Upload
jai-gupta
View
157
Download
3
Embed Size (px)
DESCRIPTION
hi
Citation preview
I N D E X
Chapter- I: INTRODUCTION
Introduction Importance of investment decision Objective of the study Methodology Limitations
Chapter-II: INDUSTRY PROFILE IN THE COMPANY
Introduction Pre-Independence Post-Independence Major Steel Industries in India Global Scenario Market Scenario Production Scenario Demand- Availability Projection Pricing &Distribution
1
Chapter-III: COMPANY PROFILE
Introduction Background Mission Vision ISO Policy Objectives Core values Quality Policy Environmental policy Energy policy OSHAS policy
HR policy Customer policy IT policy VSP Technology : state of the Art Major Departments Functions of various departments of RINL \ VSP Inputs and Basic Infrastructure Corporate Strategic Management(CSM) Achievements & Awards
Table Representation
A. Steel IndustriesB. Major Sources of Raw MaterialsC. Major UnitsD. Main Products of VSP E. Parameters of Sintering MachinesF. Production performanceG. Commercial performanceH. Financial performanceI. Man power at a Glance in VSP
Organization Chart –VISHAKHAPATANAM STEEL PLANT
2
Chapter-IV: PROJECT PLANNING
Introduction Nature of investment decisions Process of Investment decisions Importance of Investment decisions Types of Investment decisions Investment Evaluation criteria Cost effective Analysis Project planning
Chapter- V: PROJECT FINANCE
Sources of finance
Chapter –VI: EVALUTION OF CAPITAL BUDGETING
Payback period Average rate of return Net present value Internal rate of return Profitability index method
Chapter-VII: CAPITAL STRUCTURE
Frame work of capital structure Approaches to establishment target capital
structure Capital structuring in VSP
Chapter-VIII: EVALUTION OF CAPITAL STRUCTURING
Expansion project capital structure
3
Chapter-IX: FINDINGS, SUGGESTIONS
Findings Suggestions
CHAPTER – I
Introduction
4
1.1. Introduction:-
A project is an activity sufficiently self- contained to permit
financial and commercial analysis. In most cases projects represent
expenditure of capital funds by pre- existing entities which want to
expand or improve their operation.
In general a project is an activity in which, we will spend money
in expectation of returns and which logically seems to lead itself to
planning. Financing and implementation as a unit, is a specific
activity with a specific point and a specific ending point intended to
accomplish a specific objective.
To take up a new project, involves a capital investment
decision and it is the top management’s duty to make a situation
and feasibility analysis of that particular project and means of
financing and implementing it financing is a rapidly expanding field,
which focuses not on the credit status of a company, but on cash
flows that will be generated by a specific project.
Capital budgeting has its origins in the natural resource and
infrastructure sectors. The current demand for infrastructure and
capital investments is being fueled by deregulation in the power,
telecommunications, and transportation sectors, by the globalization
of product markets and the need for manufacturing scale, and by the
privatization of government –owned entities in developed and
developing countries.
The capital budgeting decision procedure basically involves the
evaluation of the desirability of an investment proposal. It is obvious
that the firm most have a systematic procedure for making capital
budgeting decisions. The procedure for making capital budgeting
decisions.
The procedure must be consistent with the objective of wealth
maximization. In view of the significance of capital budgeting
decisions, the procedure must consist of step by step analysis.
5
1.2 Importance of investment decisions:-
Capital investments, representing the growing edge of a
business, are deemed to be very important for three inter- related
reasons.
1. The influence firm growth in the long term consequences capital
investment decisions have considerable impact on what the firm can
do in future.
2. They affect the risk of the firm; it is difficult to reverse capital
investment decisions because the market for used capital
investments is ill organized and /or most of the capital equipments
bought by a firm to meet its specific requirements.
3. Capital investment decisions involve substantial out lays.
Visakhapatnam Steel Plant is a growing concern, capital budgeting
is more or less a continuous process and it is carried out by different
functional areas of management such a production, marketing,
engineering, financial management etc. All the relevant functional
departments play a crucial role in the capital budgeting decision process.
1.3 Objectives of the study:-
1. To describe the organizational profile of Visakhapatnam Steel
Plant.
2. To discuss the importance of the management of capital
budgeting.
3. Determination of proposal and investments, inflows and out
flows.
4. To evaluate the investment proposal by using capital budgeting
techniques.
5. To summarize and to suggest for the better investment proposal.
6
1.4 METHODOLOGY
The information for the study is obtained from two sources namely.
1. Primary Sources
2. Secondary Sources
Primary Sources:
It is the information collected directly without any references. It is
mainly through interactions with concerned officers & staff, either
individually or collectively; some of the information has been verified or
supplemented with personal observation. These sources include.
1. Thorough interactions with the various department Managers of VSP.
2. Guidelines given by the Project Guide, Sri P. MALLESWARA
RAO, Asst. Manager (Staff), Budget Section, F & A.
Secondary Sources:
This data is from the number of books and records of the company, the
annual reports published by the company and other magazines. The
secondary data is obtained from the following.
a) Collection of required data from annual records, monthly records,
internal
Published book or profile of Visakhapatnam Steel Plant.
b) Other books and Journals and magazines
c) Annual Reports of the company
7
1.5 Limitations:
Though the project is completed successfully a few limitations
may be there.
a) Since the procedure and polices of the company will not allow to
disclose confidential financial information, the project has to be
completed with the available data given to us.
b) The period of study that is 4 weeks is not enough to conduct
detailed study of the project.
c) The study is carried basing on the information and documents
provided by the organization and based on the interaction with the
various employees of the respective departments.
d) Lack of knowledge. Some of the lack full-fledged knowledge of the
concept and its difficult to collect a specific opinion from them.
e) Time limitation. The duration of the project is short to collect the
required information accurately.
8
CHATER-II
INDUSTRY PROFILE IN INDIA
9
Introduction
Steel is an alloy of iron usually containing less than 1% carbon
is a versatile material with multitude of useful properties used most
frequently in the automotive and construction industries. Steel can be cast
into bars strips, sheets, nails, spikes, wire, rods or pipes as needed by the
intended user. The consumption of steel is regarded as the index of
industrialization and the economic maturity any country has attained.
The development of steel industry in India should be viewed in
conjunction with the type and system of government that had been ruling
the country. The production of steel in significant quantity started after
1990. The growth of steel industry can be conveniently started by dividing
the period in to pre and post independence era. In the period of pre
independence, steel production was 1.5 million tones per year, which was
raised to 9 million tones of target. This is the result of the bold steps taken
by the government to develop this sector.
Growth of Steel Industry:
2.2 Pre-independence:-
1830 - Josiah, Marshall Health constructed the first manufacturing
plant at
Port Move in Madras presidency.
1874 - James Erskin founded the Bengal iron works.
1899 - Jamshedji Tata initiated the scheme for an integrated steel
plant.
1906 - Formation of TISCO.
1911 - Tata iron & steel company started production.
1916 - TISICO was founded.
10
2.3 Post-independence:-
1951-56 - First Five Year Plan.
No new steel plant came up .The Hindustan steel Ltd.
was born on 19th January, 1954 with the decision of
setting up three steel plants each with one million tone
input steel per year in at Rourkela, Bhilai and Durgapur;
TISCO stated its expansion program.
1956-61 - Second Five Year Plan
A bold decision was taken up to increase the ingot steel
output India to 6 Million tons per year & production at
Rourkela, Bhilai and Durgapur steel plant started.
1961-66 - Third Five Year Plan
During the third five year plan the three steel plants
under HSL; TISCO & HSCO were expanded as show. In
January 1964 Bokaro steel plant came into existence.
1966-69 - Recession Period
The entire expansion program was actively executed
during this period.
1969-74 -Fourth Five Year Plan
11
Licenses were given for setting up of many mini steel
plants and re-rolling mills.
Govt. Of. India accepted setting up two more steel
plants in south. One each at Visakhapatnam and Hospet
(Karnataka).
SAIL was formed during this period on 24th January,
1973. The total installed capacity from 6 integrated
plants was 106 Mt.
1979 - Annual Plan
The erstwhile Soviet Union agreed to help in setting up
the Visakhapatnam steel plant.
1980-85 - Sixth Five Year Plan
Work on Visakhapatnam steel plant was started with a
big bang and top priority was accorded to start the
plant.
Scheme for modernization of Bhilai steel plant,
Rourkela, Durgapur, TISCO were initiated.
1985-91 - Seventh Five Year Plan
Expansion work of Bhilai and Bokaro steel plants
completed.
Progress on Visakhapatnam steel plant picked up and
rationalized concept has been introduced to commission
the plant with 3.0Mt liquid steel capacity by 1990.
1991-96 - Eight Five Year plan
Vishakhapatnam steel plant started its production
modernization of other steel plants is also duly
envisaged.
1997-2002 - Ninth Five Year Plan
Visakhapatnam steel plant had foreseen a 7% growth
during the entire plan period.
12
2002-2007 - Tenth Five Year Plan
Steel industry registers the growth of 9.9 %
Visakhapatnam steel plant high regime targets
achieved the best of them.
2007-2012 - Eleventh Five Year Plan
Cost of schemes/project original approved by
Government of India is Rs.9, 569.18 crores
2. 4 The major steel and related companies in India:-
1. Bharat Refectories Ltd.
2. Hindustan Steel Works Construction Ltd.
3. Jindal Steel and Power Ltd.
4. Tata Iron Steel Company Metal Scrap Trade Corporation Ltd.
5. Metallurgical and Engineering Consultants India Ltd.
6. National Mineral Development Corporation Ltd.
7. Rashtriya Ispat Nigam Ltd.
8. Sponge Iron India Ltd.
9. Steel Authority India ltd.
The global steel industry has witnessed several revolutionary changes
during the last century. The changes have been in the realms of both
technology & business strategy. The ultimate object of all these changes is
to remain competitive and open global market.
13
The Indian steel industry is growing very rigorously with the major
producers like SAIL, RINL, TISCO, JVL and many others. Our steel industry
has amply demonstrated its ability of adopt to the changing scenario and
to survive in the global market that is becoming increasingly competitive.
This has been possible to a large extent due to the adoption of innovative
operating practices and modern technologies.
Industrial Development in India has reached a high degree of self-
reliance, and the steel industry occupies a primary place in the strategy for
future development. At present the production of steel industry country is
34Mt. the public sector steel industry has been restructured to meet
challenges and a separate fund has been established for modernization
and future development of the industry. It is now being proposed that
Indian steel industry should Gear up to achieve a production level of about
100 Mt by the year2000.
2.5 Global scenarios:-
As per IISI
In March’ 2005 world Crude steel output was 928Mt when
compared to march 2004 (872Mt), ∙The change in percentage
was 6.5%.
China remained the world largest crude steel producer in 2005
also (275Mt) followed by Japan (96Mt) and USA (81Mt). India
occupied 8th position (42Mt).
USA remained the largest importer of semi finished and
finished products in 2002 followed by China and Germany.
Japan remained the largest exporter of semi finished and
finished steel products in 2002 followed by Russia and
Ukraine.
