Final Project

CHAPTER I
INTRODUCTION
1
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.
2
NEED AND IMPORTANCE OF CAPITAL STRUCTURE:
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.
3
OBJECTIVES:
The project is an attempt to seek an insight into the aspects

that are involved in the capital structuring and financial decisions
of the company. This project endeavours to achieve the following
objectives.
o To Study the capital structure of NCL through EBIT-EPS

analysis
o Study effectiveness of financing decision on EPS and EBIT
of the firm.
o Examining leverage analysis of NCL INDUSTRIES LTD.
o Examining the financing trends in the NCL INDUSTRIES
LTD. for the period of 2005-10.
o Study debt/equity ratio of NCL Ind. Ltd for 2005-10.
SCOPE:
A study of the 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 the study is
confined to the sources that NCL Ind. LTD tapped over the years
under study i.e. 2005-10
RESEARCH METHODOLOGY AND DATA ANALYSIS
4
Data relating to NCL Ind. Ltd. has been collected through
SECONDARY SOURCES:
 Published annual reports of the company for the year 2005-

10.
PRIMARY SOURCES:
 Detailed discussions with Mr. K.R.Naidu (Vice-President).

 Discussions with the Finance manager Mr. Arun Kumar, and
other members of the Finance department.
DATA ANALYSIS
The collected data has been processed using the tools of
 Ratio analysis
 Graphical analysis
 Year-year analysis
These tools access in the interpretation and understanding of the

Existing scenario of the Capital Structure.
LIMITATIONS
5
 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.
6
CHAPTER II
REVIEW
OF
LITERATURE
7
Cement is a key infrastructure industry. It has been
decontrolled from price and distribution n 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 meetings held in the
cabinet secretariat under the chairmanship of secretary
(coordination). Its performance is also reviewed by the cabinet
committee n infrastructure.
CAPACITY AND PRODUCTION
India is the second largest producer of cement in the world

after china. The cement Industry comprises of 128 large
cement plants with an installed capacity of 148.28 million
tones and more than 300 mini cement plant with an estimated
capacity of 11.10 million tones per annum. The cement
corporation of India, which is central public sector undertaking,
has 10 units. There are 10 large cement plants owned by
various state Governments. The total installed capacity in the
country as a whole is 159.38 million tones. Actual cement
production in 2003-04 was 116.35 million tones as against a
production of 106.90 million tones in 2003-04, registering a
growth rate of 8.84%.
Keeping in view the trend of growth of the industry in
previous years, a production Target of 126 million tones has
fixed for the year 2004-05. During the period April-June 2005,
a production (provisional) was 31.30 million tones. The
industry has achieved a growth rate of 4.86 per cent during this
period.
8
EXPORTS
Apart from meeting the entire domestic demand, the

industry is also exporting cement and clinker. The export of
cement during 2003-04 and 2004-05 was 5.14 million tones
and 6.92 million tones respectively. Export during April-May,
2005 was 1.35 million tones. Major exporters were Gujarat
Ambuja Cements Ltd. and L&T Ltd.
RECOMMENDATIONS ON CEMENT INDUSTRY
For the development of the cement industry ‘Working

Group on cement Industry’ was constituted by the planning
commission for the formulation of X Five Year Plan. The
working Group has projected a growth rate of 10% for the
cement industry during the plan period and has projected
creation of additional capacity of 40-62 million tones mainly
through expansion of existing plants. The working Group has
identified following thrust areas for improving demand for
cement;
 Further push to housing development programmes;

