A

PROJECT REPORT
ON
CAPITAL BUDGETING
ZUARI CEMENTS HYDERABAD

(Submitted in Partial Fulfillment of the Award of the Degree Of)

MASTER OF BUSINESS ADMINISTRATION
Submitted By

G RAMALINGESWAR REDDY
MBA
ROLL NUMBER: 129U1E0033
Under The Guidance Of

SSIM
AFFLIATED TO JNTU ANANTAPUR
2012-2014

DECLARATION
I here declare that the project report entitled CAPITAL BUDGETING has
been prepared by me in partial fulfillment of the requirements for the award of
the degree of MASTER OF BUSINESS ADMINISTRATION
I also declare that this project work is a result of my effort and it has not been
submitted to any other university for the award of any degree or diploma.

PLACE:
DATE:

RAMALINGESWAR REDDY
ROLL NUMBER: 129U1E0033.

ACKNOWLEDGMENT
With a profound sense of thankfulness, I acknowledge my indebtedness
to my company guide Mr.G.RAMALINGESWARA REDDY Faculty Guide
Mrs.RASHIDHA BEGAM ., for their valuable guidance, timely suggestions
and constant encouragement. Their insightful criticisms and patience throughout
the duration of this project have been instrumental in allowing this project to be
completed.
My sincere thanks are to the name of Director, Mr.------------- name of
HOD,_________ M.B.A) and all the staff members of Department of
management studies, _______, For their consistent guidance in my project
work.
Their continual support and careful attention to the details involved in
producing a document of this nature are very much appreciated.

RAMALINGESWAR REDDY
ROLL NUMBER: 129U1E0033.

INDEX
Contents
Chapter I

Title
Introduction
Theoretical structure

Chapter II

Industry & Company profile

Industry profile

Company profile
Product profile
Chapter III

Review of literature

Chapter IV

Research Methodology
Need of the study
Objectives of study
Scope of the study
Limitations of the study
Research design &
collection, Hypothesis
testing

Chapter V

Data Analysis and Interpretation

Chapter VI

Findings
Suggestions
Conclusion
Bibliography

Page No:

Chapter - 1
Introduction

Introduction of capital budgeting:

The term Capital Budgeting refers to long term planning for proposed capital outlay
and their financial. It includes raising long-term funds and their utilization. It may be defined
as a firms formal process of acquisition and investment of capital.
Capital budgeting may also be defined as The decision making process by which a firm
evaluates the purchase of major fixed assets. It involves firms decision to invest its current
funds for addition, disposition, modification and replacement of fixed assets.
It deals exclusively with investment proposals, which is essentially long-term projects and is
concerned with the allocation of firms scarce financial resources among the available market
opportunities.
Some of the examples of Capital Expenditure are

Cost of acquisition of permanent assets as land and buildings.

Cost of addition, expansion, improvement or alteration in the fixed assets.

R&D project cost, etc.,

Definition:
Capital Budgeting is long term planning for making and financing proposed capital outlays.
By T.HORNGREEN
Capital budgeting is concerned with allocation of the firms scarce financial resources
among the available market opportunities. The consideration of investment opportunities
involves the comparison of the expected future streams of earnings from a project with
immediate and subsequent streams of expenditure for it. In any growing concern, capital
budgeting is more or less a continuous process and it is carried out by different functional
areas of management such as production, marketing, engineering, financial management etc.

all the relevant functional departments play a crucial role in the capital budgeting decision are
considered.
The role of a finance manager in the capital budgeting basically lies in the process of
critically and in-depth analysis and evaluation of various alternative proposals and then to
select one out of these. As already stated, the basic objectives of financial management is to
maximize the wealth of the share holders, therefore the objectives of capital budgeting is to
select those long term investment projects that are expected to make maximum contribution
to the wealth of the shareholders in the long run.

Industry profile:
Cement is a key infrastructure industry. It has been decontrolled from price and
distribution on 1st March 1989 and deli censed 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). The cabinet committee
on infrastructure also reviews its performance.
Cement industry is one of the major and oldest established manufacturing industries
in the modern sector of Indian economy. It is an indigenous industry in which the company is
well endowed with the necessary raw materials, skilled manpower and equipment &
machinery technology.
Cement is required by firms, bridges, buildings, water supply projects, dams, roads,
hydroelectric power projects, seaports, airports, and irrigation schemes. It is thus a vital
industry which assumes a crucial part in the economic development of the country.

RAW MATERIALS:
The basic raw material for manufacturing cement is limestone. This is available in
plenty in the form of limestone deposits in the nature. Limestone is excavated for mines by
mechanical equipment with the help of stocker & reclaimed the correct.
The raw materials consist of limestone, iron ore & bauxite. The correct proportions
are fed into a grinding mill where they are reduced to a very fine of compressed air. The
power from the storage ribs is fed into rotator kiln; the material is subjected to a temperature
is about 1500c. chemical reaction takes place between the various materials resulting in the
formation of cement compound like Tricalcium silicate (about 24%), die calcium silicate
(about 20%), Tri calcium alumina (about 7 to 10%) and aluminum ferrate (about 10 to 12%).

CAPACITY AND PRODUCTION:

The cement industry comprises of 125 large cement plants with an installed capacity
of 148.28 million tones and more than 300 mini cement plants with and estimated capacity of
11.10 million tones per annum. The cement corporation of India, which is a central public
sector undertaking, has 10 units. There are ten large cement plants owed by various State
governments. The total installed capacity in the country as a whole is 159.38 million tones.
Actual cement production in 2002-03 was 116.35 million tones as against a production of
106.90 million tones in 2001-02, regarding 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 been fixed for the year 2003-04. During the period April-June
2003, a production (provisional) was 31.30 tones. The industry has achieved a growth rate of
4.86% during the year.

EXPORTS:
A Part from meeting the entire domestic demand, the industry is also exporting
cement and clinker. The export cement during 2001-02 and 2003-04 was 5.41 million tones
and 6.92 million tones respectively. Export during April-may, 03 was 1.35 million tones.
Major exporters were Gujarat Ambuja Cement ltd. and L&T ltd.

RECOMMENDATIONS ON CEMENT INDUSTRY:

For the development of cement industry Working Group of cement industry was
constituted by the planning commission for the formulation of X five year plan. The working
group 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 programmers

Promotion of concrete Highways and roads; and

Use of ready-mix concrete in large infrastructure projects.

Further, in order to improve global competitiveness of the Indian cement industry, the
dept. of industrial policy & promotion commissioned a study on the global competitiveness
of the Indian cement industry. 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.

TECHNOLOGY CHANGE:
Cement industry has made tremendous strides in technological up gradation and
assimilation of latest technology. At present 93% of the total capacity in the industry is
based in modern and environment-friendly dry process technology. There is tremendous
scope for waste heat recovery in cement plants and there by reduction in emission level. One
project for cogeneration 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 as helped the industry immensely to conserve energy and fuel and to save
materials substantially.
India is also production 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, While
cement etc. Production of these varieties of cement conforms to the BIS Specifications. It is
worth mentioning that some cement plants have set up dedicated jetties for promoting bulk
transportation and export.

ITAL CEMENTI GROUP:

OUR MISSION:-

Our shared ambition: Effective and Efficient

To become the most effective and most efficient cement manufacturer and distributor in
the world.

OUR APPROACH: We are local, we think glow

Cement aggregates and ready mixed concrete manure and distribution are local business.
Around the world we serve local customers in local market with local needs.

OUR WAY OF WORKING: Technological leadership is our goal,

Our technology plays the key role in realizing our ambition we are committed to
increasing the value of our group, our companies, our products and services, the capabilities of
our employees and the ecological standards by which we operate.

OUR SPIRIT: One team worldwide.

We operate worldwide in many diverse markets, culture and continents.
We are proud of our cultural diversity and our distinctions character.

HISTORY OF CEMENTS:
1.

Invention of cement of JOSEPH ASPARIN. Leeds builder in bricklayer.

2.

21st October, 1824 patented as Portland cement.

3.

1904 its and American standards of Portland cement.

4.

1912 Indian cement company limited established factory at Portlander.

5.