Other significant recent developments in the global steel
scenario have been: Under the auspices of the OECD
14
(Organization for Economic Co-operation & Development) the
negotiations among the major steel producing countries for a
steel subsidy agreement (SSA) held in 2003 with the objective
to agree on a complete negotiating test for the SSA by the
Middle of 2004. It also set subsidies for the steel industry of a
ceiling of 0.5% of the value of production to be used
exclusively for Research & Development
2.6 Market scenarios:-
The year 2004-05 was a remarkable one for the steel industry with
the world crude steel production crossing the one billion mark for the first
time in the history of the steel industry. The world GDP growth about 4%
lends supports to the expectations the steel market is all set for strong
revival after prolonged period of depression .The Indian economy also
become robust with annual growth rates of 7-8 % this will provide a major
boost the steel industry. With the nations focus on infrastructure
development coupled with the growth in the manufacturing sector, the
Indian steel industry all set for north ward movement. The draft national
steel police envisage production of 60 Mt by 2012 and 110Mt by2020, and
annual growth rate of 6-7%. All this should therefore augur well for the
Indian steel industry.
2.7 Production scenarios:-
Steel industry was de-licensed and decontrolled in 1991&1992
respectively.
India is the 8th largest producer of steel in the world.
In 2003-04 finished steel production was 36.193Mt.
Pig iron production in 2003-04 was 5.221Mt.
Sponge iron production was 80.85 Mt during the year 2003-04
The annual growth rate of crude steel production in 2002-03was 8% and
in 2003-04 was 6%.
15
The last five year production performance is as under:-
(In Million tons)
YEAR PIGIRON SPONGEIRON1.1.1.1 FINISHEDST
EEL
2000-01 3.39 5.44 29.27
2001-02 4.08 5.44 30.63
2002-03 5.28 6.44 33.67
2003-04 3.76 8.09 39.12
2004-05 3.18 9.93 41.15
2005-06 4.39 0.00 30.84
2006-07 3.52 0.00 31.40
2007-08 4.95 0.00 29.74
2008-09 4.95 0.00 29.74
2.8 DEMAND-AVAILABILITY PROJECTION:-
Demand-Availability of iron and steel in the country is projected by
ministry of steel annually.
Gaps in availability are met mostly through imports.
Interface with consumers by way of Steel Consumer Council exists,
which is conducted on regular basis.
Interface helps in redressing availability problems, complaints related
to quality.
16
2.9 PRICING & DISTRIBUTION : -
Price regulation of iron & steel was abolished on 16-01-1992.
Distribution controls on iron& steel removed except 5 priority sectors,
viz. Defense, Railways, Small Scale Industries Corporations, Exporters
of Engineering Goods and North Eastern region.
Allocation to priority sectors is made by Ministry of steel.
Government has no control over prices of iron & steel.
Open market prices are generally on rise.
Price increases of late have taken place mostly in long products than
flat products.
17
CHAPTER –III
COMPANY PROFILE
18
Introduction:-
Steel comprises one of the most important resources of the economy.
History shows that, the strongest of civilizations have evolved quickly in the
course of time, because of the proper use of the iron and steel reserves they
had. The huge iron pillars at the entrance of New Delhi suggest that the
history of iron and steel industry in India is well over 2000 years old.
Steel comprises one of the most important inputs to all sectors of the
economy. Steel Industry is both a basic and a core Industry. The economy
of any nation depends on a strong base of Iron and Steel Industry in that
nation. History has shown that the countries having a strong potential for
Iron and Steel Industry have played a prominent role in the advancement in
the civilization in the world. Steel is such a versatile commodity that every
object we see in our day-to-day life had use, such as small items as nails,
pins, needles etc., to surgical instruments, agricultural implements, boilers,
ships, railway materials, automobile parts. The great investments that has
gone into the fundamental research in Iron and Steel Technology has
helped both directly and indirectly many modern fields of today’s science
and technology. Steel is versatile and indispensable item. The versatility of
steel can be traced mainly of three reasons.
1. It is only metallic item, which can be conveniently and economically produced in tonnage quality.
2. It has got very good strength coupled with malleability.
3. Its properties can be changed over a wide range. Its properties can be manipulated to any extent by proper heat treatment techniques.
Iron and Steel making as a craft as been known to India for a long time. However, its production is significant quantities only after 1900.
VSP by successfully installing & operating efficiently Rs. 460 cores
worth of Pollution Control and Environment Control Equipments and
converting the barren landscape by planting more than 3 million plants has
made the Steel Plant, Steel Township and surrounding areas into a heaven
of lush greenery. This has made Steel Township a greener, cleaner and
cooler place, which can boast of 3 to 4° C lesser temperature even in the
peak summer compared to Visakhapatnam City.
19
VSP exports Quality Pig Iron & Steel products' to Sri Lanka,
Myanmar, Nepal, Middle East, USA, China and South East Asia. RINL-VSP
was awarded "Star Trading House" status during 1997-2000. Having
established a fairly dependable export market, VSP plans to make a
continuous presence in the export market.
The govt. of India has recognized the importance of steel in Indian industry and established the following steel plants, before it actually set up VSP/RINL. The details of those are tabulated below.
Sl. No.STEEL PLANT COLLABORATED BY
1 Durgapur steel plant Britain2 Bhilai steel plant Erstwhile USSR3 Bokaro steel plant Erstwhile USSR4 Rourkela steel plant Germany
Visakhapatnam steel plant profile :-
To meet the growing domestic needs of steel, Government of India decided to set up an integrated Steel plant at Visakhapatnam. An agreement was signed with erstwhile USSR in 1979 for cooperation insetting up 3.4 million tones integrated Steel Plant at Visakhapatnam. The foundation was laid by the then Prime Minister Mrs. Indira Gandhi on 20th January 1971.
The Project was estimated to cost Rs.3, 897.28 cores based on prices as on 4th Quarter of 1981. However, on completion of Construction of the whole Plant in 1992, the cost escalated to around 8500 Cr. Unlike other interagated Steel Plants in India, Visakhapatnam Steel Plant is one of the most modern Steel Plants in the country. The plant was dedicated to the nation on 1st August 1992 by the then Prime Minister, P.V.Narasimha Rao.
New Technology, large-scale computerization and automation etc., are incorporated in the Plant. To operate the plant at international levels and attain such lab our productivity, the organizational manpower has been
20
rationalized. The plant has a capacity of producing 3.0 MT of liquid steel and 2,656Mt of saleable steel.
Visakhapatnam steel plant technology: state-of-the-art:-
7m tall Coke Oven Batteries with coke dry quenching.
Biggest Blast Furnaces in the country.
Bell less top changing system in Blast Furnace.
100% slag granulation at the Blast Furnace cast house.
Suppressed combustion—LD gas recovery system.
100% continuous casting of liquid steel.
‘Tempcore’ and ‘Stelmor’ cooling process in LMMM & WRM.
Extensive waste heat recovery systems.
Comprehensive pollution control measure.
Major sources of raw materials
Raw Materials SourceIron Ore Lumps & Fines Bacheli, Chattisgarh/Gua,
JharkandBF Lime Stone Jaggayyapeta, APSMS Lime Stone UAEBF Dolomite Madharam, APSMS Dolomite Madharam, APManganese Ore Chipurupalli, APBoiler Coal Talcher, Orissa
21
Coking Coal
AustraliaMedium Coking Coal (MCC) Gidi/Swang/Rajarappa/Kargali
Water supply:-
Operational water requirement of 36 Mgd is being met from the Yeleru Water Supply Scheme.
Power supply:- Operational Power requirement of 180 to 200 MW is being met through captive Power Plant. The capacity of the power plant is 286.5 MW. Visakhapatnam Steel Plant is exporting 60MW power to Andhra Pradesh State Electricity Board.
Major Units:-
Major Units
Department
Annual
Capacity
(‘000 T)
Units (3.0 MT Stage)
Coke Ovens 2,261 4 Batteries of 67 Ovens & 7 Meters. Height
Sinter Plant 5,256 2 Sinter Machines of 312 Sq. Meters. grate
area each
Blast Furnace 3,400 2 Furnaces of 3200 Cu. Meters. volume
each
Steel Melt Shop 3,000 3 LD Converters each of 133 Cu. Meters.
Volume and Six 4 strand bloom casters
LMMM 710 4 Strand finishing Mill
WRM 850 4 Strand high speed continuous mill with
no twist finishing blocks
MMSM 850 6 STAND FINISHING MILL
Main Products of VSP:-
22
Main Products of VSP
Steel Products By-Products
Blooms Nut Coke Granulated Slag
Billets Coke Dust Lime Fines
Channels, Angles Coal Tar Ammonium Sulphate
Beams Anthracene Oil
Squares HPNaphthalene
Flats Benzene
Rounds Toluene
Re-bars Zylene
Wire Rods Wash Oil
Vision:
To be a continuously growing world class company
We shall
Harness our growth potential and sustain profitable growth.
Deliver high quality and cost competitive products and be the first
choice of customers.
Create an inspiring work environment to unleash the creative energy
of people.
Achieve excellence in enterprise management.
Be a respected corporate citizen, ensure clean and green
environment and develop vibrant communities around us.
Mission:-
To attain 16 Mt liquid steel capacity through technological up-gradation, operational efficiency and expansion; augmentation of assured supply of raw materials; to produce steel at international Standards of Cost & Quality; and to meet the aspirations of stakeholders.
Objectives:-
23
● Expand plant capacity to 6.3 million ton by 2011-12 with the Mission to expand further in subsequent phases as per the corporate plan.
Revamping existing Blast Furnaces to make them energy efficient to contemporary levels and in the process increase their capacity by 1 Mt, thus total hot metal capacity to 7.5 Mt
● Be amongst top five lowest cost steel producers in world by 2009-10.
● Achieve higher levels of customer satisfaction.
● Vibrant work culture in the organization.
● Be proactive in conserving environment, maintaining high levels of safety and addressing social concerns.
Core values:-
Commitment.
Customer Satisfaction.
Continuous Improvement.
Concern for Environment.
Creativity & Innovatio
Quality Policy:-
Visakhapatnam Steel Plant Employees are committed to meet the needs and expectations of our customers and other interested parties. To accomplish this, they will
Supply quality goods and services to customers delight.
Achieve quality of the products by following systematic approach
through planning, documented procedure and timely review of
quality objectives.
24
Continuously improve the quality of all materials, processes and
products.
Maintain an enabling environment, which encourages teamwork and
active involvement of all employees with their involvement.
Environment Policy:-
Visakhapatnam Steel Plant carrying out its operations without harming to the environment. To accomplish this, they will
Document, implement, maintain and continuously review the
environmental management system.
Comply with all the relevant environmental legislations, regulations
and other requirements.
Ensure continual improvement in the environmental performance
and prevention of pollution by minimizing the emissions and
discharges.
Maintain a high level of environmental consciousness amongst
employees.
Energy Policy:-
Visakhapatnam Steel Plant is committed to optimally utilize various forms of energy in a cost-effective manner to effect conservation of energy resources.
To accomplish this, they will:
Monitor closely and control the consumption of various forms of
energy through an effective Energy Management System.
Adopt appropriate energy conservation technologies.
Maximize the use of cheaper and easily available forms of energy.
