A STUDY ON

“CAPITAL STRUCTURE AND PROFITABILITY ANALYSIS” OF

THE INDIA CEMENTS. LTD.

PROJECT REPORT

SUBMITTED IN

PARTIAL FULFILLMENT OF THE REQUIREMNT FOR

THE

AWARD OF THE DEGREE

Submitted by

MR. ROHIT VAIRAGI

HT. 028-08-209)

Department of Business Administration

HYDERABAD PRESIDENCY PG COLLEGE

(AFFILIATED TO OSMANIA UNIVERSITY)

(2008 – 2010)
 CERTIFICATE

This is to certify that Mr. ROHIT VAIRAGI is a student of M.B.A (FINANCE) has done his
project work entitled in partial fulfillment of the requirement for the award of the
degree of Master of Business Administration from HYDERABAD PRESIDENGY PG
COLLEGE, OSMANIA UNIVERSITY, HYDERABAD.

He has evinced keen professional interest throughout the academic and project work
and has done it with sincerity and dedication.

I have guided him during the preparation of his project.

EXTERNAL EXAMINER PRINCIPAL

 CERTIFICATE

This is to certify that [Link] VAIRAGI is a student of M.B.A (FINANCE) has done his
project work entitled in partial fulfillment of the requirement for the award of the
degree of MASTER OF BUSINESS ADMINISTRATION from HYDERABAD PRECIDENCY PG
COLLEGE, OSMANIA UNIVERSITY, HYDERABAD.

He has evinced keen professional interest throughout the project work and has done it
with sincerity and dedication.

I have guided him during the preparation of his project.

Guide

SYED SHABAZ FRABUDDIN

Associate Profess
 ACKNOWLEDGEMENT

I take this opportunity to express my deep & sincere gratitude to the management
of THE ICL Industries Ltd for their gesture of allowing me to undertake this
project & its various employees who lent their hand towards the completion of
this study.

The cooperation I received from the wide cross-section of employees of The THE
ICL Industries Ltd makes it difficult to style out individuals for acknowledgement.

I express my sincere thanks to Mr. N SHANKAR (Chairman), Mr. SRINIVASAN(M.D)

& Mr. S. PONNUMBI (Finance Manager) of The ICL Industries Ltd for helping me
and guiding immensely in carrying out this project work.

I am also thankful to our college principal, Mr. DR AZAMOINUDDIN & project

guide SYED SHABAZ FRABUDDIN, faculty of finance for providing their guidance to
complete this project work.

Finally, I would like to thank all my Friends & Family members who helped me
directly or indirectly for the successful completion of my project.

(ROHIT VAIRAGI)
 DECLARATION

ROHIT VAIRAGI declares that the project work entitled “CAPITAL

STRUCTURE AND PROFITABILITY ANALYSIS”, is an original and

bonafied work done by me. The project is being submitted in partial

fulfillment of the requirement for the Degree of MASTER OF BUSINESS

ADMINISTRATION and any other University or Institution has not

submitted it. The contents of this are based on the information collected by

me. During my tenure of the project work at “THE THE ICL

INDUSTRIES LTD”.

Place: Hyderabad

Date: 3/5/2010 (ROHIT VAIRAGI)

 CONTENT
1. CHAPTER I
1. Introduction.
2. Definition.
3. Need for the study.
4. Importance of the study.
5. Objective of the study.
6. Methodology.
7. Scope and Period of study.
8. Limitations of the study.

2. CHAPTER II

1. Review of literature.

3. CHAPTER III
1. Industry profile.

2. Company profile.

4. CHAPTER IV
1. Theoretical prospective of Capital structure and Profitability analysis.
5. CHAPTER VI
1. Methods of Capital structure Technique at THE ICL.

2. Data Analysis and interpretation.

6 CHAPTER VII
1. Findings & Suggestions.
2. Annexure.

3. Bibliography.
 CHAPTER- 1

INTRODUCTION
 Capital structure

Introduction

As the objective of a firm should be directed towards the maximization

of the value of the firm, the capital structure decision should be examined from the
point of its impact on the value of the firm if the value of the firm can be effected by
capital structure, a firm would like to have a capital structure, which maximize the
market value of the firm. There exist conflicting theories on the relation between
capital structure and value of the firm.

Capital structure one of the most complex areas of financial

decision making. It is the permanent financial of the company represented primarily by
long term debt and share holder fund but excluding all short term credit. Thus a
company capital structure is only a part of its financial structure. Poor capital structure
decision can result in a high cost of capital. Effective capital structure decision can
lower the cost of capital. The effect of capital structure of the company plays an
important role on profitability of the company. Profitability analysis will measure the
ability of the business to make profit.

MEANING:
The composition of share holders fund and outsider’s fund is called capital

Structure or funding mix. It is the mix of different sources of long term funds such as
Equity, preference, debt, retains earnings etc., in the total capitalization of the
company. It is the combination of various components in the total capital

Example: Share holders funds + loan funds + Earnings per share

DEFINATION:
According to “GESTUNBERG” capital structure refers to the composition or make–up of
a firm’s capitalization and it includes all long-term capital resources. It represents the
mix of different sources of long-term funds, retained in the total capitalization of
accompany.

OBJECTIVE OF THE STUDY:

 The study is to examine the capital structure and profitability in THE ICL.

 It conducts a critical examination and enquiry about optimum capital structure

and different theory of funding mix applied in THE ICL (M M Hypothesis, etc).

 To examine financial decisions or funding mix this remains constant.

 Examining the financing trends in the for the period of 2005-2009.

 Examining leverage analysis in THE ICL.

 Study debt/equity ratio of THE ICL Ind Ltd for 2005-2009.

 Net worth analysis and effect of financing on EPS-EBIT of the firm.

IMPORTANCE OF THE STUDY:

Capital structure is the equity and depth financing of a company. It is often
measured in terms of the relative magnitude of the various financing sources. All of
these are used in financing the firm’s assets. A company’s financial stability and risk of
insolvency depend on its financial sources and the types and sizes of various assets it
owns. The capital structure cannot affect the total earnings of a firm but it can affect
the shares of earnings available for equity share holders.
NEED FOR THE STUDY:
The study lays more emphasis on the understanding of current funding mix
procedures rather than taking an analytical view of the same. It studies the need to
further push up housing development programs, ready mix concrete in large
infrastructure projects, promotion of concrete highways and roads for supply of cement
to A.P Govt. for irrigation at subsidized. It also have global competitiveness’ of
International Repute.

METHODOLOGY OF THE STUDY:

Data Collection:
Primary Source: The primary source of data collection will be done by personal
interaction with THE ICL Finance Manager and other staff members.

Secondary Source: To achieve the above said objectives the study is collecting the data
from secondary source, as a major portion of the study is in descriptive manner,
collection by the form is suitable one. The required data for the study was collected
from annual reports of the company and other records maintained in the Finance
accounts department at THE ICL.

PERIOD OF THE STUDY:

The period of study is for 5 years annual data and other records shall gathered
from finance department (i.e., from 2005 – 2009)

SCOPE OF THE STUDY:

A study of capital structure involves an examination of long term as well as Short term
sources that a company taps in order to meet its requirements Of finance. The scope of
study is confine to the sources that THE ICL Ind LTD.

Tapped over the years under study [Link] study will analyze the current
capital structures, sale and profits realized at THE ICL. The study will evaluate the
 adequacy of current funding and it will investigate modifications and alternatives that
might improve the profit realizations.

LIMITATIONS:

 As the study is to be conducted for a period of 5 years and based on annual reports

published by the company and other data there is a scope for inaccurate conclusions.

 The data relating to purchases and cost data will not be provided by the company there

fore its leads to inaccurate conclusions and analysis.

 Since the study is based on the financial data that is obtained from the company’s

financial statements, the limitations of financial statements shall be equally applicable.

 CHAPTER II

REVIEW OF LITERATURE
Review of literature:

The empirical study of capital structure is divided into three parts. The first part

examines the evidence that relates to the cross sectional determinants of capital
structure. It discusses the characteristics of the firm that tends to be associated with

different debt ratio. In the second part it examines the changes in capital structure.

Finally it reviews the consequences of leverages Rather than determinants. It explores

how a firm’s financing choices influences its incentives to invest in its workers , price

of products ,form relationship with suppliers or compete aggressively with

competitors. Capital structure decisions are significant finance decisions of the

corporate firms in that They influence the return as well as the risk of equity share

holders. That there exists Close nexus between optimum/ judicious debt and the

Market value / valuation of the firm is well recognized in literature of finance. While

the excessive use of debt may endanger the very survival of the corporate firms, the
conservative policy may deprive its equity-holders the advantage of depr as a cheaper
Source of finance to magnify their rate of return. Following such an over- conservative
policy runs the basic objective of financial decisions making to maximize the wealth of
equity holders. Apart from financial risk return considerations, non- financial factors are
also likely to be very decisive in the designing capital structure of the corporate famous
for instance use of Debt , unlike equity does not dilute controlling power of Existing
owners in brief, debt is not an unmixed blessing and hence a dilemma for the corporate
finance manager.
An appropriate capital structure is a critical decision for any business organization.  The
decision is important not only because of the need to maximize returns to various
organizational constituencies, but also because of the impact such a decision has on an
organization’s ability to deal with its competitive environment.  The prevailing argument,
originally developed by Modigliani and Miller (1958) is that an optimal capital structure
exists which balances the risk of bankruptcy with the tax savings of debt.  Once
established, this capital structure should provide greater returns to stockholders than they
would receive from an all-equity firm. Despite its theoretical appeal, financial
management have not found optimal capital structure. The best that academics and
practitioners have been able to achieve are a prescription that satisfies short-term goals.
For example, in a recent Harvard Business Review art THE ICL, readers were left with
the impression that the use of leverage was one way to improve the performance of an
organization while this can be true in some circumstances, it fails to consider either the
complexities of the competitive environment, or the long-term survival needs of the
organization.