1951 Indian standards.

CEMENT MANUFACTURING PROCESS:

1. The cement manufacturing process beings when limestone, the basic raw material used to
make cement, is transported by rail to the plant from the limestone quarry.
2. The limestone is combined with clay, ground in a crusher and fed into the additive silos.
Sand, iron and bottom ash are then combined with the limestone and clay in a carefully
controlled mixture with which is ground into a fine power in a 200hp roller mill.
3. Next, the fine power is heated as it passes through the pre-Heater tower into a large kiln,
the power is heated to 1500degrees Celsius. This creates a new product, called clinker,
which resembles pellets about the size of marbles.
4. Next the fine powder is heated as its passes through the pre-header tower into a large kiln,
which is over half of the length of a football field and 4.2 meters in diameters. In the kiln,

the powder is heated to 1500 degrees Celsius. This creates a new product, called clinker,
which resembles pellets about the size of marbles.
5. The clinker is combined with small amounts of gypsum and limestone and finely ground
in a finishing mill. The mill is large revolving cylinder containing 250 tones of steel balls
i.e. driven by a 4000ph motor. The finished cement is ground so fine that it can pass
through a sieve that will hold water.
6. The cement manufacturing process consists of many simulations and continuous
operations using some of the largest moving machinery in manufacturing. Over 5000
sensors and 50.
7. Computers allow the entire operations to be controlled by a single operator from a central
control room.

DIFFERENT TYPES OF CEMENT:

There are varieties of cement based on different compositions according to specific
end uses namely Ordinary Portland Cement, Portland Pozolona cement, Portland Blast
furnace slag cement, and specialized cement. The basic difference lies in the percentage of
linker used.

ORDINARY PORTLAND CEMENT (OPC):

OPC, popularly know as grey cement has 95% clinker and 5% of gypsum and other
materials. It contains for 56% of the total consumption. White cement is a variation of OPC
and is used for decorative purposes like rendering of walls, flooring etc. Contains a very low
proportion of oxide.
PORTLAND POZZOLONA CEMENT (PPC):
PPC has 80% clinker, 15%pozzolona and 5% gypsum and accounts for 18% of the
total cement consumption. Pozzolona has siliceous and aluminous materials that do not
possess cementing properties in the presence of water. It is cheaply manufactured because it
uses fly ash / burnt clay/ coal waste as the ingredient. It has lower heat of hydration, which
helps in preventing cracks where large volumes are being cast.

PORTLAND BLAST FURNACE SLAG CEMENT (PBSFC):

PBSFC consist of 45% clinker, 50% blast furnace slag and 5% gypsum and accounts
for 10% of the total cement consumed. It has a heat of hydration even lower than PPC and is
generally used in construction of dams and similar massive constructions.

SPECIALIZED CEMENT:

Oil Well Cement: Is made from clinker with special additives to prevent any porosity.
RAPID HARDENING PORTLAND CEMENT:
It is similar to OPC, except, that it is ground much finer, so that casting, the compressible
strength increases rapidly.

WATER PROOF CEMENT:

OPC, with small portion of calcium separate or non- specifiable of to impart waterproofing
properties.

CEMENT INDUSTRY IN INDIA

OVERVIEW
1.

Indian cement industry data back to 1914-first unit was setup at Proddatur with
a capacity of 1000 tones.

2.

Currently India is ranked second in the world with an installed capacity of 114.2
million tones.

3.

Current per capita consumption-85 pages. Against world standard of 256 kgs.

4.

Cement grade limestone in the country reported to be 89 bit. A large proportion

however is unexplainable.

5.

55-60% of the cost of production is govt control.

6.

Cement sales primarily through a distribution channel. Bulk sales account for <

1% of the total cement produced.

7.

Ready mix concrete a relatively nascent market in India.

CEMENT INDUSTRY: STRUCTURE

Installed capacity 114.2 mn tones per annum, Production around 87.8 mn tones.

Major cement plants

Mini cement plants

Companies:59

Nearly 300 plants

Plant: 116

Located in Gujarat, Rajasthan, MP.AP

Typical installed capacity for plant: Above

Typical capacity < 200 tpd installed capacity

1.5 mntpa.

around gmm. Tones

Total installed capacity: 1.05 mntpa

Production around : 6.2 mn tones

Production 98-99:81.6 mntpa.

Excise : Rs 250/ tone

Excise: Rs 408 tones

Mini plants were meant to tap scattered

limestone reserves.

All India reach through multiple plants

However most set up in A.P.

Export to Bangladesh, Nepal, Srilanka, UAE Most use vertical Kiln technology
and Mauritius
Strong marketing network, tie ups with Production cost/ tone- Rs 1,000 to 1,400
customers, contractors
Wide spread distribution network
Sales
channel

primarily

through

the

Infrastructural facilities not to the best

Consumer

However, cement consumption per capita in our country at about 99-kg/ capita is one
of the Lowest. The world average is about 267 kg/ capita. While that of china is 450 kg / capita.
Similar in Japan its 631 kg/ capita while in France it is 447 kg / capita.

Production:
1. Excess capacity exists, through some units are sick.
2. 1999-2000 production expended to reach 95 mn tones
3. Exports around 2 mn tones.
4. Cement manufactured through the wet, semi-dry or process.
5. Dry process accounts for 90% of the installed capacity.
6. Wet process popular in the past- better control over mixing of raw materials.
7. Dry process replacing the wet process as it is space saving energy efficient and
economical.

Prices
a. Price fluctuations.
b. Essentially determined by demand.
c. Prices also vary with grades

AVERAGE MAXIMUM RETAIL PRICE

Delhi
Amount ( Rs.)

Calcutta
Amount ( Rs.)

Chennai
Amount ( Rs.)

Bangalore
Amount ( Rs.)

Aug 1999

137

146

175

170

Sep 1999

137

139

175

161

Oct 1999

136

125

175

161

Nov 1999

136

125

172

140

Dec1999

128

117

160

136

120

140

136

Jan 2000

1. Over 370 companies in the organized sector.

2. However, industry dominated by 20 companies who account for ever 70% of the
market.
3. Individually no company accounts for over of the market

Manufacturing Process:
Cement is manufactured by using the wet, semi dry and processes. The wet process
was popular in the past as it provided better control over materials mixing process. However,
the dry process has now gained popularity globally because it is space saving, energy
efficient and economical.

Capacity Distribution and Consumption Norms

Process

Capacity
(TPD)

% of total

Power
KHz/MT

Fuel
Kcal/kg

Dry

282486

93

120-125

750-800

Semi-Dry

13910

115-120

900-1000

Wet

5260

110-115

1300-1600

Total

301656

100

GEOGRAPHICAL DISPERSION

Limestone is the most important material input into cement manufacture. The plant
locations are primarily determined based on the proximity of cement grade limestone
deposits. These limestone deposits have been classified as cluster, some of which overlap
two states.

Cluster Wise Installed Capacity (Large Plants)

Capacity
Cluster

State

No of plants
(mn tpa)

Satna

MP

MP

12.18

Ballarpur

11.16

Gulbarga

Karnataka/AP

7.82

Chandrapur

Maharashtra/AP

7.49

Chanderia

Rajasthan/MP

7.45

Nalgonda

AP

5.85

Yerraguntla

AP

5.40

Nalgonda

57.37
Sub total

50

(52.5%)
52.75

Non cluster

63

(47.5%)

Total

120

110.10

PRODUCTION CAPACITY
Cement plant with a capacity of up to 0.3 mntpa are classified as mini cement plants
and are eligible for concessional excise duty. Though the minimum economic size of a
cement plant is 1 mntpa, there are over 300 white and mini cement plants in India a
collective capacity of only 9 mntpa (8% of the total domestic installed capacity). Most of the
new cement plants being set up have a capacity of 1 mntpa or more. The average cost of
setting up a mini cement plant is about Rs 1400 per ton, while for large cement it is about Rs
3500 per ton.

Ready mix concrete: Industry

1. RMC-ready to use concrete, a blend of cement, sand and aggregate and water mixed
in convenient proportion.
2. Launched first in Mumbai a few years ago is gaining in other metros in India.
3. Typical cost of a plant- Rs. 7.8 crs (US $ 1.6 to 1.8 mn) to set up a 100 cubic meter
(cum) plant with 4-5 transit mixers. Gestation period is around 3-4 months
4. Currently RMC is at a very nascent stage, accounts for 0.5% of the demand.

Company

No of plants

Capacity ( cu m/hr)

ACC

13

712

RMC Ready mix

440

L&T

330

Fletcher Challenge

320

HCC

240

Unitech

150

Jog Construction

120

Starmnac

120

Madras Cement

56

Birla Cement

30

Three units of ACC to be commissioned

Companies planning to enter this Market:

1. Priyadharshini Cements in Hyderabad.

2. Saurashtra Cements in Navy Mumbai.
3. Pioneer a world leader entering the market
4. Capacity additions expected in the next few years
5. ACC plans to treble its capacities.
6. Grasim is setting up four more plants.
7. L & T plans to add another eight more.

Concerns:
Cement industry going through a consolidation phase in the last few years.

