A

STUDY
ON
CAPITAL STRUCTURE
AT
BHARATI CEMENT LTD
Submitted
By
SIRISHA TERLA
H.T.NO: 1415-18-672-019
PROJECT SUBMITTED IN PARTIAL FULFILLMENT FOR THE AWARD
OF DEGREE OF

MASTER OF BUSINESS ADMINISTRATION

Department of Business Administration

PENDEKANTI INSTITUTE OF MANAGEMENT
IBRAHIMBAGH
(Affiliated to Osmania University)
2018-2020
1.1 INTRODUCTION:

The capital structure decision can affect the value of the firm either by changing the expected
earnings or the cost of capital or both.

The objective of the firm should be directed towards the maximization of the value of the
firm capital structure, or average, decision should be examined from the point of view of its
impact on the value of the firm

If the value of the firm can be affected by capital structure or financing decision a firm would
like to have a capital structure which maximizes the market value of the firm. The capital
structure decision can affect the value of the firm either by changing the expected earnings or
the cost of capital or both.

A mix of company’s longterm debt, a specific short-term debt, common equity and preferred
equity. The capital structure is how a firm finances its overall operations and growth by using
different souces of funds.

Debts comes in the forn of bond issues or long-term notes payable, while equity is classified
as common stock, preferred stock or retained earnings. Short-term debt such as working
capital requirements is also considered to be part of the capital structure.

The phrase “capital structure” can mean different things to different people. At its simplest,
capital structure reflects the equity and debt of the company. A privately held company that
plans to share equity with employees and raise outside capital generally as atleast two classes
of stock; common for founders and employees, and preferred for investors. A company has a
finite amount of equity to exchange for the financial and talent resources necessary to execute
your plan successfully. Great care should be taken when planning the allocation of equity.

The assets of a company can be financed either by increasing the owners claim or the
creditors claim. The owners claims increase when the form raises funds by issuing ordinary
shares or by retaining the earnings, the creditors’ claims increase by borrowing.

The various means of financing represents the “financial structure” of an enterprise .The
financial structure of an enterprise is shown by the left hand side (liabilities plus equity) of
the balance sheet. Traditionally, short-term borrowings are excluded from the list of methods
of financing the firm’s capital expenditure, and therefore, the long term claims are said to
form the capital structure of the enterprise .The capital structure is used to represent the
proportionate relationship between debt and equity .Equity includes paid-up share capital,
share premium and reserves and surplus.

The financing or capital structure decision is a significant managerial decision .It

influences the shareholders returns and risk consequently; the market value of share may be
affected by the capital structure decision. The company will have to plan its capital structure
initially at the time of its promotion.
 REVIEW OF LITERATURE

The assets of a company can be financed either by increasing the owners claim or the
creditors claim. The owners claims increase when the form raises funds by issuing ordinary
shares or by retaining the earnings, the creditors’ claims increase by borrowing .The various
means of financing represents the “financial structure” of an enterprise .The financial
structure of an enterprise is shown by the left hand side (liabilities plus equity) of the balance
sheet. Traditionally, short-term borrowings are excluded from the list of methods of financing
the firm’s capital expenditure, and therefore, the long term claims are said to form the capital
structure of the enterprise .The capital structure is used to represent the proportionate
relationship between debt and equity .Equity includes paid-up share capital, share premium
and reserves and surplus.

FACTORS AFFECTING THE CAPITAL STRUCTURE:

 LEVERAGE: The use of fixed charges of funds such as preference shares, debentures and
term-loans along with equity capital structure is described as financial leverage or trading on.
Equity. The term trading on equity is used because for raising debt.

DEBT /EQUITY RATIO-Financial institutions while sanctioning long-term loans

insists that companies should generally have a debt –equity ratio of 2:1 for
medium and large scale industries and 3:1 indicates that for every unit of equity
the company has, it can raise 2 units of debt. The debt-equity ratio indicates the
relative proportions of capital contribution by creditors and shareholders.
 EBIT-EPS ANALYSIS-In our research for an appropriate capital structure we need to
understand how sensitive is EPS (earnings per share) to change in EBIT (earnings before
interest and taxes) under different financing alternatives.

The other factors that should be considered whenever a capital structure decision is taken are:
 Cost of capital
 Cash flow projections of the company
 Size of the company
 Dilution of control
 Floatation costs
FEATURES OF AN OPTIMAL CAPITAL STRUCTURE:

An optimal capital structure should have the following features,

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.
The Capital Structure Decision Process
 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 analyzed 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.