 Promotion of concrete Highways and roads; and
 Use of ready-mix concrete in large infrastructure project.
9
Further, in order to improve global competitiveness of the
Indian Cement Industry, the Department of Industrial policy &
promotion commissioned a study on the global competitiveness
of the Indian industry through an organization of international
repute, viz. KPMG Consultancy Pvt. Ltd. The report submitted
by the organization has made several recommendations for
making the Indian Cement Industry more competitive in the
international market. The recommendations are under
consideration.
TECHNOLOICAL CHANGE
Cement industry has made tremendous strides in

technological up gradation and assimilation of latest
technology. At present ninety three per cent of the total
capacity in the industry is based on modern and environment-
friendly dry process technology and only seven per cent of the
capacity is based on old wet and semi-dry process technology.
There is tremendous scope for waste heat recovery in cement
plants and thereby reduction in emission level. One project for
co-generation of power utilizing waste heat in an Indian
cement plant is being implemented with Japanese assistance
under Green Aid Plan. The induction of advanced technology
has helped the industry immensely to conserve energy and fuel
and to save materials substantially. Indian is also producing
different varieties of cement like Ordinary Portland Cement
(OPC), Portland Pozzolana Cement (PPC), Portland Blast
Furnace Slag Cement (PBFS), Oil Well Cement, Rapid
10
Hardening Portland Cement, Sulphate Resisting Portland
Cement, White Cement etc. Production of these varieties of
cement conform to the BIS Specifications. It is worth
mentioning that some cement plants have set up dedicated
jetties for promoting bulk transportation and export.
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?
11
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. The weighted average cost 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.
12
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. kd<ke)
3) The corporate income taxes do not exist.
The first assumption implies that, if ke 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)
13
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/V
As per the assumptions of the NI approach Ke 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
14
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
15
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
16
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.
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 criterion.
17
The 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.
18
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 and
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, and the
reasons must be communicated to investors. A careful
communication to market will be helpful in reducing the
misunderstanding between management and Investors.
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
19
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
EMBED PBrush
20
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 (SEBI) and stock exchanges.
21
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.
22
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 other wise 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.
23
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 Finances.
The 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
24
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
25
certain limitations and doesn’t provide unambiguous guide in determining the capital
structure of a firm in practice.
CHAPTER III
COMPANY PROFILE
26
NCL 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
25% as of 2007. NCL Industries Ltd has a countrywide office, network with
fully computerized operations and a professional team & worker. The
company has an installed capacity of 297000 tones of Cement & 3000 tones
of Cement Boards. The company is expanding after Economic reforms have
set in NCL Industries has spread its wings over several high production
based mechanism as will.
The companies sister concerns include Altek Coating Products Ltd.

NCL energy ltd, NCL homes ltd, Kakatiya Chemical Ltd. the members of
the Board comprised of eminent personalities from the field of Banking,
Taxation, Corporate loss and Industry. Jaya Bharath Reddy is the Chairman
and Ravi (Managing Director) industrialist having through knowledge and
experience in cement business and allied fields, with a new appointed M.D
Sri. K.Ravi. The broad based clientele group reflects the high respect and
with NCL Industries Ltd, in production circles. The client includes repeated
business houses like NCL homes Ltd, and confident financial institutions
such as OBC (Oriental Bank of Commerce), Vijaya Bank and Canara Bank.
The Plant is located in Nalgonda District of A.P where abundant raw
27
materials such as Lime Stone, Fire Wood etc., are available. Apart from the
main resources River Krishna flowing adjacent to the plant.
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 Authorised capital is Rs.450 lacs of equity shares at

Rs.10 each. The issued equity capital is RS.1622.93 lacs at Rs.10 each for
the period 2005-2010 and subscribed and paid-up capital is Rs. 1622.93 lacs
at Rs.10 each for the period of 2005-2010.
2. In 2005-2010 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 2005-2010.
28
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.
29
CHAPTER IV & V
DATA ANALYSIS
&
INFERENCES
30
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 2010

128.5
ROA = PAT 290.77 274.5 104.12 7 252.19 340.78
TOTAL
ASSETS 9044.4 8632.1 8985. 9283.8 1017.3
1 8916.51 1 5 6 2
3.21 3.08 1.21 1.43 2.72 3.34
b). RETURN 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 2010
290.77 274.5 104.12 128.57 252.19 340.78
ROCE = PAT
Total Capital Emp 7111.40 7112.91 6827.97 6993.93 7079.20 9994.02
= 4.08 = 3.85 =1.52 =1.83 =3.56 =3.40
31
32
YEAR 2004-2005
Performance of company (Amount in Rs.’000s)
Gross Revenue 773919 Total Expenditure 743342
Profit (Loss) before tax 30577 Profit after tax 29077

