INDEX 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. B. C. D. E. F. G. H. I.
Steel Industries Major Sources of Raw Materials Major Units Main Products of VSP Parameters of Sintering Machines Production performance Commercial performance Financial performance Man power at a Glance in VSP
2
Organization Chart –VISHAKHAPATANAM STEEL PLANT
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
3
• •
Approaches to establishment target capital structure Capital structuring in VSP
Chapter-VIII: EVALUTION OF CAPITAL STRUCTURING •
Expansion project capital structure
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
engineering, financial management etc.
a
production,
marketing,
All the relevant functional
departments play a crucial role in the capital budgeting decision process.
1.3 1.
Objectives of the study: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.
6
4.
To evaluate the investment proposal by using capital budgeting techniques.
5.
To summarize and to suggest for the better investment proposal.
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:
7
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
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.
8
e) Time limitation. The duration of the project is short to collect the required information accurately.
CHATER-II
9
INDUSTRY PROFILE IN INDIA
10
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.
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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
12
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 24 th
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.
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2002-2007
- Tenth Five Year Plan
Steel
industry
Visakhapatnam
registers steel
the
plant
growth high
of
regime
9.9
%
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.
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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. 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 selfreliance, 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.
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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
(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.
16
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%.
The last five year production performance is as under:(In Million tons) YEAR
PIGIRON
SPONGEIRON 0.1.1.1 FINISHEDSTE EL
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
45 40 35 30 25 20 15 10 5 0
3.39 4.08 5.28 3.76 3.18 4.39 3.52 4.95 4.95
5.44 5.44 6.44 8.09 9.93 0.00 0.00 0.00 0.00
29.27 30.63 33.67 39.12 41.15 30.84 31.40 29.74 29.74
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 PIGIRON
SPONGEIRON
FINISHED STEEL
2007-08
2.8 DEMAND-AVAILABILITY PROJECTION:17
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.
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.
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CHAPTER –III
COMPANY PROFILE
19
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.
20
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. COLLABORATED BY
Sl. No.
STEEL PLANT
1
Durgapur steel plant
Britain
2
Bhilai steel plant
Erstwhile USSR
3
Bokaro steel plant
Erstwhile USSR
4
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 1 st 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
21
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
22
Raw Materials Iron Ore Lumps & Fines BF Lime Stone SMS Lime Stone BF Dolomite SMS Dolomite Manganese Ore Boiler Coal Coking Coal Medium Coking Coal (MCC)
Source Bacheli, Chattisgarh/Gua, Jharkand Jaggayyapeta, AP UAE Madharam, AP Madharam, AP Chipurupalli, AP Talcher, Orissa Australia 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 Depa rtme nt
Annual Capacity
Units (3.0 MT Stage)
(‘000 T)
Coke Ovens
2,261
Sinter Plant
5,256
Blast Furnace
3,400
Steel Melt Shop
3,000
LMMM
710
WRM
850
4 Batteries of 67 Ovens & 7 Meters. Height 2 Sinter Machines of 312 Sq. Meters. grate area each 2 Furnaces of 3200 Cu. Meters. volume each 3 LD Converters each of 133 Cu. Meters. Volume and Six 4 strand bloom casters 4 Strand finishing Mill 4 Strand high speed continuous mill with no twist finishing blocks
23
MMSM
850 6 STAND FINISHING MILL
Main Products of VSP:Main Products of VSP Steel Products Blooms Billets Channels, Angles Beams Squares Flats Rounds Re-bars Wire Rods
By-Products Nut Coke Coke Dust Coal Tar Anthracene Oil HPNaphthalene Benzene Toluene Zylene Wash Oil
Granulated Slag Lime Fines Ammonium Sulphate
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 upgradation, 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.
24
Objectives:● •
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.
25
Achieve quality of the products by following systematic approach through planning, documented procedure and timely review of quality objectives. 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.