FEATURES OF AN APPROPRIATE CAPITAL STRUCTURE: -

The board of Director or the chief financial officer (CEO) of a company should
develop an appropriate capital structure, which is most advantageous to the company. This
can be done only when all those factors, which are relevant to the company’s capital structure
decision, are properly analyzed and balanced. The capital structure should be planned
generally keeping in view the interest of the equity shareholders and financial requirements
of the company. The equity shareholders being the shareholders of the company and the
providers of the risk capital (equity) would be concerned about the ways of financing a
company’s operation. However, the interests of the other groups, such as employees,
customer, creditors, and government, should also be given reasonable consideration. When
the company lay down its objectives in terms of the shareholders wealth maximizing (SWM),
it is generally compatible with the interest of the other groups. Thus, while developing an
appropriate capital structure for it company, the financial manager should inter alia aim at
maximizing the long-term market price per share. Theoretically there may be a precise point
of range with in which the market value per share is maximum. In practice for most
companies with in an industry there may be a range of appropriate capital structure with in
which there would not be great differences in the market value per share. One way to get an
idea of this range is to observe the capital structure patterns of companies’ Vis-a Vis their
market prices of shares. It may be found empirically that there is no significance in the
differences in the share value within a given range. The management of the company may fit
its capital structure near the top of its range in order to make of maximum use of favorable
leverage, subject to other requirement (SEBI) and stock exchanges.
Articles:

Article 1: Intellectual capital and business performance in Malaysia industries.

Author: Nick Bontis , William Chau Chong , Stanley Richardson.

Source: Journal of Intellectual Capital, Vol.1 issue: 1 . pp.85-100

Abstract: The purpose of this empirical study is to investigate the three elements of

intellectual capital, i.e. human capital, structural capital, and customer capital, and customer

capital, and their inter-relationships within two industry sectors in Malaysia. The study was

conducted using a psychometrically validated questionnaire which was originally

administered in Canada. The main conclusions from this particular study are that; human

capital is important regardless of industry type; human capital has a greater influence on how

a business should be structured in non-service industries compared to service industries;

customer capital has a significant influence over structural capital irrespective of industry;

and finally, the development of structural capital has a positive relationship with business

performance regardless of industry. The final specified models in this study show a robust

explanation of business performance variance within the Malaysian context which bodes well

for future research in alternative contexts.

Article 2

Title: Intellectual capital and traditional measure of corporate performance

Author: Steven Firer, S. Mitchell Williams

Source: Journal of Intellectual Capital, Vol,4 Issue: 3, pp, 348-360

Abstract: The principle purpose of this study is to investigate the association between the

efficiency of value added (VA) by the major components of a firm’s resource base (physical

capital, human capital and structural capital) and three traditional dimensions of corporate

performance: profitability, productivity, and market valuation. Data are drawn heavily reliant

on intellectual capital. Empirical analysis is conducted using correlation associations between

the efficiency of VA by a firm’s major resource bases and the empirical findings suggest that

physical capita; remains the most significant underlying resource of corporate performance in

South Africa despite efforts to increase the nation’s intellectual capital base.
Article 3:

TITLE: Determinants of capital structure Evidence from international joint ventures in

Ghana

Author: Agyenim Boateng

Source: International Journal of Social Economics, Vol. 31 Issue: 1/2, pp.56-66

Abstract:

Capital structure has attracted intense debate and scholarity attention in the financial

management arena over the past four decades. However, in the context of sub- Saharan

Africa capital structure has received a scant attention. This paper attempts to rectify this

position by considering the firm specific factors influencing the capital structure of

international joint venture formation based on a sample of 41 firms in Ghana with partners

from Western Europe, North America and Asia.

Article 4:

TITLE: Capital structure management as a motivation for calling convertible debt .

AUTHOR: Douglas R. Emery, Mai E. Iskandar – Datta, Jong – Chul Rhim.

SOURCE: Journal of financial research, volume 17,Issue 1, June 2014, Pages 137-159

ABSTRACT: Using a matched‐pairs methodology, we present empirical evidence of

systematic changes within a corporation that are associated with calls of convertible debt. We

find that calling firms experience significantly greater growth than noncalling firms in the

same industry, as measured by retained earnings and long‐term debt. Also, the converted debt

provides a significant source of new book equity, and calling firms issue significantly less

other new equity. The pattern of growth in balance sheet accounts is consistent with the

pecking order hypothesis and supports the notion that some firms call convertible debt to

reduce their total cost of obtaining additional external financing. The evidence also shows

that, on average, calling firms experience a significant decline in their leverage ratio based on

book value but no significant change in their leverage ratio based on market value of equity.