Transportation:
1. Transportation costs high-freight accounts for 17% of the selling and distribution
cost.
2. Road preferred for transportation for distances less than 250 kms. However, industry
is heavily dependent on roads are the railway infrastructure is not adequate shortage
of wagons.

Capacity additions:
1. Acquisitions have been the mainstay of the business.
2. Regional imbalance resulting in cross regional movement-limestone availability in
Pockets has led to uneven capacity additions.
3. Capacity additions have slow down.

Industry inputs:
1. Highly capacity intensive industry.
2. Nearly 55-60% of the inputs controlled by the controlled.
3. Facing problems due to power shortage.
4. Coal availability the quality affecting production.
5. Mini plants realization of the revenue lower large plants, survival difficult.

Future out look

Most economic forecasts for the Indian cement industry indicate a favorable outlook
for the Indian cement sector. With no significant addition expected, the supply demand
position is expected to the better balanced. Retail housing segment is expected to show
significant demand growth over the next two year. With the industrial production showing an
upward trend, housing construction showing a sign so revival and the government gearing up
to spend more on infrastructure, the sector looks favorably poised. The overall demand
growth is expected to about 7-8 per cent. Withdrawal of sales tax benefits for the new units
will give an added push to consolidation via acquisitions. Consolidations will be more
regional, with companies seeking to gain dominance in their chosen regions.
Indias per capital cement consumption is less than 100 kg compared to the world
average of 250 kg. Currently, the total cement demand in India is lower than the total
capacity. The cement manufacturers association of India projects a demand of 101 mn tap in
2000-01 as against 93 mn yap last year. Against this, the total installed capacity is 109 mn
tap. However seven million tones of Cement Corporation of India and two million tones of
UP cement are lying ideal. An 8-10 per cent growth is projected in the coming years, which
will take the demand to 200 million tones in 10 years.
A focus on more value added products likely Ready Mix Concrete (RMC) is
emerging. RMC is a compound in which sand, gravel additives and water are added to
cement and sold as readymade concrete. Cement products benefit from RMC production as it
involves low capital expenditure. The cost of setting up a 100 metric cube per hour plant is in
the range of Rs 70 to 90 mn. While the central government has declare a zero excise duty on
RMC, the Maharashtra government has made it mandatory to use RMC in construction of all
the flyovers. With these measures, the total; RMC consumption is expected to touch 6 per

cent of total cement capacity in next four year. To tap is existing potential, leading cement
manufacturers in the country like L & T and ACC have already announced their plans to
expand their RMC capacities is coming years.
Next cost cutting measure appears to be transporting bulk cement. This method is
cement transpiration is preferred by cement manufacturers as it results in lower packaging
costs, hence lower demurrage costs. At present, cement is predominantly sold in 50 kg bags.
But the pattern appears to the changing as cement manufacturers have increasingly started
selling cement in bulk, especially in cities where construction activity as it is peak. Most of
the cement sold in bulk is currently used by the ready mix concrete plants. Cement consumed
in bulk could help save about Rs 110 per tone (Rs 5.50 per 50 kg bag) compared to the use of
conventional bags.

Around the world, almost 80% of the cement transportation is carried out in bulk
form. But in India, only about 1%of total cement is transported in this form. This is because
of the attendant problems like inadequate infrastructure in the form of port facilities and lack
of timely availability of wagons from the railways. Cement packaging costs accounts for
nearly 4 per cent of total costs for a cement manufacturer.

The industry will see more action on the mergers and acquisition front. So far, the
market has seen only two major international players. Lafarge and Cement Francais, in
action. But others, such as CEMEX and the big daddy, Holders Bank are waiting in the
wings. These global players are; looking towards getting a foothold in the Indian market,
offering a higher acquisition price than the international standards. Within the next three to
five years the industry is expected to be dominated by five six big players and less than ten
companies in all, both Indian and foreign.

Company profile:
This cement division project in 1978 and according to the Texaco it has taken the
steps for acquiring the land at YERRAGUNTLA in KADAPA dist. in 1982. Constructing
activity is started and the cement plant is completed in March 1985. Texaco is started
production at clinker by March 1985. Original plant capacity was 5 lakh tones per annum at
first.

The Zuari cement is strategically located at Yerraguntla. The plant location existence
of 6km from Yerraguntla. It is connected to the railway station on by a railway track of 7 km
length and is having on exchange plant inside the factory; plant is connected to the nearest
highway by 0.2 km land private load.

Basically this is belongs to DR.K.K. Birla. In 1994 January 1, this cement unit of
Texaco being handed over to Zuari agro chemical industry. Under working agreement on 7-295. This unit is sold by Texaco to Zuari in 1997 company has conceives expansion project
investing 370 crores and making increasing rated capacity from 5 lakh to 7 lakh. This project
was completed by formally 1999 and in fact from1-4-2000. Company entered in agreement
with joint venture partner with Italy cement with 50% of partnership and working agreement.
The Group has strength of 22,300 employees worldwide.

62 cement plants.

14 Grinding Units.
4 stand alone terminals.
147 aggregate quarries.
575 concrete batching units.

Part of the prestigious Dr.K.K.Birla Group a Rs 4000 crores conglomerate Zuari

cement as within a short time span made its presence felt in the cement industry. It has done
so by making top quality cement.
Consistently, Cement that has won the confidence and trust of millions in the country.
This commitment to quality has being it grow from a modest 0.5 million ton capacity in 1995
to 2 million tons today. Zuaries quality drive originates in its state of the are cement plant,
situated at yerraguntla; Renewed for rich Narji limestone deposits, this plant is cement
manufacturers envy. Yet, strategic location is just factor contributing to Zuari success.
There are other equal important reasons.

Superior work force.

Cutting-edge technology.

Decentralized quality assurance teams.

All this combine seamlessly to ensure that every bag of cement. That leaves the plants
is of consistent quality, and worthy of bearing the zuari label. World Wife excellence with
ital cement.

Zuari industries ltd has entered into 50:50 joint venture with Ital cement group, the
largest producer and distributor of cement in Europe and one of the leaders in cement
production in the world.
Ital cementi operates in 19 countries including Canada, France, Italy, Morocco, USA
and Bulgaria. Italic cements global industrial network includes more than 50 cement plants,
500 concrete batching units 150 quarries.
Zuari joint with Ital cement gives Sri Vishnu cement a global technological advantage
which reflects in finesses of every grain of Sri Vishnu cement.

History of Zuari cements:

1. Zuari cement was started in 1994 to operate the cement plant of Texaco Ltd.
Subsequently, Texacos cement business was taken over by the company in 1995.
2. Zuari cements manufacturing facility at yerraguntla in Andhra Pradesh is one of the
largest in south India and places Zuari cement among the top 5 manufacturers in the
south.
3. In 2000, Ital cement group the second largest producer and distributor of cement in
Europe and fifth largest cement producer in the world enter into a joint venture with
Zuari cement and Zuari cement Limited was formed.

COMPETITORS:

1. CORAMANDAL CEMENT
2. MAHA CEMENT
3. NAGARJUNA CEMENT
4. LANCO CEMENT
5. ULTRATECH CEMENT
6. PENNA CEMENT, etc.

Joint venture with Ital cementi:

The scenario of mergers and acquisitions is still vast in the cement industry. The entry
of many multinationals. The other MNCs planning to enter the Indian market and
consolidation of the companies in India has been forcing mergers in the cement industry.
Now company is under joint venture having rated capacity of 17 lakhs per annum.
Ital cements group CCBs mother company ( Companies des cements ), and the Zuari
Industries Ltd (ZIL) of India have reached an agreement to create a 50:50 joint venture which
will assume the cement activities of ZIL, consisting of the cement plant of yerraguntla, in
Andhra Pradesh.

Location of the plant:

Cement and its raw materials namely coal and lime stone, are all bulky that make
transportation difficult and uneconomical. Given this, cement plants are located close to both
sources of raw materials and markets. Most of lime stone deposits in India are located in
Madhya Pradesh, Rajasthan, Andhra Pradesh, Maharashtra and Gujarat.
There is a trade-off between proximity to markets and proximity to raw materials due
to which some cement plants have been setup near big markets despite lack of raw materials.
Zuari cement industries ltd., is located at Krishna Nagar, in Yerraguntla, Kadapa
district. It was nearest to the railway station and also nearest to the road. It was 6 km distance
to yerraguntla. Location of the plant at this place is having the following advantages.
Location in industrial belt of Rayalaseema with sophisticated facilities like water.

Present of best suited limestone proved scientifically for cement.

Low free limestone to ensure reduce surface cracks.

Low heat of hydration from better soundness.