We argue that the use of leverage either to discipline managers

or to achieve economic gain is the ‘easy way out’, and, in many instances, can lead to
the demise of the organization.  The fact that an optimal capital structure has not been
found is an indication of some flaw in the logic. We believe that the original question
was framed incorrectly. Rather than: What is an optimal mix of debt and equity that will
maximize shareholder wealth; it should have been: Under what circumstances should
leverage be used to maximize shareholder wealth? Why? Because debt and equity have
profound long-term implications for corporate governance that far exceed the
exigencies of the moment. A better understanding of the issues at hand requires a look
at the genesis of the concept of using debt to control managers and to reconcile this
thinking with the need to survive in the competitive environments of today.
 CHAPTER-III

INDUSTRY PROFILE
or
COMPANY PROFILE
INDUSTRY PROFILE

CEMENT INDUSTRY:

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

The world-class Indian cement industry, which is second only to china in terms of
production, recorded a growth of 6.9% in the fiscal year 2005-2206 as against 5 the
overall production of cement in the country registered an increase of 6.9% from 117.50
million tons in 2004-2005 to 125.56 million tons in 2005-2006. While domestic
consumption was up 6.3% from 114 million tons to 121 million tones, cement exports
at 4.07 million tones registered an impressive rise of 21%over the previous years.
Clinker exports also rose by 6.9% to 5.6 million tons to 5.99 million tones. The cement
growth patterns differed from region to region with the east recording The highest
growth at 16.3%, the lowest growth being accounted for by the south At 20.6%. The
low growth rate in the south was mainly due to the negative growth Rate of 6% in the
first half of 2005-2006- which was offset to a considerable extent By a surge in growth
at 9% in the second half .Again the capacity utilization of the South at 78.5%against the
all- India average of 84% was mainly due to the Creation of additional capacity over the
last few years 5% in the previous year.

OUTLOOK

As to crisinfact, a reputed Research Agency, the overall profile of the cement industry is
expected to continue to remove over the next 2 to 3 years. The present buoyancy in
demand, the positive economic indicators and focus on the infrastructure spending,
housing and irrigation augurs well for the industry. The first quarter of the current fiscal
has began on a promising note for the industry, with cement dispatches touching 34.28
million tones as against 30.72 million tons in the previous year. In the southern region,
cement dispatches during the period april-june 2005 was of the order of 10.18 million
tones as against 8.60 million tons in the corresponding period last year- an increase of
18%. Overall the outlook for the cement industry in the current fiscal seems promising.

COMPANY PROFILE

THE ICL Industries Ltd is a company established in 1981 and today it is marked
among the top ten Cement Production companies of India, growing at over 20% as of
2005. THE ICL Industries Ltd has a countrywide office, network with fully
computerized operations and a professional team & worker. The company has an
installed capacity of 796000 tons of Cement. The company is expanding after Economic
reforms have set in THE ICL Industries has spread its wings over several high
production based mechanism as well.

THE ICL Industries Ltd. in a Cement producing company established in 1981. Today it
is marked among tip 10 Cement Companies of India growing at over 40% as of 2004
THE ICL Industries has a country wide office network with fully computerized
operations and a professional team with skilled and unskilled workers the company has
a installed capacity of 796000 tons of Cement. The company is expanding after the
economic reforms initiated by government of India in 1991-1992 and as it spread has
spread it wings over several high yielding products
 The Board comprised of eminent personalities from the field of Banking, Taxation,
Corporate loss and Industry. Sri. N. Shankar is the Chairman and Sri N. Srinivasan
(Managing Director) industrialist having through knowledge and experience in cement
business and allied fields, with a new appointed M.D Sri N. Srinivasan. The broad based
clientele group reflects the high respect and with THE ICL Industries Ltd, in production
circles. The client includes repeated business houses like THE ICL homes Ltd, and
confident financial institutions such as OBC (Oriental Bank of Commerce), Vijaya Bank
and Canara Bank, ICICI etc.,

The Plant is located in Nalgonda District of A.P where abundant raw materials
such as Lime Stone, Fire Wood etc., are available. Apart from the main resources River
Krishna flowing adjacent to the plant.

PRODUCTS PROFILE OF THE ICL

 RAASI GOLD: raasi gold are high strength cements to meet the needs of the consumer
for high strength concrete. As per BIS requirements the minimum 28 days compressive
strength of 53 grade OPC should not be less than 53 MPA. For certain specialized works
such as prestressed concrete and certain items of precast concrete requiring consistently
high strength concrete, the use of 53 grade opc is found very useful. 53 grade OPC
producers higher- grade concrete at very economical cement content. In concrete mix
design, for concrete M-20 and above grades a saving of to 10% of cement may be
achieved with the use of above mentioned 53 grade OPC.
 RAASI: raasi are the 43 grade OPCs most popular general-purpose cement in the market tody.
The production of 43 grade OPC is nearly 50% of the total production of cement in the country.
The compressive strength of cement at 28 days when tested as per IS code shall be minimum 43
Mpa. Characteristic strength requirements of this cement are given in the chart .

 RASSI: rassi super power are the premium blended cements from THE INDIA
 CEMENTS LIMIED. It is produced by intergrading of OPC clinker along with gypsum and

mineral admixtures. Dedicated to the end users after passing through stringent tests at

our R&D laboratory, it ensures a durable structure that lasts for generations.

Salient features :
 Strength increases as time passes.

 Low heat of hydration- ideal for mass concrete pours and machine foundations.

 High durability concrete- protects from corrosion, coastal attack and extreme

temperature.

 Ideal cement for resisting aggressive environments like chemical, chloride and sulphate

attack.

 Best suited for high performance concrete.

 High fitness- suited for plastering and finishing works.

 Equivalent to 53 grade cement.

THEORETICAL PROSPECTIVE OF CAPITAL

STRUCTURE AND PROFITABILITY ANALYSIS

Capital Structure Analysis

The objective of any company is to mix the permanent sources of funds used by
it in manner that will maximize the company’s market price. In other words,
companies seek to maximize their cost of capital. This proper mix of funds is
referred to as the optimal capital structure.

The capital structure decision is a significant managerial decision, which

influences and return of the investors. The company will have to plan its capital
structure at the time of promotion itself and also subsequently whenever it has to
raise additional funds for various new projects. Wherever the company needs to
raise finance, it involves a capital structure decision because it has to decide
amount of finance to be raised as well as the sources it is to be raised

Capital Structure Defined:

The assets of a company can be financed either by increasing the owners claim or
the creditors claim. The owners claims increase when the form raises funds by
issuing ordinary shares or by retaining the earnings, the creditors claims increase
by borrowing .The various means of financing represents the “financial
structure” of an enterprise .The financial structure of an enterprise is shown by
the left hand side (liabilities plus equity) of the balance sheet. Traditionally,
short-term borrowings are excluded from the list of methods of financing the
firm’s capital expenditure, and therefore, the long term claims are said to form
the capital structure of the enterprise .The capital structure is used to represent
the proportionate relationship between debt and equity .Equity includes paid-up
share capital, share premium and reserves and surplus.

The financing or capital structure decision is a significant managerial decision .It

influences the shareholders returns and risk consequently; the market value of share
may be affected by the capital structure decision. The company will have to plan its
capital structure initially at the time of its promotion.
 FACTORS AFFECTING THE CAPITAL STRUCTURE:

 LEVERAGE: The use of fixed charges of funds such as preference shares, debentures and
term-loans along with equity capital structure is described as financial leverage or
trading on. Equity. The term trading on equity is used because for raising debt.
 DEBT /EQUITY RATIO-Financial institutions while sanctioning long-term loans insists that
companies should generally have a debt –equity ratio of 2:1 for medium and large scale
industries and 3:1 indicates that for every unit of equity the company has, it can raise 2
units of debt. The debt-equity ratio indicates the relative proportions of capital
contribution by creditors and shareholders.
 EBIT-EPS ANALYSIS-In our research for an appropriate capital structure we need to
understand how sensitive is EPS (earnings per share) to change in EBIT (earnings before
interest and taxes) under different financing alternatives.

The other factors that should be considered whenever a capital structure decision is
taken are

 Cost of capital
 Cash flow projections of the company
 Size of the company
 Dilution of control
 Floatation costs
 FEATURES OF AN OPTIMAL CAPITAL STRUCTURE:

An optimal capital structure should have the following features,

 PROFITABILITY: - The Company should make maximum use of leverages at a minimum

cost.
 FLEXIBILITY: - The capital structure should be flexible to be able to meet the changing
conditions .The company should be able to raise funds whenever the need arises and
costly to continue with particular sources.
 CONTROL: - The capital structure should involve minimum dilution of control of the
company.
 SOLVENCY: - The use of excessive debt threatens the solvency of the company. In a high
interest rate environment, Indian companies are beginning to realize the advantage of
low debt.

CAPITAL STRUCTURE AND FIRM VALUE:

Since the objective of financial management is to maximize shareholders wealth, the
key issue is: what is the relationship between capital structure and firm value?
Alternatively, what is the relationship between capital structure and cost of capital?
Remember that valuation and cost of capital are inversely related. Given a certain level
of earnings, the value of the firm is maximized when the cost of capital is minimized
and vice versa.

There are different views on how capital structure influences value. Some argue that there is
no relationship what so ever between capital structure and firm value; other believe that
financial leverage (i.e., the use of debt capital) has a positive effect on firm value up to a point
and negative effect thereafter; still others contend that, other things being equal, greater the

leverage, greater the value of the firm .

 CAPITAL STRUCTURE DIAGRAM
The Capital Structure Decision Process
CAPITAL STRUCTURE AND PLANNING:

Capital structure refers to the mix of long-term sources of funds. Such as

debentures, long-term debt, preference share capital including reserves and surplus
(i.e., retained earnings) The board of directors or the chief financial officer (CEO) of a
company should develop an appropriate capital structure, which are most factors to
the company. This can be done only when all those factors which are relevant to the
company’s capital structure decision are properly analysed and balanced. The capital
structure should be planned generally keeping in view the interests of the equity
shareholders, being the owners of the company and the providers of risk capital
(equity) would be concerned about the ways of financing a company’s operations.
However, the interests of other groups, such as employees, customers, creditors,
society and government, should also be given reasonable consideration. When the
company lays down its objective in terms of the shareholder’s wealth maximization
(SWM), it is generally compatible with the interests of other groups. Thus while
developing an appropriate capital structure for its company, the financial manager
should inter alia aim at maximizing the long-term market price per share. Theoretically,
there may be a precise point or range within an industry there may be a range of an
appropriate capital structure with in which there would not be great differences in the
market value per share. One way to get an idea of this range is to observe the capital
structure patterns of companies’ vis-à-vis their market prices of shares. It may be found
empirically that there are not significant differences in the share values within a given
range. The management of a company may fix its capital structure near the top of this
range in order to make maximum use of favorable leverage, subject to other
requirements such as flexibility, solvency, control and norms set by the financial
institutions, the security exchange Board of India (DEBI) and stock exchanges.
 FEATURES OF AN APPROPRIATE CAPITAL STRUCTURE: -