OSHAS Policy:-25
Visakhapatnam Steel Plant is committed to occupational health and safety of employees and contract workers. To accomplish this, the will,
Document, implement, maintain and periodically review the
occupational health and safety management system including the
policy.
Comply with the relevant occupational health and safety legislations,
regulations and other requirements.
Ensure continual improvement in the environment performance and
prevention of pollution by minimizing the emissions and discharges.
Maintain a high level of environmental consciousness amongst
employees.
Review the environmental objectives and targets on a continuous
basis.
Human Resource Policy:-
Visakhapatnam Steel Plant is committed to create an organizational culture, which nurtures employee’s potential for the prosperity of the organization. To accomplish this, they will,
Identify development needs of the employees on a regular basis,
provide the necessary training and continually evaluate and monitor
the effectiveness of the training so that the quality of the training
also gets updated.
Provide inputs to the employees for developing their attitude towards
work and for matching their competencies with organizational
requirements.
Create an environment of learning and knowledge sharing by
providing the means and facilities and also access to the relevant
information and literature.
Facilitate the employees for continuous development of their
knowledge base, skills, efficiency, innovativeness, self-expression and
behavior so that they contribute positively with commitment for the
26
growth and prosperity of the organization while maintaining a high
level of motivation and satisfaction.
Prepare employees through appropriate development programs for
taking up higher responsibilities in the organization.
Customer Policy:-
VSP will endeavor to adopt a customer-focused approach
At all times with transparency.
VSP will strive to meet more than the customer needs
and expectations pertaining to products, quality, and
Value for money and satisfaction.
VSP greatly values its relationship with customers and
would make efforts at strengthening these relations for
Mutual benefit.
I.T. Policy:-
RINL/VSP is committed to leverage Information Technology as the
vital enabler in improving the customer-satisfaction, organizational
efficiency, productivity, decision-making, transparency and cost-
effectiveness, and thus adding value to the business of steel
making. Towards this, RINL shall:
Follow best practices in process Automation & Business Processes
through IT by in-house efforts / outsourcing and collaborative efforts
with other organization / expert groups / institutions of higher
learning, etc., thus ensuring the quality of product and services at
least cost.
Install, maintain and upgrade suitable cost-effective IT hardware,
software and other IT infrastructure and ensure high levels of data
and information security
Major Departments:-
27
Raw Material Handling Plant:
VSP annually requires quality raw materials viz. Iron Ore fluxes
(Lime stone, Dolomite); coking and non coking coals etc. to the tune of 12-
13 Million Tones for producing 3 Million Tones of Liquid Steel. To handle
such a large volume of incoming raw materials received from different
sources and to ensure timely supply of consistent quality of feed materials
to different VSP consumers, Raw Material Handling Plant serves a vital
function. This unit is provided with elaborate unloading, blending, stacking
& reclaiming facilities viz. Wagon Tipplers, Ground & Track Hoppers, Stock
yards Crushing plants, Vibrating screens, Single/ twin boom stickers, wheel
on boom and Blender reclaimers. In VSP peripheral unloading has been
adopted for the first time in the country.
The Raw Material Handling Plant (RMHP) Department procures the
different raw materials from various sources. The following are the
important raw material handled by the RMHP Department.
Coke Oven Department:-
The main function of this department is to convert the coal in to
coke, which is received from RMHP Department.
Coke is a hard porous mass obtained by functional distillation of coal
in absence of air at a temperature above 125oC for a period of 16-18 hours.
It is used as a fuel and reducing agent for reduction of iron ore in blast
furnace. The following are the parameters of Coke Ovens:
Number of batteries 4
Number of ovens in
batteries
67
Coal handling capacity of
ovens
31.6 tones
Dimensions of oven 16m length x 7m
height
28
Besides coke production, a number of coal chemicals are being extracted in
coal chemical plants. The coal chemicals are tar, benzyl and ammonia
based products. The coal is not consumed directly because coke helps in
reducing the pollution.
29
Sinter Plant Department:-
Sinter is a hard and porous lump obtained by agglomeration of lines
of iron ore, coke, limestone and metallurgical waster. This department by
not wasting the powder and small pieces of iron ore coal manganese,
dolomite and limestone makes Sinter Cakes and put it for reuse. This
increases the productivity of Blast Furnace, improves the quality of pig iron
and decreases the consumption of coke rate.
30
Blast Furnace:-
Pig iron/hot metal is produced in blast furnace. The furnace is
named as blast furnace as it is running with blast at high pressure with a
temperature of 1150oC.
Raw materials required for iron making are iron ore, sinter coke and
limestone. For one tone of hot metal production, 310Kgs. iron ore,
1390Kgs. sinter and 627Kgs. of coke with some other additives.
For production of pig iron/hot metal there are two blast furnaces
named Godavari and Krishna. They are of the largest and most modern
furnaces in the country.
31
Steel Melt Shop:-
Hot metal produced in blast furnace contains impurities like carbon,
sulphur, phosphorus, silicon, etc.; these impurities will be removed in steel
making by oxidation process.
There are three LD converters to convert hot metal in to steel, after
the conversion of hot metal in to steel, the steel is subjected to
homogenization treatment and cast in to blooms in continuous casting
machines.
Rolling Mills:-
Blooms cannot be used as they are in daily life. These blooms have
to reduce in size and properly shaped to fit for various jobs. Rolling is one
of the mechanical processes to reduce larger size sections in to smaller
cones. The cast blooms are heated and rolled in to various long products of
32
different specifications at three high capacity sophisticated high-speed
rolling mills.
Wire Rod Mill:-
WRM is a stand mill and is fully automated with computers. The mill
consists of 2.5 stands and a capacity of 850,000 tonnes per annum. The mill
product mix includes rounds and ribbed wire in the sizes of 5.5 mm to 12.7 mm dia.
wire rods are made in coil having maximum weight of 1200 Kgs. Liquid Steel
produced in LD Converters is solidified in the form of blooms in continuous Bloom
Casters. However, to homogenize the steel and to raise its temperature, if needed,
steel is first routed through, Argon rinsing station, IRUT (Injection Refining & Up
temperature) / ladle Furnaces.
Wire Rod Mill is fully automated & sophisticated mill. The billets are rolled
in 4 strand, high-speed continuous mill having a capacity of 8, 50,000 Tonnes of
Wire Rod Coils. The mill produces rounds in 5.5 - 14 mm range and rebars in 8, 10
& 12 mm sizes. The mill is equipped with standard and Retarded Stelmore
controlled cooling lines for producing high quality Wire rods in Low, Medium &
High carbon grade meeting the stringent National & International standards viz.
BIS, DIN, JIS, BS etc. and having high ductility, uniform grain size, excellent surface
finish.
33
Medium Merchant & Structural Mill (MMSM):
This mill is a high capacity continuous mill. The feed material to the
mill is 250 x 250 mm size bloom, which is heated to rolling temperatures of
1200 °C in two walking beam furnaces. The mill is designed to produce
8,50,000 tons per annum of various products such as rounds, squares,
flats, angles (equal & unequal), T bars, channels, IPE beams I HE beams
(Universal beams)
AUXILIARY FACILITIES:-
Power Generation & Distribution:
The average power demands at all units of VSP when operating the
full capacity will be 221 MW. The captive generation capacity of 270 MW is
sufficient to meet all the plant needs in normal operation time. In case of
partial outage of captive generation capacity due to break down, shutdown
or other reasons. The short fall of power is availed from APSEB grid. The
agreement with APSEB provides for exporting of surplus power to APSEB.
The captive generating capacity comprises of
- TPP -247.5 MW (3x60 MW + 1 X 67.5 MW)
- Back pressure Turbines (C&CCD)* - 2 x 7.5 MW
- Gas Expansion Turbines (BF / ces)* - 2x12 MW
(*Power availability from BPT & GET is around 22MW)
34
Power plant also meets the Air Blast requirements of Blast Furnaces thro' 3
Turbo blowers each of 6067 NM 3 / hr capacity.
Power from APSEB is received at Main Receiving Station thro'
220KV overhead distribution lines. The entire plant is configured as 5
electrical load blocks (LBSS 1 to 5) and step-down substations are
provided in each block with 220 KV transformers to step down to
33/11/6.6 KV for further distribution.
Traffic Department:-
A steel plant of the size of VSP has to handle around 60 to 65 MT
traffic comprising of incoming traffic in the form of raw materials and
outgoing traffic in the form of finished or saleable steel, and also the in
process traffic such as cast pig iron, mill scrap, hot metal.
Of this 50% is transported by belt conveyors, 45% by Rail Transport
and 5% by Road. VSP has the distinction of having peripheral unloading
system for the 1st time in Steel Industry.
Engineering shops & Foundry (ES & F):-
Engineering Shops are set up to meet the requirements of Ferrous &
Non Ferrous spares of different departments. This complex is divided into
1. Forge Shop 2. Structural shop 3. Foundry 4. Central machine shop 5.
Wood Working Shop and 6. Utility Equipment Repair Shop (UERS).
The Forge shop is designed for production of shafts, coupling
flanges etc. and also of forge shapes such as crusher hammer heads,
special bolts, nuts etc. In the Structural shops the fabricated structural of
about 4500 Tonnes are produced annually and the input consisting of
sheets, plates, channels, angles beams etc. In Foundry Iron castings up to
a weight of 5 tons and non-ferrous casting up to a weight of 1 ton are
produced. 2600 Tonnes of iron castings and 200 tones of non-ferrous
castings are produced annually. In steel foundry, steel casting up to
maximum piece weight of 10T is produced. Steel ingots up to 1.3 Tonnes
for forging are also produced.
In the Central Machine Shop, various spares are made. The
machining section has over 100 major machine tools including lathes,
milling, boring, planning, slotting, shaping, grinding and other machines.
The Wood working Shop manufactures patterns for foundries. The shop will
require 300 Cu.m. Per year of wooden patterns.
35
Central Maintenance Electrical:-
Maintenance of all H.T motors, L.T motors and DC motors of above
200KW. There are 810 such large rotating electrical machines spread
throughout the plant including 3 Nos. of 60 MW Turbo-Generators, 1 No of
67.5M TG in TPP, 2 no's of Back Pressure Turbo Generators of 7.5 MW each
and 2 Nos. of Gas Expansion Turbo- Generator of 12 MW each. The services
provided are as mentioned below.
a) Repairs, Maintenance and condition monitoring of all rotating
Electrical machines of the plant. The job includes transportation,
Overhauling and re-erection with precision alignment.
b) Maintenance of Electrics of all streetlights, Tower lights and Weigh
Bridges throughout the plant.
Electro Technical Laboratory:-
1) Repairs all the defective electronic PCB’s, which are taken out from
the equipment during their functioning.
2) Procures and arranges spare PCB’s for the equipment of PLC’s and
drive controls for motors in the plant and also for UPS systems.
3) Involves in the plant modernization activities and up gradation of
equipment.
Electrical Repair Shop (ERS):
ERS is a central repair shop to carry out repair activities like
overhauling, rewinding, testing etc., of various types of AC Motors, DC
Motors, HT Motors, Submersible pumps, Distribution transformers, Welding
Machines, Control Transformers, Lifting magnets, Coils etc., of the plant.
