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CHAPTER II
CONCEPTS AND REVIEW OF LITERATURE
INTRODUCTION
Financial statements are formal records of the financial activities of a
business, person or other entity. Financial statements provide an overview of a
business or person’s financial conditions in both short and long term. All the
relevant financial information of a business enterprise, presented in a structured
manner and in an easy form to understand. These are basic concepts of
financial statements.
Theoretical Concepts
Profitability
Profit acts as the life blood for every business whether it is a private
organization, a public undertaking or joint sector entity.
Profitability implies profit-making ability of a business enterprise. The
term profitability is a combination of two words profit and ability. Profitability
may be defined as the ability of a given investment to earn a return on its use.
Profitability is a composite concept revealing the efficiency of an
organization to earn profits. To measure the productivity of capital employed
and to measure operational efficiency, profitability analysis is considered as
one of the best techniques. Profitability is the result of financial as well as
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operational efficiency. It is the outcome of all business activities. Measurement
of profitability is a multi-stage concept.
Accounting Profit
In accounting, profit is generally known as the excess of total
revenues over total costs. As such the residue of income after meeting all the
‘explicit’ and ‘implicit’ items of expenditure is termed as ‘profit’.
The measurement of profit is one of the difficult problems faced by
the accountants, because of the optional ways of treating depreciation, research
and development expenditure, goodwill and patents and inventory valuation.
The price level changes further complicate the measurement of profit during
inflation. Profits are earned on inventories held by the firm and depreciation
allowances based on historical cost fail to maintain the firm’s earning power.
Profit vs. Profitability
Profit as an absolute figure alone does not give an exact idea of the
adequacy of income or of changes in efficiency as shown by the financial
performance of an enterprise. Specially, when the problems of historical
comparison of a number of years for the same company or of horizontal
comparison of a number of companies within the same industry group are
confronted with the residual profit figure in absolute quantities it may be
confusing and difficult to interpret due to variations in the size of investments
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or the volume of sales. Therefore, it becomes necessary to relate profit figures
either with the volume of sales or with the level of investment and derive
quantitative relationship in the form of either ratios or percentage. Such ratios
and percentage are easy to handle and interpret and prove a useful tool in
financial analysis. Ratios specially selected to measure the relative profit
position of an enterprise are known as profitability ratios.
Profit is the residue of income while profitability is the profit making
ability of an enterprise denoting either constant or improved or deteriorated
state of such ability during a given period.
Thus profit is an absolute
connotation, whereas profitability is a relative concept. An analysis of the
profitability reveals of total transactions during a year.
The profitability can be analyzed either on the basis of operating
profits or in regard to net profit. It may be noted that the operating profit
reflects profit from the main business for which the enterprise was launched
and offers the most reliable measure for the long-term perspective. On the
other hand the net profit reflects the net of operating and non-operating
income. “It equips the analyst from the short term point of view”. The figure
of profit may assume any one of the following terms. a) net profit before
interest and tax b) net profit before tax and c) net profit after tax.
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Net profit before interest and tax
Interest is the share of creditors and tax is the share of the government
out of the divisible pool of profits. Hence, net profit before interest and tax is
an index of the efficiency of management.
Net profit before tax
The taxation policy of government has nothing to do with the
management efficiency and so this figure too, can form the basis of
profitability. It can be arrived before or after charging depreciation as per the
decision of management.
Net profit after tax
The share holders are interested only in the net profit. Hence,
profitability from the owner’s point of view can be analyzed on this basis. No
doubt, the basis of working out profitability would depend on the analyst as to
what he wants to analyze and focus. Thus, the basis will be determined by
objective of analysis i.e., whether one wants to judge the overall financial
performance of internal management and control or it is to be done for the
outside agencies like creditors, prospective investors and security dealers or
whether one has to keep in mind the owner as the equity holders of a business
corporation.
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Ratio Analysis
Ratio is the relationship of one item to another expressed in a simple
mathematical form. Accounting ratios are relationships expressed in
mathematical terms between figures which are connected with each other in
some manner.
Types of Ratios
Generally ratios are classified into four categories namely profitability
ratios, turn-over ratios, liquidity ratios and leverage ratios.