The board of Director or the chief financial officer (CEO) of a company should
develop an appropriate capital structure, which is most advantageous to the company. This
can be done only when all those factors, which are relevant to the company’s capital
structure decision, are properly analyzed and balanced. The capital structure should be
planned generally keeping in view the interest of the equity shareholders and financial
requirements of the company. The equity shareholders being the shareholders of the
company and the providers of the risk capital (equity) would be concerned about the ways
of financing a company’s operation. However, the interests of the other groups, such as
employees, customer, creditors, and government, should also be given reasonable
consideration. When the company lay down its objectives in terms of the shareholders
wealth maximizing (SWM), it is generally compatible with the interest of the other groups.
Thus, while developing an appropriate capital structure for it company, the financial
manager should inter alia aim at maximizing the long-term market price per share.
Theoretically there may be a precise point of range with in which the market value per share
is maximum. In practice for most companies with in an industry there may be a range of
appropriate capital structure with in which there would not be great differences in the
market value per share. One way to get an idea of this range is to observe the capital
structure patterns of companies’ Vis-a Vis their market prices of shares. It may be found
empirically that there is no significance in the differences in the share value with in a given
range. The management of the company may fit its capital structure near the top of its
range in order to make of maximum use of favorable leverage, subject to other requirement
(SEBI) and stock exchanges.
 A SOUND OR APPROPRIATE CAPITAL STRUCTURE SHOULD HAVE THE
FOLLOWING FEATURES

1) RETURN: the capital structure of the company should be most advantageous, subject to the
other considerations; it should generate maximum returns to the shareholders without
adding additional cost to them.
2) RISK: the use of excessive debt threatens the solvency of the company. To the point debt
does not add significant risk it should be used otherwise it uses should be avoided.
3) FLEXIBILITY: the capital structure should be flexibility. It should be possible to the company
adopt its capital structure and cost and delay, if warranted by a changed situation. It should
also be possible for a company to provide funds whenever needed to finance its profitable
activities.
4) CAPACITY: - The capital structure should be determined within the debt capacity of the
company and this capacity should not be exceeded. The debt capacity of the company
depends on its ability to generate future cash flows. It should have enough cash flows to pay
creditors, fixed charges and principal sum.
5) CONTROL: The capital structure should involve minimum risk of loss of control of the
company. The owner of the closely held company’s of particularly concerned about dilution
of the control.
 APPROACHES TO ESTABLISH APPROPRIATE CAPITAL STRUCTURE:

The capital structure will be planned initially when a company is incorporated .The
initial capital structure should be designed very carefully. The management of the company
should set a target capital structure and the subsequent financing decision should be made
with the a view to achieve the target capital structure .The financial manager has also to deal
with an existing capital structure .The company needs funds to finance its activities
continuously. Every time when fund shave to be procured, the financial manager weighs the
pros and cons of various sources of finance and selects the most advantageous sources
keeping in the view the target capital structure. Thus, the capital structure decision is a
continues one and has to be taken whenever a firm needs additional [Link] following
are the three most important approaches to decide about a firm’s capital structure.

 EBIT-EPS approach for analyzing the impact of debt on EPS.

 Valuation approach for determining the impact of debt on the shareholder’s value.

 Cash flow approached for analyzing the firm’s ability to service debt.

In addition to these approaches governing the capital structure decisions, many other factors
such as control, flexibility, or marketability are also considered in practice

EBIT-EPS APPROACH:
We shall emphasize some of the main conclusions here .The use of fixed cost sources of
finance, such as debt and preference share capital to finance the assets of the company, is
know as financial leverage or trading on equity. If the assets financed with the use of debt
yield a return greater than the cost of debt, the earnings per share also increases without an
increase in the owner’s investment. The earnings per share also increase when the preference
share capital is used to acquire the assets. But the leverage impact is more pronounced in
case of debt because (I) the cost of debt is usually lower than the cost of performance share
capital and (ii) the interest paired on debt is tax deductible.
Because of its effect on the earnings per share, financial leverage is an important
consideration in planning the capital structure of a company. The companies with high level of
the earnings before interest and taxes (EBIT) can make profitable use of the high degree of
leverage to increase return on the shareholder’s equity. One common method of examining
the impact of leverage is to analyze the relation ship between EPS and various possible levels
of EBIT under alternative methods of financing.

The EBIT-EPS analysis is an important tool in the hands of financial manager to get an
insight into the firm’s capital structure management .He can considered the possible
fluctuations in EBIT and examine their impact on EPS under different financial plans of the
probability of earning a rate of return on the firm’s assets less than the cost of debt is
insignificant, a large amount of debt can be used by the firm to increase the earning for share.
This may have a favorable effect on the market value per share. On the other hand, if the
probability of earning a rate of return on the firm’s assets less than the cost of debt is very
high, the firm should refrain from employing debt capital .it may, thus, be concluded that the
greater the level of EBIT and lower the probability of down word fluctuation, the more
beneficial it is to employ debt in the capital structure. However, it should be realized that the
EBIT EPS is a first step in deciding about a firm’s capital structure .It suffers from certain
limitations and doesn’t provide unambiguous guide in determining the capital structure of a
firm in practice.

The EBIT-EPS analysis is an important tool in the hands of financial manager to get an
insight into the firm’s capital structure management .He can considered the possible
fluctuations in EBIT and examine their impact on EPS under different financial plans of the
probability of earning a rate of return on the firm’s assets less than the cost of debt is
insignificant, a large amount of debt can be used by the firm to increase the earning for share.
This may have a favorable effect on the market value per share. On the other hand, if the
probability of earning a rate of return on the firm’s assets less than the cost of debt is very
high, the firm should refrain from employing debt capital .it may, thus, be concluded that the
greater the level of EBIT and lower the probability of down word fluctuation, the more
beneficial it is to employ debt in the capital structure. However, it should be realized that the
EBIT EPS is a first step in deciding about a firm’s capital structure .It suffers from certain
limitations and doesn’t provide unambiguous guide in determining the capital structure of a
firm in practice

THE CAPITAL STRUCTURE CONTROVERSY:

The value of the firm depends upon its expected earnings stream and the rate used to
discount this stream. The rate used to discount earnings stream it’s the firm’s required rate
of return or the cost of capital. Thus, the capital structure decision can affect the value of
the firm either by changing the expected earnings of the firm, but it can affect the reside
earnings of the shareholders. The effect of leverage on the cost of capital is not very clear.
Conflicting opinions have been expressed on this issue. In fact, this issue is one of the most
continuous areas in the theory of finance, and perhaps more theoretical and empirical work
has been done on this subject than any other. If leverage affects the cost of capital and the
value of the firm, an optimum capital structure would be obtained at that combination of
debt and equity that maximizes the total value of the firm or minimizes the weighted
average cost of capital. The question of the existence of optimum use of leverage has been
put very succinctly by Ezra Solomon in the following words.

Given that a firm has certain structure of assets, which offers net
operating earnings of given size and quality, and given a certain structure of rates in the
capital markets, is there some specific degree of financial leverage at which the market
value of the firm’s securities will be higher than at other degrees of leverage? The existence
of an optimum capital structure is not accepted by all. These exist two extreme views and
middle position. David Durand identified the two extreme views the net income and net
operating approaches

.
1. NET INCOME APPROACH:

Under the net income approach (NI), the cost of debt and cost of equity are assumed
to be independent to the capital structure. of capital declines and the total value of the firm
rise with increased use of leverage.

2. NET OPERATING INCOME APPROACH:

Under the net operating income (NOI) approach, the cost of equity is assumed to
increase linearly with average. As a result, the weighted average cost of capital remains
constant and the total value of the firm also remains constant as leverage is changed.

3. TRADITIONAL APPROACH:

According to this approach, the cost of capital declines and the value of the firm
increases with leverage up to a prudent debt level and after reaching the optimum point,
coverage cause the cost of capital to increase and the value of the firm to decline.

Thus, if NI approach is valid, leverage is significant variable and financing decisions have
an important effect on the value of the firm. On the other hand, if the NOI approach is correct
then the financing decisions should not be a great concern to the financing manager, as it
does not matter in the valuation of the firm.

Modigliani and Miller (MM) support the NOI approach by providing

logically consistent behavioral justifications in its favor. They deny the existence of an
optimum capital structure between the two extreme views; we have the middle position or
intermediate version advocated by the traditional writers. Thus these exists an optimum
capital structure at which the cost of capital is minimum. The logic of this view is not very
sound. The MM position changes when corporate taxes are assumed. The interest tax shield
resulting from the use of debt adds to the value of the firm. This advantage reduces the
when personal income taxes are considered.
CAPITAL STRUCTURE MATTERS: THE NET INCOME APPROACH:

The essence of the net income (NI) approach is that the firm can increase its value or
lower the overall cost of capital by increasing the proportion of debt in the capital structure.
The crucial assumptions of this approach are:

1) The use of debt does not change the risk perception of investors; as a result, the equity
capitalization rate, kc and the debt capitalization rate, kd, remain constant with changes in
leverage.
2) The debt capitalization rate is less than the equity capitalization rate (i.e. k d<ke)
3) The corporate income taxes do not exist.
The first assumption implies that, if k e and kd are constant increased use by debt by
magnifying the shareholders earnings will result in higher value of the firm via higher value
of equity consequently the overall or the weighted average cost of capital k o, will decrease.
The overall cost of capital is measured by equation: (1)

It is obvious from equation 1 that, with constant annual net operating income (NOI), the
overall cost of capital would decrease as the value of the firm v increases. The overall cost of
capital ko can also be measured by

KO = Ke - (Ke - Kd) D

As per the assumptions of the NI approach K e and Kd are constant and Kd is

less than Ke. Therefore, Ko will decrease as D/V increases. Equation 2 also implies that the
overall cost of capital Ko will be equal to Ke if the form does not employ any debt (i.e. D/V
=0), and that Ko will approach Kd as D/V approaches one.
NET OPERATING INCOME APPROACH:
According to the met operating income approach the overall capitalization rate and the cost
of debt remain constant for all degree of leverage.

rA and rD are constant for all degree of leverage. Given this, the cost of equity can be
expressed as.

The critical premise of this approach is that the market capitalizes the firm as a
whole at discount rate, which is independent of the firm’s debt-equity ratio. As a
consequence, the decision between debt and equity is irrelevant. An increase in the use of
debt funds which are ‘apparently cheaper’ or offset by an increase in the equity
capitalization rate. This happens because equity investors seek higher compensation as they
are exposed to greater risk arising from increase in the degree of leverages. They raise the
capitalization rate rE (lower the price earnings ratio, as the degree of leverage increases.
 The net operating income position has been \advocated eloquently by David
Durand. He argued that the market value of a firm depends on its net operating income and
business risk. The change in the financial leverage employed by a firm cannot change these
underlying factors. It merely changes the distribution of income and risk between debt and
equity, without affecting the total income and risk which influence the market value (or
equivalently the average cost of capital) of the firm. Arguing in a similar vein, Modigliani and
Miller, in a seminal contribution made in 1958, forcefully advanced the proposition that the
cost of capital of a firm is independent of its capital structure.

