Indian Institute of Management Kashipur

Programme : PGP (2017 - 19) Date : 27/09/2017

Exam : End - Term Duration : 3 hours
Course : Financial Reporting and Analysis Marks : 100

Instructions:
 Exam is an open book exam. You may carry only prescribed text book “Accounting Text
and Cases” by Anthony, Hawkins & Merchant in examination hall. No other material
including reading material provided by the institute is allowed in examination hall.
 Neat and systematic presentation is expected.
 Please interpret all the quantitative results obtained through your analysis. Equal weightage
will be given to correctness of calculation and qualitative interpretation of results.
 Use of laptop and mobile phone is prohibited during exam. Although you may use simple
calculator for calculations.
 Please state your assumptions and adjustments clearly before calculating the ratios.
 Answer all questions

Ramco Cement Ltd:

Ramco Cement Ltd (earlier known as Madras Cement Ltd, MCL) is a flagship company of the Ramco
group, is a major player in the blended cement category in south India. The company was incorporated in
the year 1957.Today it is the sixth largest cement producer in the country and the second largest in South
India. The company has eight state-of-the art production facilities with production capacity of 16.5 million
tons per year.
Cement Industry in India:
India is second largest producer of cement in the world after China. It has an installed capacity of around
420 million tons per year and currently operating at 70% of its capacity.
Cement is a bulky material – hence handling this bulky material takes a lot of effort. It occupies a lot of
space and carries a lot of weight. Hence higher the distance a cement bag travels, higher is the freight and
handling cost involved and lower is the profit a manufacturer makes. Therefore, the cement industry is
geographically segmented – different companies cater demand in different geographical regions. Industry
is divided in five regions viz. north, south, west, east and the central region. The Southern region of India
has the highest installed capacity of about 120 million tons
Cement is basically a commodity industry, with little or no differentiation in the end product. Product is
sold in two different market segments. Sales to infrastructure companies is basically a bulk sale; where
very low profit margins are available and there is almost no scope for product differentiation. However, in
retail customer segment companies try to differentiate their products leveraging on their brand image and
charge brand premium, if possible. Therefore, between the two factors contributing to firm’s profitability
– cost efficiency and product differentiation; cost efficiency plays a more important role in cement industry.

Cement is a capex heavy business. An investment of around Rs 3500 is required for each ton of installed
capacity. The operating asset turnover ratios of a cement plant is close to 1.00. A better effective use of
assets and maximum utilisation of installed capacity is therefore critical for the profitability of the cement
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company. However, in past cement companies in India have made a huge investment of their capacity and
now due to sluggish demand from housing and infrastructure sector, it is facing the problem of excess
capacity and high burden of fixed costs.

Consolidation in Cement Industry:

Over last five years the cement industry is passing through a process of consolidation and turnaround. The
biggest international player in the industry LafargeHolcim (emerged after merger of Lafarge and Holcim)
have invested in in ACC and Ambuja Cement; making this the second largest group of cement producers
in India with joint installed capacity of around 70 million tons per annum. Aditya Birla Group Company,
Ultratech Cement is the biggest player in the country with installed capacity of more than 90 million tons
per annum. Ultatech has also acquired recently cement plats of Jaiprakash Associates.

Ultratech Cement:

Ultratech Cement is the leader of the industry in true sense. It has not only Pan-India presence but Its
operations span across India, UAE, Bahrain, Bangladesh and Sri Lanka. UltraTech Cement is also India's
largest exporter of cement reaching out to meet the demand in countries around the Indian Ocean and the
Middle East. On consolidated basis, Ultratech and its subsidiaries are getting 7.5% of their revenue from
export. UltraTech Cement provides a range of products that cater to the various aspects of construction;
which include ordinary portland cement, white cement, ready mix concrete and Aerated Autoclaved
Concrete (AAC) blocks.

Being the market leader, Ultratech Cement can be used as a bench mark to evaluate the performance of
Ramco Cement Ltd. The recent Balance Sheet (as on March 31, 2017); and Income Statement for
Financial Year 2016-17 is given in the annexure.