Profitability Ratios
Profitability is an indication of the efficiency with which the operations
of the business are carried on. Poor operational performance may indicate poor
sales and hence poor profits. A lower profitability may arise due to the lack of
control over the expenses. Banks, financial institutions and other creditors
look at the profitability ratio as an indicator whether or not the firms earn more
than they pay interest for the use of borrowed funds and whether the ultimate
repayment of other debts reasonably. Certain owners are having the interest to
know the profitability as it indicate the return which he can get on their
investment. The following are the important profitability ratios.
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1. Return on Equity
The profitability from the point of view of the equity share holders will
be judged after taking into account the amount of dividend payable to the
preference share holders.
ROE = Net income / Share holders equity
2. Return on Assets
This ratio is computed to know the “productivity of the total assets”. It
will be proper to include the interest in computing the return on total assets.
ROA = Net income / Average of total assets.
3. Return on Sales
This ratio helps in determining the efficiency with which affairs of the
business is being managed. The ratio is thus effective measure to check the
profitability of the business.
ROS = Net income / Total sales
4. Gross Profit Margin
This ratio expresses relationship between gross profit and net sales. It
helps in ascertaining whether the average per cent of mark up on the goods is
maintained. This ratio indicates the degree to which the selling price of goods
per unit may decline without resulting in loss from operations to the firm.
GPM = Gross profit / Total sales
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5. Earnings per Share (EPS)
The EPS helps in determining the market price of the equity shares of
the company.
A comparison with the other company will also help in
determining whether the equity share capital is being effectively used or not. It
also helps in estimating the company capacity to pay dividend to its equity
share holders.
EPS = Earnings after Interest, Tax and Dividend / No of equity shares.
6. Price Earning Ratio (PER)
This ratio indicates the number of times the earning per share is covered
by its market price. It helps the investor in deciding whether to buy or not the
shares of a company at a particular market price.
PER = Market price per equity share / EPS
7. Operating Ratio
This ratio is a complementary of net profit ratio. In case the n/p ratio is
20per cent, then operating ratio would have been 80per cent. Operating cost
includes direct materials, direct labour and other overheads.
OR = Operating cost/Net share
8. Fixed Charges Coverage Ratio
It indicates whether the business would earn sufficient profits to pay
periodically the interest charges.
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Fixed charges coverage ratio = EBIT/Interest charges
9. Pay out Ratio
The ratio indicates what proportion of earning per share has been used
for paying dividend. The lower the payout ratio, the higher will be the amount
of earnings ploughed back in the business and vice versa.
10. Dividend Yield Ratio
This ratio is particularly useful for those investors who are only
interested in dividend income.
This is calculated by comparing rate of
dividend per share with its market value.
DYR = Dividend per share / Market price per share.
Turn-over Ratios
The turnover ratios are also known as activity or efficiency ratios. They
indicate the efficiency with which the capital employed is rotated at the
business. The overall profitability of the business depends on capital employed
and the turnover. Higher the ratios, the greater will be the profitability. In
order to find out which part of capital is effectively employed and which part
not, different turnover ratios are calculated. These ratios are as follows:
1. Fixed Asset Turnover Ratio
This ratio indicates the extent to which the investments in fixed assets
contribute towards sales. Comparison with previous period indicates whether
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the investment in fixed assets has been judicious or not. The ratio can further
be divided into turnover of each item of assets to find out whether fixed assets
have been properly used, for example, plant and machinery to turnover.
FATR = Net sales / Average of Net block.
2. Working Capital Turnover Ratio
This ratio indicates whether or not working capital has been effectively
utilized in making sales.
3. Debtors Turnover Ratio
Debtors constitute an important constituent of current assets and
therefore the quality of debtors to a great extent determines a firm’s liquidity.
DTR = Credit sales / Average account receivable.
4. Debt Collection Period
The ratio indicates the extent to which the debts have been collected in
time. It gives the average debt collection period. It is very helpful to the
lenders because it explains to them, whether their borrowers are repaying
money within a reasonable time.
DCP = Months (days) in a year / Debtors turnover ratio.
