the kesoram

cement industries we can note the following points:

1) Profit After Tax has increased from Rs 45.75 Cores to

Rs. 265.68 Cores. '

2) Earning per share has improved from Rs 9.99 to Rs.

58.08

3) Dividend has been enhanced from Rs. 3.00 to 4.00

4) Increased net worth from Rs. 416.05 Cores to Rs. 65 4.4 3

5) The dividend carries some informational content.

6) The dividend pay out ratio has an impact on the firm.

7) The dividend per share increased normally.

8) There is a fluctuation in earning per share

9) The Return per share has been increased gradually.

83

BIBLIOGRAPHY

BIBLIOGRAPHY:

1 Prasanna Chandra: `Financial Management-Theory and

Practice' 5’Th Edition, 2001, Tata Mc Graw Hill

Publishing

House.

2. Cooper Donald E, Pamela S Schindler, 8th Edition, 2003, Mc

Graw Hill Publishing House.

3. Khan M Y, P Jain: ‘Financial Management-Text and

problems’ 3rd Edition, 1999, Tata Mc Graw Hill Publishing

House.

84

4. Pandy I M: ‘Financial Management’ 8th Edition, 2003, Vikas

Publishing House Private Limited.

5. Lawrence J. Gilma : Principle of managerial Finance, Addisa

Worley.

85