The Main Functions of ERS are:
a) Overhauling of motors
b) Rewinding of motors, magnets, transformers, pumps, coils etc.
c) Testing of Electrical equipment
d) Emergency Site Repairs
36
e) Performance assessment of electrical motors
Utilities Department:-
Utilities dept. Consists of 1. Air Separation Plant 2. Compressor
Houses 3. Chilled water plants and Acetylene plants. The ASP is designed
to meet the maximum daily demand of gaseous oxygen, gaseous nitrogen
and gaseous argon. Compressor Houses produce Compressed Air required
for the operation of pneumatic devices, for instruments and controls,
pneumatic tools and for general purpose in the various production units of
Steel Plants. Chilled Water plants ( 2 No's ) produce chilled water required
for use in the ventilation and air conditioning system in areas such as
office rooms, electrical control room etc. Acetylene plant produces
Acetylene gas required for general purpose cutting and welding.
Quality Assurance and Technological Development (QA &TD):
The QA & TD dept. has been set up to take care of activities
pertaining to Quality Control of Raw Materials, Semi finished products and
finished products. The QA & TD labs are provided at major department like
CO&CCP, SP, BF, SMS, and Rolling Mills etc., in addition to Central
Laboratory. The department monitors the process parameters for
production of quality products. QA & TD carries out analysis, testing and
final inspection including spark testing of finished products and assigns
grades to them.
Calcining & Refractory Material Plant:
CRMP consists of two units - Calcining Plant & Brick Plant. In
Calcining plant limestone & dolomite are calcined for producing lime &
calcined dolomite, which are used for refining of steel in the converters.
Roll shop & Repair shop:
37
Roll shop & Repair shop is in the complex of Rolling Mills catering to
the needs of mills in respect of roll assemblies, guides few Maintenance
spares and roll pass design. Geographically this dept. is in three areas as
roll shop-1, Roll shop-II and Area Repair Shop. The main activities of this
shop is Roll pass Design, grooving of rolls, assembly of rolls with bearings,
preparation of guides and their service and manufacture / repair of mill
maintenance spares.
For the first time in the country, VSP has adopted CNC technology
for grooving of steel rolling mill rolls. High constant respective accuracy,
higher productivity, use of standard tool for any groove turning,
elimination of the use of different templates, easier to incorporate groove
modification etc., are some of the advantages of CNC lathes over the
conventional one.
Plant Design:
Major functions of this unit are
Development of detailed Manufacturing Drawing and Replacement
Specification drawings
Suggesting New Designs and detailing by doing elaborate
engineering study and Analysis
Standardization
Works Contracts Department:-
Obtaining administrative approval on receipt of proposal from
indenting departments, tendering and awarding of work
Converting tender committee meetings and preparing
recommendations forwarding work.
Preparing COM/Board Note for decisions at those forum Participating
in claims and arbitration proceedings and legal cases pertaining to
contracts
Registration f agencies under various categories & classes of works
periodically.
38
FUNCTIONS OF VARIOUS DEPARTMENTS OF RINL/VSP: Directorate of Operations
Production Planning and Control:
Formulation of long term production plans and infrastructure support.
Formulation of Annual and Monthly production plan. This involves
detailed planning for product mix and value added steel along with
Marketing Dept.
Analyzing Plant performance against targets on a periodic basis and
taking necessary corrective actions.
Techno-economic and Quality :-
Formulation of techno-economic norms and energy management
parameters and reviewing the same against targets periodically.
Inputs and Basic Infrastructure:-
Long term and short term planning for procurement of raw materials
like Imported Coking Coal (ICC), Medium Coking Coal (MCC), Boiler
Coal, Iron Ore Fines and Iron Ore Lumps etc.,
Formulation of Annual Inward and Outward traffic movement plan for
raw materials and finished products in consultation with Marketing
and Material Management Depts.
Repairs and Maintenance Planning:
Planning of major Capital Repairs, Shutdowns, Spares requirement
and ensuring preparedness before taking up the repairs.
Mines planning:-
Formulation of annual and monthly production plans for BF limestone,
BF grade dolomite, Mn Ore and Sand at VSP Captive Mines.
Monitoring of production and dispatch of Limestone, Dolomite, Mn Ore
and Sand from Captive Mines.
Projects planning:-
39
Long and short term planning for all developmental schemes of capital
nature comprising modernization and technology up-gradation.
Planning and implementation of Additions, Modifications and
Replacement (AMR) schemes.
Expansion of Plant Capacity from 3.0 Mt liquid steel to 6.3Mt.
Research and Development:-
Identification of Technological Improvement scopes for various
processes and plan for adoption of them by acquiring design and
know-how capability.
Indigenous development of technology involving laboratory
investigation.
Development of new grades and products in coordination with
marketing dept.
Information Technology:-
Formulation of Organizational IT-Policy, IT-Security Policy and IT-
Vision.
Identification of IT enabled projects for various processes and
implements them.
Budget plan and control:-
Identification of Budget requirement under various heads.
Control of the Budget and Spares, Consumables & Raw Materials
Inventory.
Systems and Procedures:-
Streamlining the contract management system to ensure consistency
of approach and adoption of sound principles of contract
management.
40
Ensuring the implementation and maintenance of quality management
system requirements for ISO 9001:2000 Certificate.
Monitoring pollution control activities of the Plant and interaction with
the State and Central Pollution Control Board.
Project Division:-
Design & Engineering Department:-
§ Liaisoning with Consultants and Government Authorities in connection
with designs, specifications, approval of drawings and Liaisoning work
for various types of clearances.
§ Preparation of drawings, design and specification for AMR and Non-
AMR jobs.
§ Assisting indenting departments in technical discussion with parties
and preparation of technical recommendation.
§ Layout clearances of various facilities coming in the Plant and
Township.
§ Operation of Consultancy contracts.
Construction Department:-
§ Exercising supervision of work at sites both for quality and quantity
checks.
§ Preparation of contractor’s bills, processing of extra items and closure
of contracts.
§ Liaisoning with suppliers, MM department, Design & Engineering
Department and Stores in connection with progress of work at site.
§ Arranging PAT/FAT will all concerned departments like works, design,
consultants and suppliers in terms of contract and handing over the
unit to works department for operation.
41
Contracts Department:
§ Awarding of contract from the point on receipt of administrative
approval from indenting departments.
§ Conducting commercial discussions with parties.
§ Arranging Tender Committee meetings and preparing recommendations
for awarding work.
§ Preparing COM/Board Note for decisions at those forms.
§ Participating in claims and arbitration proceedings.
Project Monitoring Department:-
§ To monitor the physical and financial progress of all the works
executed by Construction department.
§ To monitor the progress of works executed by D&E as well as
Contracts department.
§ Preparation of various types of reports for information of Government
and different levels of Management.
§ Interaction with departments and consultant for updating the
schedules and networks for Project Monitoring.
Directorate of Finance & Accounts
Making arrangement for long-term fund requirements.
Accounting of all minority transactions and preparation of financial
statement of the company and getting the same audited as required
under law.
Maintaining records with regard to the cost of products produced by
the company.
Release of payments to suppliers/providers of goods and services.
Release of salaries to the employees.
According concurrence to proposals for investments & expenditure as
per the policies, procedures and the Delegation of Powers.
42
Conduct Internal Audits, Stock Verification and Statutory compliance.
Making working capital arrangements.
Submission of periodical reports to banks as per their sanctioned
terms.
Organizing for payment of Central Excise, Sales Tax, Income Tax and
other statutory payments.
Directorate of Personnel
Personnel Department:-
Manpower Planning,
Employees’ induction,
Service matters, policy & rules
Industrial relations,
Employees’ welfare
Corporate Social Responsibility (CSR),
Replies to parliamentary questions,
Official Language implementation
Legal Affairs:
Legal Affairs deals with all legal matters including arbitration,
coordination with Standing Councils, Legal Advices etc.
Management Services:
Quality Circle,
Suggestion Scheme,
Incentive Scheme,
Reward Scheme,
Procedural Orders etc.
43
Training & HRD:-
Leadership Training,
Training on Motivation and Attitude,
Team Building
Skill Training.
Induction and Orientation,
Plant Practice Lectures,
Basic Engineering Lectures,
Plant Specialized Training,
Management Development.
3.18 Corporate Strategic Management (CSM):-
CSM is a “think tank” of the organization. The Department is
engaged in formulation of VMO (Vision, Mission & Objectives) of the
organization and developing the strategy to achieve VMO. It has various
wings which inter-alia includes Knowledge Management Cell (KM Cell). It
has also developed the Corporate Plan of RINL. It takes up strategic tasks
of the organization.
Town Administration & Administration:-
Matters relating to Land & State,
Civil Maintenance,
Electrical Maintenance,
Water Supply,
Roads and Drain Maintenance,
Horticulture and Afforestation,
Peripheral Development and
Medical & Health Services:-
The Medical & Health Services Division of RINL consists of Visakha Steel
General Hospital (VSGH) & Peripheral Units viz. Pedagantyada Health
44
Center (PGHC), Health Center – II, Occupational Health Services & Research
Center (OHSRC), Emergency Unit – I & II and Hospitals in Mines –
Jaggayyapeta Limestone Mines and Madharam Mines. The special features
of Visakha Steel General Hospital are:
Full fledged Modern American Designed ICU and MBU capable of
treating 6 patients at a time.
Full fledged Modern Radiology with Central A/c systems
Well equipped Path. Lab with Blood bank facility
Cluster type Wards & Casualty with Central Nursing Station
Modern Operation Theatre couples with Shadow less cold lights and
100% bacterial free A/c system
Directorate of Commercial:-
Marketing Department:-
It has 24 no. of Branch Sales Offices all over India and four Regional
Offices viz. North Delhi, South – Chennai, West – Mumbai, East –
Kolkata and Headquarter Sales. Main Activities of Marketing are as
follows:
Collecting Market feedback and Customers requirements for the
preparation of Annual Plan in coordination with Works Department,
for the sale of Pig Iron Steel and Byproducts
Preparation of Marketing Policies
Finalization of Long Term Contracts, MOUs, Spot sale agreements
etc., in Domestic and Export Markets
Preparation of Monthly Rolling Plans in coordination with Works
Department for meeting the sale commitments
Processing of Materials like straightening of coils, cutting, bending,
bundling, packaging etc., at the plant premises and in branches to
meet customers as well as transportation requirements
Dispatch of products to various stockyards by road or rail or to
customers from the plant on direct dispatch basis
Operation of the contracts for transportation of products by road
and stockyard handling/ consignment agency contracts for domestic
45
sales, stevedoring contracts and third party inspection agency for
exports
Sale of products at branches, Headquarters and on direct dispatch
basis to the customers in domestic markets and on Ex-works and fob
Visakhapatnam basis in exports subject to tying up of commercial
and financial terms and conditions. Ensure documentation as per the
procedures and as per the statutory requirements
Rendering after sales services, obtaining customer feedback and
Customer Relations Management.
Materials Management Department:-
Procurement of all materials such as Raw materials, Spares and
consumables required for the entire Plant Operations.
To enter into long term agreements for supply of major & minor raw
materials with indigenous and imported suppliers.
To effect economy in the cost of materials by purchasing materials of
the right quality, in the right quantity at the right time from the
right source at the right place.