5. Creditors Turnover Ratio
It is similar to debtors’ turnover ratio. It indicates the speed with which
the payments for credit purchases are made to the creditors.
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CTR = Credit purchases / Average account payable
6. Debt Payment Period
The ratio gives the average credit period enjoyed from the creditors.
However, a very favourable ratio to this effect also shows that the business is
not taking full advantage of credit facilities which can be allowed by creditors.
DPP = Months (days) in a year / Creditors turn over ratio.
7. Stock Turnover Ratio
This ratio indicates whether investment in inventory is effectively used
or not. It therefore explains whether investment in inventories is within proper
limits or not. Inventory ratio can be calculated regarding each constituent of
inventory such as raw materials, work in progress and finished goods.
STR = Cost of goods sold / Average inventory.
8. Total Assets Turnover Ratio
This ratio indicates the extent to which the investment in total assets
contributes towards sales.
Comparison with previous period will explain
whether the investments in assets have been judicious or not.
TATR = Net sales / Average of net block.
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Liquidity Ratios
Liquidity ratios help one to ascertain whether a company can pay its
currently maturing obligations as well as has enough cash to meet its
operational requirements.
1. Current Ratio
This ratio is an indicator of the firm’s commitment to meet its short term
liabilities. It also indicates safety to take care of price fluctuations, bad debts
and uneven inflow of funds. A low ratio may signify shortage of working
capital in the business.
CR = Current assets / Current liabilities.
2. Quick Ratio
Quick ratio measures company’s capacity to pay off immediate claims of
creditors. It reveals possibilities of immediate conversion of assets into cash.
QR = Liquid assets / Current liabilities.
Leverage Ratios
These ratios are also termed as working capital or short term solvency.
An enterprise must have adequate working capital to run its daily operations.
Inadequacy of working capital may bring the entire business operation to riding
half because of liability of the enterprise to pay wages materials and regular
expenses.
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1. Debt-Equity Ratio
The debt-equity ratio is determined to ascertain the soundness of longterm financial policies of the company. It is also known as “External-Internal”
equity ratio. The term external equities refers to total outside liabilities and the
term internal equities refers to share holders funds or tangible net worth. In
case the ratio is 1, it is considered to be quite satisfactory.
DER = Debt / Equity.
2. Proprietary Ratio
It is a variant of debt equity ratio. It establishes relationship between the
proprietors or share holders funds and the total tangible assets. It measures
conservatism of capital structure and shows the extent of share holders funds in
the total assets employed in the business.
PR = Share holders funds / Total tangible assets.
REVIEW OF LITERATURE
Review of literature paves way for a clear understanding of the areas of
research already undertaken and throws a light on the potential areas which are
yet to be covered. Keeping this view in mind, an attempt has been made to
make a brief survey of the previous works undertaken on the field of financial
analysis.
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The Review of Literature guides the researcher for getting better
understanding of methodology used, limitations of various available estimation
procedures, data base, lucid interpretation and reconciliation of the conflicting
results. Besides, this the review of empirical studies explores the avenues for
future and present research efforts related to the subject matter. A number of
research studies have carried out on different aspects of performance appraisal
by the researchers, economists and academicians in India and abroad. A review
of this analysis is important in order to develop of the study of cement
industries. Therefore in this part review of empirical studies related with the
study has been made.
FINANCIAL AND CAPITAL STRUCTURE ASPECTS
Chudson1 has presented a research paper on, “The pattern of corporate
financial structure”, in which he provides direct evidence on the companies
with high properties of fixed assets to use more long term debt. The research
also indicated that there is no simple linear relationship between corporate size
and debt ratio.
Barges, Alexander,2 in his research paper on “The effect of Capital
Structure on the cost of capital”, adopted the most comprehensive test of
Chudson ‘The performance of Corporate Financial Structure’, National Bureau of Economic Research, 1945
Barges, Alexander, “The effect of Capital Structure on the cost of capital”, New Jersey, Prentice Hall, Eagle wood cliffs,
pp.26-33, 1963
1
2
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Modigliani-Miller hypothesis.