COST OF CAPITAL AND VALUATION APPROACH

The cost of a source of finance is the minimum return expected by its

suppliers. The expected return depends on the degree of risk assumed by investors. A high
degree of risk is assumed by shareholders than debt-holders. In the case of debt-holders,
the rate of interest is fixed and the company is legally bound to pay dividends even if the
profits are made by the company. The loan of debt-holders is returned within a prescribed
period, while shareholders will have to share the residue only when the company is wound
up. This leads one to conclude that debt is cheaper source of funds than equity. This is
generally the case even when taxes are not considered. The tax deductibility of interest
charges further reduces the cost of debt. The preference share capital is also cheaper than
equity capital, but not as cheap as debt. Thus, using the component, or specific, cost of
capital as criterion for financing decisions and ignoring risk, a firm would always like to
employ debt since it is the cheapest source of funds.

CASH FLOW APPROACH:

One of the features of a sound capital structure is conservatism does not mean
employing no debt or small amount of debt. Conservatism is related to the fixed charges
created by the use of debt or preference capital in the capital structure and the firm’s ability
to generate cash to meet these fixed charges. In practice, the question of the optimum
(appropriate) debt –equity mix boils down to the fir’s ability to service debt without any
threat of insolvency and operating inflexibility. A firm is considered prudently financed if it is
able to service its fixed charges under any reasonably predictable adverse conditions.

The fixed charges of a company include payment of interest, preference

dividend and principal, and they depend on both the amount of loan securities and the
terms of payment. The amount of fixed charges will be high if the company employs a large
amount of debt or preference capital with short-term maturity. Whenever a company thinks
of raising additional debt, it should analyse its expected future cash flows to meet the fixed
charges. It is mandatory to pay interest and return the principal amount of debt of a
company not able to generate enough cash to meet its fixed obligation, it may have to face
financial insolvency. The companies expecting larger and stable cash inflows in to employ
fixed charge sources of finance by those companies whose cash inflows are unstable and
unpredictable. It is possible for high growth, profitable company to suffer from cash
shortage if the liquidity (working capital) management is poor. We have examples of
companies like BHEL, NTPC, etc., whose debtors are very sticky and they continuously face
liquidity problem in spite of being profitability servicing debt is very burdensome for them.

One important ratio which should be examined at the time of planning the
capital structure is the ration of net cash inflows to fixed changes (debt saving ratio). It
indicates the number of times the fixed financial obligation are covered by the net cash
inflows generated by the company.

FINANCING DECISION

Financing strategy forms a key element for the smooth running of any
organization where flow, as a rare commodity, has to be obtained at the optimum cast and
put into the wheels of business at the right time and if not, it would lead intensely to the
shutdown of the business.
 Financing strategies basically consists of the following components:

 Mobilization
 Costing
 Timing/Availability
 Business interests
Therefore, the strategy is to always keep sufficient availability of finance at
the optimum cost at the right time to protect the business interest of the company.

STRATEGIES IN FINANCE MOBILIZATION

There are many options for the fund raising program of any company and it is quite
pertinent to note that these options will have to be evaluated by the finance manager
mainly in terms of:

 Mode of repayment
 Timing and time lag involved in mobilization
 Assets security
 Cost of funds
 Stock options
 Cournants in terms of participative management and
 Other terms and conditions.

Strategies of finance mobilization can be through two sectors, that is, owner’s resources and
the debt resources. Each of the above category can also be split into: Securitized resources;
and non-securities resources. Securitized resources are those who instrument of title can be
traded in the money market and non-securities resources and those, which cannot be
traded in the markets
 THE FORMS OF FUNDS MOBILIZATION IS ILLUSTRATED BY A CHART:

FUNDING MIX - SOURCES

OWNERS FUND BORROWED FUND

EQUITY RETINED PREFERENCE CONVENTIONAL NON- CONVENTIONAL

CAPITAL EARNINGS CAPITAL SOURCES SOURCES

FINANCIAL SUPPLIERS CREDIT

INSTITUTION SHORT TERM

BANK BANKBORROWINGS

CASH CREDIT HIRE PURCHASE

DEBENTURES
 COMPOSITION AND OBSERVATION

The sources tapped by NCL Industries Ltd. Can be classified into:

 Shareholders’ funds resources

 Loan fund resources

SHAREHOLDER FUND RESOURCES:

Shareholder’s fund consists of equity capital and retained earnings.

EQUITY CAPITAL BUILD-UP

1. From 1995, the Authorized capital is Rs.450 lacks of equity shares at Rs.10 each. The issued
equity capital is RS.1622.93 lacs at Rs.10 each for the period 2000-2005 and subscribed and
paid-up capital is Rs. 1622.93 lacs at Rs.10 each for the period of 2001-2005.
2. In 2001-2005 the calls in arrears added to equity is Rs.0.55 lacs and in 2000 there are no
calls in arrears.
3. There is an increase of 1.38% in the equity from 2001-2005.

RETAINED EARNINGS COMPOSITION

This includes…….

 Capital Reserve
 Share Premium Account
 General Reserve
 Contingency Reserve
 Debentures Redemption Reserve
 Investment Allowance Reserve
 Profit & Loss Account
1. The profit levels, company dividend policy and growth plans determined. The amounts
transferred from P&L a/c to General Reserve. Contingency Reserve and Investment
Allowance Reserve.
2. The Investment Allowance Reserve is created for replacement of long term leased assets
and this reserve was removed from books because assets pertaining to such reserves ceased
to exist. The account was transferred to investment allowance utilized.

LIMITATION OF EPS AS A FINANCING-DECISION CRITERION

EPS is one of the mostly widely used measures of the company’s performance in practice. As
a result of this, in choosing between debt and equity in practice, sometimes too much
attention is paid on EPS, which however, has serious limitations as a financing-decision
[Link] major short coming of the EPS as a financing-decision criterion is that it does
not consider risk; it ignores variability about the expected value of EPS. The belief that
investors would be just concerned with the expected EPS is not well founded. Investors in
valuing the shares of the company consider both expected value and variability.

EPS VARIABILITY AND FINANCIAL RISK: -

The EPS variability resulting form the use of leverage is called financial
risk. Financial risk is added with the use of debt because of (a) the increased variability in
the shareholders earnings and (b) the threat of insolvency. A firm can avid financial risk
altogether if it does not employ any debt in its capital structure. But then the shareholders
will be deprived of the benefit of the financial risk perceived by the shareholders, which
does not exceed the benefit of increase EPS. As we have seen, if a company increase its debt
beyond a point the expected EPS will continue to increase but the value of the company
increases its debt beyond a point, the expected EPS will continue to increase, but the value
of the company will fall because of the greater exposure of shareholders to financial risk in
the form of financial distress. The EPS criterion does not consider the long-term
perspectives of financing decisions. It fails to deal with the risk return trade-off. A long term
view of the effects of the financing decisions, will lead one to a criterion of the wealth
 maximization rather that EPS maximization. The EPS criterion is an important performance
measure but not a decision criterion.

Given limitations, should the EPS criterion be ignored in making financing

decision? Remember that it is an important index of the firm’s performance and that
investors rely heavily on it for their investment decisions. Investors do not have information
in the projected earnings and cash flows and base their evaluation an historical data. In
choosing between alternative financial plans, management should start with the evaluation
of the impact of each alternative on near-term EPS. But management’s ultimate decision
making should be guided by the best interests of shareholders. Therefore, a long-term view
of the effect of the alternative financial plans on the value of the shares should be taken, o
management opts for a financial plan which will maximize value in the long run but has an
adverse impact in near-term EPS, the reasons must be communicated to investors. A careful
communication to market will be helpful in reducing the misunderstanding between
management and Investors

FINANCIAL LEVERAGE

INTRODUCTION:

Leverage, a very general concept, represents influence or power. In financial

analysis leverage represents the influence of a financial variable over same other related
financial [Link] leverage is related to the financing activities of a firm. The
sources from which funds can be raised by a firm, from the viewpoint of the cost can be
categorized into:

 Those, which carry a fixed finance charge.

 Those, which do not carry a fixed charge.

The sources of funds in the first category consists of various types of long term debt
including loans, bonds, debentures, preference share etc., these long-term debts carry a fixed
rate of interest which is a contractual obligation for the company except in the case of
preference shares. The equity holders are entitled to the remainder of operating profits if any.
Financial leverage results from presence of fixed financial charges in eh firm’s income
stream. These fixed charges don’t vary with EBIT or operating profits. They have to be paid
regardless of EBIT availability. Past payment balances belong to equity holders. Financial
leverage is concerned with the effect of changes I the EBIT on the earnings available to
shareholders.

DEFINITION:
Financial leverage is the ability of the firm to use fixed financial charges to
magnify the effects of changes in EBIT on EPS i.e., financial leverage involves the use of
funds obtained at fixed cost in the hope of increasing the return to [Link]
favorable leverage occurs when the Firm earns more on the assets purchase with the funds
than the fixed costs of their use. The adverse business conditions, this fixed charge could be
a burden and pulled down the companies wealth

MEANING OF FINANCIAL LEVERAGE:

As stated earlier a company can finance its investments by

debt/equity .The company may also use preference capital. The rate of interest on debt is
fixed, irrespective of the company’s rate of return on assets. The company has a legal
banding to pay interest on debt .The rate of preference dividend is also fixed, but
preference dividend are paid when company earns profits. The ordinary shareholders are
entitled to the residual income. That is, earnings after interest and taxes belong to them.
The rate of equity dividend is not fixed and depends on the dividend policy of a company.

The use of the fixed charges, sources of funds such as debt and preference capital along
with owners’ equity in the capital structure, is described as “financial leverages” or
“gearing” or “trading” or “equity”. The use of a term trading on equity is derived from the
fact that it is the owners equity that is used as a basis to raise debt, that is, the equity that is
traded upon the supplier of the debt has limited participation in the companies profit and
therefore, he will insists on protection in earnings and protection in values represented by
owners equity’
 FINANCIAL LEVERAGE AND THE SHAREHOLDERS RISK

Financial leverage magnifies the shareholders earnings we also find that the
variability of EBIT causes EPS to fluctuate within wider ranges with debt in the capital
structure that is with more debt EPS rises and falls faster than the rise and fall in EBIT. Thus
financial leverage not only magnifies EPS but also increases its [Link] variability of
EBIT and EPs distinguish between two types of risk- operating risk and financial risk. The
distinction between operating and financial risk was long ago recognized by Marshall in the
following words.