To arrange inspection of materials prior to handing over to
Production Units to ensure quality materials only are issued to
Production Units.
Storage of materials & issue the same to the Production Units as per
their requirement.
To develop and encourage ancillary industries so that the availability
of the materials at right time is ensured.
46
MILE STONES OF THE ORGANIZATION:-
Sl.
No.
Date Milestone
1 17-04-1970
Prime Minister of India Announced in Parliament to
construct new steel plant at Visakhapatnam
2 June 1970 Site selection committee appointed
3 30-11-1970 Committee report approved for site
4 20-01-1971 Foundation stone laid by Prime Minister
5 27-02-1971
Consultant appointed Feasibility reports submitted in
1972 & other investigation carried out
6 07-04-1974 First block of land taken over for VSP
7 15-10-1977 Detailed Project report submitted by consultant
8 24-05-1979 Public investment aboard accords approval for 3.4 million
tonnes steel project
9 12-06-1979 Inter-Government agreement signed between India
erstwhile USSR at Moscow for the co-op in the
construction of VSP
10 19-10-1979
Government approved setting up of VSP. Soviet side
carried out the revision of details project work
11 January
1980
Site levelling work started
12 30-11-1980
M. N. Dastur & co principal consultant submits the
comprehensive revised detailed project report
13 06-01-1981
Expert committee submits Recommendations for approval
of comprehensive revised detailed project report with
modifications
14 05-02-1981
Contract signed with erstwhile Soviet Union for
preparation of working drawings for Coke Oven, Blast
Furnace Sinter plant.
15 23-02-1981
Comprehensive revised detailed project report along
with expert committee recommendations approved
16 10-07-1981 Protocol signed with erstwhile Soviet Union for supply
of equipments and specialists
17
23-01-1982
To Blast Furnace foundations
47
26-01-1982
(First mass concreting in the project)
18 01-02-1982 Zero date of construction of the project
19 18-02-1982 RASHTRIYA ISPAT NIGAM Limited formed
20 29-01-1987
Commissioning of structural shop with this
commissioning of various auxiliary units commenced.
21 06-09-1989
Coke Oven battery # 1 starts pushing of come with this
the commissioning of metallurgical units started
22 14-11-1989 Sinter Plant (Machine 1) commissioned
23 28-03-1990 “GODAVARI” the first Blast Furnace commissioned
24 03-05-1990 Prime Minister decided “GODAVARI” to the nation
25 06-09-1990
The first converter and the first continuous casting
machine of the steel melt shop started production
26 28-09-1990 Billet production in the light and medium merchant mill
started.
27 21-11-1990 Wire rod mill commissioned
28 04-03-1991 The second converter commissioned
29 30-06-1991 Yarada water supply scheme made obey for supply of
VSP
30 28-10-1991 First production commences in the plant of Light &
Medium merchant mill
31 31-10-1991 Coke Oven battery # 2 commissioned
32 27-12-1991 Sinter Machine # 2 commissioned
33 20-03-1992 Medium merchant and Structural mill commissioned
34 21-03-1992 “KRISHNA” Blast Furnace # 2 commissioned
35 July 1992 Coke Oven batter # 3 commissioned
36 July 1992 Converter # 3 of steel melt shop commissioned of all the
units of the 3 million tonnes plant
37 July 1992 Dedication of plant to the nation by the Prime Minister
38 1992-93 Indira Priyadarshini Vriksha Mitra Award
39 1992-93
&
1993-94
Nehru Memorial National Award for Pollution Control
40 1994-95 EEPC Export Excellence Award
41 1991-94 Ispat Suraksha Puraskar (First Prize) for longest Accident
free period
42 1995-96 CII Energy Conservation Award
43 1996 Steel Ministers’ Trophy for “Best Safety Performance”
48
PERFORMANCE OF RINL AT A GLANCE:
PRODUCTION PERFORMANCE:
Achieving new targets year after year in production has
become a part of the work culture.
The production performance of VSP in the last four years is as
follows:
YEAR HOT METALLIQUIDSTEEL
SALABLESTEEL
2000-2001 3165 2909 2507
2001-2002 3485 3080 2757
2002-2003 3941 3356 3056
2003-2004 4055 3508 3169
2004-2005 3920 3560 3173
2005-2006 4153 3603 3237
2006-2007 4046 3606 3290
49
2007-2008 39133322 3074
2008-2009 3546 3145 2701
PRODUCTION PERFORMANCE CHART– (‘000 TONS):
Figure of production performance-3.a
50
COMMERCIAL PERFORMANCE:
The commercial performance of VSP for the past four years is as follows:
Commercial Performance (In crores):
YEAR
SALES
TURNOVER
DOMESTIC
SALES EXPORTS
2000-2001 3436 3122 322
2001-2002 4081 3710 371
2002-2003 5059 4433 626
2003-2004 6174 5406 768
2004-2005 8181 7933 248
2005-2006 8469 8026 443
2006-2007 9131 8487 424
2007-2008 10433 9878 555
2008-2009 10411 10332 78
(Rupees in Crores)
51
Commercial Performance Line Chart (In crores):
Figure of commercial performance-3.b
FINANCIAL PERFORMANCE:
VSP had to bear the burnt of huge project cost right from the day of
its inception. This has affected the company’s balance sheet due to very
high interest burden. The company, in spite of making operating profit
every year had to report net loss during all financial years. This on the
other hand had resulted in making VSP to take great care in planning the
financial resources.
52
The financial performance of VSP for the past ten years is as follows:
FINANCIAL PERFORMANCE (In crores):
YEAR
GROSS
MARGIN
CASH
PROFIT
NET
PROFIT
2000-2001 504 153 (-) 291
2001-2002 690 400 (-) 75
2002-2003 1049 915 521
2003-2004 2073 2024 1547
2004-2005 3271 3260 2008
2005-2006 2383 2355 1252
2006-2007 2633 2584 1363
2007-2008 3515 3483 1943
2008-2009 2356 2267 1336
FINANCIAL PERFORMANCE LINE CHART (In crores):53
Figure of Financial performance-3.c
54
Manpower at a Glance in VSP
2004-2005 2005-2006
As on 31/3/2005 As on 30/04/2006 As on 31/05/2006Executives
Works Projects
MinesOthers
32571994145
511067
32252142227
531103
35202140227
531100
Junior officersWorks
ProjectsMines
Others
1255925
2120
280
1105776
2722
280
1104775
2722
280Non Executives Works
ProjectsMines
Others
1210110778
73289961
1193210673
74281904
1192310676
62281904
Total Works Projects
MinesOthers
1661313697
239360
2317
1656113590
328356
2287
1654713591
316356
2284
55
Manpower at a Glance in VSP
2006-2007 2007-2008 2008-2009
As on 31/3/2007 As on 31/03/2008 As on 31/03/09Executives
Works Projects
MinesOthers
38602362263
561179
42082577275
641290
45342745316
711402
Junior officersWorks
ProjectsMines
Others
814559
1822
215
761564
1021
166
684504
1322
145Non Executives Works
ProjectsMines
Others
1172710533
642732857
1144910302
61263823
1200710476
63267
1201Total Works
ProjectsMines
Others
1640113454
345351
2251
1641613443
346348
2279
1722513725
392360
2748
56
Organisational Chart of Visakhapatnam Steel Plant
CHAIRMAN-CUM-MANAGING DIRECTOR
57
ED(Works)
ED(M M)
GM(Mktg.)
GM(Mines)
DGM(IT)
GM (Maint.)
GM(Automn.)
GM (IT & SC)
GM(Power)
ED(Projects)
GM(PM&MIS)
ED(Projects)
GM(CSM)
DGM(CA & CS)
DGM(F&A)IA & SV
ED(F & A)
GM(Projects)
GM (Operations)
GM (Elect.)
Director(Projects)
Director(Personnel)
Director(Finance)
Director(Commercial)
Director(Operations)
CVO
GM(M & HS)
GM(MS)
Director(Projects)
ED(P & IR)
GM(Corp. Pers&Coord.)
GM(P & A)
GM(Trg&HRD
)Comm.dt(CISF)
GM(Vigilance)
GM (Corp Planning)
GM(TIC)
GM (CD & Logistics)
GM(Const.)
GM(Utilities)
GM(E & S)
58
CHAPTER- IV
PROJECT PLANNING
4.1 INTRODUCTION:- An efficient allocation of capital is the most important finance
function in the modern times. It involves decisions to commit the firm’s
funds to the long - term assets. Capital budgeting for investment decisions
59
is of considerable importance to the firm since they tend to determine its
value by influencing its growth, evaluation of capital budgeting decisions.
4.2 NATURE OF INVESTMENT DECISIONS:- The investment decisions of a firm are generally known as the capital
budgeting, or capital expenditure decisions. A capital budgeting decision
may be defined as the firm’s decision to invest its current funds most
effectively in the long- term assets in anticipation of an expended flow of
benefits over a series of years. The long-term assets are those that affect the
firm’s operational beyond the one year period.
Investment decisions generally include expansion, acquisition
modernization and replacement of the long-term assets. Sale of a division or
business (Divestment) is also an investment decision. Decision like the
change in the methods of sales distribution, or an advertisement campaign
or a research and development program have long-term implications for the
firm’s expenditures and benefit, and therefore, they should also be
evaluated as investment decisions.
The following are the features of investment decisions.
The exchange of current funds for future benefits.
The funds are invested in long-term assets.
The feature benefits will occur to the firm over a series of years.
4.3 OBJECTIVES OF INVESTMENT DECISIONS:-
Understand the nature and importance of investment
decisions.
Explain the methods of calculating net present value (NPV) and
internal rate of return (IRR)
Show the implicated of net present value (NPV) and internal
rate of
return (IRR)
Describe the Non- DCF evaluation Criteria. Payback period and
accounting rate of return (ARR).
Institute the competition of the discounted payback.
Compare and contract NPV and IRR and emphasize the
superiority of
NPV rule.
60
4.4 PROCESS OF INVESTMENT DECISIONS:-
Capital Budgeting is a complex process which may be divided into the
following phases.
Capital Budgeting Process:-
1. Identification of investment proposal.
2. Screening the proposal.
3. Evaluation of various proposals.
4. Fixing priorities.
5. Final approval & preparation of capital expenditure
budget.
6. Implementing proposal.
7. Performance review.
Identification of investment proposal:-
The capital budgeting process begins with the identification of
investment proposal. The proposal or idea about potential investment
opportunities may originate from the top of management or may come from
the rank and file workers of any department or from any officers of the
organization. The departmental head analyses the various proposals in the
light of the corporate strategies and submits the suitable proposals to the
capital expenditures planning committee in case of large organization or to
the officers a concerned with the corporate strategies and submits the
suitable proposals to the capital expenditures. Capital expenditures
planning committee in the case of large organization or the officers
concerned with the process of long-term investment decision.
Screening the proposal:-
The expenditures planning committee screens the various proposals
received from different departments. The committee view these proposals
61
form various angles to ensure that these are in accordance with the
corporate strategies or selection criterion of the firm and also do not lead to
the department imbalances.