Low magnesia content to ensure reduced tensile cracks.

Specially designed setting time to suit Indian working conditions.

PRODUCTION:
Cement production during the period has also increased from about 72.23
Million tons about 90 million tons in 2005-2006 excluding the contribution of mini cement
plants.

RAW MATERIALS:
The actual requirements of raw material at 100% capacity utilization would be;
1. 12.5 million tons of limestone per annum.
2. 70000 tons of Gypsum per annum.
3. 39000 tons of Bauxite per annum.
4. 20000 tons of Iron ore per annum.
1. The limestone is major component required for the plant is net from the mines located
adjacent to the proposed site.
2. Gypsum is procured from fertilizer factories at Madras and Cochin.
3. Iron is soured partly from mini steel plants located at Tirupathi and partially from Bellary.
4. Bauxite is procured from Goa, Karnataka and Maharashtra.

POWER:
Maximum estimated power demand is 45 M.V. The company has an existing contract
50 M.V demands APSEB, the plant presents has D.G sets with an aggregate general capacity
of 12.6 M.V.

WATER:
Water is required for seeds of consumption make for plant and machinery for general
need in plant. Company has a pumping station and underground bore wells near Hanuman
Gutta village at Penna River to tap the undergrounds water in riverbed.

TRANSPORT:
The factory is when connected to different part of the country through rail and road
facilities is near to Yerraguntla railway station and has a railway lint to the factory with an
extern point within the factory premises 605 of the cement is dispatched by rail gal is
received through rail. The plant is connected to the nearest state highway to Bangalore,
Hyderabad and Chennai.

MANPOWER:
Existing plant has a total of 500 employees. After and addition of employees may be
required.

QUARRY:
It is situated adjacent to the factory. It constituted limestone, one of the major
materials for cement industry. The quarry has a mining base area of 1027.56 acres.

S.No

Description

Massive
(MT)
Flagged
Total (MT)
grade limestonestone(MT)

Total reserves of limestone

36 blocks

108442

9.894

118.36

Un workable limestone due

to mining obstacles

29530

2540

32.07

Workable reserves

79912

7354

86.266

Chambal fertilizers and chemicals ltd (CFCL) promoted by Zuari industries ltd.,
has set up a large gas based area manufacturing plant at Gadapan about 35 km from Keta,
a major industrial town of Rajasthan state in India.
CFCLs plant is a state-of-the-are-high-tech complex built at a cost of Rs.12.67
billions. Spread over an area of 1105 acres (or 447 hectares 4.47 sq.kms), containing the
manufacturing units offsite facilities including captive power plant, railways siding and
amenities like residential complex, club, school, etc in a pleasant and green surroundings
snamprogetti of Italy and Haldor topsoe of Denmark provided the technical know-how and
Engineering and other services for Ammonia and urea plant while off-site facilities were built
mainly by Tokyo engineering India ltd.

The enterprise value of the unit has been pegged at Rs. 740 crores. The creation of
this joint venture company is a new step in the international of the Ital cement group in Asia.
It is a new opportunity for the group, to further increase its presence in the emerging
countries by entering the promising Indian market, the third largest in the world. In
combination with a very important partner says a release issued by laggard who advised ital
cement on the deal.

Here are 6 of the many reasons why Zuari 53 grade and 43 grades cement
edges out its competitors.
1.

High compressive strengths.

2.

Low heat of hydration.

3.

Better soundness.

4.

Lesser consumption of cement for M-20 concrete grade and above.

5.

Faster de-shuttering of formed work.

6.

Reduced construction time.

With a superior and wide range of cement catering to very conceivable building
need, Zuari cement is a formidable player in the cement market. Here are just a
few reasons why Zuari cement is chosen by millions in India.

Ideal raw materials

Low time and magnesia content and high proportion of silicates

Greater fineness

Slow initial and fast final setting

Wide range of applications

Quality customer service

A wide range to address every need:

Residential, commercial, multistoried buildings and complex.

Mass concreting-dams, canals, spillways

Construction and repair of pavements, roads, flyovers and runways.

Spun pipes and poles manufacturing

Cold weather concreting

Pre-fabricated elements such a pipes, sleepers, windows, door frames etc.

Quality customer service:

In an effort to reach out to customers better, Zuari cement as set up a technical
cell named Zuari home partner. This cell gives guidance in the field of building.
Technology, architecture, housing finance and economical usage of the high
quality. Technical experts provide the assistance according to the individual
requirements. So that customers get the best value for the investment they have
made.

Products

Zuari Cement manufactures and distributes its own main product lines of cement .We aim to
optimize production across all of our markets, providing a complete solution for customer's
needs at the lowest possible cost, an approach we call strategic integration of activities.
Cement is made from a mixture of 80 percent limestone and 20 percent clay. These are
crushed and ground to provide the "raw meal, a pale, flour-like powder. Heated to around
1450 C (2642 F) in rotating kilns, the meal undergoes complex chemical changes and is
transformed into clinker. Fine-grinding the clinker together with a small quantity of gypsum
produces cement. Adding other constituents at this stage produces cements for specialized
uses.

Zuari Cements range of cement

Process Technology, the Solid Foundation

The culture of quality that has always prevailed in Zuari Cement's manufacturing facilities is
best exemplified in the process technology employed.
Advanced technology methods are used to ensure that a high level of quality is attained and
sustained right through the manufacturing process. Yet, these high standards are constantly
improved upon by an experienced and dedicated R&D team to attain performance oriented
cement
The process Technology Advantages

Complete homogenization of limestone is achieved by stacking the limestone in

stock-plies with the use of stackers and reclaiming it through reclaimers. The
optimum ratio of raw mix is attained by the use of X-ray analyzer and automatic
weigh feeder which are linked to the centralized computers control room.

BOARD OF DIRECTORS

DIRECTORS

: Saroj Kumar Poddar, Chairman

Rodolfo Danielle
Yves Rene Nanot
Goran Siefert
Maurizio Caneppele, Managing director
Raghunathan Vishwanathan

EXECUTIVES

: Director-Marketing

; K. Srivasthava

Director-Technical

: P. Sheoran

Vice President

: S. Suresh

COMPANY SECRETARY

L.R Neelakanta

BANKERS

State Bank of India, Andhra bank,

BNP Paribas, Standard chartered Bank,
State Bank of Hyderabad.

AUDITORS

BSR & Co.,

Chartered accountants Bangalore

FACTORY

Krishna Nagar, Yerraguntla,

Literature review:
FEATURE OF CAPITAL BUDGETING:
The important features, which distinguish capital budgeting decision in other day-to
day decision, are Capital budgeting decision involves the exchange of current funds for the
benefit to be achieved in future. The future benefits are expected and are to be realized over a
series of years. The funds are invested in non-flexible long-term funds.They have a long term
and significant effect on the profitability of the concern. They involve huge funds.They are
irreversible decisions. They are strategic decision associated with high degree of risk.
IMPORTANCE OF CAPITAL BUDGETING:
The importance of capital budgeting can be understood from the fact that an unsound
investment decision may prove to be fatal to the very existence of the organization.
The importance of capital budgeting arises mainly due to the following:

1. LARGE INVESTMENT:
Capital budgeting decision, generally involves large investment of funds. But the funds
available with the firm are scarce and the demand for funds for exceeds resources. Hence, it
is very important for a firm to plan and control its capital expenditure.

2. LONG TERM COMMITMENT OF FUNDS:

Capital expenditure involves not only large amount of funds but also funds for long-term or a
permanent basis. The long-term commitment of funds increases the financial risk involved in
the investment decision.

3. IRREVERSIBLE NATURE:
The capital expenditure decisions are of irreversible nature. Once, the decision for acquiring a
permanent asset is taken, it becomes very difficult to impose of these assets without incurring
heavy losses.

4. LONG TERM EFFECT ON PROFITABILITY:

Capital budgeting decision has a long term and signifant effect on the profitability of a
concern. Not only the present earnings of the firm are affected by the investment in capital
assets but also the future growth and profitability of the firm depends up to the investment
decision taken today. Capital budgeting decision has utmost has importance to avoid over or
under investment in fixed assets.
5. Difference of investment decision:
The long-term investment decision are difficult to be taken because uncertainties of future
and higher degree of risk.
6. Notional Importance:
Investment decision though taken by individual concern is of national importance because it
determines employment, economic activities and economic growth.