OPERATING RISK: -
Operating risk can be defined as the variability of EBIT (or return on total assets). The
environment internal and external in which a firm operates determines the variability of
EBIT. So long as the environment is given to the firm, operating risk is an unavoidable risk. A
firm is better placed to face such risk if it can predict it with a fair degree of accuracy.

THE VARIABILITY OF EBIT HAS TWO COMPONENTS

1. Variability of sales

2. Variability of expenses

1. VARIABILITY OF SALES:
The variability of sales revenue is in fact a major determinant of operating
risk. Sales of a company may fluctuate because of three reasons. First the changes in general
economic conditions may affect the level of business activity. Business cycle is an economic
phenomenon, which affects sales of all companies. Second certain events affect sales of
company belongings to a particular industry for example the general economic condition
may be good but a particular industry may be hit by recession, other factors may include the
availability of raw materials, technological changes, action of competitors, industrial
relations, shifts in consumer preferences and so on. Third sales may also be affected by the
factors, which are internal to the company. The change in management the product market
 decision of the company and its investment policy or strike in the company has a great
influence on the company’s sales.

2. VARIABILITY OF EXPENSES: -

Given the variability of sales the variability of EBIT is further affected by the
composition of fixed and variable expenses. Higher the proportion of fixed expenses relative
to variable expenses, higher the degree of operating leverage. The operating leverage
affects EBIT. High operating leverage leads to faster increase in EBIT when sales are rising. In
bad times when sales are falling high operating leverage becomes a nuisance; EBIT declines
at a greater rate than fall in sales. Operating leverage causes wide fluctuations in EBIT with
varying sales. Operating expenses may also vary on account of changes in input prices and
may also contribute to the variability of EBIT.

FINANCIAL RISK: -

For a given degree of variability of EBIT the variability of EPS and ROE increases with
more financial leverage. The variability of EPS caused by the use of financial leverage is
called “financial risk”. Firms exposed to same degree of operating risk can differ with respect
to financial risk when they finance their assets differently. A totally equity financed firm will
have no financial risk. But when debt is used the firm adds financial risk. Financial risk is this
avoidable risk if the firm decides not to use any debt in its capital structure.

MEASURES OF FINANCIAL LEVERAGE:-

The most commonly used measured of financial leverage are:

1) Debt ratio: the ratio of debt to total capital, i.e.,

 Where, D is value of debt, S is value of equity and V is value of total capital D and S may be
measured in terms of book value or market value. The book value of equity is called not
worth.

2) debt-equity ratio: The ratio of debt to equity, i.e.,

1) Interest coverage: the ration of net operating income (or EBIT) to interest charges, i.e.,

The first two measures of financial leverage can be expressed in terms of book or market
values. The market value to financial leverage is the erotically more appropriate because
market values reflect the current altitude of investors. But, it is difficult to get reliable
information on market values in practice. The market values of securities fluctuate quite
frequently.

There is no difference between the first two measures of financial leverage in operational
terms. They are related to each other in the following manner.

These relationships indicate that both these measures of financial leverage will rank
companies in the same order. However, the first measure (i.e., D/V) is more specific as its
value ranges between zeros to one. The value of the second measure (i.e., D/S) may vary
from zero to any large number. The debt-equity ratio, as a measure of financial leverage, is
more popular in practice. There is usually an accepted industry standard to which the
company’s debt-equity ratio is compared. The company will be considered risky if its debt-
equity ratio exceeds the industry-standard. Financial institutions and banks in India also focus
on debt-equity ratio in their lending decisions.
The first two measures of financial leverage are also measures of capital gearing. They are
static in nature as they show the borrowing position of the company at a point of time. These
measures thus fail to reflect the level of financial risk, which inherent in the possible failure
of the company to pay interest repay [Link] third measure of financial leverage, commonly
known as coverage ratio, indicates the capacity of the company to meet fixed financial
charges. The reciprocal of interest coverage that is interest divided by EBIT is a measure of
the firm’s incoming gearing. Again by comparing the company’s coverage ratio with an
accepted industry standard, the investors, can get an idea of financial risk .how ever, this
measure suffers from certain limitations. First, to determine the company’s ability to meet
fixed financial obligations, it is the cash flow information, which is relevant, not the reported
earnings. During recessional economic conditions, there can be wide disparity between the
earnings and the net cash flows generated from operations. Second, this ratio, when
calculated on past earnings, does not provide any guide regarding the future risky ness of the
company. Third, it is only a measure of short-term liquidity than of leverage.

FINANCIAL LEVERAGE AND THE SHARE HOLDER’S RETURN:

The primary motive of a company in using financial leverage is to magnify the

shareholder’s return under favorable economic conditions. The role of financial leverage in
magnifying the return of the share holders is based under assumption that the fixed charges
funds (such as the loan from financial institutions and other sources or debentures) can be
obtained at a cost lower than the firm’s rate of return on net assets. Thus, when the difference
between the earnings generalized by assets financed by the fixed charges funds and cost of
these funds is distributed to the share holders, the earnings per share (EPS) or return on
equity increases. However, EPS or ROE will fall if the company obtains the fixed charges
funds at a cost higher than the rate of return on the firm’s assets. It should, there fore, be clear
that EPS, ROE and ROI are the important figures for analyzing the impact of financial

leverage.

COMBINED EFFECT OF OPERATING AND FINANCIAL LEVERAGES

Operating and financial leverages together cause wide fluctuations in EPS for
a given change in sales. If a company employs a high level of operating and financial
leverage, even a small change in the level of sales will have dramatic effect on EPS.
A company with cyclical sales will have a fluctuating EPS; but the swings in EPS will be more
pronounced if the company also uses a high amount of operating and financial leverage.

The degree of operating and financial leverage can be combined to see the
effect of total leverage on EPS associated with a given change in sales. The degree of
combined leverage (DCL) is given by the following equation:

Yet another way of expressing the degree of combined leverage is as follows:

Since Q (S-V) is contribution and Q (S-V)-F-INT is the profit after interest but before taxes,
Equation 2 can also be written as follows:
 CHAPTER-IV

CAPITAL STRUCTURE AND PROFITABILITY

TECHNIQUES AT THE ICL DATA ANALYSIS AND
INTERPRETATION
EBIT – EPS CHART
One convenient and useful way showing the relationship between EBIT and EPS for
the alternative financial plans is to prepare the EBIT-EPS chart. The chart is easy to prepare
since for any given level of financial leverage, EPS is linearly related to EBIT. As noted earlier,
the formula for calculating EPS is

EPS = (EBIT - INT) (1 – T) = (1 – T) (EBIT – INT)

N N

We assume that the level of debt, the cost of debt and the tax rate are constant. Therefore
in equation (10), the terms (1-T)/N and INT (=iD) are constant: EPS will increase if EBIT
increases and fall if EBIT declines. Can also be written as follows

Under the assumption made, the first part of is a constant and can be represented by an
EBIT is a random variable since it can assume a value more or less than expected. The term
(1 – T)/N are also a constant and can be shown as b. Thus, the EPS, formula can be written
as:

EPS = a + b EBIT

Clearly indicates that EPS is a linear function of EBIT.

 EBIT AND EPS ANALYSIS

Particulars 2005 2006 2007 2008 2009

PAT 45812000 453131000 4788298000 6375400000 4321765000

(+) Tax 15571498.8 154019226.9 1627542490 2166998460 1468967924

(33.99%)

PBT 6138498.8 607150226.9 3160755510 8542398460 5790732924

(+) Interest 1334968000 1489265000 588861000 1098619000 1121493000

EBIT 1341106499 2096415227 4658716510 9641017460 6912225924

(-) Tax 455842099 712571535.7 1583497742 3276981835 2349465592

PAT 885264400 1383843691 4500368768 6364035625 4562760332

(-) Dividend 86250000 86250000 0 0 0

(11.5%)

Profit to 799014400 1297593691 4500368768 6364035625 4562760332

equity share
holder

EPS 5.725 6.8017 20.421 22.57 16.155

EPS= Profit to equity share holder

No of share
 120
x 100000000

100

80

60

40

20

0
rs T ) T s t IT x T nd % e r S
la PA
%
PB re EB Ta PA e 50 ld EP
u 99 te (- ) vid 1. ho
tic 3. n Di
ar (3 )I -1
ar
e
P a x (+ (- ) sh
)T ity
(+ u
eq
to
o fit
Pr

2005 2006 2007 2008 2009

INTERPRETATION

The EBIT of the company has increased from the year 2005 to 2009 and the interest
payment has decreased during the above period. Thereby contributing to more profit before
tax the company has paid off high interest bearing funds by taking loans from the banks at
lower rate of interest and the company has also redeemed total preference share capital at
the end of the year 2006. The companies EPS has grown from RS 5 per share to RS 16 per
share during the period of study.

The EPS of the company is increasing every year from 5.72 n the year 2005
to 16.15% b the year 2009 which shows that the company has made huge profits because of
demand in the cement industry from the year 2006 onwards till 2009 and it will be
continued in the comming years. The company also paid 10% dividend in the year 2007 and
20% dividend per share in the year 2008-2009. The PBT has almost increased by 250%
during the period of study The optimal structure of the company has contributed to increase
the profitability position of the company in a satisfactory manner.
 LEVERAGE ANALYSIS

Particulars 2005 2006 2007 2008 2009

Sales and other 1402303700 1836690700 2620877000 3605614100 3954535500

income

(-) Variable cost 842999800 1019934100 583548700 1580747800 1919738000

Contribution 559303900 816756600 1945528300 35301210600 3935361700

(-) Fixed cost 118424700 124861800 168888400 211035100 331370600

EBIT 440879200 804294800 1776639900 35090175500 3603991100

(-) Interest 133496800 148926500 149796100 109861900 112149300

EBT 307382400 655358300 1626843800 34980313600 3491841800

Operating leverage 1.268 1.015 1.095 1.006 1.091

Financial leverage 1.434 1.227 1.09 1.0031 1.032

Combined leverage 1.818 1.245 1.193 1.009 1.125

Operating leverage= contribution/EBIT

Financial leverage=EBIT/EBT

Combined leverage= operating leverage * financial leverage

(Or)

Contribution/EBT
INTERPRETATION

THE EFFECTIVE USE OF OUTSIDERS FUNDS IN THE CAPITAL STRUCTURE OF THE COMPANY HAS GIVEN

MAXIMUM BENEFITS TO THE SHARE HOLDERS OF THE COMPANY. THE OPERATING LEVERAGE OF THE

COMPANY IS MORE THAN 1 I.E. (1.2) IN 2005 (1.01) IN 2006 (1.09) IN 2007 (1.06) IN 2008 (1.091)
IN 2009. THIS SHOWS THE COMPANIES OPERATING CAPABILITY.