Required:

1. Calculate return on equity, return on total (operating) assets and return on capital employed
for Ramco Cement Ltd. Compare the profitability of Ramco Cement with Ultra Tech
Cement. (6 x 2 = 12)

2. Compare the revenue realisation per ton, EBITDA Margins, EBITDA realised per ton and
operating profit margins for Ramco Cement and Ultra Tech Cement. What is the role of cost
efficiency and product differentiation in explaining the profitability of these two companies?
(8 x 2 = 16+4 = 20)

3. Cement Industry is a capital intensive industry; therefore, the success of a cement industry depends
on how effectively it uses its assets to generate revenue. Evaluate the two companies on this
parameter. (5+5)

4. Evaluate cash conversion cycle and its different components for both the companies. (8)

5. Using DuPont framework analyse the differences and similarities in the factors explaining the
profitability of Ramco cement with Ultra Tech Cement. (6 x2 = 12+8 =20)

6. Suppose you are a financial institution. Both of these cement companies approach you for private
placement of their non-convertible bonds. How will you evaluate them? (10)

7. You are an equity researcher in big mutual fund asset management company (AMC). How will
you evaluate these two cement companies from long term equity investment point of view, given
industry P/E ratio and P/B ratio are 45.25 and 4.6, respectively?
(20)
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 Annexure

INCOME STATEMENT FOR THE YEAR ENDING ON 31ST MARCH 2017

ULTRA TECH RAMCO
PARTICULARS CEMENT CEMENT
INCOME: (RS. CRORE) (RS. CRORE)
SALE OF PRODUCTS 27162 4564
OTHER INCOME 660 43
TOTAL INCOME 27822 4607
EXPENSES
COST OF MATERIAL CONSUMED 3468 641
PURCHASE IN STOCK IN TRADE 484 31
CHANGE IN INVENTORIES 73 15
EXCISE DUTY 3271 615
FINANCING COST 571 104
EMPLOYEE BENEFITS 1414 278
DEPRECIATION 1268 266
TRANSPORTATION AND HANDLING 5846 738
POWER AND FUEL 3927 518
OTHER EXPENSES 3732 552
LESS: CAPTIVE CEMENT CONSUMPTION -19 0
TOTAL EXPENSES 24035 3757
PROFIT BEFORE EXCEPTIONAL ITEMS 3787 850
EXCEPTIONAL ITEM -14 0
PROFIT BEFORE TAX EXPENSES 3773 850
TAX EXPENSES 1146 201
PROFIT FOR THE YEAR 2627 649

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 BALANCE SHEET AS ON 31ST DECEMBER 2017
ULTRA TECH RAMCO
PARTICULARS CEMENT CEMENT
ASSETS: (RS. CRORE) (RS. CRORE)
NON CURRENT ASSETS:
PROPERTY PLANT AND EQUIPMENT 22898 4877
INVESTMENT PROPERTY 0 241
CAPITAL WORK IN PROGRESS 878 97
INTANGIBLE ASSETS 334 65
INTANGIBLE ASSETS UNDER DEVELOPMENT 1 23
FINANCIAL INVESTMENT 2132 204
OTHER NON-CURRENT INVESTMENTS 564 83
TOTAL NON-CURRENT ASSETS (A) 26807 5590
CURRENT ASSETS:
INVENTORIES 2225 575
INVESTMENTS 5406 0
TRADE RECEIVABLES 1276 555
CASH AND CASH EQUIVALENTS 51 82
BANK BALANCE 2167 36
LOAN AND ADVANCES 124 27
OTHER FINANCIAL INVESTMENTS 285 32
OTHER CURRENT ASSETS 941 112
TOTAL CURRENT ASSETS (B) 12475 1419
TOTAL ASSETS (A+B) 39282 7009

EQUITY AND LIABILITIES :

EQUITY:
EQUITY SHARE CAPITAL 275 24
OTHER EQUITY (RESERVE AND SURPLUS) 23666 3718
SHARE HOLDER FUNDS (C) 23941 3742
NON-CURRENT LIABILITIES:
BORROWINGS 4232 504
PROVISION 271 4
DEFERRED TAX LIABILITIES 2774 728
DEFERRED GOVT. GRANTS 0 11
OTHER NON-CURRENT LIABILITIES 5 0
TOTAL OF NON-CURRENT LIABILITIES (D) 7282 1247
CURRENT LIABILITIES:
BORROWINGS 1016 635
TRADE PAYABLES 1714 256
OTHER CURRENT LIABILITIES 4610 1078
PROVISIONS 160 47
CURRENT TAX LIABILITIES 559 4
TOTAL CURRENT LIABILITIES (E) 8059 2020
TOTAL EQUITY AND LIABILITIES (C+D+E) 39282 7009

No. of Shares outstanding 274507906 238076780

Current Market Price of the Share (Rs.) 4193 755
Face Value of Share (Rs.) 10 1
Dividend Given in 2017 100% dividend 300% dividend
Sale (Crore Tonnes) 8.597 1.442