This is consistent with the call's being used as part of the firm's management of its capital

structure.
ARTICLE 5:

TITLE: The effect of capital structure on a firm’s liquidation decision

AUTHOR: Sheridan Titman

SOURCE: Journal of Financial Economics, Volume 13, March 1984, Pages 137-151.

ABSTRACT:A firm's liquidation can impose costs on its customers, workers, and

suppliers. An agency relationship between these individuals and the firm exists in that the

liquidation decision controlled by the firm (as the agent) affects other individuals (the

customers, workers, and suppliers as principals). The analysis in this paper suggests that

capital structure can control the incentive/conflict problem of this relationship by serving as a

pre-positioning or bonding mechanism. Appropriate selection of capital structure assures that

incentives are aligned so that the firm implements the ex-ante value-maximizing liquidation

policy.
1.2 NEED OF THE STUDY:

1. The value of the firm depends upon its expected earnings stream and the rate used to
discount this stream.
2. The rate used to discount earnings stream it’s the firm’s required rate of return or the cost
of capital.
3. Thus, the capital structure decision can affect the value of the firm either by changing the
expected earnings of the firm, but it can affect the reside earnings of the shareholders.
4. The effect of leverage on the cost of capital is not very clear. Conflicting opinions have
been expressed on this issue.
5. In fact, this issue is one of the most continuous areas in the theory of finance, and perhaps
more theoretical and empirical work has been done on this subject than any other.
6. If leverage affects the cost of capital and the value of the firm, an optimum capital
structure would be obtained at that combination of debt and equity that maximizes the total
value of the firm or minimizes the weighted average cost of capital. The question of the
existence of optimum use of leverage has been put very succinctly by Ezra Solomon in the
following words.
Given that a firm has certain structure of assets, which offers net operating earnings of
given size and quality, and given a certain structure of rates in the capital markets, is there
some specific degree of financial leverage at which the market value of the firm’s securities
will be higher than at other degrees of leverage?

The existence of an optimum capital structure is not accepted by all. These exist two extreme
views and middle position. David Durand identified the two extreme views the net income
and net operating approaches
1.3 SCOPE OF THE STUDY:

A study of the capital structure involves an examination of long term as well as short
term sources that a company taps in order to meet its requirements of finance. The scope of
the study is confined to the sources that BHARATHI CEMENT LIMITED tapped over the
years under study i.e. 2015-2019.
1.4 OBJECTIVES OF THE STUDY:

The project is an attempt to seek an insight into the aspects that are involved in the capital
structuring and financial decisions of the company. This project endeavors to achieve the
following objectives.

1. To study the capital structure of BHARATHI CEMENT LIMITED through EBIT-EPS

analysis

2. To study effectiveness of financing decision on EPS and EBIT of the firm.

3. To examine leverage analysis of BHARATI CEMENT.

4. To examine the financing trends in BHARATHI CEMENT LIMITED for the period of
2015-2019.

5. To study debt/equity ratio of BHARATHI CEMENT LIMITED for 2015-2019.

 1.5 RESEARCH METHODOLOGY:

Data relating to BHARATI CEMENT. Has been collected through secondary sources.

SECONDARY SOURCES:

A major portion of the data in this study has been collected through secondary sources of data
i.e, Journals, websites, Books, and all other relevant information or literary are taken as
secondary source of data.

RESEARCH DESIGN
The collected data has been processed using the tools of

 Ratio analysis
 Graphical analysis
 Year-year analysis

These tools access in the interpretation and understanding of the Existing scenario of the
Capital Structure
3.2COMPANY PROFILE

Bharathi Cement is the flagship brand of Vicat Operations in India

Vicat is a pioneer in cement manufacturing since its invention by Louis Vicat in 1818. Vicat
Group, France is a global cement organisation with offices in 11 countries. It’s main business
interests are Cement, Ready-Mixed Concrete, Concrete Product (Precast) and Aggregates.

Vicat in India functions in 3 verticals - Cement, Aggregates and Polymers with a team of
over 850 professionals and operations spread across 7 states in India. We are a young
organization with a great professional experience and a strong 198 years of legacy.

Bharathi Cement Corporation Private Limited (BCCPL) is a producer of Superior

Quality Cement has set new standards in the cement business. It is a joint venture of Vicat
Group, France (pioneers in cement) in India having 51% majority stake.