THE FINANCIAL LEVERAGE OF THE COMPANY AND COMPOSITE LEVERAGE OF THE COMPANY IS ALSO

MORE THAN 1 DURING THE PERIOD OF STUDY.

THE ICL INDUSTRIES LTD. THE FUNDING MIX

Perticulars 2005 2006 2007 2008 2009

Share Holder's fund

Share capital 1635885 2157699 2203714 2818674 2824305

(+) Reserves and surplus 14195503 17897681 1948162 3039248 33489593

Total share holders’ funds (A) 1635885 2157699 21688334 33211082 36313898

Loan funds

Secured loans 6216834 3277601 1582863 431352 229154

Term loans 7860321 8311777 8457189 7826712 7681067

Cash credit facilities 4375692 2444476 1619821 1452104 2452278

unsecured loans 1419571 1218456 1159932 326887 117245

unsecured loans 1419571 1218456 1159932 326887 117245

Total outsiders funds (B) 19872418 1525231 12819805 10037055 1047974

Funding Mix ( A+B) 3055456 35307690 34508139 43248137 37361872

% of share holders funds 44% 56.80% 62.80% 76.70% 97.19%

% of loan funds 56% 43.19% 37.12% 23.20% 2.80%

 INTERPRETATION

THE FUNDING MIX OF THE ICL CONSISTS OF 44% IN SHARE HOLDERS FUND AND THE BALANCE 56% AS

OUTSIDER’S FUND IN THE YEAR 2005. THUS MAINTAINING AN OPTIMAL DEBT EQUITY RATIO OF ALMOST

1:1. BUT FROM 2006 ONWARDS THE COMPANY HAS REDUCED ITS DEBT COMPONENT AND INCREASED

SHAREHOLDERS FUND TO ALMOST 90%. THIS IS DUE TO INCREASEIN PROFITS IN THE CEMENT INDUSTRY AND

THE COMPANY IS MAXIMUM STAKE HOLDERS ARE PURCHASING THEIR OWN SHARES IN THE STOCK MARKET

TO MAINTAIN THEIR MONOPOLY. THE USE OF OUTSIDERS FUND IN THE CAPITAL STRUCTURE OF THE

COMPANY TO OPTIMUM LEVEL FOR GIVING BENEFITS TO OWN EQUITY SHARE HOLDERS ( FINANCIAL

LEVERAGES ) WAS NOT PROPERLY CARRIED OUT . SO, THE COMPANY IS SAID TO BE PERFECTLY LEVERED

COMPANY .

THE FUNDING MIX OF THE COMPANY OR OPTIMUM CAPITAL STRUCTURE WILL CONTRIBUTE TO MAXIMIZING

THE POFITS OF THE COMPANY . THE COMPANY IS MAINTAINING DEBT-EQUITY RATIO OF 4:6 TILL THE YEAR
2007 AND THERE AFTER IT HAS INCREASED ITS SHARE HOLDERS FUND BY (76%) IN 2008 (90%) IN 2009.
THE OPTIMAL CAPITAL STRUCTRE WILL PROVIDE THE COMPANY

1. TO MAXIMIZE THE PROFITS

2. TO MAXIMIZE THE NETWORTH OF THE COMPANY

THE PROFIT BEFORE TAX (PBT) HAS INCREASED TO 64830 LAKHS BY THE YEAR 2009 AND NETWORTH HAS
REACHED 262559 LAKHS BY THE YEAR 2009.
NET WORTH
ASSET SIDE APPROACH
Perticulars 2005 206 2007 2008 2009

Fixed assets 22018506000 20839906000 27958314000 34644595000 3808251

Current assets and loans &

advances 13684489000 15124162000 17175140000 21494124000 2143528

Investments 348364805 348364805 550749770 1292824118 5897333

Other assets 0 0 0 0 0

Total Assets 36051359805 36312432805 30226577770 57431543118 6010753

(-) Liability to outsiders

Current liability and provisions 3661094000 3739550000 4348270000 9842122000 1153947

Fixed deposits 310786000 319805000 286533000 187922000 1172230

Secured loans 18452847000 14033854000 11659873000 9710168000 1036249

Unsecured loans 1571576195 1218456000 9817070230 326887000 1172450

Net assets to share holders 23996303195 17000767805 21429108000 37364444118 4797109

( - )preference capital 75000000 75000000 75000000 75000000 7500000

Amount to equity share holders 12284067000 16925767805 21354108000 37289444118 4789609

Value of each share =

Amount available/No of shares 88.02 88.72 96.89 132.29 169.5

LIABILITY SIDE APPROACH

Subscribed capital net of arrears 1385884000 1907698000 2203714000 2818674000 282430

(+)Reserves and Surplus 14195503000 18060298805 19481620000 34708715118 452073

Total Share holders funds 15581387000 19967996805 21685334000 37527389118 480316

(-) Miscellaneous exp not written off 3297320000 3042229000 331226000 237945000 135512

Net Worth 12284067000 16925767805 21354108000 37289444118 478960

Bok value= Net Worth/No of Shares 88.02 88.72 96.89 132.29 169.5
NETWORTH ANALYSIS
The net worth of the company is maximizing every year from the year 2005 till 2009 and
the book value of the share is almost doubled during the period of the study(2005-
2009).in 2005 the value of the share is 88rs and it has reached 169rs at the end of the
financial year [Link] is almost 100% increased which shows the company has written
off accumulated losses of the previous year till 2006 and has transferred huge amounts of
profit to reserves which contributed to increase in book value of the share. The
company’s capital budgeting policy and current asset management policy has contributed
to increase in profit as the company has invested almost 60% of funds in long term and
the balance in the short term assets of the company these by maintaining long term and
short term solvency positions to satisfactory levels
INCOME STATEMENT

Particulars 2005 2006 2007 2008 2009

sales 13742779 18187553 26043947 35370435 37583853

(-) cost of goods sold 8357861 10020536 11965899 10707479 14122451

Gross profit 5384918 8167017 14078048 24662956 23461402

(-)Operating expenses 5192351 6472213 8595945 10576061 12322752

Operating profit 192567 1694804 5482103 14086895 11138650

(+)Non operating income 280258 179354 164823 685706 1961502

(-)Non operating expenditure 1335718 1493898 1504674 1124969 1128183

PBT -862893 380260 4142252 13647632 11971969

(-) TAX 0 129250374 1407951455 4638830117 4069272263

PAT 0 -128870114 -1403809203 -4625182485 -4057300294

- -
% of Total income (PAT/Sales*100) 0 708.5621359 5390.155352 -13076.40826 -10795.32823
 INTERPRETATION

 THE SALES HAS INCREASED DURING THE PERIOD OF STUDY (2005-2009) BY ALMOST 275% WHICH

CONTRIBUTES TO INCREASE IN THE ROFITS OF THE COMPANY. THIS IS DUE TO INCREASE IN THE PRODUCTION

AND DISPATCHES DURING THE ABOVE SAID PERIOD BECAUSE OF INCREASE IN DEMAND IN THE CEMENT

INDUSTRY ALL OVER INDIA AND PARTICULARLY THE COMPLUSORY SUPPLY CLAUSE MET BY THE AP GOVT AT

CONCESSIONAL RATE TO IRRIGATION PROJECTS, HOUSING SCHEMES AND OTHER INFRASTRUCTURE FACILITIES

TAKEN UP BY THE STATE GOVT.

 THE COST OF GOODS SOLD HAS INCREASED BETWEEN 15 AND 20% EVERY YEAR DURING THE PERIOD OF

STUDY BUT IT IS LESS THAN THE % OF INCREASE IN SALES DURING THE SAID PERIOD. THIS IS DUE TO

DECREASE IN THE RAW MATERIAL CONSUMED COST. THE COMPANY HAS EXTRACTED MORE LIME STONE

FROM THEIR OWN QURIEES FOR PRODUCTION PURPOSES AND THE ROYALTY FOR EXTRACTING LIME STONE

FROM OTHER HAS ALSO DECREASED ALMOST BY 26% TO 30% EVERY YEAR.

 THE OVERHEAD EXPENSE LIKE SALARIES AND WAGES HAS INCREASED PROPORTIONATELY IN

TANDEM WITH SALES TILL THE YEAR 2006 AND THERE AFTER IT HAS DOUBLED BECAUSE OF EMPLOYING THE

MORE MEN FOR OPERATIONS BECAUSE OF THE PLANT EXPANSION CAPACITY PROGRAMME TAKEN UP BY THE

COMPANY AT THE END OF 2006 TO 12950,000 TONNES INSTALLED CAPACITY AND ACHIVED CAPACITY

9113544 TONNES BY THE YEAR 2009.

 THE ADMINISTRATION, SELLING AND DISTRIBUTION OVERHEADS HAS ALSO INCREASED BY 15% EVERY YEAR

FROM 2005-2009 WHICH IS LESS THAN THE % OF INCREASE IN SALES DURING THE SAID PERIOD WHICH

CONTRIBUTES TO MORE PROFIT BEFORE TAX.

 THE NON-OPERATING INCOME OF THE COMPANY HAS INCREASED FRON 28 CRORES TO 17 CRORES IN 2005

AND 2006, A FURTHER DECREASE IN THE TEAR 2007 BECAUSE OF DISINVESTMENT BY THE COMPANY IN ITD

SUBSIDIARIES CEMENT PLANTS AT ERRAGUNTALA, TANDUR, AND THRINALVARIIN TAMIL NADU

 THE NON OPERATING INCOME HAS INCREASED IN THE YEAR 2009 BY ALMOST 160%WHEN COMPARED TO

PREVIOUS YEARS BECAUSE OF FURTHER INVESTMENTS MADE BY THE COMPANY AT THE END OF 2008 WHICH

CONTRIBUTES TO INCREASE IN PROFITS.