Earnings per share Rs. 1.79 Dividend ratio 10%
YEAR 2005-2006
Performance of company (Amount in Rs.’000s)
742200 Total Expenditure 711921

Gross Revenue
YEAR 2006-2007
PERFORMANCE OF COMPANY (AMOUNT IN RS.’000S)

Gross Revenue
33
YEAR 2007-2008

Gross Revenue
YEAR 2008-2009

Gross Revenue
YEAR 2009-2010

Gross Revenue
34
PERFORMANCE ANALYSIS OF 2004-2005
There has been an increase of over 25% sales, where compared to previous year there
by contributing to increase in Gross Profit which increases over 45% because of increase
in sales and decrease in cost of sales which in due to reduction in royalty for mining and
other overheads reduction. In this year the company’s operating profit is around 165 lacs
as compared to a heavy loss of over 365 lacs in previous year cost reduction also
contributed to the alone. A dividend of Rs.178 lacs was declared for the year including
Tax.
There has been an increase of over 20% sales when compared to cost year, which
resulted in Gross Profit of Rs.1375 lacs as against around 1300 lacs in last year. Because
of decrease in Non-Operating expenses to the time of 130 lacs the Net profit has
increased. It stood at 293 lacs in current year against 165 lacs in previous year because of
redemption of debenture and cost reduction. A dividend of Rs.162 lacs was declared
during the year at 10% on equity.
The production and Sales has increased by 23% Cement turn over has increased by 6% as
against fall in Sales realization by 15% last year. Cement Boards Division has contributed
18% more than the previous year to the PBDIT. Perform Division realization has
increased by 4% even the Turn over have came down to 845 lacs from 1189lacs in last
year. The profit After Tax has came down from 302 lacs to 112lacs in Current year
because of slope in Cement Industry.
1. The Interest cost has come down by 24% due to reduction in Interest rates by
Commercial Banks & Public Deposits.
35
The Cement Industry has a successful year because of Govt. policies such
as infrastructure Development a Rural housing. There has been a small reduction in Gross
Sales and with the performance of prefab Division the Gross Profit gap has narrowed and
contributing to the EBIT. The Gross Profit has increased considerably from 1014 lacs in
Last year to 1259 lacs in Current year. The interest payment has increased by 14 lacs in
the Current year and the Profit before Tax at 331 lacs when compared to 112 lacs in Last
year.
The Net profit also increased from 104 lacs in Last year to 128.57 lacs in Current
year. The Director has recommended a 7.5% Dividend and in Last year it was at 5%.
In 2007-’08 the company has performed well in all decisions because of high
demand and realizations. The Gross Profit Increased considerably and the interest
payments have decreased at about 140 lacs because of loans taken from the bank at a
lesser rate of interest and payment of loan funds for which the company is paying higher
rate of interest. In the previous year, the cash credit granted by UCO bank to the tune of
Rs.594 lacs and losing of loan funds borrowed from Vijaya Bank and Canara Bank
factors, which can tribute to increase in the Profit before Tax to the tune of Rs.190 lacs
the company declared a dividend of 10% on its equity to its shareholders when compared
to 7.5% in the previous year. The EPS of the company also increased considerably which
investors in coming period. The company has taken up a plant expansion program during
the year to increase the production activity and to meet the increase in the demand
36
Company is operating in 3 segments, out of which cement contributes about 55% of