He analyzed the relationship between the
average cost of capital and leverage, and between the stock yield and debtequity ratio. For the purpose of his study, he utilized cross-section data from
three different industries namely rail road, departmental stores and cement
industries. Unlike Modigliani-Miller’s study, his observations have good
distribution over the entire range of capital structure. Each sample has a
significant number of observations with little or no debt. He made a special
effort to introduce homogeneity into the sample firms so that it might not
distort the relationships. Barges criticized Modigliani and Miller for using
market value as it introduced bias in the estimate of leverage coefficient. He,
therefore, used book value as measure of leverage.
Wippern Ronald,3 in his research paper on “Financial structure and the
value of the firm”, concentrated on the cost of equity function instead of the
overall cost of capital function. By doing this, he could show that the cost of
equity function was significantly linear and increased at an appropriate rate to
exactly off-set the injection of debt into the capital structure and keep the
overall cost of capital constant.
3
Wippern Ronald, “ Financial structure and the value of the firm”, Journal of Finance, Vol. IV, Dec.1966, pp.615-634
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Comanor, W.S and Wilson.T,4 in their article on “Advertising, Market
Structure and performance”, examined the relevance of advertising intensity as
a factor for industrial profitability. They found advertising intensity as a major
determinant of profitability (leverage after-tax return on equity) in thirty five
US consumer goods industries.
FINANCIAL PERFORMANCE ASPECTS
Jain, D.C.5 has analyzed the financial statements of cement companies in
India. The study revealed by and large that their financial performance was
satisfactory, on the basis of ratio analysis made.
There are number of works on determinants of profitability in India.
Subramanian and Papoia, T.S6 have studied the relationship between
profitability and growth of firms in Indian chemical industry during the period
1960-69 with data of 27 companies quoted in stock exchange. They found that
most of the firms want to grow in an expanding market with differing
intensities and that those who have ability aided by profit continued to grow
faster.
Comanor, W.S. and Wilson.T, “ Advertising, Market Structure and Performance”, Review of Economics and Statistics,
Vol. 17, Sep. 1967, pp.423-44
5 .Jain,D.C. Analysis of Financial Statements in Cement Companies in India, Rajasthan University, Jaipur, 1967.
6 Subramanian, K.K. and Papoia, T.S., Profitability and the Growth of the firms: The Case of Indian Chemical
Industry, Anvesak, June 1971, Vol. 1, No.1.
4
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Gale7 has examined the effect of market share on the rate of return of
selected firms operating in different market environment using data of 106
firms. He found that high market share is associated with high rates of return
and that the effect of share on profitability depends on other firm and industry
characteristics such as degree of concentration and rate of growth in the
industries in which the firm competes and on the absolute size of the firm. He
also found that the relation between rate of return on equity and the equity to
capital ratio (a measure of risk in an inter-industry sample of firms) to be
positive and significant.
Hurdle8 has developed theoretical model relating to leverage, market
structure, risk and profitability and tested the model using cross-sectional data
on 228 U.S. manufacturing firms and 85 industries data covering the 1960s.
Hurdle used three simultaneous equations to test the hypothesis of his study
and found that the high profit firms earned this because of market structure and
not through capital structure.
Ghosh T.P. and Roy M.M9 have analyzed in their study to see how far
the liquidity of the firm is influenced by the economy and industry. Liquidity
characteristics have been chosen for replication of the model used elsewhere to
7
Gale, B.T., Market Share and Rate of Return, The Review of Economical Statistics,Vol.LIV, No.4, November
1972, p.412.
8 Hurdle, G.J., Leverage, Risk, Market Structure and Profitability, Review of Economics and Statistics, 56, 1974.
9 Ghosh T.P. and Roy MM :‘The Industry and Secondary Influence on Firm’s Liquidity: a case study of Cement Industry’
October, Lok Udyog, 1977.
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judge the industry and economy influence. Liquidity characteristics are judged
in terms of current ratio, since it is widely accepted tool of measuring liquidity.
Industry and economy influence on firm’s liquidity characteristic are
statistically significant although not dominating. It seems better to develop
industry average and economy average for comparing firm’s financial
characteristic instead of comparing simply with the industry average.