Bharathi Cement has a 2 production lines with using state-of-the-art technology having a total
capacity of 5 MTPA and is located at Nallalingayapalli, in Kadapa district of Andhra
Pradesh. The cement is marketed as“Bharathi Cement” since 2009.

The company was established on 25th October 2006 after taking over from Raghuram
Cements Private Limited. Eventually the company's ownership changed and Raghuram
Cements was renamed as Bharathi Cement Corporation Private Limited on 6th August
2008. Vicat Group, France has acquired a majority of 51% stake in 2010.

In 2006, it started the construction of its first production line of 2.25 MTPA at
Nallalingayapalli. It started with a vision of having an ultra-modern manufacturing facility by
installing new generation equipment’s made with German & Danish Technology to produce
one of the Superior Quality Cement. A Robotic Lab analyses the raw materials and controls
and takes correcting measures if required to avoid human errors and deliver Superior Quality
Cement.

On 4th February 11, 2nd production line of 2.75 MTPA was started making the total capacity
increase to 5 MPTA. In 2016, a 30MW Captive Power Plant was set-up to self-suffice power
requirement. As a part of its forward integration strategy, the group established two
subsidiaries - Bharathi Polymers India Private Limited (Laminated PP bag manufacturing
unit) and Bharathi Rock Products India Private Limited (Aggregates Division).
It also invested to build a robust back-end rail and road transport system ensuring the delivery
of cement within 24 hours of placing an order.

What do awards mean to us?

The measures we take in ensuring the delivery of the best product to the market or the safety
of our people or protecting the environment is, because we strongly believe in doing so. And,
not to get any form of recognition. However, being recognized by Government bodies and
External Professional agencies is an extraordinary and proud moment for the entire team. We
consider awards as recognition by any body or agency determining we have done something
worth notice, have excelled in our particular industry, or have contributed something to the
industry, community or environment.

To get a pat on the back by any agency always motivates the team involved in achieving the
feat, including our channel and business partners.

Here are a few of our a few of those extra ordinary and proud moments of our team.

Manufacturing Awards

CII : Energy Efficient Unit

CII National Award for Excellence in Energy Management

Confederation of Indian Industry under the aegis of the Energy Efficiency Council is
facilitating advancement of energy efficiency in India. CII National Award for Excellence in
Energy Management is the 18th edition of its series covering over 160 energy efficient
companies across various sectors such as pharma, cement, and power have converged at
Hyderabad for a CII event on energy efficiency to share their strategies and best practices on
energy management.
BE A PART OF US

Like any other organisation, we too are proud of our organisation. In a short span we have
achieved a lot more under the tough business conditions and have emerged as a leader in the
industry. And we could manage this only because of our strong leadership and dedicated
team. Without which we would not have been the organisation what we are today.

We believe people are the most valuable assets of any organization. They can change the face
of any business at any stage. We believe to provide a professional environment, where every
individual gets his freedom and space to work in his dedicated role and capacity at ease with
leadership, professionalism, dynamism and discipline. A environment which relies on an
"Open Door Policy", as we believe in the culture of Transparency of work.

OUR GOALS, VALUES AND BELIEFS

 Every employee is motivated and privded with an opportunity to constantly improve

and grow along with the organisation
 The Company does not tolerate discrimination of any kind and encourages all
managers and supervisors to involve in the employee problem solving and creativity
process
 Provide the most effective and efficient corrective action, to resolve customer service
issues, to ensure our customers’ satisfaction and that the problem not to be repeated in
future.
 Foster an open door policy encouraging interaction, debating, discussions and ideas to
improve the work environment, thus increasing the overall productivity
 “Do it right the first time” - Our commitment as a team and our only way of doing
business. This commitment as a team will assure continued growth and prosperity.
 We also think about our shareholders. It is our belief that shareholders, who have
supported the company with their investments, have a right to receive returns on
investment. This is again possible through total employee commitment to customer
satisfaction.
Balanced Approach

We endeavor to provide a balanced environment to our people where fun and work go hand
in hand not only for our employees but for their families as well. We continuously strive to
provide world class facilities to our employees which take care of their personal and family
needs.

Various celebrations on the special occasion of World Environment Day, International

Women's Day, Children's Day and festivals (like Diwali, Holi) among others allow
employees and their families to interact and unwind.

Our Health and wellness calendar focusing on preventive health provides ready reckoners for
employees to eat right, be safe and feel good. Annual Health Checkups, Safety weeks are
activities reflecting the organization's commitment to employee safety and wellbeing.

At our both manufacturing locations, we provide the best in the industry infrastructure to our
employees at our staff colony which includes.