 THE DECREASE IN NON OPERATING EXPENSES FROM THE YEAR 2005 TOLL 2007 HAS ALSO CONTRIBUTED TO

INCREASE IN PROFITS BECAUSE OF DECREASE IN THE FINANCIAL CHARGES IN THE FORM OF INTEREST

PAYMENTS BY THE COMPANY BY TAKING CASH CREDIT FACILITIES FROM CONSORTIUM OF BANKS AND PAID

OF HIGH INTEREST BEARING DEBENTURES WHICH CONTRIBUTED TO MORE PROFITS DURING THE PERIOD OF

STUDY
 FIXED ASSETS ANALYSIS

Particular 2005 2006 2007 2008 2009

Land 1873000 2100433 2162113 38888545 3980455
Building 3116076 3014401 2948887 3714448 4179254
Plant & 22659542 22678251 22470461 30224966 35475313
machinery
Wind
electric
423953 423953 423953 757622 741270
generators
Furniture 300442 333379 447293 45614 440420
Ship - - - 197225 2066978
Vehicles 109847 109289 181651 231651 246987
Franchise - - - 13609085 3276000
right
Computer - - - 3609085 97372
software
Total 28482860 28659706 28634358 43080056 50504049
INTERPRETATION

THE PROFITS MAXIMIZATION AND WEALTH MAXIMIZATION BY THE COMPANY IS BECAUSE OF ITS CAPITAL
BUDETING POLICIES ( INVESTMENT IN FIXED ASSETS IN 2005 IS 22485 LAKHS) AND REACHED TO 471229
LAKH IN THE YEAR 2009. THIS WAS PURELY EXPANDED ON PLANT EXPANSION PROGRAMMES TO INCREASE
THE PRODUCTION TO BDRIGE THE GAP OF DEMAND AND SUPPLY MISMATCH IN THE CEMENT INDUSTRY THE
COMPANYWORKING CAPITAL MANAGEMENT POLICY WAS IMPLEMENTED EFFECTIVELY BY INVESTING ALMOST
40% OF TOTAL FUNDS IN THE CURRENT ASSETS (38791) LAKHS IN 2005 TO 83010 LAKHS IN 2009 TO
MAINTAIN ITS LIQUIDITY POSITION SATISFACTORY

TERM LOAN OR INTEREST PAYMENT ANALYSIS

Particulars 2005 2006 2007 2008 2009

Interest
and other
1334968 1489265 1497961 1098619 1121493
charges
(A) net
Secured
and term
18452847 14033854 111659873 9710168 10362499
loans (B)
AVG % of
interest
7.23 10.61 12.84 11.31 10.822
=A/B*100
INTERPRETATION

The financial charges decrease in the form of interest payments by the company by
taking cash and credit facilities from consortium of banks and paid of high interest
bearing debentures which contributed to more profits during the period of the study.

YEAR 2005

Position of mobilization and development of funds

(Amount in Rs.000s)

Total liabilities 36,305,887 Total assets 3,63,05,887

Sources of funds
Paid u capital 22,37,966 Reserves & surplus 1,41,95,503
Secured Loans 1,84,52,847 Unsecured loans 14,19,571
Application

of funds
Net fixed assets 2,20,48,455 Investments 3,48,365
Net current assets 1,06,11,747 Misc. Expenditure 3,2,97,320
Accumulated losses Nil

YEAR 2006
 Position of Mobilization and Development of funds

(Amount in RS. 000s)

Total liabilities 3,66,66,457 Total assets 3,66,66,457

Sources of funds
Paid u capital 35,16,466 Reserves & surplus 1,78,97,681
Secured Loans 1,40,33,854 Unsecured loans 12,18,456
Application of

funds
Net fixed assets 2,11,49,700 Investments 37,06,899
Net current assets 1,13,92,894 Misc. Expenditure 4,16,967
Accumulated losses Nil
 YEAR 2007

Position of Mobilization and Development of funds

(Amount in RS. 000s)

Total liabilities 4,32,75,784 Total assets 4,32,75,784

Sources of funds
Paid up capital 26,03,714 Reserves & surplus 1,94,81,620
Deferred tax 602903
Secured Loans 1,16,59,873 Unsecured loans 89,27,674
Application of funds
Net fixed assets 2,93,85,826 Investments 57,23,506
Net current assets 11,28,35,226 Misc. Expenditure 3,31,226
Accumulated losses Nil
 YEAR 2008

Position of Mobilization and Development of funds

(Amount in RS. 000s)

Total liabilities 5,35,83,286 Total assets 7,03,225

Sources of funds
Paid u capital 28,18,674 Reserves & surplus 3,03,92,408
Deferred tax 22,57,146
Secured Loans 97,10,168 Unsecured loans 84,04,890
Application of funds
Net fixed assets 4,03,93,717 Investments 12,92,824
Net current assets 1,16,58,800 Misc. Expenditure 2,37,945
Accumulated losses Nil
 YEAR-2009

Position of Mobilization and Development of funds

(Amount in RS. 000s)

Total liabilities 5,89,34,818 Total assets 9,28,386

Sources of funds
Reserves &

Paid u capital 28,24,305 surplus 3,34,89,593

Deferred tax 27,40,624
Secured Loans 1,03,62,499 Unsecured loans 95,17,797
Application of

funds
Net fixed assets 4,71,22,929 Investments 17,74,256
Net current assets 99,02,121 Misc. 1,35,512

Expenditure
Accumulated Nil

losses
RATIO ANALYSIS:-

The primary user of financial statements are evaluating part performance and
predicting future performance and both of these are facilitated by comparison. Therefore
the focus of financial analysis is always on the crucial information contained in the financial
statements. This depends on the objectives and purpose of such analysis. The purpose of
evaluating such financial statement is different form person to person depending on its
relationship. In other words even though the business unit itself and share holders,
debenture holders, investors etc. all under take the financial analysis differs. For example,
trade creditors may be interested primarily in the liquidity of a firm because the ability of
the business unit to play their claims is best judged by means of a through analysis of its
l9iquidity. The shareholders and the potential investors may be interested in the present
and the future earnings per share, the stability of such earnings and comparison of these
earnings with other units in thee industry. Similarly the debenture holders and financial
institutions lending long-term loans maybe concerned with the cash flow ability of the
business unit to pay back the debts in the long run. The management of business unit, it
contrast, looks to the financial statements from various angles. These statements are
required not only for the management’s own evaluation and decision making but also for
internal control and overall performance of the firm. Thus the scope extent and means of
any financial analysis vary as per the specific needs of the analyst. Financial statement
analysis is a part of the larger information processing system which forms the very basis of
any “decision making” process.

The financial analyst always needs certain yardsticks to evaluate the

efficiency and performance of business unit. The one of the most frequently used yardsticks
is ratio analysis. Ratio analysis involves the use of various methods for calculating and
interpreting financial ratios to assess the performance and status of the business unit. It is a
tool of financial analysis, which studies the numerical or quantitative relationship between
with other variable and such ratio value is compared with standard or norms in order to
highlight the deviations made from those standards/norms. In other words, ratios are
relative figures reflecting the relationship between variables and enable the analysts to
draw conclusions regarding the financial operations.

However, it must be noted that ratio analysis merely highlights the potential areas of
concern or areas needing immediate attention but it does not come out with the conclusion
as regards causes of such deviations from the norms. For instance, ABC Ltd. Introduced the
concept of ratio analysis by calculating the variety of ratios and comparing the same with
norms based on industry averages. While comparing the inventory ratio was 22.6 as
compared to industry average turnover ratio of 11.2. However on closer sell tiny due to
large variation from the norms, it was found that the business unit’s inventory level during
the year was kept at extremely low level. This resulted in numerous production held sales
and lower profits. In other words, what was initially looking like an extremely efficient
inventory management, turned out to be a problem area with the help of ratio analysis? As
a matter of caution, it must however be added that a single ration or two cannot generally
provide that necessary details so as to analyze the overall performance of the business unit.

In order to arrive at the reasonable conclusion regarding overall performance of the

business unit, an analysis of the entire group of ratio is required. However, ration analysis
should not be considered as ultimate objective test but it may be carried further based on
the out come and revelations about the causes of variations. Some times large variations are
due to unreliability of financial data or inaccuracies contained there in therefore before
taking any decision the basis of ration analysis, their reliability must be ensured. Similarly,
while doing the inter-firm comparison, the variations may be due to different technologies
or degree of risk in those units or items to be examined are in fact the comparable only. It
must be mentioned here that if ratios are used to evaluate operating performance, these
should exclude extra ordinary items because there are regarded as non-recurring items that
do not reflect normal performance.

Ratio analysis is the systematic process of determining and interpreting the

numerical relationship various pairs of items derived form the financial statements of a
business. Absolute figures do not convey much tangible meaning and is not meaningful
while comparing the performance of one business with the other.
 It is very important that the base (or denominator) selected for each ratio is
relevant with the numerator. The two must be such that one is closely connected and is
influenced by the other.

CAPITAL STRUCTURE RATIOS

Capital structure or leverage ratios are used to analyse the long-term

solvency or stability of a particular business unit. The short-term creditors are interested in
current financial position and use liquidity ratios. The long-term creditors world judge the
soundness of a business on the basis of the long-term financial strength measured in terms
of its ability to pay the interest regularly as well as repay the installment on due dates. This
long-term solvency can be judged by using leverage or structural ratios.

There are two aspects of the long-term solvency of a firm:-

(i) Ability to repay the principal when due, and

(ii) Regular payment of interest, there are thus two different but mutually dependent and
interrelated types of leverage ratio such as:
(a) Ratios based on the relationship between borrowed funds and owner’s capital, computed
form balance sheet eg: debt-equity ratio, dividend coverage ratio, debt service coverage
ratio etc.,

A. RETURN ON ASSETS
In this case profits are related to assets as follows

Return on assets = Net profit after tax

Total assets
Particulars 2005 2006 2007 2008 2009

Net profit 45,81,200 4,53,13,100 47,88,29,800 63,75,40,000 43,21,76,500

after tax

Total 3,60,81,30,900 3,28,90,95,900 4,27,21,80,100 5,33,45,34,100 5,86,14,78,300

assets

ROA 0.0012 0.013 0.112 0.119 0.073

YEAR
INTERPRETATION

THE RETURN ON ASSETS HAS INCREASED FROM 0.0012% TO 0.73% DURING THE PERIOD OF
STUDY WHICH SHOWS THAT THE COMPANY LIQUIDITY POSITION IS SATISFACTORY

[Link] ON CAPITAL EMPLOYED

Here return is compared to the total capital employed. A comparison of this ratio with that
of other units in the industry will indicate how efficiently the funds of the business have
been employed. The higher the ratio the more efficient is the use of capital employed.

Return on capital employed = Net profit after taxes & Interest

Total capital employed

(Total capital employed = Fixed assets + Current assets–Current liabilities)

Particulars 2005 2006 2007 2008 2009

ROCE 6.24 11.17 22 28.02 24.33
INTERPRETATION

THE RETURN ON CAPITAL EMPLOYED HAS INCREASED FROM 6.24% IN 2005 TO

24.33% BY THE YEAR 2009WHICH SHOWS THE COMPANY HAS PROPERLY
MOBOLISED AND DEPLOYED TOTAL FUNDS IN AN EFFECTIVE MANNER.

