I N D E X

Chapter- I: INTRODUCTION

Introduction Importance of investment decision Objective of the study Methodology Limitations

Chapter-II: INDUSTRY PROFILE IN THE COMPANY

Introduction Pre-Independence Post-Independence Major Steel Industries in India Global Scenario Market Scenario Production Scenario Demand- Availability Projection Pricing &Distribution

1

Chapter-III: COMPANY PROFILE

Introduction Background Mission Vision ISO Policy Objectives Core values Quality Policy Environmental policy Energy policy OSHAS policy

HR policy Customer policy IT policy VSP Technology : state of the Art Major Departments Functions of various departments of RINL \ VSP Inputs and Basic Infrastructure Corporate Strategic Management(CSM) Achievements & Awards

Table Representation

A. Steel IndustriesB. Major Sources of Raw MaterialsC. Major UnitsD. Main Products of VSP E. Parameters of Sintering MachinesF. Production performanceG. Commercial performanceH. Financial performanceI. Man power at a Glance in VSP

Organization Chart –VISHAKHAPATANAM STEEL PLANT

2

Chapter-IV: PROJECT PLANNING

Introduction Nature of investment decisions Process of Investment decisions Importance of Investment decisions Types of Investment decisions Investment Evaluation criteria Cost effective Analysis Project planning

Chapter- V: PROJECT FINANCE

Sources of finance

Chapter –VI: EVALUTION OF CAPITAL BUDGETING

Payback period Average rate of return Net present value Internal rate of return Profitability index method

Chapter-VII: CAPITAL STRUCTURE

Frame work of capital structure Approaches to establishment target capital

structure Capital structuring in VSP

Chapter-VIII: EVALUTION OF CAPITAL STRUCTURING

Expansion project capital structure

3

Chapter-IX: FINDINGS, SUGGESTIONS

Findings Suggestions

CHAPTER – I

Introduction

4

1.1. Introduction:-

A project is an activity sufficiently self- contained to permit

financial and commercial analysis. In most cases projects represent

expenditure of capital funds by pre- existing entities which want to

expand or improve their operation.

In general a project is an activity in which, we will spend money

in expectation of returns and which logically seems to lead itself to

planning. Financing and implementation as a unit, is a specific

activity with a specific point and a specific ending point intended to

accomplish a specific objective.

To take up a new project, involves a capital investment

decision and it is the top management’s duty to make a situation

and feasibility analysis of that particular project and means of

financing and implementing it financing is a rapidly expanding field,

which focuses not on the credit status of a company, but on cash

flows that will be generated by a specific project.

Capital budgeting has its origins in the natural resource and

infrastructure sectors. The current demand for infrastructure and

capital investments is being fueled by deregulation in the power,

telecommunications, and transportation sectors, by the globalization

of product markets and the need for manufacturing scale, and by the

privatization of government –owned entities in developed and

developing countries.

The capital budgeting decision procedure basically involves the

evaluation of the desirability of an investment proposal. It is obvious

that the firm most have a systematic procedure for making capital

budgeting decisions. The procedure for making capital budgeting

decisions.

The procedure must be consistent with the objective of wealth

maximization. In view of the significance of capital budgeting

decisions, the procedure must consist of step by step analysis.

5

1.2 Importance of investment decisions:-

Capital investments, representing the growing edge of a

business, are deemed to be very important for three inter- related

reasons.

1. The influence firm growth in the long term consequences capital

investment decisions have considerable impact on what the firm can

do in future.

2. They affect the risk of the firm; it is difficult to reverse capital

investment decisions because the market for used capital

investments is ill organized and /or most of the capital equipments

bought by a firm to meet its specific requirements.

3. Capital investment decisions involve substantial out lays.

Visakhapatnam Steel Plant is a growing concern, capital budgeting

is more or less a continuous process and it is carried out by different

functional areas of management such a production, marketing,

engineering, financial management etc. All the relevant functional

departments play a crucial role in the capital budgeting decision process.

1.3 Objectives of the study:-

1. To describe the organizational profile of Visakhapatnam Steel

Plant.

2. To discuss the importance of the management of capital

budgeting.

3. Determination of proposal and investments, inflows and out

flows.

4. To evaluate the investment proposal by using capital budgeting

techniques.

5. To summarize and to suggest for the better investment proposal.

6

1.4 METHODOLOGY

The information for the study is obtained from two sources namely.

1. Primary Sources

2. Secondary Sources

Primary Sources:

It is the information collected directly without any references. It is

mainly through interactions with concerned officers & staff, either

individually or collectively; some of the information has been verified or

supplemented with personal observation. These sources include.

1. Thorough interactions with the various department Managers of VSP.

2. Guidelines given by the Project Guide, Sri P. MALLESWARA

RAO, Asst. Manager (Staff), Budget Section, F & A.

Secondary Sources:

This data is from the number of books and records of the company, the

annual reports published by the company and other magazines. The

secondary data is obtained from the following.

a) Collection of required data from annual records, monthly records,

internal

Published book or profile of Visakhapatnam Steel Plant.

b) Other books and Journals and magazines

c) Annual Reports of the company

7

1.5 Limitations:

Though the project is completed successfully a few limitations

may be there.

a) Since the procedure and polices of the company will not allow to

disclose confidential financial information, the project has to be

completed with the available data given to us.

b) The period of study that is 4 weeks is not enough to conduct

detailed study of the project.

c) The study is carried basing on the information and documents

provided by the organization and based on the interaction with the

various employees of the respective departments.

d) Lack of knowledge. Some of the lack full-fledged knowledge of the

concept and its difficult to collect a specific opinion from them.

e) Time limitation. The duration of the project is short to collect the

required information accurately.

8

CHATER-II

INDUSTRY PROFILE IN INDIA

9

Introduction

Steel is an alloy of iron usually containing less than 1% carbon

is a versatile material with multitude of useful properties used most

frequently in the automotive and construction industries. Steel can be cast

into bars strips, sheets, nails, spikes, wire, rods or pipes as needed by the

intended user. The consumption of steel is regarded as the index of

industrialization and the economic maturity any country has attained.