Ghosh.D.K10 has studied the financial position of 18 private sector
companies, all with a paid up capital of Rs.50 lakhs and above, whose principal
item of manufacture was cement. He had analyzed the balance sheets and the
combined income and expenditure statements and found out that they were
financially sound.
Pramod Kumar11 has made a comparative study of the industry to
evaluate its performance and achieve higher standards in all the fields. A
comparative study has been made between private, state owned and central
owned firms. It reveals that the utilization of investment in augmenting sales
is better in private sector than in state-owned and central public sectors. The
income generated by the industry has shown an upward trend. This study also
reveals that long term funds are the major source of capital structure in the
10
Ghosh.D.K, Financial Performance and Private Sector Cement Units in India.1977, December, Lok Udyog, 1978.
Pramod Kumar , ‘Analysis of Financial Statements of Cement Industry in India since 1979’, ‘A Survey of Research in
Commerce and Management’ 1980, P.275
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private sector. The main points of this study are that highest priority should be
given to reduce the operating cost, optimizing capacity utilization; much
importance should be given to improve the liquidity and solvency position and
attention should be given to better packaging and distribution.
Kanna and Subramanian12 have studied 10 units in the cement industry
to analyze liquidity, profitability, financial structure and overall performance.
They used ratio analysis and merit rating to arrive at valid conclusions. They
found the financial structure of the industry had declined over the years. Non availability of funds had affected modernization of plants and periodic
rehabilitation of kiln.
T.L.N. Swamy13 has examined the various aspects of capital,
employment, productivity, profitability, rate of return on capital and cost
structure etc., of cement industry for the period 1965-78 in detail. The study
reveals that fixed capital of the industry showed a negative growth rate during
the period. Secondly, capital intensity declined drastically over the period
indicating deterioration of financial position of the industry. Ratio of working
capital to productive capital also declined over the period, whereas the input-
12
Kanna and Subramanian, Financial Performance and the Cement Industry, Large and Medium,1972- 1979, March,
Yojana, 1981
13 T.L.N. Swamy , ‘Trends in Cement Industry in India – 1965-78’, Lok Udyog, September 1984, P.46
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output ratio showed a favourable increase. Finally, material consumed cost
increased over the period.
Sethuraman.T.V., Jog.S.D and Khaled.S.M14, have viewed that the
concept of social limits to growth has been with us for some time. Now that
the Indian economy is opened up, it has interesting implications for the
industry, which is poised for growth. This study was prompted by the cement
industry, which found itself in difficult conditions within months of
delicensing.
Using simple criteria, it is suggested here that the Indian
Economy be easily prone to market saturation. Relatively small increases in
output have succeeded in a turn around from scarcity and attractive margins to
falling unit realisation and capacity utilisation.
Since this behaviour is a
characteristic of the economy, it is feared that the story could easily be repeated
in other cases like fertilizers, two wheelers etc., closely on the heels of cement
and light commercial vehicle.
It is suggested that corporate management
should pay due attention to this characteristic in the course of planning and
implementation of expansion projects.
P.C.Chamoli,15 has attempted to assess the capital structure pattern of
Cement Industry in both private and public sector. It also makes a comparison
Sethuraman T.V., Jog S.D and Khaled S.M., “Market Saturation in Indian Conditions-Cement Industry”, Indian
Economic Journal, Vol.35, No.3, 1985, pp. 39-46.
15 P.C.Chamoli, ‘ A Panorama of Capital Structure Planning of Indian Cement Industry’, Lok Udyog, Dec 1985, P.23
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of observed ratios by debt-equity. With established norms it identifies the
factors responsible for the difference between them. It is suggested that if the
financial function of the industry is to be made self-propelling, the gear as well
as the pay-out ratios are to be pushed up by financing future expansion with the
help of long term debt and not with the help of addition to equity. General
reserves should be used to raise dividend on ordinary shares.