KINDS OF CAPITAL BUDGETING:

Every capital budgeting decision is a specific decision in the situation, for a given firm and
with given parameters and therefore, almost infinite number of types or forms of capital
budgeting decision may occur. Even if the same decision being considered by the same firm
at two different points of time, the decision considerations may change as a result of change
in any of the variables. However, the different types of capital budgeting decision undertaken
from time to time by different firms can be classified on a number of dimensions.
Some projects affect other projects of the firm is considering and analyzing. At the other
extreme, some proposals are pre-requisite for other projects. The project may also be
classified as revenue generating or cost reducing projects can be categorized as follows:
1. From the point of view of firms existence: The capital budgeting decision may be
taken by a newly incorporated firm or by an already existing firm.
New Firm:
A newly incorporated firm may be required to take different decision such as selection of a
plant to be installed, capacity utilization at initial stages, to set up or not simultaneously the
ancillary unity etc.
Existing Firm:
A firm which already exists may be required to take various decisions from time to time meet
the challenge of competition or changing environment. These decisions may be:

Replacements and Modernization Decision: This is a common type of a capital budgeting

decision. All types of plant and machineries eventually require replacement. If the existing
plant is to be replaced because of the economic life of the plant is over, then the decisions

may be known as a replacement decision. However, if an existing plant is to be replace

because it has become technologically outdated (though the economic life may not be over)
the decision any be known as a modernization decision.
In case of a replacement decision, the objective is to restore the same or higher capacity,
whereas in case of modernization decision, the objectives are to increase the efficiency and/or
cost reduction. In general, the replacement decision and the modernization decision are also
known as cost reduction decisions.
Expansion:
Some times, the firm may be interested in increasing the Installed production capacity so as
to increase the market share. In such a case, the finance manager is required to evaluate the
expansion program in terms of marginal costs and marginal benefits.
Diversification:
Some times, the firm may be interested to diversify into new product lines, new markets,
production of spares parts etc. in such a case, the finance manager is required to evaluate not
only the marginal cost and benefits, but also the effect of diversification on the existing
market share and profitability. Both the expansion and diversification decisions may be also
be known as revenue increasing decisions.

The capital budgeting may also be classified from the point of view of the decision
situation as follows:
(i)Independent project Decision:
This is a fundamental decision in Capital Budgeting. It also called as accept /reject criterion.
If the project is accepted, the firm invests in it. In general all these proposals, which yield a
rate of return greater than a certain required rate of return on cost of capital, are accepted and
the rest are rejected. By applying this criterion all independent projects with one in such a
way that the acceptance of one precludes the possibility of acceptance of another. Under the
accept-reject decision all independent projects that satisfy the minimum investment criterion
should be implemented.
(ii) Mutually Exclusive Projects Decision:
Mutually Exclusive project are those, which compete with other projects in such a way that
the acceptance of one will exclude the acceptance of the other projects. The alternatively are
mutually exclusive and only one may be chosen. Suppose a company is intending to buy
anew machine. There are three competing brands, each with a different initial investment
adopting costs. The three machines represent mutually exclusive alternatives as only one of
these can be selected. It may be noted here that the mutually exclusive projects decisions are
not independent of the accept-reject decisions.

(iii) Capital Rationing Decision:

In a situation where the firm has unlimited funds all independent investment proposals
yielding return greater than some pre-determined levels are accepted. However this situation
does not prevail in most of the business firms in actual practice. They have a fixed capital
budget.
A large number of investment proposals compete for these limited funds, the firm must
therefore ration them. The firm allocates funds to projects in a manner that it maximizes
long run returns; this rationing refers to a situation in which a firm has more acceptance
investment than it can finance. It is concerned with the selection of a group of investment
proposals acceptable. Under the accept-reject decision capital rationing employees ranking of
the acceptable investment projects. The project can be ranked on the basis of a predetermined
criterion such as the rate of return. The project is ranked in the descending order of the rate of
returns.

PROBLEMS AND DIFFICULTIES IN CAPITAL BUDGETING:

The problems in Capital budgeting decision may be as follows:
Future uncertainty: Capital budgeting decision involves long-term commitments. However
there is lot of uncertainty in the long term. Uncertainty may be with reference to cost of the
project, future expected returns, future competition, legal provisions, political situation etc.
Time Element: The implication of a Capital Budgeting decision are scattered over along
period. The cost and benefit of a decision may occur at different points of time. The cost of
project is incurred immediately. However the investment is recovered over a number of
years. The future benefits have to be adjusted to make them comparable with the cost. Longer
the time period involved, greater would be the uncertainty.

Difficulty in quantification of impact: The finance manager may face difficulties in

measuring the cost and benefits of projects in quantitative terms. For example, the new
products proposed to be launched by a firm may result in increase or decrease in sales of
other products already being sold by the same firm. It is very difficult to ascertain the extent
of impact as the sales of other products may also be influenced by factor other than the
launch of the new products.

ASSUMPTION IN CAPITAL BUDGETING:

The capital budgeting decision process is a multi-faceted and analytical process. A number of
assumptions are required to be made. These assumptions constitute a general set of condition
within which the financial aspects of different proposals are to be evaluated. Some of these
assumptions are:
1. Certainty With Respect To Cost And Benefits: it is very difficult to estimate the cost
and benefits of a proposal beyond 2-3 years in future. However, for a capital budgeting
decision, it is assumed that the estimate of cost and benefits are reasonably accurate and
certain.
2. Profit Motive: Another assumption is that the capital budgeting decisions are taken with a
primary motive of increasing the profit of the firm. No other motive or goal influences the
decision of the finance manager.
3. No Capital Rationing: The capital Budgeting decision in the present chapter assumes that
there is no scarcity of capital. It assumes that a proposal will be accepted or rejected in the
strength of its merits alone. The proposal will not be considered in combination with other
proposals to the maximum utilization of available funds.

CAPITAL BUDGETING PROCESS

Capital budgeting is complex process as it involves decision relating to the investment of
current funds for the benefit for the benefit to be achieved in future and the future is always
uncertain. However, the following procedure may be adopted in the process of Capital
Budgeting.
Identification of investment proposals
The capital budgeting process begins with the identification of investment

proposals.

The proposal about potential investment opportunities may originate either from top
management or from any officer of the organization. The departmental head analysis various
proposals in the light of the corporate strategies and submits the suitable proposals to the
capital expenditure planning.
Screening proposals:
The expenditure planning committee screens the various proposals received from different
departments. The committee reviews these proposals from various angles to ensure that these
are in accordance with the corporate strategies or selection criterion of the firm and also do
not lead departmental imbalances.
Evaluation of Various proposals:
The next step in the capital budgeting process is to various proposals. The method, which
may be used for this purpose are Payback period method, Rate of return method, N.P.V and
I.R.R etc.

Fixing priorities:
After evaluating various proposals, the unprofitable uneconomical proposal may be rejected
and it may not be possible for the firm to invest immediately in all the acceptable proposals
due to limitation of funds. Therefore, it is essential to rank the project/proposals after
considering urgency, risk and profitability involved in there.
FINAL APPROVAL AND PREPARATION OF CAPITAL EXPENDITURE
BUDGET:
Proposals meeting the evaluation and other criteria are approved to be included in the capital
expenditure budget. The expenditure budget lays down the amount of estimated expenditure
to be incurred on fixed assets during the budget period.
Implementing proposals:
Preparation of a capital expenditure budget and incorporation of a particular Proposal in the
budget doesnt itself authorize to go ahead with the implementation of the project.
A request for the authority to spend the amount should be made to the capital Expenditure
committee, which reviews the profitability of the project in the changed circumstances.
Responsibilities should be assigned while implementing the project in order to avoid
unnecessary delays and cost overruns. Network technique likes PERT and CPM can be
applied to control and monitor the implementation of the projects.
Performance Review:
The last stage in the process of capital budgeting is the evaluation of the performance of the
project. The evaluation is made by comparing actual and budget expenditures and also by
comparing actual anticipated returns

METHODS OR TECHNIQUES OF CAPITAL BUDGETING:

There are many methods for the evaluating the profitability of investment proposals the
various commodity used methods are
TECHNIQUES OF CAPITAL BUDGETING

Traditional Methods

Time Adjusted Methods

1. Pay Back Period

1.N.P.V

2. Accounting Rate of Return

2.I.R.R
3. P.I.