The development of steel industry in India should be viewed in

conjunction with the type and system of government that had been ruling

the country. The production of steel in significant quantity started after

1990. The growth of steel industry can be conveniently started by dividing

the period in to pre and post independence era. In the period of pre

independence, steel production was 1.5 million tones per year, which was

raised to 9 million tones of target. This is the result of the bold steps taken

by the government to develop this sector.

Growth of Steel Industry:

2.2 Pre-independence:-

1830 - Josiah, Marshall Health constructed the first manufacturing

plant at

Port Move in Madras presidency.

1874 - James Erskin founded the Bengal iron works.

1899 - Jamshedji Tata initiated the scheme for an integrated steel

plant.

1906 - Formation of TISCO.

1911 - Tata iron & steel company started production.

1916 - TISICO was founded.

10

2.3 Post-independence:-

1951-56 - First Five Year Plan.

No new steel plant came up .The Hindustan steel Ltd.

was born on 19th January, 1954 with the decision of

setting up three steel plants each with one million tone

input steel per year in at Rourkela, Bhilai and Durgapur;

TISCO stated its expansion program.

1956-61 - Second Five Year Plan

A bold decision was taken up to increase the ingot steel

output India to 6 Million tons per year & production at

Rourkela, Bhilai and Durgapur steel plant started.

1961-66 - Third Five Year Plan

During the third five year plan the three steel plants

under HSL; TISCO & HSCO were expanded as show. In

January 1964 Bokaro steel plant came into existence.

1966-69 - Recession Period

The entire expansion program was actively executed

during this period.

1969-74 -Fourth Five Year Plan

11

Licenses were given for setting up of many mini steel

plants and re-rolling mills.

Govt. Of. India accepted setting up two more steel

plants in south. One each at Visakhapatnam and Hospet

(Karnataka).

SAIL was formed during this period on 24th January,

1973. The total installed capacity from 6 integrated

plants was 106 Mt.

1979 - Annual Plan

The erstwhile Soviet Union agreed to help in setting up

the Visakhapatnam steel plant.

1980-85 - Sixth Five Year Plan

Work on Visakhapatnam steel plant was started with a

big bang and top priority was accorded to start the

plant.

Scheme for modernization of Bhilai steel plant,

Rourkela, Durgapur, TISCO were initiated.

1985-91 - Seventh Five Year Plan

Expansion work of Bhilai and Bokaro steel plants

completed.

Progress on Visakhapatnam steel plant picked up and

rationalized concept has been introduced to commission

the plant with 3.0Mt liquid steel capacity by 1990.

1991-96 - Eight Five Year plan

Vishakhapatnam steel plant started its production

modernization of other steel plants is also duly

envisaged.

1997-2002 - Ninth Five Year Plan

Visakhapatnam steel plant had foreseen a 7% growth

during the entire plan period.

12

2002-2007 - Tenth Five Year Plan

Steel industry registers the growth of 9.9 %

Visakhapatnam steel plant high regime targets

achieved the best of them.

2007-2012 - Eleventh Five Year Plan

Cost of schemes/project original approved by

Government of India is Rs.9, 569.18 crores

2. 4 The major steel and related companies in India:-

1. Bharat Refectories Ltd.

2. Hindustan Steel Works Construction Ltd.

3. Jindal Steel and Power Ltd.

4. Tata Iron Steel Company Metal Scrap Trade Corporation Ltd.

5. Metallurgical and Engineering Consultants India Ltd.

6. National Mineral Development Corporation Ltd.

7. Rashtriya Ispat Nigam Ltd.

8. Sponge Iron India Ltd.

9. Steel Authority India ltd.

The global steel industry has witnessed several revolutionary changes

during the last century. The changes have been in the realms of both

technology & business strategy. The ultimate object of all these changes is

to remain competitive and open global market.

13

The Indian steel industry is growing very rigorously with the major

producers like SAIL, RINL, TISCO, JVL and many others. Our steel industry

has amply demonstrated its ability of adopt to the changing scenario and

to survive in the global market that is becoming increasingly competitive.

This has been possible to a large extent due to the adoption of innovative

operating practices and modern technologies.

Industrial Development in India has reached a high degree of self-

reliance, and the steel industry occupies a primary place in the strategy for

future development. At present the production of steel industry country is

34Mt. the public sector steel industry has been restructured to meet

challenges and a separate fund has been established for modernization

and future development of the industry. It is now being proposed that

Indian steel industry should Gear up to achieve a production level of about

100 Mt by the year2000.

2.5 Global scenarios:-

As per IISI

In March’ 2005 world Crude steel output was 928Mt when

compared to march 2004 (872Mt), ∙The change in percentage

was 6.5%.

China remained the world largest crude steel producer in 2005

also (275Mt) followed by Japan (96Mt) and USA (81Mt). India

occupied 8th position (42Mt).

USA remained the largest importer of semi finished and

finished products in 2002 followed by China and Germany.

Japan remained the largest exporter of semi finished and

finished steel products in 2002 followed by Russia and

Ukraine.

Other significant recent developments in the global steel

scenario have been: Under the auspices of the OECD

14

(Organization for Economic Co-operation & Development) the

negotiations among the major steel producing countries for a

steel subsidy agreement (SSA) held in 2003 with the objective

to agree on a complete negotiating test for the SSA by the

Middle of 2004. It also set subsidies for the steel industry of a

ceiling of 0.5% of the value of production to be used

exclusively for Research & Development

2.6 Market scenarios:-

The year 2004-05 was a remarkable one for the steel industry with

the world crude steel production crossing the one billion mark for the first

time in the history of the steel industry. The world GDP growth about 4%

lends supports to the expectations the steel market is all set for strong

revival after prolonged period of depression .The Indian economy also

become robust with annual growth rates of 7-8 % this will provide a major

boost the steel industry. With the nations focus on infrastructure

development coupled with the growth in the manufacturing sector, the

Indian steel industry all set for north ward movement. The draft national

steel police envisage production of 60 Mt by 2012 and 110Mt by2020, and

annual growth rate of 6-7%. All this should therefore augur well for the

Indian steel industry.