B. DEBT-EQUITY RATIO

DEBT-EQUITY RATIO = Secured + unsecured loans

(Share capital+ R&S+ P&L a/ - Miscellaneous expenditure

Particulars 2005 2006 2007 2008 2009

Debt 19872418 15252310 12819805 10037055 10479744

Equity 15920353 22263593 21847389 32973137 36178386

capital
DEBT- 1.24 0.685 0.58 0.30 0.28
EQUITY
RTIO
 YEARS

INTERPRETATION

THE DEBT –EQUITY RATIO OF THE COMPANY US AT 1.24 TIMES IN THE YEAR 2005 AND IT
GRADUALLY DECREASE TO 0.28 IN THE YEAR 2009. WHICH SHOWS THAT THE COMPANY
HAS INCREASED SHARE HOLDERS FUND AND REDUCED OUTSIDERS FUND.

D. RETURN ON INVESTMENT

RETURN ON INVESTMENT= NET PROFIT AFTER TAX

TOTAL INVESTMENT
Particulars 2005 2006 2007 2008 2009
Net profit 45,812 4,53,131 47,88,298 63,754 43,21,765
after tax
Total 3,48,365 3,48,365 5,50,749 12,92,824 15,89,733
investment
ROI 0.13 1.30 8.694 0.04 2.718

YEARS

INTERPRETATION

The return on investment has reached 2.7% at the end of 2009 when compared to 0.1% in
2005 which shows the satisfactory level of investment.
GROSS PROFIT RATIO

Gross profit ratio = Gross profit / net sales *100

Gross profit = sales – cost of goods sold

Particulars 2005 2006 2007 2008 2009

Gross 53,84,918 81,67,017 1,40,78,048 2,46,62,956 2,34,61,402
profit
Sales 1,37,42,779 1,81,87,553 2,60,43,947 3,53,70,435 3,75,83,853

Gross
profit
39.18 44.90 54.05 69.72 62.42
ratio

70

60

50

40
Gross profit ratio
30

20

10

0
 YEARS

INTERPRETATION

THE GROSS PROFIT RATIO IS AT 39% IN 2005 AND IT REACHED 62% IN THE YEAR 2009
WHICH SHOWS THAT THE COMPANY HAS REACHED SATISFACTORY PROFIT.

NET PROFIT RATIO:

Net profit ratio = Net profit / sales*100

Net profit = gross profit- operating expenses

Particulars 2005 2006 2007 2008 2009

Net profit 1,95,652 40,84,440 73,16,314 1,39,12,148 40,33,958
Sales 1,37,42,779 1,81,87,553 2,60,43,947 3,53,70,435 3,75,83,853
Net profit 1.42 22.45 28.09 39.33 10.73
ratio
 YEARS

INTERPRETATION

THE NET PROFIT RATIO ALSO INCREASED TO 39% IN THE YEAR 2008 AND STABLED AT
10.73% AS PROFIT AFTER TAX IN THE YEAR 2009.

DIVIDEND PER SHARE

Dividend per share = dividend / no of shares

Particulars 2005 2006 2007 2008 2009

Dividend
per share
Nil Nil 1 2 2
 2
1.8
1.6
1.4
1.2
Debenture per share
1
0.8
0.6
0.4
0.2
0

YEARS

INTERPRETATION

The dividend per share in the year 2005 was 0 it has increased to 2% in the year 2009
which shows that the company is able to pay off dividend to share holders.

FINANCIAL PERFORMANCE OF COMPANY

2005 2006 2007 2008 2009

Sales/income
from
operations 138539000 182944000 261075000 355447000 335949000
other income 1691000 725000 1013000 5114000 11541000
Total income 140230000 183669000 262088000 360561000 347490000
Total expenditure 124885000 156848000 187649000 247505000 243170000
Operating profit 15345000 26821000 74439000 113056000 104320000
Operating
profit margin 10.94% 14.60% 28.40% 31.36% 30.02%
Interest and
financing
charges 13350000 14893000 14980000 10986000 11215000
Gross profit

after interest 1995000 11928000 59459000 102070000 93150000

Depreciation 7877000 78770000 10263000 12792000 20332000
Profit/loss
before tax 5882000 4041000 49196000 89278000 72773000
Extra ordinary
items-net
income 6340000 957000 0 4814000 7943000
Net
profit/loss
before tax 458000 4998000 49196000 84464000 64830000
Deferred
taxation asset 0 0 0 0 0
Profit/loss after tax 458000 4531000 47883000 63754000 43218000
Return on capital
employed 6.24% 11.17% 22% 28.02% 24.33%
Deferred
taxation
liability 0 234000 1143000 18270000 2989000
Fringe benefit tax 0 233000 170000 960000 478000
 YEARS

INTERPRETATION

THE RETURN IN CAPITAL EMPLOYED IS AT 6.24% IN THE YEAR 2005 AND IT REACHED 24% BY
THE YEAR 2009 WHICH SHOWS THE COMPANY HAS PROPERLY MOBILIZED AND DEPLOYED
TOTAL FUNDS IN EFFECTIVE MANNER

THE OPERATING PROFIT MARGIN OF THE COMPANY IS AT 10.94% IN 2005 AND IT REACHED
30.20% BY THE YEAR 2009
ANNEXURES
 EBIT AND EPS ANALYSIS

Particulars 2005 2006 2007 2008 2009

PAT 45812000 453131000 4788298000 6375400000 4321765000
(+) Tax 15571498.8 154019226.9 1627542490 2166998460 1468967924
(33.99%)
PBT 6138498.8 607150226.9 3160755510 8542398460 5790732924
(+) Interest 1334968000 1489265000 588861000 1098619000 1121493000
EBIT 1341106499 2096415227 4658716510 9641017460 6912225924
(-) Tax 455842099 712571535.7 1583497742 3276981835 2349465592
PAT 885264400 1383843691 4500368768 6364035625 4562760332
(-) Dividend 86250000 86250000 0 0 0

(11.5%)
Profit to
equity
799014400 1297593691 4500368768 6364035625 4562760332
share
holder

EPS 5.725 6.8017 20.421 22.57 16.155

 LEVERAGE ANALYSIS

Particulars 2005 2006 2007 2008 2009

Sales and
other
1402303700 1836690700 2620877000 3605614100 3954535500
income
(-) Variable
cost
842999800 1019934100 583548700 1580747800 1919738000
Contribution 559303900 816756600 1945528300 35301210600 3935361700

(-) Fixed cost 118424700 124861800 168888400 211035100 331370600

EBIT 440879200 804294800 1776639900 35090175500 3603991100
(-) Interest 133496800 148926500 149796100 109861900 112149300
EBT 307382400 655358300 1626843800 34980313600 3491841800
Operating 1.268 1.015 1.095 1.006 1.091
leverage
Financial 1.434 1.227 1.09 1.0031 1.032
leverage
Combined
leverage
1.818 1.245 1.193 1.009 1.125
 WORKING CAPITAL ANALYSIS

Particulars 2005 2006 2007 2008 2009

Gross
current
1368448900 599468800 1717514000 2149412400 2143528300
assets (A)
Net
current
366109400 373955000 434827000 984212200 1153947200
liabilities
(B)
WORKING
CAPITAL
1002339500 225513800 1272687000 1165200200 989581100
(A-B)
 FIXED ASSETS ANALYSIS

Particulars 2005 2006 2007 2008 2009

LAND 1873000 2100433 2162113 3888545 3980455
BUILDING 3116076 3014401 2948887 3714448 4179254
PLANT & 22659542 22678251 22470461 30224966 35475313
MACHINERY
WIND ELECTRIC 423953 423953 423953 757622 741270
GENERATORS
FURNITURE 300442 333379 447293 45614 440420
VEHICLES 109847 109289 181651 231651 246987
SHIPS - - - 197225 2066978
FRANCHISE - - - 13609085 3276000
RIGHTS
COMPUTER - - - 3609085 97372
SOFTWARE
TOTAL 28482860 28659706 28634358 43080056 50504049
 INCOME STATEMENT

Particulars 2005 2006 2007 2008 2009

sales 13742779 18187553 26043947 35370435 37583853

(-) cost of goods sold 8357861 10020536 11965899 10707479 14122451

Gross profit 5384918 8167017 14078048 24662956 23461402

(-)Operating expences 5192351 6472213 8595945 10576061 12322752

Operating profit 192567 1694804 5482103 14086895 11138650

(+)Non operating income 280258 179354 164823 685706 1961502

(-)Non operating expenditure 1335718 1493898 1504674 1124969 1128183

PBT -862893 380260 4142252 13647632 11971969

(-) TAX 0 129250374 1407951455 4638830117 4069272263

PAT 0 -128870114 -1403809203 -4625182485 -4057300294

% of Total income - -
(PAT/Sales*100) 0 708.5621359 5390.155352 -13076.40826 -10795.32823
FINDINGS

1. In ICL industries the funding mix or capital structure

is not at optimum level at the beginning of the study (2005). Appropriate
capital structure i.e, mix of shareholders fund and outsiders fund will give
more benefits to shareholders
2. In ICL the shareholders fund is at 40% in the year 2005 and it reached
91% by the year 2009. This is because the huge4 profits made by the
company from the year 2006 onwards which led to the same.
3. It is evident that the company is not using outsiders fund (loan funds)
to the optimum level as the loan funds are decreasing every year and
optimum debt equity ratio I not maintained (2005 loan funds 60% ,
2009 10%)
4. The company’s sales realization is increasingly every year during the
period of study(in 2005 14023 lakhs to 39545 by the year 2009)
because of increase in the demand in the cement industry.
5. The variable cost (raw material cost in the form of gypsum and cost)
prices have increased in tandem with the sales but it did not effect the
contribution towards profit.
6. The fixed cost mainly in the form of deprecation has increased
substantially because of capitalization of profits by the company
towards plant expansion programme which was at 34 lakhs tons in the
year 2005 and it reached 1 crore 25 lakhs tons installed capacity by the
year 2009.
7. The operating leverage and financial leverage of the company shows a
healthy trend and proves the efficiency of the management in operating
sector and decisions making in the finance without substantial issue of
share capital to the public
8. The non-operating income of the company has increased substantially
almost by 20% because of the companies investment in its subsidiaries
located in south India at various places.
9. The PAT of the company is increasing every year and the company’s
profit after tax is at 17% by the year 2009 which is morethan the cost of
capital of the company
10. The interest payments is increasing every year (2005 7.2% and in 2009
13.5%) which shows the company borrowings are very less and it used
only insiders funds for making new investments.
 BIBLOGRAPHY

1) Financial Management : Khan & Jain

2) Financial Management : I.M. Pandey

3) Financial Management : Prasanna Chandra

4) Financial Management : R.P. Rastogi

5) Strategic Management : John .A. Pierce Robinson

6) News Papers : Financial Express, Economic

Times