Traditional methods:
Payback period method (P.B.P)
Accounting Rate of Return Method (A.R.R)
Time adjusted or discounted technique:
(I) Net Present Value method (N.P.V)
(II) Internal Rate of Return method (I.R.R)
(III) Profitability Index method (P.I)

PAY BACK PERIOD METHOD

The pay back come times called as payout or pay off period method represents the period in
which total investment in permanent assets pay back itself. This method is based on the
principle that every capital expenditure pays itself back within a certain period out of the
additional earnings generated from the capital assets.
Decision rule:
A project is accepted if its payback period is less than period specific decision rule.
A project is accepted if its payback period is less than the period specified by the
management and vice-versa.
Initial Cash Outflow
Pay Back Period

---------------------------Annual Cash Inflows

ADVANTAGES:
o Simple to understand and easy to calculate.
o It saves in cost; it requires lesser time and labor as compared to other methods
of capital budgeting.
o In this method, as a project with a shorter payback period is preferred to the
one having a longer pay back period, it reduces the loss through
obsolescence.
o Due to its short- time approach, this method is particularly suited to a firm
which has shortage of cash or whose liquidity position is not good.

DISADVANTAGES:
o It does not take into account the cash inflows earned after the pay back period
and hence the true profitability of the project cannot be correctly assessed.
o This method ignores the time value of the money and does not consider the
magnitude and timing of cash inflows.
o It does not take into account the cost of capital, which is very important in
making sound investment decision.
o It is difficult to determine the minimum acceptable pay back period, which is
subjective decision.
o It treats each assets individual in isolation with other assets, which is not
feasible in real practice.

ACCOUNTING RATE OF RETURN METHOD

This method takes into account the earnings from the investment over the whole life. It is
known as average rate of return method because under this method the concept of accounting
profit (NP after tax and depreciation) is used rather than cash inflows. According to this
method, various projects are ranked in order of the rate of earnings or rate of return.
Decision rule:
The project with higher rate of return is selected and vice-versa.
The return on investment method can be in several ways, as

AVERAGE RATE OF RETURN METHOD:

Under this method average profit after tax and depreciation is calculated and then it is divided
by the total capital out lay.
Average Annual profits (after dep. & tax)
Average rate of return =----------------------------------------- ----x100
Net Investment

ADVANTAGES:
o It is very simple to understand and easy to calculate.
o It uses the entire earnings of a project in calculating rate of return and hence
gives a true view of profitability.
o As this method is based upon accounting profit, it can be readily calculated
from the financial data.
DISADVANTAGES:
o It ignores the time value of money.
o It does not take in to account the cash flows, which are more important than
the accounting profits.
o It ignores the period in which the profit are earned as a 20% rate of return in 2
years is considered to be better than 18%rate of return in 12 years.
o This method cannot be applied to a situation where investment in project is to
be made in parts.

NET PRESENT VALUE METHOD

The NPV method is a modern method of evaluating investment proposals. This methods
takes in to consideration the time value of money and attempts to calculate the return on
investments by introducing time element. The net present values of all inflows and outflows
of cash during the entire life of the project is determined separately for each year by
discounting these flows with firms cost of capital or predetermined rate. The steps in this
method are
1) Determine an appropriate rate of interest known as cut off rate.
2) Compute the present value of cash inflows at the above determined discount rate.
3) Compute the present value of cash inflows at the predetermined rate.
4) Calculate the NPV of the project by subtracting the present value of cash outflows.
Decision rule
Accept the project if the NPV of the projects 0 or positive that is present value of
cash inflows should be equal to or greater than the present value of cash outflows.

ADVANTAGES:
o It recognizes the time value of money and is suitable to apply in a situation
with uniform cash outflows and uneven cash inflows.
o It takes in to account the earnings over the entire life of the project and gives
the true view if the profitability of the investment
o Takes in to consideration the objective of maximum profitability.
DISADVANTAGES:
o More difficult to understand and operate.
o It may not give good results while comparing projects with unequal
investment of funds.
o It is not easy to determine an appropriate discount rate.
INTERNAL RATE OF RETURN METHOD
The internal rate of return method is also a modern technique of capital budgeting that
takes in to account the time value of money. It is also known as time- adjusted rate of return
or trial and error yield method. Under this method the cash flows of a project are discounted
at a suitable rate by hit and trial method, which equates the net present value so calculated to
the amount of the investment. The internal rate of return can be defined as that rate of
discount at which the present value of cash inflows is equal to the present value of cash
outflow.
Decision Rule:
Accept the proposal having the higher rate of return and vice versa.
If IRR>K, accept project. K=cost of capital. If IRR<K, reject project.

DETERMINATION OF IRR
a) When annual cash flows are equal over the life of the asset.
Initial Outlay
FACTOR =

-------------------------------- x 100
Annual Cash inflow

b) When the annual cash flows are unequal over the life of the asset:
PV of cash inflows at lower rate PV of cash out flows
IRR =LR+ -------------------------------------------------------------------------

(hr-lr)

PV of cash inflows at lower rate - PV of cash inflows at higher rate

The steps are involved here are

o Prepare the cash flows table using assumed discount rate to discount the net cash
flows to the present value.
o Find out the NPV, & if the NPV is positive, apply higher rate of discount.
o If the higher discount rate still gives a positive NPV increases the discount rate
further. Until the NPV becomes zero.
o If the NPV is negative, at a higher rate, NPV lies between these two rates.

ADVANTAGES:
o It takes into account, the time value of money and can be applied in situation with
even and even cash flows.
o It considers the profitability of the projects for its entire economic life.
o The determination of cost of capital is not a pre-requisite for the use of this method.
o It provide for uniform ranking of proposals due to the percentage rate of return.
o This method is also compatible with the objective of maximum profitability.
DISADVANTAGES:
o It is difficult to understand and operate.
o The results of NPV and IRR methods my differ when the projects under evaluation
differ in their size, life and timings of cash flows.
o This method is based on the assumption that the earnings are reinvested at the IRR for
the remaining life of the project, which is not a justified assumption.

PROFITABILITY INDEX METHOD OR BENEFIT

COST RATIO METHOD
It is also a time-adjusted method of evaluating the investment proposals. PI also called
benefit cost ratio or desirability factor is the relationship between present value of cash
inflows and the present values of cash outflows. Thus
PV of cash inflows
Profitability index = ----------------------------PV of cash outflows
NPV
Net profitability index = --------------------------Initial Outlay

ADVANTAGES:
o Unlike net present value, the profitability index method is used to rank the
projects even when the costs of the projects differ significantly.
o It recognizes the time value of money and is suitable to apply in a situation
with uniform cash outflow and uneven cash inflows.
o It takes into account the earnings over the entire life of the project and gives
the true view of the profitability of the investment. Takes into consideration
the objectives of maximum profitability.

DISADVANTAGES:o More difficult to understand and operate.

o It may not give good results while comparing projects with unequal
investment funds.
o It is not easy to determine and appropriate discount rate.
o It may not give good results while comparing projects with unequal lives as
the projects having higher NPV but have a longer life span may not be as
desirable as a projects having somewhat lesser NPV achieved in a much
shorter span of life of the asset.

According to Robert S. Haris (2008): Finance scholars' approach to capital-structure

issues reflects a progression of thought over time. This note provides an overview of the
current state of capital-structure theory. One perspective on capital-structure choice is to view
it as posing trade-offs among five elements: (1) the tax benefits of financing, (2) the explicit
costs of financial distress, (3) the agency costs of debt (including an array of indirect costs
linked to financial distress), (4) the agency costs of equity, and (5) the signaling effect of
security issuance.

The first two elements reflect the "modern, traditional" balancing theory of capital structure.
The third and fourth build on agency theory and imperfect information and emphasize the
individual incentives of decision makers. The fifth element recognizes that the very act of
issuing a security can convey new information to investors when there is imperfect
information. While newer theories provide a rich array of insights into aspects of financial
policy beyond how much debt the firm should undertake, the downside is that at present there
is no overarching synthesis of these theories. As a result, practical application requires careful

identification of how these particular theories are relevant to the business, the markets, and
the situations at hand.

According to Matti J. Suominen (2010): In this paper, they studied a two-country

general equilibrium model with partially segmented financial markets, where hedge funds
emerge endogenously. Empirically, we show that the hedge fund investment strategy
predicted by our model, so called risk-adjusted carry trade strategy, explains more than
16% of a broad hedge fund index returns and more than 33% of a fixed income arbitrage subindex returns. The flow of new money to hedge funds affects market interest rates,
exchange rate, the both the hedge funds contemporaneous and expected future returns as
predicted by the model.

According to Robert F. Bruner (2008): A mutual-fund management firm pored over

analyst write-ups of Nike, Inc., the athletic shoe manufacturer. Nikes share price had
declined significantly from the beginning of the year. Ford was considering buying some
shares for the fund she managed, the North Point Large-Cap Fund, which was invested
mostly in Fortune 500 companies with an emphasis on value investing. Ford had read all the
analyst reports that she could find about the June 28th meeting, but the reports gave her no
clear guidance. She decided instead to develop her own discounted cash flow forecast to
come to a clearer conclusion.