turnover while the Boards and prefab segments contribute about 45%. Huge investment
in the industrial sector over the next 3 years is expected to lead to higher cement off –take
on the back of strong GDP growth across the country. It is expected that the domestic
cement consumption would grow at a CAGR of 8% for the next 5 ears. By FY 2003 the
domestic consumption is expected to grow to 199 million Tons from 136 million Tons
consumption FY2008. During the year 2008-09 your company’s Gross sales increased by
about 38% to Rs.12708 Lacks from Rs.9224 Lacks in FY 2007-08. Net sales increased
by about 39% to Rs.10337 Lacks from Rs.7448 Lacks in FY 2007-08. Improved sales
from all the tree divisions particularly from prefab division contributed for increased
turnover.
EBIT LEVELS
Particulars 2005 2006 2007 2008 2009 2010
Earnings Before
Interest & Tax 1096.15 969.61 618.76 803 861.16 1235.69
Change - 126.54 477.39 294.2 234.99 374.53
% Change - 11.50% 43.55% 26.83% 21.44% 30.30%
DEGREE OF FINANCIAL LEVERAGE:
37
The higher the quotient of DEL, the greater the leverage. In NCL Industries case it is
increasing because of decrease in EBIT levels from 2004-2005, to 2009-2010.
The EBIT level is in a decreasing trend because of drastic decline in prices in Cement
Industry during above period. In the year 2009 and 2010 the EBIT level has increased
substantially because of Raise inn Cement prices because of demand and the policies of
Govt. such as rural housing and irrigation project taken up.
EBIT LEVELS
1400
1200
1000
800
BI
600
E
400
200
0
2005 2006 2007 2008 2009 2010
YEARS
38
INTERPRETATION
The EBIT level in 2005 is at 1096.15 lacs and is decreasing every year till 2007. Because
of slump in the Cement Industry less realisation. The EBIT levels in 2008 again started
growing and reached to 802.46 lacs and in 2009 were at 861.16 lakhs and in 2010 were at
861.16, because of the sale price increase per bag and increase in demand. The
infrastructure program taken up by the A.P. Govt. in the field s of rural housing irrigation
projects created demand and whole Cement Industries are making profits.
PERFORMANCE
EPS ANALYSIS
Particulars 2005 2006 2007 2008 2009 2010

Profit After Tax 29077000 2745000 10412000 30569000 32806000 34078000
Less: Preference
Dividend - - - - - -
Amount of Equity share
holder 29077000 27450000 10412000 12857000 25219000 34093133
No. OF equity share of
Rs.10/- each 16234825 16234825 16234825 16234825 16234825 16234825
EPS 1.79 1.69 0.64 0.79 1.55 2.1
39
EPS LEVELS
2.5
1.5
E
P
S
0.5
0
2005 2006 2007 2008 2009 2010
YEARS
INTERPRETATION
The PAT is in an increasing trend from 2007-2008 because of increase in sale prices and
also decreases in the cost of manufacturing. In 2009 and 2010 even the cost of
manufacturing has increased by 5% because of higher sales volume PAT has increased
considerably, which leads to higher EPS, which is at 9.36 in 2009
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) = (EBIT - INT) (1 – T)

N N
We assume that the level of debt, the cost of debt and the tax rate are constant. Therefore
in equation, 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
40
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 + bEBIT
Clearly indicates that EPS is a linear function of EBIT.
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 cost and
put into the wheels of business at the right time and if not, it would lead intensely to the
shut down 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.
41
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:
 Cost of funds
 Mode of repayment
 Timing and time lag involved in mobilization
 Assets security
 Stock options
 Cournand’s 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 market.
42
THE FORMS OF FUNDS MOBILIZATION IS ILLUSTRATED BY A CHART:
FUNDING MIX - SOURCES
OWNERS FUND BORROWED FUND
EQUITY RETAINED PREFERENCE CONVENTIONAL NON-
CONVENTIONAL
CAPITAL EARNINGS CAPITAL SOURCES SOURCES
FINANCIAL SUPPLIERS CREDIT

