A STUDY ON CAPITAL STRUCTURE

WITH REFERENCE TO ULTRATECH CEMENT LTD

A Project report submitted to Jawaharlal Nehru Technological University, Hyderabad,

in partial fulfillment of the requirements for the award of the degree of 

MASTER OF BUSINESS ADMINISTRATION

By

K.RAVI KISHORE

Reg. No. 10241E0039

Under the Guidance of 

D.INDIRA

Associate Professor

Department of Management Studies

Gokaraju Rangaraju Institute of Engineering & Technology

(Affiliated to Jawaharlal Technological University,
Hyderabad) Hyderabad

2010-2012
 

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DECLARATION

I hereby declare that the project entitle “ A STUDY ON CAPITAL STRUCTURE ”  Submitted in
partial fulfillment of the requirements for award of the degree of MBA at Gokaraju
Rangaraju Institute of Engineering and Technology, affiliated to Jawaharlal Nehru
Technological University, Hyderabad, is an authentic work and has not been submitted to
any other University/Institute for award of any degree/diploma.

K.RAVI KISHORE

(10241E0039)
MBA, GRIET
HYDERABAD

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ACKNOWLEDGEMENT

Firstly I would like to express our immense gratitude towards our institution Gokaraju Rangaraju Institute of Engineering
&  Technology, which created a great platform to attain profound technical skills in the field of MBA, thereby fulfilling our
most cherished goal.

I would thank all the finance department of “ULTRATECH CEMENT LTD( ADITYA BIRLA GROUP) “. specially Mr.
RAMA KRISHNA (Asst Manager Finance) , and the employees in the finance department for guiding me and helping me in
successful completion of the project

I am very much thankful to our professor Mrs. D.INDIRA (Internal Guide)  madam for extending his cooperation in doing
this project.

I am also thankful to our project coordinator Mr. S. Ravindra Chary Sir   for extending his cooperation in completion of 
Project.

I convey my thanks to my beloved parents and my faculty who helped me directly or indirectly in bringing this project
successfully.

K.RAVI
KISHORE (10241E0039)
 

INDEX

S.No: CONTENTS   PAGE NO.

CHAPTER-1 1-6

INTRODUCTION
Scope of the Study
Objectives of the Study
Methodology of the Study
Limitations of the Study
CHAPTER-2 7-26
REVIEW OF LITERATURE
CHAPTER-3 27-56
INDUSTRY PROFILE
COMPANY PROFILE
CHAPTER-4 57-88
DATA ANALYSIS AND INTERPRETATION
CHAPTER-5 89-94
FINDINGS
CONCLUSIONS
SUGGESTION

BIBLIOGRAPHY
 

FEATURES OF AN OPTIMAL CAPITAL STRUCTURE:

An optimal capital structure should have the following features,

1.PROFITABILITY: - The Company should make maximum use of leverages at a minimum cost.

2.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.
3.CONTROL: - The capital structure should involve minimum dilution of control of the company.

4.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.
 

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CAPITAL STRUCTURE DIAGRAM

The Capital Structure Decision Process

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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.
 

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

dividend and principal, and they depend on both the amount of loan securities and the terms
of payment. The amount of fixed charges will be high if the company employs a large amount
of debt or preference capital with short-term maturity. Whenever a company thinks of raising
additional debt, it should analyse its expected future cash flows to meet the fixed charges. It is
mandatory to pay interest and return the principal amount of debt of a company not able to
generate enough cash to meet its fixed obligation, it may have to face financial insolvency.
The companies expecting larger and stable cash inflows in to employ fixed charge sources of 
finance by those companies whose cash inflows are unstable and unpredictable.

It is possible for high growth, profitable company to suffer from cash shortage if the liquidity
(working capital) management is poor. We have examples of companies like BHEL, NTPC,
etc., whose debtors are very sticky and they continuously face liquidity problem in spite of 
being profitability servicing debt is very burdensome for them.

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

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.

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.
 

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EPS VARIABILITY AND FINANCIAL RISK: -

The EPS variability resulting form the use of leverage is called financial risk.
Financial risk is added with the use of debt because of 

(a) The increased variability in the shareholders earnings and

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

Given limitations, should the EPS criterion be ignored in making financing decision?
Remember that it is an important index of the firm’s performance and that investors rely
heavily on it for their investment decisions. Investors do not have information in the projected
earnings and cash flows and base their evaluation 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.
 

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COMPOSITION AND OBSERVATION

The sources tapped by ULTRA TECH CEMENTS Industries Ltd. Can be classified into:

• Shareholders’ funds resources

• Loan fund resources
SHAREHOLDER FUND RESOURCES:

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

EQUITY CAPITAL BUILD-UP

1.From 1995, the Authorized capital is Rs.450 lacs of equity shares at Rs.10 each. The issued
equity capital is RS.1622.93 lacs at Rs.10 each for the period 2002-2009 and subscribed and
paid-up capital is Rs. 1622.93 lacs at Rs.10 each for the period of 2004-2009.
3.There is an increase of 1.38% in the equity from 2005-2010.
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.
 

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