Evaluation of various proposals:-
The next step in the capital budgeting process is to evaluate the profitability
of various proposals. There are many method which may be used for this
purpose such as pay back period method, rate of return method, net present
value method, internal rate of return, etc. All these method of evaluating
profitability of capital investment proposals have been discussed in detail
separately in the page of this chapter. It should be classified as below.
i. Independent proposals.
ii. Contingent or dependent proposals and
iii. Mutually exclusive proposals.
Fixing priorities:-
After evaluating various proposals, the unprofitable proposals may be
rejected straight away. But it may not be possible for the firm to invest
immediately in the all the acceptable proposals due to limitation of funds.
Hence, it is very essentials to rank the various proposals and to establish
priorities after considering urgency, risk and profitability involved there in.
Final approval & preparation of capital expenditure budget:-
Proposals meeting the evaluation and other criteria are finally approved to
be included in the capital expenditure budget. However, a proposal
involving smaller investment may be decides at the lower levels for
expenditure action. The capital expenditures a budget lays down the amount
of the estimation expenditures to be incurred on fixed assets during the
budget period.
62
Implementing proposals:-
Translating an investment proposal into a concrete project is a
complex, time consuming, and risk- fraught task.
1. Adequate formulation of projects
The major reason for delay is insinuate formulation of projects put
differently, if necessary homework in terms of preliminary comprehensive
and detailed formulation of the project.
2. Use of the principle of responsibility accounting
Assigning specific responsibility to project managers for completing
the project within the defined time-frame and cost limits is helpful for
expeditious execution and cost control.
3. Use of Network Techniques
For project planning and control several network techniques like
PERT (Programme Evaluation Review Techniques) and CPM (Critical Path
Method) are available.
Performance Review:-
Performance review, or post – completion audit, is a feedback device.
It is a means for comparing actual performance with projected
performance. It may be conducted, most appropriately. When the
operations of the project have stabilized.
It is useful several ways.
I. It throws light on how realistic were the assumptions underlying the
project.
II. It provided a documented log of experience that is highly valuable for
decision making.
63
4.5 Importance of Investment Decisions:-
Investment decisions require special attention because of the
following reasons.
They influence the firm’s growth in the long term.
They affect the risk of the firm.
They involve commitment of large amount of funds.
They are irreversible, or reversible at substantial loss.
They are among the most difficult decisions to make.
4.6 Types of investment decisions:-
There are many ways to classify investments one classification is as
follows;
Expansion of existing business.
Expansion of new business.
Replacement and modernization.
Expansion and diversifications
A company may add capacity to its existing product lines to expand
existing operations. For example, the Visakhapatnam Steel Plant (VSP) may
increase its plant capacity to manufactures more liquid steel. It is an
example of related diversification.
A firm mat expand is activities in a new business expansion of a new
business requires investment in new products and new kind of production
activating within the firm. If packing manufacturing company invests in a
new plant and machinery to produce ball bearings, which the firm has not
manufactured before, this represents expansion of new business or
unrelated diversification. Sometimes a company acquires existing firms to
expand its business.
Replacement and modernization.
The main objective of modernization and replacement is to improve
operating efficiency reduce costs. Cost savings will reflect in the increased
profits, but the firm’s revenue may remain unchanged. Assets become
outdated and absolute with technological changes. The firm must decide to
64
replace those assets with new assets that operate more economically.
Replacement decisions help to introduce more efficient and economical
assets and therefore, are also called cost- reduction investments.
How ever replacement decisions that involve substantial
modernization and technological improvements expand revenues as well as
reduce costs.
Yet another useful way to classify investments is as follows;
Mutually exclusive investments
Independent investments
Contingent investments
Mutually exclusive investments
Mutually exclusive investments serve the same purpose and compete
with each other. If one investment understands others will have to be
excluded. Accompany May, for example, either use a more labour- intensive,
semi- automatic machine, or employ a more capital intensive, highly
automatic machine for production.
Independent investments
Independent investments serve different purposes and do not
compete with each other. For example, a heavy engineering company may
have been considering expansion of its plant capacity to manufacture
additional excavators and addition of new production facilities to
manufacture a new product.
Contingent Investments
Contingent investments are dependent projects; the choice of one
investment necessitates understanding one or more other investments for
example, if a company decides to build a factory in a remote, backward area,
it may have to invest in houses, roads, hospitals, schools, etc., and the total
expenditure will be treated as one single investment.
4.7 Investment Evaluation Criteria:-
65
Three steps are involved in the evaluation of investment.
Estimation of cash flows
Estimation of the required rate of return
(the opportunity cost of capital )
Application of a decision rule for making the choice.
Evaluation Criteria:-
A number of investment criteria (or capital budgeting techniques) are
in use in practice. They may be grouped in the following two categories.
Capital budgeting techniques:
Capital Budgeting Techniques
DCF Criteria Non – DCF Criteria
NPV I.R.R. P. IPaybac
k period
Accounting Rate of Return
66
Non DCF Criteria:-
Payback period (PB):
The payback period (PB) is one of the most popular and widely
recognized traditional methods of evaluating investment proposals. Pay
back is the number of years required to recover the original cash outlay
invested in a project.
If the project generates constant annual cash inflows, the payback
period can be computed by dividing cash outlay by the annual cash inflow.
Co : Initial Investment
C : Annual Cash in flow
In case of UN equal cash inflows, the payback period can be found out
by adding up the cash inflows until the total is equal to the initial cash
outlay.
Payback = Initial Investment Co Annual cash flow C
67
Accounting Rate of Return (ARR):
The accounting rate of return (ARR) also known as the return on
investment (ROI) uses accounting information, as revealed by financial
statements, to measure the profitability of an investment. The Accounting
rate of return is the ratio of the average after fax profit divided by the
average investment. The average investment would be equal to half of the
original investment if it were depreciated constantly.
A R R = x 100
DCF Criteria:
Net Present Valued Method (NPV):
The NPV present value (NPV) method is the classic economic method of
evaluating the investment proposals. If is a DCF technique that explicitly
recognizes the time value at different time periods differ in value and are
comparable only when their equipment present values- are found out.
N P V = - Co
Average income
Average
C1 + C2 + C3 + … … … + Cn
68
N P V = Σ - Co
Where
N P V = Net present value
Cfi = Cash flows occurring at time
k = the discount rate
n = life of the project in years
Co = Cash out lay
Internal Rate of Return (IRR):
The internal rate of return (IRR) method is another discounted cash
flow technique which takes account of the magnitude and thing of cash
flows, other terms used to describe the IRR method are yield on an
investment, marginal efficiency of capital, rate of return over cost, time-
adjusted rate of internal return and soon.
N P V = Σ +
Where
Cfi = Cash flows occurring at different point of time
k = the discount rate
n = life of the project in years
Co = Cash out lay
SV & WC = Salvage value and Working Capital at the end of the n years.
I R R = L + (H – L)
Ci (1+k)i
n
i = 0
Cfi SV+WC (1+k)i (1+k)n
n
i = 0
A (A – B)
69
Where
L : Lower discount rate at which NPV is positive
H : Higher discount rate at which NPV is negative
A : NPV at lower discount rate, L
B : NPV at higher discount rate, H
Profitability Index (PI):-
Yet another time- adjusted method of evaluating the investment
proposals is the benefit- cost (B/C.) ratio or profitability index (PI)
Profitability Index is the ratio of the present valued of cash inflows, at the
required rate of return, to the initial cash out flow of the investment.
P I =
Where PV: Present Value
4.8 Cost Effective Analysis:-
In the cost effectiveness analysis the project selection or
technological choice, only the costs of two or more alternative choices are
considered treating the benefits as identical. This approach is used when
the acquisition of how to minimize the costs for undertaking an activity at a
PV of cash inflow
Initial Cash
70
given discount rates in case the benefits and operating costs are given, one
can minimize the capital cost to obtain given discount.
4.9 Project Planning:
The planning of a project is a technically pre- determined set of inter
related activities involving the effective use of given material, human,
technological and financial resources over a given period of time. Which in
association with other development projects result in the achievement of
certain predetermined objectives such as the production of specified goods
& services?
Project planning is spread over a period of time and is not a one shot
activity. The important stages in the life of a project are:
It’s Identification
It’s initial formulation
It’s evaluation (Whether to select or to project)
It’s final formulation
71
It’s implementation
It’s completion and operation
The time taken for the entire process is the gestation period of the
project. The period of the project. The process of identification of a project
begins when we are seriously trying to overcome certain problems. They
may be non- utilization to overcome available funds. Plant capacity,
expansion etc
Contents of the project report:
1. Market and marketing
2. Site of the project
3. Project engineering dealing with technical aspects of the
project.
4. Location and layout of the project building
5. Building
6. Production capacity.
7. Work Schedule
72
Details of the cost of the Project:-
1. Cost of land
2. Cost of Building
3. Cost of plant and machinery
4. Engineering know how fee
5. Expenses on training Erection supervision
6. Miscellaneous fixed assets
7. Preliminary expenses
8. Pre-operative expenses
9. Provision for contingencies
CHAPTER- V
73
PROJECT FINANCE
74
Project financing is considered right from the time of the conception
of the project. The proposal of the project progress working capital, so, in
general a project is considered as a ‘mini firm’ is a part and parcel of the
organization.
5.1 Sources of Finance:
Loan Financing
Security Financing
Internal Financing
5.1.1. Loan Financing:
(a) Short- Term Loans & Credits
Short – Term Loans & Credits are raised by a firm for meeting its
working capital requirements. These are generally for a short period not
exceeding the accounting period i.e., one – year.
Types of Short Term Loans & Credits:
1. Trade Credit.
2. Installment Credit.
3. Advances.
4. Commercial papers
5. Commercial banks
6. Cash Credits
7. Over Drafts
8. Public Deposits.
(b) Term Loans:
Term loans are given by the financial institutions and banks, which
form the primary source of long term debt for both private as well as the
Government organizations. Term loans are generally employed to finance
the acquisition of fixed assets that are generally repayable in less than 10
75
years. In addition to short- term loans, company will raise medium term and
long term loans.
5.1.2. Security Financing:
Corporate Securities can be classified into two categories.
(a) Ownership Securities or capital stock.
(b) Creditor ship Securities or debt Capital.
(a) Ownership Securities or capital Stock:
Types of Ownership Securities or Capital Stock:
i) Equity Capital:
Equity Capital is also known as owner’s capital in a firm. The holders
of these shares are the real owners of the company. They have a control over
the working of the company. Different ways to raise the equity capital.
o Initial public offering.
o Seasoned offering
o Rights issue.
o Private placement
o Preferential allotment.
ii) Preference Capital:
These shares have certain preferences as compared to other type of
shares.
1. Payment of Divided
2. Repayment of the capital at the time of liquidation of the
company.
b) Types of Creditor ship Securities:
i) Debentures:
76
Debentures are an alternative to the term loans and are instruments
for raising the debt finance. Debenture holders are the creditors of a
company and the company and the company have the obligations to pay the
interest and principal at specified times. Debentures provide more
flexibility, with respect to maturity, interest rate, security and repayment
Debentures may be fixed rate of interest or floating rate or may be zero
rates. Debentures & Ownership Securities help the management of the
company to reduce the cost of capital.
