Prism Cements Ltd Submitted by Nigam Mehta (IPMX09035)

Prism Cements Ltd:

Prism Cement Limited (PCL) is an ISO 9001:2000 certified company promoted by
the Rajan Raheja Group, which was incorporated on 26th March 1992 in the
name of Karan Cement Limited. The Company manufactures and markets
Portland Pozzollana Cement (PPC) with the brand name Champion' and the full
range of Ordinary Portland Cement (OPC) of 33, 43 and 53 Grades. It operates
one largest single kiln cement plant at Satna, Madhya Pradesh, equipped with
state-of-the-art machinery and technical support from F.L Smidth & Co A.S
Denmark, the world leaders in cement technology. Also the company is running
the Technical Services Cell, for helping in further increasing the brand preference
for Prism Cement and to provide on-site services to individual house builders.
Latest News
10-Aug-2016- Prism Cement reports standalone net profit of Rs 15.65 crore in the June
2016 quarter

Net profit of Prism Cement reported to Rs 15.65 crore in the quarter ended June
2016 as against net loss of Rs 14.90 crore during the previous quarter ended June
2015. Sales declined 1.34% to Rs 1286.91 crore in the quarter ended June 2016 as
against Rs 1304.37 crore during the previous quarter ended June 2015.

Beta

10-Aug-2016 - Board decision of Prism Cement Ltd.

Prism Cement Ltd has informed that the Company's Board of Directors has, at its Meeting
held on August 09, 2016, appointed Mr. Shobhan Thakore - Non- executive Independent
Director as the Chairman of the Board of Directors of the Company with immediate effect.

Analysis:
In the past couple of years, the real estate sector has seen a downturn. This has
impacted the Infrastructure or the Cement industry. In order to measure the
market risk, I have used the market returns of the NSE 50 and the companys
returns for the last 1 year (14-08-2015 to 12-08-2016) to estimate the Beta
value. The Beta value a measure of the stocks volatility in relation to the
market index gives us a peek in into the riskiness of the companys stock.
Description
Annual Return
Standard
Deviation
Std. Deviation
Annualised
Beta

Prism Cement
6.51%

NSE 50
3.79%

2.63%

1.05%

41.27%
1.322

16.39%
1

Systematic Risk
Unsystematic
Risk

21.67%

16.39%

19.60%

Based on the 1 year data (14-08-2015 to 12-08-2016), we measure the Beta to

be 1.322. A Beta value of 1.322 indicates that the company is above the market
average (1) in terms of riskiness. It indicates that in the last year, the company
stocks produced a fluctuation of 1.322 for a INR 1.00 fluctuation in the market.
Based on the beta value, we calculated the WACC (weighted average cost of
capital). The data used for the calculation has been taken from the companys
financial statements of March 2016.
The equity cost of capital was calculated using the risk free rate, yield of
government security for last 22 years(Bloomberg) is 7.17%. For the equity cost of
debt I checked the credit rating of Prism Cement Ltd in Capitaline which provided
a rating of A- for the company.
The final Weighted Average Cost of Capital is 16.05% which is closer to the
average yearly market returns. This is due to beta being more than 1. So, the
company stock poses higher risk compared to the market though it will provide
lesser returns.
The attached spreadsheet provides all the calculations for beta and
WACC.

Beta & WACC

Calculation.xlsx

I have used the templates provided by Prof. Aswath Damodaran on his website to
estimate the Default Spread and Ratios. It was also used in estimating the
optimum D/E ratio for the maximization of the shareholders value.

Analyze the capital structure and decide whether the firm is

under or over leveraged
Debt
Ratio
0%
10%
20%
30%
40%
50%

Beta
1.034
8
1.110
7
1.205
5
1.397
0
1.629
8
1.955
7

Costof
Equity

Interestrate
ondebt

Tax
Rate

CostofDebt
(aftertax)

WAC
C

Enterprise
Value

16.40%

Bond
Rating
Aaa/AA
A

7.92%

34.00%

5.23%

16.40%

6,951

17.08%

Aa2/AA

8.85%

5.84%

Ba1/BB+

11.35%

7.49%

15.95%
15.84
%

7,304

17.92%

34.00%
34.00
%

7,403

19.63%

C2/C

23.17%

18.34%

18.92%

19.42%

5,238

21.71%

C2/C

23.17%

13.75%

19.98%

21.02%

4,633

24.62%

C2/C

23.17%

11.00%

20.62%

22.62%

4,153

60%
70%
80%
90%

2.444
7
3.287
5
4.931
3
9.862
5

28.98%

C2/C

23.17%

9.17%

21.05%

24.22%

3,763

36.49%

D2/D

27.17%

6.70%

25.35%

28.69%

2,981

51.16%

D2/D

27.17%

5.86%

25.58%

30.69%

2,728

95.14%

D2/D

27.17%

5.21%

25.75%

32.69%

2,514

The template by Prof. Damodaran has been attached here for the references. A
brief summary of inputs is listed here. The data entered is from the March 2016
Financial statements.
-

Earnings before interest expenses, depreciation & amortization (EBITDA) = 454.68

cr
Depreciation and Amortization: 178.58 cr
Capital Spending: 185.66 cr
Interest expense on debt: 282.03 cr
Marginal tax rate to use for pre-tax cost of debt : 34%
Current pre-tax cost of debt for your company : 8.92%
Cash and marketable securities : 144.29 CR
Book Value of Debt : 2180.45 Cr

Worksheet in
Financial Management Project - Prism Cements v1.0.xlsx

Enterprise Value
8,000
6,000
4,000

6,951 7,304 7,403

2,000
0

0.1

0.2

5,238 4,633
4,153 3,763
2,981 2,728 2,514
0.3

0.4

0.5

0.6

0.7

0.8

0.9

Debt / Value Ratio

As can be seen in the table below, the Prism Cements has increasingly taken up
debt to finance its operations over the last 6-7 years. A high debt/equity ratio
shows that the company has been aggressive in financing its growth with debt.
Aggressive leveraging practices also bring in high levels of risk. This may result
in volatile earnings as a result of the additional interest expense.
Prism Cement Ltd

Year
Debt-Equity Ratio
Long Term DebtEquity Ratio

Description
Debt to Capital
Cost of capital
Enterprise value (in
crores)
Value per share

Mar
10
0.44
0.39

Mar
11
0.83
0.61

Mar
12
1.05
0.8

Mar
13
1.32
1.12

Mar
14
1.66
1.42

Mar
15
1.84
1.6

Mar
16
1.88
1.48

Current
Optimal
State
State
29.60%
20.00%
16.05%
15.84%
7,221
103.00

7,400
106.55

The optimal D/V ratio is obtained at 20% where the overall cost of capital is
estimated to be about 15.84%. From the above table and the chart it is also seen
that the Enterprise Value would be maximum for the D/V ratio of 20.00% and so
the Value per share would be maximum for this value.
At 20% D/V ratio, the company would attain a maxiumum valuation of Rs 7,400
crores.
In the current state, the company is over leveraged and it should reduce its Debt
Capital ratio to 20% in order to attain the maximum value for its shareholders.
If the company raises its debt any further, then its ratings could get downgraded
and the cost of Debt may increase significantly. This could pose a major problem
to the companys WACC and its total valuations would also be impacted.

References
http://pages.stern.nyu.edu/~adamodar/
www.capitaline.com
http://www.prismcement.com/