2.7 Production scenarios:-

Steel industry was de-licensed and decontrolled in 1991&1992

respectively.

India is the 8th largest producer of steel in the world.

In 2003-04 finished steel production was 36.193Mt.

Pig iron production in 2003-04 was 5.221Mt.

Sponge iron production was 80.85 Mt during the year 2003-04

The annual growth rate of crude steel production in 2002-03was 8% and

in 2003-04 was 6%.

15

The last five year production performance is as under:-

(In Million tons)

YEAR PIGIRON SPONGEIRON1.1.1.1 FINISHEDST

EEL

2000-01 3.39 5.44 29.27

2001-02 4.08 5.44 30.63

2002-03 5.28 6.44 33.67

2003-04 3.76 8.09 39.12

2004-05 3.18 9.93 41.15

2005-06 4.39 0.00 30.84

2006-07 3.52 0.00 31.40

2007-08 4.95 0.00 29.74

2008-09 4.95 0.00 29.74

2.8 DEMAND-AVAILABILITY PROJECTION:-

Demand-Availability of iron and steel in the country is projected by

ministry of steel annually.

Gaps in availability are met mostly through imports.

Interface with consumers by way of Steel Consumer Council exists,

which is conducted on regular basis.

Interface helps in redressing availability problems, complaints related

to quality.

16

2.9 PRICING & DISTRIBUTION : -

Price regulation of iron & steel was abolished on 16-01-1992.

Distribution controls on iron& steel removed except 5 priority sectors,

viz. Defense, Railways, Small Scale Industries Corporations, Exporters

of Engineering Goods and North Eastern region.

Allocation to priority sectors is made by Ministry of steel.

Government has no control over prices of iron & steel.

Open market prices are generally on rise.

Price increases of late have taken place mostly in long products than

flat products.

17

CHAPTER –III

COMPANY PROFILE

18

Introduction:-

Steel comprises one of the most important resources of the economy.

History shows that, the strongest of civilizations have evolved quickly in the

course of time, because of the proper use of the iron and steel reserves they

had. The huge iron pillars at the entrance of New Delhi suggest that the

history of iron and steel industry in India is well over 2000 years old.

Steel comprises one of the most important inputs to all sectors of the

economy. Steel Industry is both a basic and a core Industry. The economy

of any nation depends on a strong base of Iron and Steel Industry in that

nation. History has shown that the countries having a strong potential for

Iron and Steel Industry have played a prominent role in the advancement in

the civilization in the world. Steel is such a versatile commodity that every

object we see in our day-to-day life had use, such as small items as nails,

pins, needles etc., to surgical instruments, agricultural implements, boilers,

ships, railway materials, automobile parts. The great investments that has

gone into the fundamental research in Iron and Steel Technology has

helped both directly and indirectly many modern fields of today’s science

and technology. Steel is versatile and indispensable item. The versatility of

steel can be traced mainly of three reasons.

1. It is only metallic item, which can be conveniently and economically produced in tonnage quality.

2. It has got very good strength coupled with malleability.

3. Its properties can be changed over a wide range. Its properties can be manipulated to any extent by proper heat treatment techniques.

Iron and Steel making as a craft as been known to India for a long time. However, its production is significant quantities only after 1900.

VSP by successfully installing & operating efficiently Rs. 460 cores

worth of Pollution Control and Environment Control Equipments and

converting the barren landscape by planting more than 3 million plants has

made the Steel Plant, Steel Township and surrounding areas into a heaven

of lush greenery. This has made Steel Township a greener, cleaner and

cooler place, which can boast of 3 to 4° C lesser temperature even in the

peak summer compared to Visakhapatnam City.

19

VSP exports Quality Pig Iron & Steel products' to Sri Lanka,

Myanmar, Nepal, Middle East, USA, China and South East Asia. RINL-VSP

was awarded "Star Trading House" status during 1997-2000. Having

established a fairly dependable export market, VSP plans to make a

continuous presence in the export market.

The govt. of India has recognized the importance of steel in Indian industry and established the following steel plants, before it actually set up VSP/RINL. The details of those are tabulated below.

Sl. No.STEEL PLANT COLLABORATED BY

1 Durgapur steel plant Britain2 Bhilai steel plant Erstwhile USSR3 Bokaro steel plant Erstwhile USSR4 Rourkela steel plant Germany

Visakhapatnam steel plant profile :-

To meet the growing domestic needs of steel, Government of India decided to set up an integrated Steel plant at Visakhapatnam. An agreement was signed with erstwhile USSR in 1979 for cooperation insetting up 3.4 million tones integrated Steel Plant at Visakhapatnam. The foundation was laid by the then Prime Minister Mrs. Indira Gandhi on 20th January 1971.

The Project was estimated to cost Rs.3, 897.28 cores based on prices as on 4th Quarter of 1981. However, on completion of Construction of the whole Plant in 1992, the cost escalated to around 8500 Cr. Unlike other interagated Steel Plants in India, Visakhapatnam Steel Plant is one of the most modern Steel Plants in the country. The plant was dedicated to the nation on 1st August 1992 by the then Prime Minister, P.V.Narasimha Rao.

New Technology, large-scale computerization and automation etc., are incorporated in the Plant. To operate the plant at international levels and attain such lab our productivity, the organizational manpower has been

20

rationalized. The plant has a capacity of producing 3.0 MT of liquid steel and 2,656Mt of saleable steel.

Visakhapatnam steel plant technology: state-of-the-art:-

7m tall Coke Oven Batteries with coke dry quenching.

Biggest Blast Furnaces in the country.

Bell less top changing system in Blast Furnace.

100% slag granulation at the Blast Furnace cast house.

Suppressed combustion—LD gas recovery system.

100% continuous casting of liquid steel.

‘Tempcore’ and ‘Stelmor’ cooling process in LMMM & WRM.

Extensive waste heat recovery systems.

Comprehensive pollution control measure.