5.1.3. Internal Financing:
A new company can raise finance only through external sources such
as shares, debentures, loans and public deposits. For existing company they
need to raise funds through internal source. Such as retained earnings
depreciation as a source of funds. Some other innovative source of finance.
Venture Capital
Seed Capital
Bridge Finance
Lease Financing
Euro- Issues
a) Equity Capital:
1. Infusion of Government equity either from budgetary resources or
from Steel Development Funds (SDF).
2. Induction of equity by agencies/ companies who are setting up
separate stand alone blast furnaces or blast furnace based steel
plant complexes without captive coke oven plant.
3. Equity by overseas buyer suppliers of coking coal.
4. Equity by overseas buyer of coke, whom may hedge initial capital
invested and assured by buy – back arrangement for limited
number of years.
b) Loan Capital:
77
1. Loan capital from financial installations like TDBI, IFCI, ICICI etc.,
guaranteed by the central Government who is the owner of RINI.
2. Surplus credit by major supplier of plant & equipment.
3. Providing loan by agencies that enter into an assured buy- back
arrangement at the terms and condition mutually agreed upon.
CHAPTER- VI
EVALUATION OF CAPITAL
BUDGETING
78
PROJECT EXPANSION OF VSP:
VSP is operating at 6.3 M.T. of liquid steel at present. It is framed to
Enhance its capacity to produce 6.3M.T of liquid steel by expansion.
The estimated cost of expansion is:
Approved cost: 8692 Crs (Base Jun, 05)
Debt component: 4346Crs.
Assumed in calculation as per rate as 5.5%.
How expansion will affect the capacity in positive way:
Project Schedule:
Divided in two stage Time
Stage –I 36 Months
Stage-II Structural mills -48 Months
79
Pay Back Period:
Sl.No Years
Income (Profit
After Tax)Depreci
ationCash
InflowsCumulative
Cash In Flows1 2005-06 1493 474 1967 19672 2006-07 1316 474 1790 37573 2007-08 1457 527 1984 57414 2008-09 2645 874 3519 92605 2009-10 3022 919 3941 132016 2010-11 3100 924 4024 172257 2011-12 3331 685 4016 212418 2012-13 3519 507 4026 252679 2013-14 3553 513 4066 29333
10 2014-15 3619 518 4137 3347011 2015-16 3686 524 4210 3768012 2016-17 3755 529 4284 4196413 2017-18 3839 535 4374 4633814 2018-19 3931 540 4471 50809
80
15 2019-20 4030 546 4576 55385$
(a) Cash Outlay : 8692
(b) Payback Period : INITIAL INVESTMENT
ANNUAL CASH FLOW
= 3 + 2951
3519
= 3.10 years
Pay Back Period:
It is assumed that the profit earning of the project will start from
2008-09.
Taken consideration of (incremental adjusted cash flow) i.e. expansion
Base year, for calculation PAY BACK PERIOD.
Estimated profits are taken from the data provided.
For CIF we have deducted depreciation from profit &then
Cumulative profit.
So the projected payback period is calculated as 3.10 years.
We should increase this period with same exception as there
May be any additional factor and other cause so rounding of
3.10 to 4 years will be right, so that it will give more assistance
To the calculation.
81
Average Rate of Return:
SL.No Years Income DepreciationCash Inflows (Before
depreciation)
1 2005-06 1967 474 1493
2 2006-07 1790 474 1316
3 2007-08 1984 527 1457
4 2008-09 3519 874 2645
5 2009-10 3941 919 3022
6 2010-11 4024 924 3100
7 2011-12 4016 685 3331
8 2012-13 4026 507 3519
9 2013-14 4066 513 3553
10 2014-15 4137 518 3619
11 2015-16 4210 524 3686
12 2016-17 4284 529 3755
13 2017-18 4374 535 3839
14 2018-19 4471 540 3931
82
15 2019-20 4576 546 4030
A R R = Average profit
x 100Average investment
Average Profit=Total cash inflows
No. of years
46296 = 3086.4
15
Average investment:
here the additional working capital is also taken the consideration while calculating the ARR.
Average investment = investment
+ Ad. WC2
8692 + 702
2
= 5048
A R R = 3086.4
x 1005048
= 61.14%
R O I = Average Annual profit
x 100Total initial investment
R O I = 3086.4
x 1008692
83
R O I = 35.51%
It is more calculation taking total profit and taking average of
it. It
Show the return on an average as what an average income of the firm
on
Long run basis with certain assumption 61.14% for any firm at long run is
Good but there must be some decrease as future is not certain.
84
NPV:
Sl.No YearsCash
Inflows DCF(19%)Present Values of
Inflows
1 2005-06 1967 0.840 1652.28
2 2006-07 1790 0.706 1263.74
3 2007-08 1984 0.593 1176.51
4 2008-09 3519 0.499 1755.98
5 2009-10 3941 0.419 1651.28
6 2010-11 4024 0.352 1416.45
7 2011-12 4016 0.296 1188.74
8 2012-13 4026 0.249 1002.47
9 2013-14 4066 0.209 849.79
10 2014-15 4137 0.176 728.11
11 2015-16 4210 0.148 623.08
12 2016-17 4284 0.124 531.22
13 2017-18 4374 0.104 454.90
14 2018-19 4471 0.088 393.45
15 2019-20 4576 0.074 338.62
Total Present Values of Inflows 15026.62
N P V = Total Present Value of Cash inflows – Total Outlay
= 15026.62 – 8692
= 6334.62
It is the factor of Re.1 calculation at the end of the year. It will be
Value of Re.1 at the end of the year which is based interest rate, cost of
Capital and market state which is called as discounted rate to get an
Discounted rate to get an approximate decision.
It should be taken in every calculation of project so that an
approximate. Decision can be taken. As it is more reliable the simple cash
inflows (profits).
85
Internal Rate of Return:
Discount rate taken as 18%
(in crores)
Sl.No YearsCash
Inflows DCF(18%)
Present Values of Inflows
1 2005-06 1967 0.847 1666.049
2 2006-07 1790 0.718 1285.220
3 2007-08 1984 0.609 1208.256
4 2008-09 3519 0.516 1815.804
5 2009-10 3941 0.437 1722.217
6 2010-11 4024 0.370 1488.880
7 2011-12 4016 0.314 1261.024
8 2012-13 4026 0.266 1070.916
9 2013-14 4066 0.225 914.850
10 2014-15 4137 0.191 790.167
11 2015-16 4210 0.162 682.020
12 2016-17 4284 0.137 586.908
13 2017-18 4374 0.116 507.384
14 2018-19 4471 0.099 442.629
15 2019-20 4576 0.084 384.384
Total Present Values of Inflows 15826.708
86
Discount rate taken as 35% (in crores)
SL.No YearsCash
Inflows DCF(35%)Present Values
of Inflows1 2005-06 1967 0.741 1457.5
2 2006-07 1790 0.549 982.71
3 2007-08 1984 0.406 805.5
4 2008-09 3519 0.301 1059.2
5 2009-10 3941 0.223 878.84
6 2010-11 4024 0.165 663.96
7 2011-12 4016 0.122 489.95
8 2012-13 4026 0.091 366.37
9 2013-14 4066 0.067 272.42
10 2014-15 4137 0.050 206.85
11 2015-16 4210 0.037 155.77
12 2016-17 4284 0.027 115.67
13 2017-18 4374 0.020 87.48
14 2018-19 4471 0.015 67.065
15 2019-20 4576 0.011 50.336Total Present Values of Inflows 7659.621
I R R =
L +
A - Cash out lay
X (H – L)
A-B
= 18 +
15826.708 - 8692
X (35-18)
15826.708 – 7659.6921
= 18 +7134.708 X 17
8167.016
= 18 + 0.874 X 17
= 32.85
In this calculation, is done on the basis of trail and errors. By taking
87
various percentage of (DCF).So that an appropriate percentage of Internal
Rate of Return can be judge out.
Calculated figure is 32.85%, so we can take it as 35% cause at market
Uncertainty.
Profitability Index Method:
Sl.No YearsCash
Inflows DCF(19%)Present Values of
Inflows1 2005-06 1967 0.840 1652.28
2 2006-07 1790 0.706 1263.74
3 2007-08 1984 0.593 1176.51
4 2008-09 3519 0.499 1755.98
5 2009-10 3941 0.419 1651.28
6 2010-11 4024 0.352 1416.45
7 2011-12 4016 0.296 1188.74
8 2012-13 4026 0.249 1002.47
9 2013-14 4066 0.209 849.79
10 2014-15 4137 0.176 728.11
11 2015-16 4210 0.148 623.08
12 2016-17 4284 0.124 531.22
13 2017-18 4374 0.104 454.90
14 2018-19 4471 0.088 393.45
15 2019-20 4576 0.074 338.62
Total Present Values of Inflows 15026.62
88
In calculation of P.I. simple income is taken in to consideration that’s why
P.I =1.73.
But it is not correct as per practical study. So discounted rate will help to
get
A good path to get an approximate P.I and it will be more reliable than old
Traditional approach.
P. I = Cash InflowsCash Outflows
=15026.62
8692
= 1.73
89
CHAPTER- VII
CAPITAL STRUCTURE
90
Framework for Capital Structure:
The FRICT analysis a financial structure may be evaluated from
various perspectives. From the owners’ point of view, return risk and value
are important consideration. From the strategic point of view, flexibility
assumes great significance. A sound capital structure will be achieved by
balancing all these considerations.
Flexibility:
The capital structure should be determined within the debt capacity
debt capacity of the company, and this capacity should not be exceeded. The
debt capacity of a company depends on its ability to generate future cash
flows, it should have enough cash to pay creditors’ fixed charges and
principal sum and leave some excess cash to meet future contingency. The
capital structure should be flexible. It structure should be flexible. It should
be possible for a company to adapt if warranted by a changed situation. It
should also be possible for a company to adapt its capital structure with a
minimum cost and delay if warranted by changed situation. It should also be
possible for the company to provide funds whenever needed to finance its
profitable activities.
Risk: The risk depends on the variability in the firm’s
operations. It may be caused by the macroeconomic factors and industry
and firm specific factors. The excessive use of debt magnifies the variability
of shareholders earnings, and threatens the solvency of the company.
Income: The capital structure of the company should be most
advantageous to the owners (Shareholders) of the firm. It should create
value; subject to other considerations, it should generate maximum returns
to the shareholders with minimum additional cost.
91
Control: The Capital structure should involve minimum risk of loss of
control of the company. The owners of closely held companies are
particularly concerned about dilution of control.
Timing: The capital structure should be feasible to implement given the
current and future conditions of the capital market. The sequencing of
sources of financing is important. The current decision influences the future
options of raising capital.
The FRICT (Flexibility, Risk, Income, Control and Timing) analysis
provides the general framework for evaluating a firm’s capital structure.
The particular characteristics of a company may reflect some additional
specific features. Further, the emphasis given to each of these features will
differ from company may reflect some additional specific features. Further
the emphasis given to each of these features will differ from company to
company. For example, a company may give more importance to flexibility
than control, while another company may be more concerned about solvency
than any other requirement. Furthermore, the relative importance of these
requirements may change with shifting conditions. The company’s capital
structure should, therefore, be easily adaptable.