According to Ignacio Velez-Parejas ( 2010): a short review of the major statistics

regarding the non traded firms in the U.S. and in Colombia as an example of an emerging
market. He shows some alternatives to estimate the cost of equity capital when there is not
enough trading information. Some of them use the Capital Assets Pricing Model (CAPM)

The note is organized as follows: In Section One he present some relevant statistics
regarding the non traded firms in the U. S. and in Colombia. In Section Two he mention the
importance of the emerging markets mostly composed of non-trading firms and the relevance
of popular approaches to the estimation of cost of equity capital. In Section Three he
distinguish between total and systematic risk and present methods to estimate the cost of
equity capital with systematic risk and total risk. When using Accounting Risk Models
(ARM) he used data from a well known firm in the Colombian stock market .In section Four
he presented some concluding remarks.

According to Harry De Angelo (2008): Firms deliberately but temporarily deviate

from permanent leverage targets by issuing transitory debt to fund investment. Leverage
targets conservatively embed the option to issue transitory debt, with the evolution of
leverage reflecting the sequence of investment outlays. They estimated a dynamic capital
structure model with these features and find that it replicates industry leverage very well,
explains debt issuances/repayments better than extant tradeoff models, and accounts for the
leverage changes accompanying investment "spikes." It generates leverage ratios with slow
average speeds of adjustment to target, which are dampened by intentional temporary
movements away from target, not debt issuance costs.

According to Rebecca N. Hann Maria Ogneva (2009): she examined whether

organizational form matters for a firm's cost of capital. Contrary to the conventional view,
our model shows that coinsurance among a firm's business units can reduce systematic

risk through the alleviation of countercyclical deadweight costs. Using measures of implied
cost of capital constructed from analyst forecasts, she found that

diversified firms have on average a lower cost of capital than stand-alone firms. In addition,
diversified firms with less correlated segment cashflows have a lower cost of capital ,
consistent with a coinsurance effect. Holding the magnitude of cash flows constant, our
estimates imply an average value gain of approximately 6% when moving from the highest to
the lowest cash flow correlation quintile.

According to Byoun (2008): They hypothesized that financial flexibility - characterized

by future investment opportunities relative to expected future cash flows and financing
constraints - is the main driver of firms' structure decisions. The ensuing implication is that
there is an inverted-U relationship between leverage ratio and the financial life cycle. They
found that: developing firms have lower leverage ratios; growth firms have high leverage
ratios; finally, mature firms have moderate leverage ratios. Their hypothesis explains several
capital structure "puzzles'' raised in the literature and can be a prominent alternative to
existing theories.. It also provides important implications for dividend and cash holding
policies.

NEED FOR THE STUDY

The Project study is undertaken to analyze and understand the Capital Budgeting

process
in ZUARI , which gives exposure to practical implications of theory knowledge.

To know about the organizations operation of using various Capital budgeting

techniques.

To know how the organization gets funds from various resources

OBJECTIVES OF THE STUDY

To study the relevance of capital budgeting in evaluating the project.

To study the technique of capital budgeting for decision- making.

To understand financial performance of the organization.

Understand the nature and importance of investment decision.

To know the time value of money opportunity costs.

To evaluate the project using NPV,IRR,PAYBACK and ARR.

To summaries merits and demerits of the investment criteria viz.. NPV, IRR,
PAYBACK and ARR.

SCOPE OF THE STUDY:

The scope of the study is restricted to the following:
The scope is limited to the operations of company or a firm and the system followed in the
company or a firm for capital expenditure decision.

LIMITATIONS OF THE STUDY

Lack of time is a limiting factor, i.e., the schedule period of 6 weeks are not sufficient
to make the study on Capital Budgeting in ZUARI CEMENTS.

The busy schedule of the officials in the ZUARI CEMENTS is another limiting
factor.

The study is conducted in a short period, which was not detailed in all aspects.

Research Methodology:
DATA SOURCES & METHODOLOGY:
The required data on implementation of capital budgeting techniques is collected with the
help of primary and secondary data.
PRIMARY DATA:
The information collected directly without any reference is primary data. In the study it is
mainly through conversation with concerned officers or staff members either individually or
collectively. The data includes:
1. .Interaction with the planning and development department.
2. Interaction with the finance department.
SECONDARY DATA:
The secondary data is collected from the published annual reports, manuals, magazines of
company.
The collected data has been classified, tabulated, summarized and analyzed in a systematic
manner. For the data analysis various capital budgeting techniques have been applied such as
NPV, PB, IRR Analysis for the period of the study.
The proposed research is a case method of study for the examining the procedure and
effective implementation of capital budgeting techniques in the company has been selected.

NET PRESENT VALUE:

Net present value method is one of the modern method which comes under the category of
discounted cash flow methods. This method is very useful in evaluating investment
proposals. Under this method the cash inflows and outflows associated with each project are
first determined. The cash inflows and outflows are then converted to present value using a
discounting factor. This rate of return or discounting factor is considered as the cutoff rate
and is generally determined on the basis of the cost of capital for risk element.
The equation for calculating NPV is:

INTERNAL RATE OF RETURN:

The Internal rate of return is also one of the capital budgeting technique that identifies the
time value of money. This method is also known as yield method. It is that rate of return
which equates the present value of cash inflows to the present value of cash outflows.
The internal rate of return is calculated by using the formula:

PAYBACK PERIOD:
Payback period method is a traditional method of capital budgeting. It is the simple and
widely used quantitative method of investment evaluation. Payback period is also termed as
payout or payoff period method, with the help of payback period method firm can evaluate
the number of years to recoup the initial investment from cash flow after tax.
The formula to calculate payback period is:

ACCOUNTING RATE OF RETURN:

Accounting Rate of Return (ARR) is a traditional method of capital budget evaluation and it
is also known as average rate of return method. According to this method the capital
investment proposals are judged on the basis of accounting information rather than cash
flows.
Average Rate of Return can be calculated using the formula:

journals, annual reports of ZUARI CEMENTS

DATA ANALYSIS & INTERPRETATION

ZUARI HYDERABAD
CAPITAL BUDGETING
EXAMPLE OF STAGE I & II
Sl.

Schemes

Outlay

1.

Stage-I ( 3 x 20000 MT)

5,48,92,00,000

2.

Stage- II( 3 x 50000 MT)

11,03,69,00,00

3.

Stage-III( 1 x 50000MT)

1229.38(Millions)

Stage I consisting outlay of 5,48,92,00,000 this is recovered in 5 years of time.

RECOVERY OF PROJECTS (Stage-I):

Following calculations are under consider
Under Discounted Pay Back Period:
Stage I (3 x 20000) Outlay

5,48,92,00,000

ZUARI INVESTMENTS
TABLE-1

Year
2009-10
2010-11
2011-12
2012-13
2013-14

Investments (In Lakhs)

3,991,459.40
4,038,114.20
3,667,441.15
7,338,000.00
2,089,775.00
Total:

Cash
inflows(P.V.)
Cash Out Flows (Initial)
19210
33000
11130
70000
65420
40000
19233
80000
61323
60000
498896
525000

graph represents

The
abov
e

TABLE-2
ZUARI NET PRESENT VALUE:
Year Cash Inflows

Dis. @12% Present Value of Cashflows

Rs. 1.129.384.000

0,892

Rs. 1.007.410.528

Rs. 1.310.895.000

0,797

Rs. 1.043.986.315

Rs. 1.761.879.000

0,711

Rs. 1.252.695.969

Rs. 1.732.086.000

0,635

Rs. 1.109.874.610

Rs. 2.193.061.000

0,567

Rs. 1.243.465.587

Present Value of Cash Flows

Rs. 5.647.433.010

Less: Cash Outlay

Rs. 5.489.200.000

Net Present Value

Rs. 158.233.010

GRAPH 1:
2500000
2000000
Year

1500000

Cash Inflows

1000000

Present Value of Cashflows

500000
0
1

Interpretation:
The Net Present Value is the difference between the Present value of cash inflows and
Present value of cash outflows.

TABLE-3
PAY BACK PERIOD:
ZUARI Investments (In
Cash
Lakhs)
inflows(P.V.)
Cash Out Flows (Initial)
25,000.00
2900
33000
12,000.00
1100
70000
90,000.00
1600
40000
30,000.00
1200
80000
50,000.00
1800
60000
207,000.00
8,600.00
283,000.00

Year
2013-09
2009-10
2010-11
2011-12
2012-13
Total:

Initial Investments
Pay Back Period

--------------------------Annual Cash inflows

25000
=

---------

5 Years

8600

GRAPH 3:
300,000.00
250,000.00
200,000.00

BHEL Investments (In Lakhs)

150,000.00

Cash inflows(P.V.)