INSTITUTION SHORT TERM
BANK BANK
BORROWINGS
CASH CREDIT HIRE PURCHASE
DEBENTURES
FIXED DEPOSITS
ICD
43
NCL INDUSTRIES LTD. THE FUNDING MIX
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Source of funds
Share holders funds

a) Share capital 1622.93 1622.93 1622.93 1622.93 1622.93 2179.97
b) Reserves and surplus 1502.87 796.48 890.21 881.46 948.59 937.65

c)Deferred tax - 778.62 787.99 - - -
TOTAL (A) 3125.8 3198.03 3301.13 2504.39 2571.52 3117.62
Loan Funds
a) Secured Loans 1724.9 1372.53 1413.17 1167.82 1783.66 4015.28
b) Unsecured Loans 2299.16 2588.22 2161.95 2404.33 1711.95 1954.07

TOTAL (B) 4024.06 3960.75 3575.12 3572.15 3495.61 5969.35
TOTAL (A+B) 7154.86 7158.78 6876.24 6075.92 6067.13 9086.97
% of S H in total C.E 43.72 44.67 48 41.22 42.38 34.3
% of Loan Fund in
total C.E 56.28 55.33 52 58.78 57.62 65.69
INTERPRETATION
The shareholder fund is at 3125.8 constitutes 43.72% in total C.E and loan funds
constitute 56.28% in 2004-05. The Funding Mix on an average for 6 years will be 45% of
shareholders Fund and 55% of Loan Funds there by the company is trying to maintain a
good Funding Mix. The leverage or trading on equity is also good because the company
affectively utilizing the Loan Funds in the Capital Structure. So that it leads to higher
profit increase of EPS in 2007 at 0.79 to 2010 1.55
44
TERM LOANS
2004-2005
Particulars Rs. (in Lakhs)

TERM LOANS
IDBI 0.00
IFCI 0.00
0.00
HIRE PURCHASE LOANS
TVS Lakshmi Credit Ltd 0.00 0.00
Haritha Finance Ltd 0.00 0.00
Funded interest 0.00 0.00
Non Convertible Debentures 1027.98
CASH CREDIT
Global Trust Bank 641.33
Vijaya Bank 55.59
696.92
1,724.90
UNSECURED LOANS
Deposits from public 727.76
Lease /Hire purchases 0.34
IFST Loan from Govt. of AP 0.00
Deferred sales tax loan 1.60
Deposits from stockiest & others 1,566.21
Inter corporate deposits 3.25
TOTAL 2,299.16
45
TERM LOANS
2005-2006

TERM LOANS
IDBI 0.00
IFCI 0.00
0.00
HIRE PURCHASE LOANS
Non Convertible Debentures 677.75
CASH CREDIT
Vijaya Bank 56.57
694.78
1,372.53
UNSECURED LOANS
IFST Loan from Govt. of AP 0.00
Deposits from stockiest & others 1730.39
Others 201.04
TOTAL 2588.22
46
TERM LOANS
2006-2007

TERM LOANS
Indian Renewable Energy
255.00
development agency ltd.
Non convertible debentures 509.61
HIRE PURCHASE LOANS

CASH CREDIT
Vijaya Bank 65.15
648.56
1,413.17
UNSECURED LOANS
Canara Bank factors ltd. 100.09
Deposits from stockiest & others 1,239.02
Others 201.04
TOTAL 2161.94
47
TERM LOANS
2007-2008

TERM LOANS
207.00
HIRE PURCHASE LOANS

CASH CREDIT
Vijaya Bank 174.12
Canara Bank Factors 158.98 960.20
1167.20
UNSECURED LOANS
Lease/Hire purchase 10.30
Others 201.04
TOTAL 3571.53
48
TERM LOANS
2008-2009

TERM LOANS
779.17
HIRE PURCHASE LOANS

CASH CREDIT
Oriental Bank of Commerce 410.15
UCO Bank 594.34
Canara Bank Factors 0.00 1004.49
1167.20
UNSECURED LOANS
Others 201.04
TOTAL 3495.64
TERM LOANS
49
2009-2010