COST AND PRODUCTIVITY ASPECTS
Arun Khandekar 16 has studied in his paper that the Seventh Plan target
for installed capacity of cement has been fixed at 60 million tonnes as against
the Sixth Plan-end level of 42.5 million tonnes. The production target has been
as against the actual production of 30 million tonnes in 1984-85. This means
the cement industry will have to grow one and a half times more within a span
of five years. By all standards, it is a challenging task.
Moammed Talha and Faheem Usman Siddique17 have opined that for the
cement industry coal quality is very important as it affects both the quality of
cement and the operation of the plant.
Indian cement industry uses coal
because of its abundant availability and shortage of oil and natural gas. Today
the Indian cement industry has to use coal of high ash content with a varying
Arun Khandekar, “Cement Industry: Challenging Task Ahead”, Commerce, April 12, 1986, pp 728-734.
Mohammed Talha and Faheem Usman Siddique – “Cement Industry – The Current Scene”, Yojana, February 16
– 28, 1990, p.19.
16
17
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characteristic. To sort out this problem the role of coal on cement making and
possible improvements in coal quality and consistency have been dealt with.
Under the formula suggested by the Bureau of industrial costs and price,
old cement plants up to 75 percent capacity utilisation and new ones with 60
percent utilisation will be acquired by the government at the levy price. The
rest will be sold at market price.
The author says this proposal, if
implemented, will give a shot in the arm to the industry
N.K.Nair,18 has studied in his paper about the productivity aspect of
Indian Cement Industry.
Being a construction material, cement forms a
strategic section in the Indian economy. In 1990-91, the industry has an
installed capacity of 60 million tonnes with a production of 48 million tonnes.
The industry is poised for a capacity growth to about 100 million tonnes by
2000 A.D.
The present study attempts to analyze the productivity and
performance ratio of the industry with a view to identifying the major problem
areas and the prospects of solving them.
Anup Agarwal and Nandu J. Nagarajan,
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have published a research
paper on, “Corporate Capital Structure, Agency costs, and ownership control:
The case of all –equity firms”. In this study, they attempted to evidence that all
N.K.Nair, ‘Productivity in Indian Cement Industry’, Productivity Vol 32 No,1, April-June 1991, P.141
Anup Agarwal and Nandu J. Nagarajan, “Corporate Capital Structure,
Agency Costs, and ownership control-The case
of all-equity firms”, The journal of Finance, Vol. XLV, No.4, pp. 1325 – 1331:1992
18
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equity firms (Firms which use no long – term debt over a continuous five-year
period) exhibit greater levels of managerial stock holdings, more extensive
family relationships among top management, and higher liquidity positions
than a matched sample of levered firms. Further, it leads that the managerial
control of voting rights and family relationship among senior managers are
important factors in the decision to eliminate leverage. Their main findings are
that i) Managers of all-equity firms have significantly larger stock holdings
than managers of similar-sized levered firms in their industry, ii) there is
significantly greater family involvement in the corporate operations of allequity firms than in levered firms, iii) Managerial ownership in all equity firms
is positively related to the extent of family involvement, and
iv) all-equity
firms are characterized by greater liquidity positions than levered firms.
Subir Cokavn, Rejendra Vaidya20 has made a serious attempt to evaluate
the performance of cement industry after decontrol.
It is found that the
performance of the cement industry after decontrol is characterized by
outcomes that are generally competitive and welfare enhancing. The structure
of the industry changed significantly with large magnitude of relative
technologically superior capacity being created by many new entrants into the
industry. It is noticed that there are significant real price increase and an
Subir Cokavn, Rejendra Vaidya – ‘Deregulation and Industrial Performance’ , The Indian Cement Industry ‘ Economic
and Political Weekly, Feb 20-27, 1993
20
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associated increase in profitability. The performance of firms across strategic
group is different, with firms operating relatively new and large plants
appearing to have an advantage. An important point which is highlighted in
this paper is the nature and effect of inter-firm heterogeneities in the cement
industry.
N.Chandrasekaran21 has made an attempt to examine determinants of
profitability in cement industry. Profitability is determined by structural as
well as behavioural variables.