100,000.00

Cash Out Flows (Initial)

50,000.00
0.00
2008-09 2009-10 2010-11 2011-12 2012-13 Total:

Interpretation:

a)

In the Pay Back method the Investment and the case inflows are fluctuating from
year to year where as in the year 1999-00 it is 40000 and in the year 2009-10 is
50000.

b)

Cash inflows are in the order of increasing to decreasing from 1999-00 and 200910.

TABLE-4
Year
(Thousands)
2013-09
2009-10
2010-11
2011-12
2012-13
Total

ZUARI Investments (Lakhs) Cash Flows after Taxes Average Income

4,500,000.00
4,000,000.00
3,500,000.00
3,000,000.00
2,500,000.00
2,000,000.00
1,500,000.00
1,000,000.00
500,000.00
0.00

260,000.00
600,000.00
100,000.00
250,000.00
520,000.00
3,280,000.00

64000
78000
25000
18000
22000
430000

200000
300000
600000
800000
750000
4360000

BHEL Investments (Lakhs)

Cash Flows after Taxes
Average Income

Interpretations:
a)

From 2006-2007 the net block and gross fixed assets is 328916.

b)

Whereas the Net Block and gross fixed asset is been increased in the year 2009-10.

TABLE:-5
FY YEAR

ZUARI NET SALES(IN LAKS)

2013-09

229055

2009-10

258117

2010-11

286453

2011-12

315400

2012-13

355502

TOTAL

1444527

1600000
1400000
1200000
1000000
800000
600000
400000
200000
0

1444527

229055

258117

286453

315400

355502

ZUARI NET SALES(IN LAKS)

Interpretations:
a)

Net worth and net assets has been increasing from year to year from 2005-06 it is
229055 and compare to 2009-10 it has been increased to 440302.

b)

By observing the chat we can say the net worth and net assets have been increasing
from 2005-06 to 2009-2010.

TABLE-6

FY YEAR

ZUARI NET BLOCK (IN LAKS)

2013-09

284738

2009-10

323083

2010-11

328916

2011-12

386106

2012-13

400381

TOTAL

1723224

1723224

1800000
1600000
1400000
1200000
1000000
800000
600000
400000

284738

323083

328916

386106

400381

200000
0
2008-09 2009-10 2010-11 2011-12 2012-13

TOTAL

ZUARI NET BLOCK (IN LAKS)

Interpretations:
a)

Net worth and net assets has been increasing from year to year from 2005-06 it is
229055 and compare to 2009-10 it has been increased to 440302.

b)

By observing the chat we can say the net worth and net assets have been increasing
from 2005-06 to 2009-2010.

TABLE 7 :
FY YEAR

ZUARI PROFIT AFTER TAX

2008-09

34245

2009-10

37338

2010-11

35396

2011-12

36085

2012-13

52609

TOTAL

195673

PROFIT AFTER TAX

195673
200000
180000
160000
140000
120000
100000
80000
60000
40000
20000
0

52609
34245

37338

35396

36085

2008-09

2009-10

2010-11

2011-12

2012-13

TOTAL

ZUARI PROFIT AFTER TAX

Interpretations:
a) The chart shows the increase value after the deduction of tax in the year 2009-10.
b) The Profit is changing from year to year in the year 2004-05 it is 34245 where as
increasing value in the year 2004-2005 and decreased, in the year 2009-10 the value is
increased.

Mar '13
Sources Of Funds
Total Share Capital
Equity Share Capital
Share Application Money
Preference Share Capital
Reserves
Revaluation Reserves
Networth
Secured Loans
Unsecured Loans
Total Debt
Total Liabilities
Application Of Funds
Gross Block
Less: Accum. Depreciation
Net Block
Capital Work in Progress
Investments
Inventories
Sundry Debtors
Cash and Bank Balance
Total Current Assets
Loans and Advances
Fixed Deposits
Total CA, Loans & Advances
Deffered Credit
Current Liabilities
Provisions
Total CL & Provisions
Net Current Assets
Miscellaneous Expenses
Total Assets
Contingent Liabilities
Book Value (Rs)

Mar '12

Mar '11

Mar '10

Mar '09

489.52
489.52
0
0
29,954.58
0
30,444.10
1,286.00
129.2
1,415.20
31,859.30

489.52
489.52
0
0
24,883.69
0
25,373.21
0
123.43
123.43
25,496.64

489.52
489.52
0
0
19,664.32
0
20,153.84
0
102.14
102.14
20,255.98

489.52
489.52
0
0
15,427.84
0
15,917.36
0
127.75
127.75
16,045.11

489.52
489.52
0
0
12,449.29
0
12,938.81
0
149.37
149.37
13,088.18

10,585.56
6,127.07
4,458.49
1,171.59
429.17
11,763.82
29,234.49
7,732.05
48,730.36
15,338.84
0
64,069.20
0
29,327.02
8,942.13
38,269.15
25,800.05
0
31,859.30
3,441.04
124.38

9,542.79
5,245.98
4,296.81
1,347.61
461.67
13,444.50
26,336.13
6,671.98
46,452.61
14,217.32
0
60,669.93
0
33,638.01
7,641.37
41,279.38
19,390.55
0
25,496.64
6,500.34
103.67

7,917.62
4,516.70
3,400.92
1,733.76
439.17
10,852.05
20,103.50
9,630.15
40,585.70
13,100.74
0
53,686.44
0
31,407.77
7,596.54
39,004.31
14,682.13
0
20,255.98
5,129.50
411.71

6,579.70
4,164.74
2,414.96
1,550.49
79.84
9,235.46
20,688.75
865.08
30,789.29
4,801.24
8,925.00
44,515.53
0
28,097.73
4,417.98
32,515.71
11,999.82
0
16,045.11
2,538.13
325.16

5,224.43
3,754.47
1,469.96
1,212.70
52.34
7,837.02
15,975.50
1,950.51
25,763.03
4,616.67
8,364.16
38,743.86
0
23,415.10
4,975.58
28,390.68
10,353.18
0
13,088.18
2,546.25
264.32

Findings and suggestions:

The Corporate mission of ZUARI is to make available reliable and quality power in
increasingly large quantities. The company will spear head the process of accelerated
development of the power sector by expeditiously planning, implementing CEMENT
project and operating power stations economically and efficiently.
The organization needs the capable personalities as management to lead to organization
successfully. The management make the plans and implement of these plans. These plans
are expressed in terms of long-term investment decisions.
The special budgets are rarely used in the organization like long-term budgets, research &
development budget and budget and budget for constancy.
From the Revenue budget for the year 2012-2013, it is clear that the Actual sales ( Rs.
168552.50 lacks) are more then the budgeted or Estimated sales ( Rs. 164208.54 lacks). It
is a good sign and the overall earnings of the budget indicate high volume over estimated.
New projects acceptance consider on the basis of Return Benefits. Risk is evaluated while
considering the new projects.

Conclusions :
Every organization has pre-determined set of objective and goals, but reaching those
objectives and goals only by proper planning and executing of the plans economically.
Within a Short span of its existence, the corporation has commissioned 19502 MW as on
31st March, 2000 with an operating capacity of 19.9%. ZUARI today generate 24.9% of
nations Best Cement is presently executing 12 Cement manufacturing Projects with a
total approved capacity of 29,935 MT as on 31st March 2014

Bibliography:
References:
1. According to Robert S. Harris, Susan Chaplin skys (2008) article on capital structure theory:
A current perspective, Darden case no. UVA-F-1165.
2. According to Matti J. Suominen Petri Jylhas(2010) article on speculative capital & currency
trader.
3. According to Robert F.Bruners (2008) article on Nike inc: cost of capital, Darden case no.
VVA-F-1353.
4. According to Ignacio Velez- Parejas (2010) article on cost of capital for non trading firms.
5. According to Harry De Angelo, Linda De Angelo, Toni m. whites (2008) article on capital
structure dynamics and transitory debt
6. According to Rebecca N. Hann Maria Ognevas (2009) article on corporate diversification and
cost of capital.
7. According to Byoun, Sokus (2008) article on financial flexibility and capital structure
decision.

BOOKS & AUTHORS

FINANCIAL MANAGEMENT

PRASANNA CHANDRA
6th EDITION

FINANCIAL MANAGEMENT

I.M.PANDEY

FINANCIAL MANAGEMENT

KHAN AND JAIN

FINANCIAL MANAGEMENT

F.M.VANHORNE

Web Site
S.no

Web sites

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www.zuaricements.com