26
OSHAS Policy: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
27
behavior so that they contribute positively with commitment for the 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 costeffectiveness, 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
28
Major Departments: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 1213 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 125 oC 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 Number of ovens in batteries Coal handling capacity of
4 67 31.6 tones
ovens
29
Dimensions of oven 16m length x 7m height 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.
30
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.
31
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.
32
Steel Melt Shop:33
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 different specifications at three high capacity sophisticated high-speed rolling mills.
34
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.
35
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) 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:-
36
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.
Central Maintenance Electrical:-
37
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
e)
Performance assessment of electrical motors
38
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: 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
39
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.
40
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.
41
Monitoring of production and dispatch of Limestone, Dolomite, Mn Ore and Sand from Captive Mines.
Projects planning:
Long and short term planning for all developmental schemes of capital nature comprising modernization and technology upgradation.
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 ITVision.
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.
42
Systems and Procedures:
Streamlining the contract management system to ensure consistency of
approach
and
adoption
of
sound
principles
of
contract
management.
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 NonAMR 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.
43
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.
44
•
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.
•
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.
45
Management Services:
Quality Circle,
Suggestion Scheme,
Incentive Scheme,
Reward Scheme,
Procedural Orders etc.
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,
46
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 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
47
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 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.
48
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.
49
MILE STONES OF THE ORGANIZATION:-
Sl.
Date
Milestone
No. Prime Minister of India Announced in Parliament to construct 1 2 3 4
17-04-1970 June 1970 30-11-1970 20-01-1971
new steel plant at Visakhapatnam Site selection committee appointed Committee report approved for site Foundation stone laid by Prime Minister Consultant appointed Feasibility reports submitted in 1972 &
5 6 7 8
27-02-1971 07-04-1974 15-10-1977 24-05-1979
other investigation carried out First block of land taken over for VSP Detailed Project report submitted by consultant Public investment aboard accords approval for 3.4 million
9
12-06-1979
tonnes steel project Inter-Government agreement signed between India erstwhile USSR at Moscow for the co-op in the construction of VSP Government approved setting up of VSP. Soviet side carried out
10 11
19-10-1979 January
the revision of details project work Site levelling work started
1980 M. N. Dastur & co principal consultant submits the 12
30-11-1980
comprehensive revised detailed project report Expert committee submits Recommendations for approval of
13
06-01-1981
comprehensive revised detailed project report with modifications Contract signed with erstwhile Soviet Union for preparation of
14
05-02-1981
working drawings for Coke Oven, Blast Furnace Sinter plant. Comprehensive revised detailed project report along with
15 16
23-02-1981 10-07-1981
expert committee recommendations approved Protocol signed with erstwhile Soviet Union for supply of equipments and specialists
23-01-1982 17
To
Blast Furnace foundations
18 19
26-01-1982 01-02-1982 18-02-1982
(First mass concreting in the project) Zero date of construction of the project RASHTRIYA ISPAT NIGAM Limited formed Commissioning of structural shop with this commissioning of
20
29-01-1987
various auxiliary units commenced. Coke Oven battery # 1 starts pushing of come with this the
21 22 23