Major sources of raw materials

Raw Materials SourceIron Ore Lumps & Fines Bacheli, Chattisgarh/Gua,

JharkandBF Lime Stone Jaggayyapeta, APSMS Lime Stone UAEBF Dolomite Madharam, APSMS Dolomite Madharam, APManganese Ore Chipurupalli, APBoiler Coal Talcher, Orissa

21

Coking Coal

AustraliaMedium Coking Coal (MCC) Gidi/Swang/Rajarappa/Kargali

Water supply:-

Operational water requirement of 36 Mgd is being met from the Yeleru Water Supply Scheme.

Power supply:- Operational Power requirement of 180 to 200 MW is being met through captive Power Plant. The capacity of the power plant is 286.5 MW. Visakhapatnam Steel Plant is exporting 60MW power to Andhra Pradesh State Electricity Board.

Major Units:-

Major Units

Department

Annual

Capacity

(‘000 T)

Units (3.0 MT Stage)

Coke Ovens 2,261 4 Batteries of 67 Ovens & 7 Meters. Height

Sinter Plant 5,256 2 Sinter Machines of 312 Sq. Meters. grate

area each

Blast Furnace 3,400 2 Furnaces of 3200 Cu. Meters. volume

each

Steel Melt Shop 3,000 3 LD Converters each of 133 Cu. Meters.

    Volume and Six 4 strand bloom casters

LMMM 710 4 Strand finishing Mill

WRM 850 4 Strand high speed continuous mill with

no twist finishing blocks

MMSM 850 6 STAND FINISHING MILL

 

Main Products of VSP:-

22

Main Products of VSP

Steel Products By-Products

Blooms Nut Coke Granulated Slag

Billets Coke Dust Lime Fines

Channels, Angles Coal Tar Ammonium Sulphate

Beams Anthracene Oil

Squares HPNaphthalene

Flats Benzene

Rounds Toluene

Re-bars Zylene

Wire Rods Wash Oil

Vision:

To be a continuously growing world class company

We shall

Harness our growth potential and sustain profitable growth.

Deliver high quality and cost competitive products and be the first

choice of customers.

Create an inspiring work environment to unleash the creative energy

of people.

Achieve excellence in enterprise management.

Be a respected corporate citizen, ensure clean and green

environment and develop vibrant communities around us.

Mission:-

To attain 16 Mt liquid steel capacity through technological up-gradation, operational efficiency and expansion; augmentation of assured supply of raw materials; to produce steel at international Standards of Cost & Quality; and to meet the aspirations of stakeholders.

Objectives:-

23

● Expand plant capacity to 6.3 million ton by 2011-12 with the Mission to expand further in subsequent phases as per the corporate plan.

Revamping existing Blast Furnaces to make them energy efficient to contemporary levels and in the process increase their capacity by 1 Mt, thus total hot metal capacity to 7.5 Mt

● Be amongst top five lowest cost steel producers in world by 2009-10.

● Achieve higher levels of customer satisfaction.

● Vibrant work culture in the organization.

● Be proactive in conserving environment, maintaining high levels of safety and addressing social concerns.

Core values:-

Commitment.

Customer Satisfaction.

Continuous Improvement.

Concern for Environment.

Creativity & Innovatio

Quality Policy:-

Visakhapatnam Steel Plant Employees are committed to meet the needs and expectations of our customers and other interested parties. To accomplish this, they will

Supply quality goods and services to customers delight.

Achieve quality of the products by following systematic approach

through planning, documented procedure and timely review of

quality objectives.

24

Continuously improve the quality of all materials, processes and

products.

Maintain an enabling environment, which encourages teamwork and

active involvement of all employees with their involvement.

Environment Policy:-

Visakhapatnam Steel Plant carrying out its operations without harming to the environment. To accomplish this, they will

Document, implement, maintain and continuously review the

environmental management system.

Comply with all the relevant environmental legislations, regulations

and other requirements.

Ensure continual improvement in the environmental performance

and prevention of pollution by minimizing the emissions and

discharges.

Maintain a high level of environmental consciousness amongst

employees.

Energy Policy:-

Visakhapatnam Steel Plant is committed to optimally utilize various forms of energy in a cost-effective manner to effect conservation of energy resources.

To accomplish this, they will:

Monitor closely and control the consumption of various forms of

energy through an effective Energy Management System.

Adopt appropriate energy conservation technologies.

Maximize the use of cheaper and easily available forms of energy.

OSHAS Policy:-25

Visakhapatnam Steel Plant is committed to occupational health and safety of employees and contract workers. To accomplish this, the will,

Document, implement, maintain and periodically review the

occupational health and safety management system including the

policy.

Comply with the relevant occupational health and safety legislations,

regulations and other requirements.

Ensure continual improvement in the environment performance and

prevention of pollution by minimizing the emissions and discharges.

Maintain a high level of environmental consciousness amongst

employees.

Review the environmental objectives and targets on a continuous

basis.

Human Resource Policy:-

Visakhapatnam Steel Plant is committed to create an organizational culture, which nurtures employee’s potential for the prosperity of the organization. To accomplish this, they will,

Identify development needs of the employees on a regular basis,

provide the necessary training and continually evaluate and monitor

the effectiveness of the training so that the quality of the training

also gets updated.

Provide inputs to the employees for developing their attitude towards

work and for matching their competencies with organizational

requirements.

Create an environment of learning and knowledge sharing by

providing the means and facilities and also access to the relevant

information and literature.

Facilitate the employees for continuous development of their

knowledge base, skills, efficiency, innovativeness, self-expression and

behavior so that they contribute positively with commitment for the

26

growth and prosperity of the organization while maintaining a high

level of motivation and satisfaction.

Prepare employees through appropriate development programs for

taking up higher responsibilities in the organization.

Customer Policy:-

VSP will endeavor to adopt a customer-focused approach

At all times with transparency.

VSP will strive to meet more than the customer needs

and expectations pertaining to products, quality, and

Value for money and satisfaction.

VSP greatly values its relationship with customers and

would make efforts at strengthening these relations for

Mutual benefit.

I.T. Policy:-

RINL/VSP is committed to leverage Information Technology as the

vital enabler in improving the customer-satisfaction, organizational

efficiency, productivity, decision-making, transparency and cost-

effectiveness, and thus adding value to the business of steel

making. Towards this, RINL shall:

Follow best practices in process Automation & Business Processes

through IT by in-house efforts / outsourcing and collaborative efforts

with other organization / expert groups / institutions of higher

learning, etc., thus ensuring the quality of product and services at

least cost.