TERM LOANS
2532.14
HIRE PURCHASE LOANS

CASH CREDIT
Oriental Bank of Commerce 561.32
UCO Bank 306.54
Canara Bank Factors 403.46
UTI Bank Ltd 211.82 1483.14
4015.28
UNSECURED LOANS
Interest free from sales tax
162.40
deferment loan
Others 201.29
TOTAL 5969.35
50
TERMS LOANS
7,000.00
6,000.00
5,000.00
IN
s.
R
A
K
H
S
L
4,000.00
3,000.00
2,000.00
1,000.00
0.00
2005 2006 2007 2008 2009 2010
YEARS
INTERPRETATION
The Non-convertible debentures are being redeemed from 2005 and 2006 financial year
onwards and were completely repaid by 2009-2010. The cash credit assistance was
provided by Global Trust Bank and Vijaya Bank to the tune of Rs.696 lacs and Canara
bank factors to the tune Rs.158 lacs was completely repaid by taking cash credit facility
from Oriental Bank of Commerce and UCO Bank to the tune of Rs.1000 lacs. The
company is paying of deposits from public every year.
Deposits from public were stood at 727.76 lacs in 2004-200 and in 2009-2010 it
came down to 399.69 lacs. The IRIDA has granted Rs.255 lacs term loan for installation
of energy saving equipment and the loan was again increased to 779.17 lacs in 2009-
2010.
YEAR 2004- 2005
51
Position of mobilization and development of funds
(Amount in Rs.000s)
Total liabilities 714986 Total assets 714986

Sources of funds
Paid u capital 162293 Reserves & surplus 150287
Secured Loans 172496 Unsecured loans 229916
Application of funds
Net fixed assets 522854 Investments 6278
Net current assets 182008 Misc. Expenditure 3846
Accumulated losses
YEAR 2005 - 2006
Position of Mobilization and Development of funds

(Amount in RS. 000s)

Sources of funds
Accumulated losses
YEAR 2006 – 2007


Sources of funds
Deferred tax 78799
Accumulated losses Nil
52
Financial leverage results from the presence of fixed financial charges in
the firm income stream. These fixed charges don’t vary with EBIT availability post
payment balances belong to equity holders.
Financial leverage is concerned with the effect of charges in the EBIT on

the earnings available to shareholders.
YEAR 2007-2008

Sources of funds
Deferred tax 78799
YEAR 2008- 2009
Position of Mobilization and Development of funds (Amount in RS. 000s)

Sources of funds
Paid u capital 1622.93 Reserves & surplus 94859
Deferred tax 1041.93
53
YEAR 2009 – 2010