The other variables, which influence
profitability, are growth of the firm, capital turnover ratio, management of
working capital, inventory turnover ratio etc. The some of the main changes in
the cement industry environment during 1980’s are from complete control to
decontrol, number of new entrants and substantial addition of capacity,
changing technology from inefficient wet process to efficient dry process and
from conditions of scarcity of cement to near gloat in the market.
The
companies were involving aggressive marketing strategies.
D.Kumar22
has stressed the importance of coal in cement industry.
Coal quality is very important as it affects both the quality of cement and the
operations of the plant.
Indian cement industry uses coal because of its
N.Chandrasekaran, ‘Determinants of profitability in Cement Industry’, - Cement Industry, Vol 20 No.4, Oct-Dec 1993
D.Kumar.’ Utilization of coal in the cement industry with particular reference to coal benefaction’ ‘Mintech Vol15, No.1,
Jan-Feb 1994, P.40
21
22
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abundant availability and shortage of oil and natural gas. The industry has to
use coal of high ash content with varying characteristics. To sort out this
problem, the role of coal on cement making and possible improvement to coal
quality and consistency has been dealt with.
It is necessary for the coal
industry to adopt measures in respect of improvements and care in mining
techniques as well as resorting to coal beneficiation so as to minimize
extraneous material and ensure consistency in the quality of coal supply.
Finally the cement industry has to go for technological improvements in
different unit operations such as drying and grinding, matching of raw mix and
coal burning technique etc., which can lead to successful kiln operation.
N.Chandrasekaran,23 has studied in his paper about the market structure
of the Indian Cement industry. The concept of firm, industry, market structure,
conduct and performance are defined as conventionally used in the literature of
industrial organizations. It is concluded that demand and supply gap has been
reduced considerably and supply of cement during study period increased due
to creation of additional capacity and capacity utilization. Private sector has
about 84 per cent of installed capacity. It is also found that the size of plants
have increased over the years. Mini Cement plants came into existence in
1980s. Consumption of Portland cement increased during the period. Thus
23
N.Chandrasekaran, ‘Structural Analysis of Cement Industry’, Management Journal, Vol 7, No.1, Jan 1994, P.18
43
structural analysis shows changes in structural features and competitive
condition of the industry. This is mainly due to government initiative and
corporate responses.
B.D. Jethra and S.C. Lahivy24 have made an analysis to list out the
problems and prospects faced by the Indian Cement industry. Cement industry
in the country dates back to early part of this century. The first cement plant
was set up in Porbandur in 1914. Since then the capacity and production of
cement have grown steadily. The geographical spread of the industry is mainly
determined by the occurrence of limestone deposits. The decades of eighties
witnessed major developments in the cement scenario. A welcome feature in
the industry in the recent past is a very healthy growth in exports. Further it is
stated that the basic problem of cement industry are coal, power and transport.
There is need for conversion from wet process to dry process to improve their
techno economics.
In Industrial Researcher,25 an attempt is made to discuss various facets
of this industry in brief and to assess the future scope of development in this
industry. Among the five varieties of cement manufactured in India, portland
cement is the most popular one. It is extensively used in construction of
buildings. Production is spread in all parts of the country and limestone and
24
25
B.D.Jethra and S.C.Lahivy, ‘Cement Industry problems and prospects’, Yojana, Sep 30, 1994, P.4
Industrial Researcher, 25 ‘A review of Cement Industry in India’, Industrial Researcher, Oct- Dec 1994, P.95
44
other materials are available at many places. India’s dependence on imports
have declined over the years and reached to nil. The consumption pattern of
cement has shown a dramatic change in upward trend. The industry caters two
types of buyers namely individual and the government.
The demand for
cement is as such perennially satisfied basic requirement of people at large and
economy in general.
The problem of industrial concentration is very old. It gives rise to
widespread consequences. The intensity of concentration is very insignificant
in the cement industry as a whole and in two of its sectors. Few large houses
are in a position to dictate and control a large proportion of production and
investment activity of the industry. In this industry, extreme inequality persists
in the shares of the largest firm, average firm and smallest firm of the industry.