Install, maintain and upgrade suitable cost-effective IT hardware,

software and other IT infrastructure and ensure high levels of data

and information security

Major Departments:-

27

Raw Material Handling Plant:

  VSP annually requires quality raw materials viz. Iron Ore fluxes

(Lime stone, Dolomite); coking and non coking coals etc. to the tune of 12-

13 Million Tones for producing 3 Million Tones of Liquid Steel. To handle

such a large volume of incoming raw materials received from different

sources and to ensure timely supply of consistent quality of feed materials

to different VSP consumers, Raw Material Handling Plant serves a vital

function. This unit is provided with elaborate unloading, blending, stacking

& reclaiming facilities viz. Wagon Tipplers, Ground & Track Hoppers, Stock

yards Crushing plants, Vibrating screens, Single/ twin boom stickers, wheel

on boom and Blender reclaimers. In VSP peripheral unloading has been

adopted for the first time in the country.

The Raw Material Handling Plant (RMHP) Department procures the

different raw materials from various sources. The following are the

important raw material handled by the RMHP Department.

Coke Oven Department:-

The main function of this department is to convert the coal in to

coke, which is received from RMHP Department.

Coke is a hard porous mass obtained by functional distillation of coal

in absence of air at a temperature above 125oC for a period of 16-18 hours.

It is used as a fuel and reducing agent for reduction of iron ore in blast

furnace. The following are the parameters of Coke Ovens:

Number of batteries 4

Number of ovens in

batteries

67

Coal handling capacity of

ovens

31.6 tones

Dimensions of oven 16m length x 7m

height

28

Besides coke production, a number of coal chemicals are being extracted in

coal chemical plants. The coal chemicals are tar, benzyl and ammonia

based products. The coal is not consumed directly because coke helps in

reducing the pollution.

29

Sinter Plant Department:-

Sinter is a hard and porous lump obtained by agglomeration of lines

of iron ore, coke, limestone and metallurgical waster. This department by

not wasting the powder and small pieces of iron ore coal manganese,

dolomite and limestone makes Sinter Cakes and put it for reuse. This

increases the productivity of Blast Furnace, improves the quality of pig iron

and decreases the consumption of coke rate.

30

Blast Furnace:-

Pig iron/hot metal is produced in blast furnace. The furnace is

named as blast furnace as it is running with blast at high pressure with a

temperature of 1150oC.

Raw materials required for iron making are iron ore, sinter coke and

limestone. For one tone of hot metal production, 310Kgs. iron ore,

1390Kgs. sinter and 627Kgs. of coke with some other additives.

For production of pig iron/hot metal there are two blast furnaces

named Godavari and Krishna. They are of the largest and most modern

furnaces in the country.

31

Steel Melt Shop:-

Hot metal produced in blast furnace contains impurities like carbon,

sulphur, phosphorus, silicon, etc.; these impurities will be removed in steel

making by oxidation process.

There are three LD converters to convert hot metal in to steel, after

the conversion of hot metal in to steel, the steel is subjected to

homogenization treatment and cast in to blooms in continuous casting

machines.

Rolling Mills:-

Blooms cannot be used as they are in daily life. These blooms have

to reduce in size and properly shaped to fit for various jobs. Rolling is one

of the mechanical processes to reduce larger size sections in to smaller

cones. The cast blooms are heated and rolled in to various long products of

32

different specifications at three high capacity sophisticated high-speed

rolling mills.

Wire Rod Mill:-

WRM is a stand mill and is fully automated with computers. The mill

consists of 2.5 stands and a capacity of 850,000 tonnes per annum. The mill

product mix includes rounds and ribbed wire in the sizes of 5.5 mm to 12.7 mm dia.

wire rods are made in coil having maximum weight of 1200 Kgs. Liquid Steel

produced in LD Converters is solidified in the form of blooms in continuous Bloom

Casters. However, to homogenize the steel and to raise its temperature, if needed,

steel is first routed through, Argon rinsing station, IRUT (Injection Refining & Up

temperature) / ladle Furnaces.         

Wire Rod Mill is fully automated & sophisticated mill. The billets are rolled

in 4 strand, high-speed continuous mill having a capacity of 8, 50,000 Tonnes of

Wire Rod Coils. The mill produces rounds in 5.5 - 14 mm range and rebars in 8, 10

& 12 mm sizes. The mill is equipped with standard and Retarded Stelmore

controlled cooling lines for producing high quality Wire rods in Low, Medium &

High carbon grade meeting the stringent National & International standards viz.

BIS, DIN, JIS, BS etc. and having high ductility, uniform grain size, excellent surface

finish.

33

     

Medium Merchant & Structural Mill (MMSM):

          This mill is a high capacity continuous mill. The feed material to the

mill is 250 x 250 mm size bloom, which is heated to rolling temperatures of

1200 °C in two walking beam furnaces. The mill is designed to produce

8,50,000 tons per annum of various products such as rounds, squares,

flats, angles (equal & unequal), T bars, channels, IPE beams I HE beams

(Universal beams)

AUXILIARY FACILITIES:-

Power Generation & Distribution:

The average power demands at all units of VSP when operating the

full capacity will be 221 MW. The captive generation capacity of 270 MW is

sufficient to meet all the plant needs in normal operation time. In case of

partial outage of captive generation capacity due to break down, shutdown

or other reasons. The short fall of power is availed from APSEB grid. The

agreement with APSEB provides for exporting of surplus power to APSEB.

The captive generating capacity comprises of

-  TPP -247.5 MW (3x60 MW + 1 X 67.5 MW)

-   Back pressure Turbines (C&CCD)* - 2 x 7.5 MW

-   Gas Expansion Turbines (BF / ces)* - 2x12 MW

    (*Power availability from BPT & GET is around 22MW)

34

Power plant also meets the Air Blast requirements of Blast Furnaces thro' 3

Turbo blowers each of 6067 NM 3 / hr capacity.

