DESIGN OF THE STUDY:

ABSTRACTThe Project report of CAPITAL STRUCTURE Of ULTRA TECH CEMENT. The research includes study and analysis of current market, identification of the problem and its features. The work is basically concentrated on perception towards performance, what will be its affect on the market. Which factors it should concentrate on and what are the different servicing methods used to improve service quality.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 firms 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.

TABLE OF CONTENTSChapters CONTENTSPAGE Numbers

LIST OF TABLESI

LIST OF FIGURESII

1INTRODUCTION1

2OBJECTIVES & RESEARCH METHODOLOGY12

3INDUSTRY & COMPANY PROFILES21

4DATA ANALYSIS & INTERPRETATION29

5CONCLUSIONS &

RECOMMENDATIONS60

BIBLIOGRAPHY64

LIST OF TABLES ISno TablesPage Numbers

1Ebit Levels

34

2Eps analysis

36

3ULTRA TECH CEMENT Industries Ltd. The Funding Mix

40

4Term Loans

41

5Position of Mobilization and Development of Funds

48

LIST OF FIGURES II

SnoFigures

Page Numbers

1Ebit Levels

35

2Eps analysis

36

3The forms of funds

39

4Term Loans

47

Hyderabad Office: 503, Aditya Trade Centre,

Aditya Enclave Road, Ameerpet, Hyd-500002

Tel: 040 - 6643 0530 Fax: 040 - 6644 0440

___________________________________________________________________________________________________________

TO WHOM SOEVER IT MAY CONCERN

This is to certify that Mr. ARSHAD AHMED bearing Hall Ticket No: 4171-10-672-009 Student of Nizam Institute of Engineering & Technology, Deshmukhi,Nalgonda., Opp. Police Ground, Nizamabad. has undertaken project work titled Capital Srtucture from 15/11/2011 to 29/12/2011 in partial fulfillment of the requirement for the award of Master of Business Administration and submitted the report.

During the above training programme the student has been associated with various department and activity contributed to experimental learning process.

Coordinated issued on (Rajesh Kumar. D)

29-05-2011 (Manager) ____________________________________________________________________________________________________________

Registered office "B" Wing, 2nd floor, Ahura Centre, Andheri (East), Mumbai 400 093, India, Tel: 91-22-66917800,

www.ultratechcement.comCHAPTER- I

INTRODUCTIONDEFINITION:

FINANCE is a branch of economic concerned with the resources allocation as well as resources.Management,acquisition and investment .Simply financial deals with matters related to money and the market.Financeis often defined simply as the management of money or funds management.[1]Modernfinance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created for transacting and trading assets, liabilities, and risks. Finance is conceptualized, structured, and regulated by a complex system of power relations within political economies across state and global markets. Finance is both art (e.g. product development) and science (e.g. measurement), although these activities increasingly converge through the intense technical and institutional focus on measuring and hedging risk-return relationships that underlie shareholder value. Networks of financial businesses exist to create, negotiate, market, and trade in evermore-complex financial products and services for their own as well as their clients accounts. Financial performance measures assess the efficiency and profitability of investments, the safety of debtors claims against assets, and the likelihood that derivative instruments will protect investors against a variety of market risks.INTRODUCTIONFinancial management is that managerial activity which is concerned with planning and controlling of firms financial resourses. It was branch of economics till 1890,and as a seprate discipline,it is of recent origin. Still, it has know unique body of knowledge of its own,and draws heavily on economic for its theoretical concepts event today.

The subject financial management is of immense interest in both academicians and practicing managers. It is of great interest to academicians because the subject is still developing, and there are still certain areas where controversies exit for which no unanimous solutions have been reached as yet.practising managers are interested in this subject because among the most crucial decisions of the firm are those which relate to finance, and an understanding of the theory of financial management provides them with conceptual and analytical insights to make those decisions skillfully.Given the capital budgeting decision of a firm, it has to decide the way in which the capital projects will be financed. Every time the firm makes an investment decision, it is at the same time making a financing decision also. for example, a decision to build a new plant or to buy a new machine implies specific way of financing that project.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 firms 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 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 companys 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 companys 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 shareholders 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--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. 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 companys 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 companys 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 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 companys 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 Finances.

The following are the three most important approaches to decide about a firms capital structure.

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

Valuation approach for determining the impact of debt on the shareholders value.

Cash flow approached for analyzing the firms 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 owners 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 shareholders 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 firms 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 firms 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 firms 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 firms capital structure .It suffers from certain limitations and doesnt provide unambiguous guide in determining the capital structure of a firm in practice.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 shareholders, 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 managements 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 units 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. 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 owners capital, computed form balance sheet eg: debt-equity ratio, dividend coverage ratio, debt service coverage ratio etc.,

NEED FOR STUDY:

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 its the firms 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 firms 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.CHAPTER - II

OBJECTIVES

&

RESEARCH

METHODOLOGYObjectives:

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 endeavors to achieve the following objectives.

To Study the capital structure of ULTRATECH CEMENTS through EBIT-EPS analysis

Study effectiveness of financing decision on EPS and EBIT of the firm.

Examining leverage analysis of ULTRATECH CEMENTS.

Examining the financing trends in the ULTRATECH CEMENTS. for the period of 2006-10.

Study debt/equity ratio of ULTRATECH CEMENTS for 2006-10.

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 ULTRATECH CEMENTS tapped over the years under study i.e. 2006-10

Research Methodology And Data Analysis

Data relating to ULTRATECH CEMENTS. has been collected through

Primary Sources:

Discussions with the Finance manager and other members of the Finance department.Secondary Sources: Published annual reports of the company for the year 2006-10.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 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 its the firms 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 firms 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. 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.

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