06-09-1989 14-11-1989 28-03-1990
commissioning of metallurgical units started Sinter Plant (Machine 1) commissioned “GODAVARI” the first Blast Furnace commissioned
50
24
03-05-1990 Prime Minister decided “GODAVARI” to the nation The first converter and the first continuous casting machine of
25
06-09-1990
the steel melt shop started production
26
28-09-1990
Billet production in the light and medium merchant mill
27 28 29 30
21-11-1990 04-03-1991 30-06-1991 28-10-1991
started. Wire rod mill commissioned The second converter commissioned Yarada water supply scheme made obey for supply of VSP First production commences in the plant of Light & Medium
31 32
31-10-1991 27-12-1991
merchant mill Coke Oven battery # 2 commissioned Sinter Machine # 2 commissioned
33 34 35 36
20-03-1992 21-03-1992 July 1992 July 1992
Medium merchant and Structural mill commissioned “KRISHNA” Blast Furnace # 2 commissioned Coke Oven batter # 3 commissioned Converter # 3 of steel melt shop commissioned of all the units
37 38 39
July 1992 1992-93 1992-93
of the 3 million tonnes plant Dedication of plant to the nation by the Prime Minister Indira Priyadarshini Vriksha Mitra Award Nehru Memorial National Award for Pollution Control
& 40 41
1993-94 1994-95 1991-94
EEPC Export Excellence Award Ispat Suraksha Puraskar (First Prize) for longest Accident free
42 43
1995-96 1996
period CII Energy Conservation Award Steel Ministers’ Trophy for “Best Safety Performance”
PERFORMANCE OF RINL AT A GLANCE: PRODUCTION PERFORMANCE: 51
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 METAL
LIQUID STEEL
SALABLE STEEL
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
3913
3322
3074
3546
3145
2701
2000-2001
2007-2008 2008-2009
52
PRODUCTION PERFORMANCE CHART– (‘000 TONS):
4500 4000 3500 3000 2500
Hot metal Liquid Steel
2000 1500 1000 500 0 20 08 -2 00 9
20 07 -2 00 8
20 06 -2 00 7
20 05 -2 00 6
20 04 -2 00 5
20 03 -2 00 4
20 02 -2 00 3
Salable Steel
20 01 -2 00 2
20 00 -2 00 1
production in tons
production performance
years
Figure of production performance-3.a
53
COMMERCIAL PERFORMANCE: The commercial performance of VSP for the past four years is as follows:
Commercial Performance (In crores): SALES
DOMESTIC
YEAR 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006
TURNOVER 3436 4081 5059 6174 8181 8469
SALES 3122 3710 4433 5406 7933 8026
EXPORTS 322 371 626 768 248 443
2006-2007
9131
8487
424
2007-2008
10433
9878
555
2008-2009
10411
10332
78 (Rupees in
Crores)
54
Commercial Performance Line Chart (In crores): 12000
900 800
10000
700
8000
600 500
6000
400
4000
SALES DOMESTIC EXPORTS
300 200
2000
100
0
0 2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 20082001 2002 2003 2004 2005 2006 2007 2008 2009
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.
55
The financial performance of VSP for the past ten years is as follows:
FINANCIAL PERFORMANCE (In crores):
GROSS
CASH
NET
YEAR
MARGIN
PROFIT
PROFIT
2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007
504 690 1049 2073 3271 2383 2633
153 400 915 2024 3260 2355 2584
(-) 291 (-) 75 521 1547 2008 1252 1363
2007-2008
3515
3483
1943
2008-2009
2356
2267
1336
FINANCIAL PERFORMANCE LINE CHART (In crores):
56
4000 3500 3000 2500 2000 1500 1000 500 0 20002001
20012002
20022003
20032004
GROSS MARGIN
20042005
20052006
NET PROFIT
20062007
20072008
CASH PROFIT
Figure of Financial performance-3.c
57
20082009
Manpower at a Glance in VSP 2004-2005 Executives
Works Projects Mines Others
Junior officers
Non Executives
Total
Works Projects Mines Others Works Projects Mines Others Works Projects Mines Others
As on 31/3/2005 3257 1994 145 51 1067 1255 925 21 20 280 12101 10778 73 289 961 16613 13697 239 360 2317
2005-2006 As on 30/04/2006 3225 2142 227 53 1103 1105 776 27 22 280 11932 10673 74 281 904 16561 13590 328 356 2287
As on 31/05/2006 3520 2140 227 53 1100 1104 775 27 22 280 11923 10676 62 281 904 16547 13591 316 356 2284
58
Manpower at a Glance in VSP 2006-2007 Executives Works Projects Mines Others Junior officers
Non Executives
Total
Works Projects Mines Others Works Projects Mines Others Works Projects Mines Others
As on 31/3/2007 3860 2362 263 56 1179 814 559 18 22 215 11727 10533 64 2732 857 16401 13454 345 351 2251
2007-2008 As on 31/03/2008 4208 2577 275 64 1290 761 564 10 21 166 11449 10302 61 263 823 16416 13443 346 348 2279
2008-2009 As on 31/03/09 4534 2745 316 71 1402 684 504 13 22 145 12007 10476 63 267 1201 17225 13725 392 360 2748
59
Organisational Chart of Visakhapatnam Steel Plant
CHAIRMAN-CUM-MANAGING DIRECTOR
60
Director (Projects)
Director (Personnel)
Director (Finance)
Director (Commercial)
ED (Projects)
ED (F & A)
ED (M M)
Director GM (Projects) (PM&MIS)
DGM(F&A)
GM (Mktg.)