Power from APSEB is received at Main Receiving Station thro'

220KV overhead distribution lines. The entire plant is configured as 5

electrical load blocks (LBSS 1 to 5) and step-down substations are

provided in each block with 220 KV transformers to step down to

33/11/6.6 KV for further distribution.

Traffic Department:-

A steel plant of the size of VSP has to handle around 60 to 65 MT

traffic comprising of incoming traffic in the form of raw materials and

outgoing traffic in the form of finished or saleable steel, and also the in

process traffic such as cast pig iron, mill scrap, hot metal.

Of this 50% is transported by belt conveyors, 45% by Rail Transport

and 5% by Road. VSP has the distinction of having peripheral unloading

system for the 1st time in Steel Industry.

Engineering shops & Foundry (ES & F):-

Engineering Shops are set up to meet the requirements of Ferrous &

Non Ferrous spares of different departments. This complex is divided into

1. Forge Shop 2. Structural shop 3. Foundry 4. Central machine shop 5.

Wood Working Shop and 6. Utility Equipment Repair Shop (UERS).

The Forge shop is designed for production of shafts, coupling

flanges etc. and also of forge shapes such as crusher hammer heads,

special bolts, nuts etc. In the Structural shops the fabricated structural of

about 4500 Tonnes are produced annually and the input consisting of

sheets, plates, channels, angles beams etc. In Foundry Iron castings up to

a weight of 5 tons and non-ferrous casting up to a weight of 1 ton are

produced. 2600 Tonnes of iron castings and 200 tones of non-ferrous

castings are produced annually. In steel foundry, steel casting up to

maximum piece weight of 10T is produced. Steel ingots up to 1.3 Tonnes

for forging are also produced.

In the Central Machine Shop, various spares are made. The

machining section has over 100 major machine tools including lathes,

milling, boring, planning, slotting, shaping, grinding and other machines.

The Wood working Shop manufactures patterns for foundries. The shop will

require 300 Cu.m. Per year of wooden patterns.

35

Central Maintenance Electrical:-

Maintenance of all H.T motors, L.T motors and DC motors of above

200KW. There are 810 such large rotating electrical machines spread

throughout the plant including 3 Nos. of 60 MW Turbo-Generators, 1 No of

67.5M TG in TPP, 2 no's of Back Pressure Turbo Generators of 7.5 MW each

and 2 Nos. of Gas Expansion Turbo- Generator of 12 MW each. The services

provided are as mentioned below.

a)  Repairs, Maintenance and condition monitoring of all rotating

Electrical machines of the plant. The job includes transportation,

Overhauling and re-erection with precision alignment.

b)  Maintenance of Electrics of all streetlights, Tower lights and Weigh

Bridges throughout the plant.

Electro Technical Laboratory:-

1)  Repairs all the defective electronic PCB’s, which are taken out from

the equipment during their functioning.

2)  Procures and arranges spare PCB’s for the equipment of PLC’s and

drive controls for motors in the plant and also for UPS systems.

3)  Involves in the plant modernization activities and up gradation of

equipment.

Electrical Repair Shop (ERS):

ERS is a central repair shop to carry out repair activities like

overhauling, rewinding, testing etc., of various types of AC Motors, DC

Motors, HT Motors, Submersible pumps, Distribution transformers, Welding

Machines, Control Transformers, Lifting magnets, Coils etc., of the plant.

The Main Functions of ERS are:

a)       Overhauling of motors

b)       Rewinding of motors, magnets, transformers, pumps, coils etc.

c)       Testing of Electrical equipment

d)       Emergency Site Repairs

36

e) Performance assessment of electrical motors

 

Utilities Department:-

          Utilities dept. Consists of 1. Air Separation Plant 2. Compressor

Houses 3. Chilled water plants and Acetylene plants. The ASP is designed

to meet the maximum daily demand of gaseous oxygen, gaseous nitrogen

and gaseous argon. Compressor Houses produce Compressed Air required

for the operation of pneumatic devices, for instruments and controls,

pneumatic tools and for general purpose in the various production units of

Steel Plants. Chilled Water plants ( 2 No's ) produce chilled water required

for use in the ventilation and air conditioning system in areas such as

office rooms, electrical control room etc. Acetylene plant produces

Acetylene gas required for general purpose cutting and welding.

Quality Assurance and Technological Development (QA &TD):

The QA & TD dept. has been set up to take care of activities

pertaining to Quality Control of Raw Materials, Semi finished products and

finished products. The QA & TD labs are provided at major department like

CO&CCP, SP, BF, SMS, and Rolling Mills etc., in addition to Central

Laboratory. The department monitors the process parameters for

production of quality products. QA & TD carries out analysis, testing and

final inspection including spark testing of finished products and assigns

grades to them.

Calcining & Refractory Material Plant:

CRMP consists of two units - Calcining Plant & Brick Plant.  In

Calcining plant limestone & dolomite are calcined for producing lime &

calcined dolomite, which are used for refining of steel in the converters.

Roll shop & Repair shop:

37

Roll shop & Repair shop is in the complex of Rolling Mills catering to

the needs of mills in respect of roll assemblies, guides few Maintenance

spares and roll pass design. Geographically this dept. is in three areas as

roll shop-1, Roll shop-II and Area Repair Shop. The main activities of this

shop is Roll pass Design, grooving of rolls, assembly of rolls with bearings,

preparation of guides and their service and manufacture / repair of mill

maintenance spares.

For the first time in the country, VSP has adopted CNC technology

for grooving of steel rolling mill rolls. High constant respective accuracy,

higher productivity, use of standard tool for any groove turning,

elimination of the use of different templates, easier to incorporate groove

modification etc., are some of the advantages of CNC lathes over the

conventional one.

Plant Design:

Major functions of this unit are

Development of detailed Manufacturing Drawing and Replacement

Specification drawings

Suggesting New Designs and detailing by doing elaborate

engineering study  and Analysis

Standardization

Works Contracts Department:-

Obtaining administrative approval on receipt of proposal from

indenting departments, tendering and awarding of work

Converting tender committee meetings and preparing

recommendations forwarding work.