It manifests itself in the non-competitive market structure, merger and
collusion, unduly high prices, restriction of output, low capacity utilization, and
monopolistic and restrictive trade practices against consumers. The largest
firm and the second largest four firms produce about 30 to 37 per cent and 48
to 56 per cent of the entire industry’s production. It leads to least desirable
combinations of high concentration and least competition. All concentration
though register a declining trend, it is very negligible. The public sector firms
have a very passive role to improve the most undesirable combination. The
45
larger firms in the public sector have no capacity to provide potential
competitive threat to their counterparts in the private sector. The structure of
the industry did not change and the pattern of competition and concentration
remained basically unaltered throughout the period 1971-80.26
Bhanu,27 has made an attempt to bridge the gap by empirically
evaluating the performance of the cement industry during various phases of
control and decontrol. Capacity utilization is taken in this study to be the most
important factor which explains the decentralization in investment in the
cement industry after mid 1980s. This study argues that both supply and
demand factors, besides policy change, influence the performance of the
industry and shortage in supply side factor hamper higher utilization of
capacity. The availability of coal as well as power is important for higher
capacity utilization in cement industry, while price of cement has a positive
effect on capacity utilization and levy has a negative effect. This study also
reveals that the effect of liberalization in the cement industry was diluted by
the lack of investment in coal and power which resulted in shortage, which in
turn, lead to poorer performance and deceleration in additional investment in
the industry.
Kumarados and Sahoo B., “Intensity of Concentration in Indian Cement Industry”, Log Udoyog, February 1995 pp 4551.
27 Bhanu, ‘Liberalization and performance of cement industry’, Economic and Political weekly, August 25, 1995
26
46
Dev Prasad, Garry D. Broton and Andreas G. Merikas,28 have presented
a research paper on “Long – run Strategic Capital Structure”, in which they
analyzed to confirm the linkage between capital structure and strategic posture
of the firm. Specifically, managers were found to structure the selection of debt
and capital intensity in a mean consistent with the strategic goal of long – run
control of systematic risk. Therefore, the efficacy of a strategic perspective of
capital structure will be examined by investigating the control of systematic
risk in firms over the long term through the adjustment of the firm’s capital
structure.
Tiwari.R.S29 has analyzed in his paper that the cement industry is
passing through a highly discouraging period due to high cost of production
and low prices.
Many units are suffering due to the above factors and
unexpected fall in demands particularly in government sector. There is no
doubt that the demand will improve and the prices will go up but cutthroat
competition in the market has come to stay in spite of the various strategies
adopted by the Cement Manufacturer’s Association. The industry must earn
reasonable profits to survive and this will mostly depend on the cost of
production.
Proper management, effective controls and cost reduction
Dev Prasad, Garry D. Broton and Andreas G. Merikas, “Long – run Strategic Capital Structure”, Journal of Financial and
Strategic Decisions, Vol 10, Num 1, Spring 1997, pp 47-58.
28
29
Tiwari R.S.,Cost Reduction in Cement Industry, the Management Accountant November 1998, p.825.
47
strategies are the most important methods to improve the profitability in
cement factories. We shall examine and discuss the areas in a cement factory
where cost reduction is possible with conscious efforts.
Present Study
Previous studies reviewed in this chapter are all related to performance
of various industries and are related to financial performance of some specific
industries.
Intense analysis is not so far done with reference to the
performance analysis of cement industrial units, especially India Cements
Limited and that of Dalmia Cements Limited. The present study systematically
analyses the performance of the two companies from various angles. First indepth analysis is done with reference to the performance of India Cements
Limited. Then the performance of Dalmia Cements Limited is analyzed in
detail which is one of the prominent private sector units.
Then the financial
aspects of both companies are compared and ratios are calculated.
The
statistical tools such as Mean, Standard Deviation and Coefficient of Variance,
for analyzing performance are used for understanding the performance to a
greater extent. This study is unique in this aspect and a pioneer in analyzing
the performance of two prominent cement industrial units in the state of Tamil
Nadu.
48
CONCLUSION
This chapter examined the literature relevant to the study. It contains
conceptual framework, incorporate scholarly works and theories. The rationale
of the study was to ascertain the role of financial statements played in
determining the financial performance. The literature under review was
obtained from journals, articles, websites and text books.