APPROACHES TO ESTABLISHMENT TARGET CAPITAL
STRUCTURE
The capital structure will be planned initially when a company is
incorporated. The initial capital structure should be designed very carefully.
The management of Ht Company should set a Target Capital Structure and
the subsequent financing decisions should be made with a view to achieve
the target capital Structure. The company needs funds to finance its
activities continuously. Every time when funds have to be procured, the
financial manager weighs the pros and cons of various sources of finance
and selects the most advantageous sources keeping in view the target
92
capital Consequently, it is being increasingly realized that a company
should plan its capital structure to maximize the use of the funds and to be
able to adapt more easily to the changing conditions.
Theoretically, the financial manager should plan an Optimum Capital
Structure for his company. The optimum capital structure is one that
maximizes the market value of the firm. So far out discussion of the
optimum capital structure has been theoretical. In practice, the optimum
capital structure has been theoretical. In practice, the determination of an
optimum capital structure is a formidable task, and one has to go beyond
the theory. There are significant variations among industries and among
companies within an industry in terms of capital structure. Since a number
of factors influence the capital structure decision of a company, the
judgment of the person making the capital structure decision plays a crucial
part. Two similar companies may have different capital structures if the
decision- makers differ in their judgment of the significance of various
factors.
A totally theoretical model perhaps cannot adequately handle all
those factors, which affect the capital structure decision in practice these
factors are highly psychological, complex and qualitative and do not always
follow accepted theory, since capital markets are not perfect and the
decision has to be taken under imperfect knowledge and risk.
Elements of Capital Structure:
A company formulating its long-term financial policy should first of all,
analyze its current financial structure. The following are the important
elements of the company’s financial structure that need proper security and
analysis.
93
Capital Mix: Firms have to decide about the mix of debt and equity
capital. Debt capital can be mobilized from a variety of sources. How heavily
does the company depend on debt? What is the mix of debt instruments?
Given the company’s risks, is the reliance on the level and instruments of
debt reasonable? Does the firm’s debt policy allow it flexibility to undertake
strategic investments in adverse financial conditions? The firms and
analysis use debt ratios, debt-service coverage ratios, and the funds flow
statement to analyze the capital mix.
1. Net Income Approach (NI Approach):
Accounting to NI Approach, the debt in the capital structure influences
the total value of the enterprise. In other words the overall cost of capital as
well as the total value of the enterprise, in other words, the overall cost of
capital as well as the value of the firm would change with change in debt in
the capital structure.
NI Approach states that if the proportion of debt in the capital
structure in increased, the weighted average cost of capital would decrease
and the market value of the firm would increase. On the other hand a
decrease in the financial leverage will lead to an increase in the overall cost
of capital thus reducing the value of the firm.
2 Net Operating Income Approach (NOI Approach)
NOI Approach is contrary to the NI Approach. It argues that the capital
structure changes do not influence the value of the firm. In other words, the
value of the firm and the overall cost of capital are independent of the
degree of leverage (Debt)
The Net Operating Income Approach has made the following
assumptions.
94
1. The market evaluates the value of the firm as a whole. So the split
between debt and equity is insignificant.
2. Net Operating Income is capitalized at the overall cost of capital (K0)
which is dependent on the business risk. If business risk is assumed
to be constant K0) remains unchanged.
3. Cost of Debt (K0) is constant.
4. Cost of Equity (K0) increases with the degree leverage.
5. Corporate taxes do not exist...
3. Traditional Approach:
First Stage:
In the first stage Overall cost of capital is reduced or the value of the
firm is increased with increasing leverage. Cost of equity (Ke) remains
constant or there may be a slight rise because the increased use of debt
increases the financial risk to shareholders, only to some extent. But this
rise is not sufficient to offset the advantage derived than using cheaper
source of debt. Cost of debt (K0) remains constant since the proportion of
debt is considered to be within reasonable limit. As a result, with the use of
more debt. A cheaper source, the value of the firm increase or the overall
cost of capital decreases with increasing leverage (proportion of debt.)
Second Stage:
95
After reaching a certain level of debt, the degree of leverage has little
or no effect on the value or the overall cost of the firm. This is because the
advantage of low cost debit is offset by increased cost of equity. The cost of
equity is increased due to a higher financial risk. In this stage. Overall cost
of capital is minimum or the value of the firm is maximum.
Third Stage:
Beyond the acceptable limit, if the amount of debt is increased, the
cost of equity would show a great rise thus offsetting advantage of low cost
debt. Further, the cost of debt (Kd) also rises because the firm’s capacity to
borrow decreases. Thus, during this stage, the cost of capital increases or
the value of the firm decreases with leverage.
96
CAPITAL RESTRUCTURING IN VSP
A. FIRST CAPITAL RESTRUCTURING:
Objective:
The ensure viability and to prevent from becoming potentially sick
under sick industrial companies (Special Provisions) Act 1985 as the analysis
made in 1989 indicated non- viability even at 100% capability utilization due
to high capital related charges.
Approval Reference:
10 (13)/89- VSP (Vol- III) Dt. 26th July, 1993
Salient Features:
o Conversion of Rs. 1184 Crs Govt. of India Loans the Equity Capital.
o Conversion of Rs. 1185 Crs Govt. of India loans into 7% non-
cumulative preference shares redeemable at the end of 10 years.
o Conversion of Rs.791, Crs interest due on Govt. of India loans into
interest free loan for a period of seven years.
o Conversion of Govt. of India loans receivable in 1992-1993 into 7% non-
cumulative preference shares redeemable at the end of 10 years
from the date of allotment (Rs. 419 Crs released after 31st July, 1992).
o Conversion of Govt. of India Loans receivable in 1993-94 into
preference shares to be decided after review.
o Waiver of penal interest that become due up to July, 1992 (Rs.149.40.
Crores)
o Govt. of India ensures funds (Rs. 1507 Crs) in the plan period for the
project.
Challenges Set:
100% Capacity utilization by 1996-97.
Net profit with no interest on Govt. of India funds by 1997-98.
Cumulative losses to be wiped out by 2004-05.
97
Benefits from Capital Restructuring:
Reduction of loss by Rs. 432.47 crores annually on account of interest
saving due to conversion of loans to equity capital, preference
capital and interest free loan.
Reduction of loss by Rs. 149.40 crores on account of interest saving
due to waive of penal interest.
B. SECOND CAPITAL RESTRUCTURING:
Objective:
To prevent becoming potentially sick unit under sick industrial
companies (Special Provision) Act 1985.
Approval Preference:
10 (13)/89- VSP (Vol- III) Dt. 27th May, 1998.
Salient Features:
o Conversion of Rs. 542.47 Crs loan into 7% non – cumulative
preferences capital redeemable after 10 years...
o Conversion of Rs.791, Crs interest free loan to 7% non- cumulative
preference capital with effect from 31.03.1998 redeemable after 2000-01
with repayment schedule to be communicated in due course.
Benefits from capital Restructuring:
o Reduction of loss by Rs. 235.85 Crs on account of interest saving due
to conversion of loans to preference capital retrospectively.
o Interest saving of Rs. 88.47 Crs. Per annum.
o Company could avoid attracting provisions of sick industrial
companies (Special Provisions) Act 1985.
98
CHAPTER – VIII
EVALUATION OF CAPITAL STRUCTURING
99
1 ST Condition:
When 70% of the project expenses is taken through
loans (long term at 5.5%) & rest. 30% as
equity.
Particular Amount
EBIT 1629.000
Less : Interest
(8692 X 70%) = 6084. 4 Cr X 5.5% as int
334.642
EBT 1294.358
Less : Tax at 35% as on
1294.358 x 35% 453.025
EAT 841.333
Less: Pref. Share at 7% 322.646
Calculation of EPS:
Project cost 8692 Cr
Its 30% as equity
8692 x 30 % = 2607.6 Cr into Rs. 26076000000
and divide it by face value of equity - 1000 Rs/- share
Total Equity share valueNo of Equity =
Value of the Share
26076000000No of Equity =
1000
= 26076000
For EPS = Earning’s to Equity (E to E)______________________ No of Equity Share
8413330000
100
=26076000
= 322.646
101
2 nd Condition:
When the mix ratio between debt & Equity is change as 70%
equity & 30% as debts. Then the level of impact,
With same assumptions
Particular AmountEBIT 1629.000Less : Interest (8692 X 30%) = 2607.6 Cr X 5.5% as int 143.418
EBT 1485.582Less : Tax at 35% as on 1485.582 x 35% 519.954
EAT 965.628Less: Pref. Share at 7% (No – issue of pref. Share) ____
E To E 965.628For EPS – Earning per share 158.706
EPS calculation:
8692 cr X 70% = 6084.4 Cr
Total Equity share valueNo of Equity =
Value of the Share
In Rs. = 60844000000 = 60844000
1000
So EPS = E to E = 9656280000
=
158.706
No of Equity 60844000
102
3 rd Condition:
In this part debt Equity mix are divided in ratio 60:40 as debt as
60% and equity as 40%.
Particular Amount
EBIT 1629.000Less : Interest (8692 X 60%) = 5215.2 Cr X 5.5% as int 286.836
EBT 1342.164Less : Tax at 35% as on 1342.164 x 35% 469.757
EAT 872.407Less: Pref. Share at 7% (No – issue of pref. Share) ____
E To E 872.407For EPS – Earning per share 250.922
EPS Calculations:
Project cost = 8692 Cr
40%as equity = 3476.80 Cr
Total Equity share valueNo of Equity =
Value of the Share
in Rs. = 34768000000 = 34768000
1000
For EPS = E to E 8724070000
=
= 250.922
No of Equity 34768000
103
CHAPTER- IX
FINDINGS, SUGGESSIONS
104
FINDINGS:
The project completion cost is estimated to be Rs. 8692. Cr.
The payback period of the project in VSP is 3 years and 10 months.
The payback period is less than the target period so the project may
be accepted.
The NPV of the project is positive than the value of the capital.
The Internal rate of return is Internal rate of 31.85% it is greater than
the cost of capital i.e., 19% so the project accepted.
The profitability index is also more than 3 times returns on
investment so the project is accepted.
The estimated cash flows of the project include interest and tax.
Before expansion the EPS value is Rs. 13,603.6
For only expansion the EPS (at 7 : 3) of VSP is Rs. 322.646
For expansion project the mix of Capital structure (6: 4) is also best for
the company, but equity to be raised and debt to be lowered.
105
SUGGESSIONS
The project completion cost is estimated to be Rs. 8692. Cr.
The payback period of the project in VSP is 3 years and 10 months.
The payback period is less than the target period so the project may
be accepted.
The NPV of the project is positive than the value of the capital.
The Internal rate of return is Internal rate of 31.85 % it is greater than
the cost of capital i.e., 19% so the project accepted.
The best Capital restructuring mix is 70: 30, because it having EPS
(Equity per Share) value is higher than the other mixes.
The company has to maintain at 7: 3 (debt: equity), that is better for
company.
It also maintains 60: 40, but equity to be raised.
106
BIBLIOGRAPHY:
Financial Management - I. M. Pandey
Financial Management - Prasanna Chandra
Financial Management - M. Y. Khan & Jain
URL: http://www.vizagsteel.com
VSP profile & Annual Reports
107