Preparing COM/Board Note for decisions at those forum Participating

in claims and arbitration proceedings and legal cases pertaining to

contracts

Registration f agencies under various categories & classes of works

periodically.

38

FUNCTIONS OF VARIOUS DEPARTMENTS OF RINL/VSP: Directorate of Operations

Production Planning and Control:

Formulation of long term production plans and infrastructure support.

Formulation of Annual and Monthly production plan. This involves

detailed planning for product mix and value added steel along with

Marketing Dept.

Analyzing Plant performance against targets on a periodic basis and

taking necessary corrective actions.

Techno-economic and Quality :-

Formulation of techno-economic norms and energy management

parameters and reviewing the same against targets periodically.

Inputs and Basic Infrastructure:-

Long term and short term planning for procurement of raw materials

like Imported Coking Coal (ICC), Medium Coking Coal (MCC), Boiler

Coal, Iron Ore Fines and Iron Ore Lumps etc.,

Formulation of Annual Inward and Outward traffic movement plan for

raw materials and finished products in consultation with Marketing

and Material Management Depts.

Repairs and Maintenance Planning:

Planning of major Capital Repairs, Shutdowns, Spares requirement

and ensuring preparedness before taking up the repairs.

Mines planning:-

Formulation of annual and monthly production plans for BF limestone,

BF grade dolomite, Mn Ore and Sand at VSP Captive Mines.

Monitoring of production and dispatch of Limestone, Dolomite, Mn Ore

and Sand from Captive Mines.

Projects planning:-

39

Long and short term planning for all developmental schemes of capital

nature comprising modernization and technology up-gradation.

Planning and implementation of Additions, Modifications and

Replacement (AMR) schemes.

Expansion of Plant Capacity from 3.0 Mt liquid steel to 6.3Mt.

Research and Development:-

Identification of Technological Improvement scopes for various

processes and plan for adoption of them by acquiring design and

know-how capability.

Indigenous development of technology involving laboratory

investigation.

Development of new grades and products in coordination with

marketing dept.

  Information Technology:-

Formulation of Organizational IT-Policy, IT-Security Policy and IT-

Vision.

Identification of IT enabled projects for various processes and

implements them.

 Budget plan and control:-

Identification of Budget requirement under various heads.

Control of the Budget and Spares, Consumables & Raw Materials

Inventory.

Systems and Procedures:-

Streamlining the contract management system to ensure consistency

of approach and adoption of sound principles of contract

management.

40

Ensuring the implementation and maintenance of quality management

system requirements for ISO 9001:2000 Certificate.

Monitoring pollution control activities of the Plant and interaction with

the State and Central Pollution Control Board.

Project Division:-

Design & Engineering Department:-

§      Liaisoning with Consultants and Government Authorities in connection

with designs, specifications, approval of drawings and Liaisoning work

for various types of clearances.

§      Preparation of drawings, design and specification for AMR and Non-

AMR jobs.

§      Assisting indenting departments in technical discussion with parties

and preparation of technical recommendation.

§      Layout clearances of various facilities coming in the Plant and

Township.

§    Operation of Consultancy contracts.

Construction Department:-

§   Exercising supervision of work at sites both for quality and quantity

checks.

§   Preparation of contractor’s bills, processing of extra items and closure

of contracts.

§   Liaisoning with suppliers, MM department, Design & Engineering

Department and Stores in connection with progress of work at site.

§   Arranging PAT/FAT will all concerned departments like works, design,

consultants and suppliers in terms of contract and handing over the

unit to works department for operation.

41

Contracts Department:

§   Awarding of contract from the point on receipt of administrative

approval from indenting departments.

§   Conducting commercial discussions with parties.

§   Arranging Tender Committee meetings and preparing recommendations

for awarding work.

§   Preparing COM/Board Note for decisions at those forms.

§   Participating in claims and arbitration proceedings.

Project Monitoring Department:-

§     To monitor the physical and financial progress of all the works

executed by Construction department.

§    To monitor the progress of works executed by D&E as well as

Contracts department.

§     Preparation of various types of reports for information of Government

and different levels of Management.

§     Interaction with departments and consultant for updating the

schedules and networks for Project Monitoring.

Directorate of Finance & Accounts

Making arrangement for long-term fund requirements.

Accounting of all minority transactions and preparation of financial

statement of the company and getting the same audited as required

under law.

Maintaining records with regard to the cost of products produced by

the company.

Release of payments to suppliers/providers of goods and services.

Release of salaries to the employees.

According concurrence to proposals for investments & expenditure as

per the policies, procedures and the Delegation of Powers.

42

Conduct Internal Audits, Stock Verification and Statutory compliance.

Making working capital arrangements.

Submission of periodical reports to banks as per their sanctioned

terms.

Organizing for payment of Central Excise, Sales Tax, Income Tax and

other statutory payments.

Directorate of Personnel

Personnel Department:-

Manpower Planning,

Employees’ induction,

Service matters, policy & rules

Industrial relations,

Employees’ welfare

Corporate Social Responsibility (CSR),

Replies to parliamentary questions,

Official Language implementation

Legal Affairs:

Legal Affairs deals with all legal matters including arbitration,

coordination with Standing Councils, Legal Advices etc.

Management Services:

Quality Circle,

Suggestion Scheme,

Incentive Scheme,

Reward Scheme,

Procedural Orders etc.

43

Training & HRD:-

Leadership Training,

Training on Motivation and Attitude,

Team Building

Skill Training.

Induction and Orientation,

Plant Practice Lectures,

Basic Engineering Lectures,

Plant Specialized Training,

Management Development.

 3.18 Corporate Strategic Management (CSM):-

    CSM is a “think tank” of the organization. The Department is

engaged in formulation of VMO (Vision, Mission & Objectives) of the

organization and developing the strategy to achieve VMO. It has various

wings which inter-alia includes Knowledge Management Cell (KM Cell). It

has also developed the Corporate Plan of RINL. It takes up strategic tasks

of the organization.