ED (Projects)
GM (CSM)
ED (P & IR) GM(Corp. Pers&Coord.)
GM (P & A) GM (Trg&HRD )
IA & SV
DGM (CA & CS) GM (M & HS)
GM (Mines) DGM (IT) GM (Corp Planning)
GM (MS) GM (Projects)
Director (Operations)
ED (Works)
CVO
GM (Vigilance)
GM (Maint.)
GM (IT & SC)
GM (Automn.)
GM (Power)
GM (Elect.)
(Operations)
GM (CD & Logistics)
GM (Utilities)
GM
61
Comm.dt (CISF)
GM (TIC)
GM (Const.)
GM (E & S)
62
CHAPTER- IV
PROJECT PLANNING
63
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 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
64
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.
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
65
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 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.
66
The capital expenditures a budget lays down the amount of the estimation expenditures to be incurred on fixed assets during the budget period.
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.
67
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.
4.5
Importance of Investment Decisions:Investment decisions require special attention because of the following
reasons.
4.6
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.
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.
68
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 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, semiautomatic 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
69
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: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
NPV
I.R.R.
Non – DCF Criteria
P. I
Payback period
70
Accounting Rate of Return
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.
Payback = Initial Investment Annual cash flow
Co C
71
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.
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
=
Average income
x 100
Average investment DCF Criteria: Net Present Valued Method (NPV):
72
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.
C1
NPV=
+
(1+k) NPV=
n
Σ
(1+k)
Ci
i = 0 (1+k)
C2
+
C3 (1+k)
2
+
………
+ Cn (1+k)
3
- Co n
- Co i
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
NPV=
Σ
i=0
Cfi (1+k)
SV+WC i
(1+k)
+
n
Where Cfi = Cash flows occurring at different point of time k = the discount rate
73
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.
A IRR=
L+
(A – B)
(H – L)
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.
PV of cash inflow PI
=
Initial Cash outlay Where PV: Present Value
74
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 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?
75
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
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
76
6.
Production capacity.
7.
Work Schedule
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
77
CHAPTER- V
PROJECT FINANCE
78
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.
(a)
Loan Financing: 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:
(b)
1.
Trade Credit.
2.
Installment Credit.
3.
Advances.
4.
Commercial papers
5.
Commercial banks
6.
Cash Credits
7.
Over Drafts
8.
Public Deposits.
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 years. In
79
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:
80
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:
81
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
82
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
83
Pay Back Period:
Sl.No 1 2 3 4 5 6 7 8 9 10 11 12
Years 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Income (Profit Depreci After Tax) ation 1493 474 1316 474 1457 527 2645 874 3022 919 3100 924 3331 685 3519 507 3553 513 3619 518 3686 524 3755 529
Cash Inflows 1967 1790 1984 3519 3941 4024 4016 4026 4066 4137 4210 4284
Cumulative Cash In Flows 1967 3757 5741 9260 13201 17225 21241 25267 29333 33470 37680 41964 84
13 14 15
2017-18 2018-19 2019-20
3839 3931 4030
535 540 546
4374 4471 4576
46338 50809 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 200809. 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
85
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.