Sources of funds
Paid u capital 1623.48 Reserves & surplus 93765
Deferred tax 1086.23
Secured Loans 4015.28 Unsecured loans 195407
Net fixed assets 7055.88 Investments 13000
Net current assets 2938.22 Misc. Expenditure 4910
54
CHAPTER VI
SUMMARY
&
CONCLUSIONS
55
FINDINGS & CONCLUSIONS
1) Sales in 2007-2008 are at 7267.74 and in 2009-2010 12752.43 lakhs those in a
decreasing trend to the extent of 20% every year. On the other hand manufacturing
expenses are at 8725.11 lakhs from 2008-2009. There has been significant increase in
cost of production during 2006-2007 because of increase in Royalty.
2) The interest charges were 492.21 in 2008 and 357.07in 2009 and 522.56 respectively
shows that the company redeemed fixed interest bearing funds from time to time out of
profit from 2007-2008.Debantures were partly redeemed with the help of debenture
redemption reserve and other references.
3) The PAT (Profit After Tax) in 2009-2010 is at 340.78 lakhs. The PAT has increased in
prices in whole Cement industry during the above period. The profit has increased
almost 15% during the period 2007-2010.
4) Debentures were redeemed by transfers to D.R.R. in 2008-2009.
5) A steady transfer for dividend during 2007-2009 from P&L appropriation but in 2007
there is no adequate dividend equity Shareholders.
56
6) The share capital of the company remained in charge during the three-year period
because of no public issues made by the company.
7) The secured loans have decreased consistently from 2007-2010 and slight increase in
2010.
8) The unsured loans have increased from 2007-2010. All the secured and an insecure
loan obtained by the company to optimize the leverage financially has some set books.
Because of non-payment of dividends to share holders. Because of less profit made
during the period.
9) The reserves of the company steadily increase from 2007 to 2010. Because of less
transfer in P&L appropriation A/C and transfer to differed Tax. Thus marginalizing the
equity interest net worth of the company.
10) The current ratio of the company in 2007-08 is at 2.08 and in 2008-09 at 1.98 and in
2009-10 at 1.95, which is as per the norms of the manufacturing Industry. The current
Ratio shows that the company’s liquidity or short-term solvency is in a better position to
pay off the current liabilities as and when payable.
57
SUGGESTIONS:
1. The company has to maintain the optimal capital structure and leverage so that in
coming years it can contribute to the wealth of the shareholders.
2. The mining loyalty contracts should be revised so that it will decrease the direct in
the production
3. The company has to exercise control over its out side purchases and overheads
which have effect on the profitability of the company.
4. As the interest rates in pubic Financial institutions are in a decreasing trend after
globalization the company going on searching for loan funds at a less rate of interest as in
the case of UCO Bank.
5. Efficiency and competency in managing the affairs of the company should be
maintained.
58
Bibliography
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
6) World Wide Web : nclindustries.com
7) News Papers : Financial Express
Economic Times
8) Websites : www.nclind.com
www.google.com
59

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CHAPTER I

The assets of a company can be financed either by

The financing or capital structure decision is a significant

The value of the firm depends upon its expected earnings

If leverage affects the cost of capital and the value of the

Given that a firm has certain structure of assets, which offers

The existence of an optimum capital structure is not

The project is an attempt to seek an insight into the aspects

o To Study the capital structure of NCL through EBIT-EPS

A study of the capital structure involves an examination of

RESEARCH METHODOLOGY AND DATA ANALYSIS

 Published annual reports of the company for the year 2005-

 Detailed discussions with Mr. K.R.Naidu (Vice-President).

The collected data has been processed using the tools of

These tools access in the interpretation and understanding of the

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.

CAPACITY AND PRODUCTION

India is the second largest producer of cement in the world

Apart from meeting the entire domestic demand, the

RECOMMENDATIONS ON CEMENT INDUSTRY

For the development of the cement industry ‘Working

 Further push to housing development programmes;

Cement industry has made tremendous strides in

THE CAPITAL STRUCTURE CONTROVERSY:

The value of the firm depends upon its expected earnings

If leverage affects the cost of capital and the value of the

Given that a firm has certain structure of assets, which offers

1.NET INCOME APPROACH:

2. NET OPERATING INCOME APPROACH:

Under the net operating income (NOI) approach, the cost of

According to this approach, the cost of capital

Thus, if NI approach is valid, leverage is significant variable

1) The use of debt does not change the risk perception of

The first assumption implies that, if ke and kd are constant

As per the assumptions of the NI approach Ke and Kd

NET OPERATING INCOME APPROACH

According to the met operating income approach the overall

The critical premise of this approach is that the market

The net operating income position has been \

COST OF CAPITAL AND VALUATION APPROACH

The cost of a source of finance is the minimum return

CASH FLOW APPROACH:

One of the features of a sound capital structure is

The fixed charges of a company include payment of

One important ratio which should be examined at the

LIMITATION OF EPS AS A FINANCING-DECISION CRITERION

EPS is one of the mostly widely used measures of the

EPS VARIABILITY AND FINANCIAL RISK: -

The EPS variability resulting form the use of leverage is

(a) The increased variability in the shareholders earnings and

CAPITAL STRUCTURE AND FIRM VALUE:

Since the objective of financial management is to maximize