Average Rate of Return: SL.No
Years
Income
Depreciation
Cash 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
86
12
2016-17
4284
529
3755
13
2017-18
4374
535
3839
14
2018-19
4471
540
3931
15
2019-20
4576
546
4030
Average profit Average investment
ARR =
x 100
Total cash inflows Average Profit= No. of years 46296 15
= 3086.4
Average investment: here the additional working capital is also taken the consideration while calculating the ARR.
investment 2
Average investment =
8692 2
+ Ad. WC
+ 702
= 5048 ARR =
3086.4 5048
x 100
= 61.14%
87
ROI =
ROI =
Average Annual profit Total initial investment
x 100
ROI =
3086.4 8692
x 100
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.
88
NPV: Sl.No
Years
Cash 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).
89
Internal Rate of Return: Discount rate taken as 18%
(in
crores)
Sl.No
Years
Cash 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
90
(in crores)
Discount rate taken as 35%
SL.No
Years
Cash Inflows
Present Values of DCF(35%) Inflows
1
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 Total Present Values of Inflows
50.336 7659.621
A - Cash out lay IRR
=
X
L+
(H – L)
A-B 15826.708 - 8692 =
X (35-18)
18 +
15826.708 – 7659.6921 =
7134.708
18 +
X
17
8167.016 =
18 +
=
32.85
0.874
X
17
91
In this calculation, is done on the basis of trail and errors. By taking 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
Years
Cash 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
92
P. I
=
Cash Inflows Cash Outflows 15026.62 8692
=
=
1.73
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.
93
CHAPTER- VII
CAPITAL STRUCTURE
94
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.
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.
95
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 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.
96
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.
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
97
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. 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 (K 0) which is dependent on the business risk. If business risk is assumed to be constant K0) remains unchanged.
98
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 (K e) 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: 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.
99
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.
100
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% noncumulative 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.
101
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.
102
CHAPTER – VIII EVALUATION OF CAPITAL STRUCTURING
103
1ST 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
334.642
int EBT
1294.358
Less : Tax at 35% as on 1294.358 x 35% EAT
453.025 841.333
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 value
No of Equity =
Value of the Share No of Equity
For EPS
=
26076000000 1000
=
26076000
=
Earning’s to Equity (E to E) ______________________ No of Equity Share
104
8413330000 =
=
26076000 322.646
105
2nd 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
Amount 1629.000
EBIT Less : Interest (8692 X 30%) = 2607.6 Cr X 5.5% as int EBT Less : Tax at 35% as on 1485.582 x 35% EAT Less: Pref. Share at 7% (No – issue of pref. Share) E To E For EPS – Earning per share
143.418 1485.582 519.954 965.628 ____ 965.628 158.706
EPS calculation: 8692 cr X 70%
=
No of Equity
=
6084.4 Cr Total Equity share value Value of the Share
In
Rs. =
60844000000
= 60844000
1000 So EPS
=
E to E
=
9656280000 = 158.706
No of Equity
60844000
106
3rd Condition: In this part debt Equity mix are divided in ratio 60:40 as debt as 60% and equity as 40%.
Particular
Amount 1629.000
EBIT Less : Interest (8692 X 60%) = 5215.2 Cr X 5.5% as int EBT Less : Tax at 35% as on 1342.164 x 35% EAT Less: Pref. Share at 7% (No – issue of pref. Share) E To E For EPS – Earning per share
286.836 1342.164 469.757 872.407 ____ 872.407 250.922
EPS Calculations: Project cost
=
8692 Cr
40%as equity
=
3476.80 Cr
No of Equity
=
in Rs.
=
Total Equity share value Value of the Share 34768000000
34768000
=
1000 For EPS
=
8724070000
E to E
= 250.922
= No of Equity
34768000
107
CHAPTER- IX FINDINGS, SUGGESSIONS
108
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.
109
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.
110
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
111