Town Administration & Administration:-

Matters relating to Land & State,

Civil Maintenance,

Electrical Maintenance,

Water Supply,

Roads and Drain Maintenance,

Horticulture and Afforestation,

Peripheral Development and

Medical & Health Services:-

The Medical & Health Services Division of RINL consists of Visakha Steel

General Hospital (VSGH) & Peripheral Units viz. Pedagantyada Health

44

Center (PGHC), Health Center – II, Occupational Health Services & Research

Center (OHSRC), Emergency Unit – I & II and Hospitals in Mines –

Jaggayyapeta Limestone Mines and Madharam Mines. The special features

of Visakha Steel General Hospital are:

Full fledged Modern American Designed ICU and MBU capable of

treating 6 patients at a time.

Full fledged Modern Radiology with Central A/c systems

Well equipped Path. Lab with Blood bank facility

Cluster type Wards & Casualty with Central Nursing Station

Modern Operation Theatre couples with Shadow less cold lights and

100% bacterial free A/c system

Directorate of Commercial:-

Marketing Department:-

It has 24 no. of Branch Sales Offices all over India and four Regional

Offices viz. North Delhi, South – Chennai, West – Mumbai, East –

Kolkata and Headquarter Sales. Main Activities of Marketing are as

follows:

Collecting Market feedback and Customers requirements for the

preparation of Annual Plan in coordination with Works Department,

for the sale of Pig Iron Steel and Byproducts

Preparation of Marketing Policies

Finalization of Long Term Contracts, MOUs, Spot sale agreements

etc., in Domestic and Export Markets

Preparation of Monthly Rolling Plans in coordination with Works

Department for meeting the sale commitments

Processing of Materials like straightening of coils, cutting, bending,

bundling, packaging etc., at the plant premises and in branches to

meet customers as well as transportation requirements

Dispatch of products to various stockyards by road or rail or to

customers from the plant on direct dispatch basis

Operation of the contracts for transportation of products by road

and stockyard handling/ consignment agency contracts for domestic

45

sales, stevedoring contracts and third party inspection agency for

exports

Sale of products at branches, Headquarters and on direct dispatch

basis to the customers in domestic markets and on Ex-works and fob

Visakhapatnam basis in exports subject to tying up of commercial

and financial terms and conditions. Ensure documentation as per the

procedures and as per the statutory requirements

Rendering after sales services, obtaining customer feedback and

Customer Relations Management.

Materials Management Department:-

Procurement of all materials such as Raw materials, Spares and

consumables required for the entire Plant Operations.

To enter into long term agreements for supply of major & minor raw

materials with indigenous and imported suppliers.

To effect economy in the cost of materials by purchasing materials of

the right quality, in the right quantity at the right time from the

right source at the right place.

To arrange inspection of materials prior to handing over to

Production Units to ensure quality materials only are issued to

Production Units.

Storage of materials & issue the same to the Production Units as per

their requirement.

To develop and encourage ancillary industries so that the availability

of the materials at right time is ensured.

46

MILE STONES OF THE ORGANIZATION:-

Sl.

No.

Date Milestone

1 17-04-1970

Prime Minister of India Announced in Parliament to

construct new steel plant at Visakhapatnam

2 June 1970 Site selection committee appointed

3 30-11-1970 Committee report approved for site

4 20-01-1971 Foundation stone laid by Prime Minister

5 27-02-1971

Consultant appointed Feasibility reports submitted in

1972 & other investigation carried out

6 07-04-1974 First block of land taken over for VSP

7 15-10-1977 Detailed Project report submitted by consultant

8 24-05-1979 Public investment aboard accords approval for 3.4 million

tonnes steel project

9 12-06-1979 Inter-Government agreement signed between India

erstwhile USSR at Moscow for the co-op in the

construction of VSP

10 19-10-1979

Government approved setting up of VSP. Soviet side

carried out the revision of details project work

11 January

1980

Site levelling work started

12 30-11-1980

M. N. Dastur & co principal consultant submits the

comprehensive revised detailed project report

13 06-01-1981

Expert committee submits Recommendations for approval

of comprehensive revised detailed project report with

modifications

14 05-02-1981

Contract signed with erstwhile Soviet Union for

preparation of working drawings for Coke Oven, Blast

Furnace Sinter plant.

15 23-02-1981

Comprehensive revised detailed project report along

with expert committee recommendations approved

16 10-07-1981 Protocol signed with erstwhile Soviet Union for supply

of equipments and specialists

17

23-01-1982

To Blast Furnace foundations

47

26-01-1982

(First mass concreting in the project)

18 01-02-1982 Zero date of construction of the project

19 18-02-1982 RASHTRIYA ISPAT NIGAM Limited formed

20 29-01-1987

Commissioning of structural shop with this

commissioning of various auxiliary units commenced.

21 06-09-1989

Coke Oven battery # 1 starts pushing of come with this

the commissioning of metallurgical units started

22 14-11-1989 Sinter Plant (Machine 1) commissioned

23 28-03-1990 “GODAVARI” the first Blast Furnace commissioned

24 03-05-1990 Prime Minister decided “GODAVARI” to the nation

25 06-09-1990

The first converter and the first continuous casting

machine of the steel melt shop started production

26 28-09-1990 Billet production in the light and medium merchant mill

started.

27 21-11-1990 Wire rod mill commissioned

28 04-03-1991 The second converter commissioned

29 30-06-1991 Yarada water supply scheme made obey for supply of

VSP

30 28-10-1991 First production commences in the plant of Light &

Medium merchant mill

31 31-10-1991 Coke Oven battery # 2 commissioned

32 27-12-1991 Sinter Machine # 2 commissioned

33 20-03-1992 Medium merchant and Structural mill commissioned

34 21-03-1992 “KRISHNA” Blast Furnace # 2 commissioned

35 July 1992 Coke Oven batter # 3 commissioned

36 July 1992 Converter # 3 of steel melt shop commissioned of all the

units of the 3 million tonnes plant

37 July 1992 Dedication of plant to the nation by the Prime Minister

38 1992-93 Indira Priyadarshini Vriksha Mitra Award

39 1992-93

&

1993-94

Nehru Memorial National Award for Pollution Control

40 1994-95 EEPC Export Excellence Award

41 1991-94 Ispat Suraksha Puraskar (First Prize) for longest Accident

free period

42 1995-96 CII Energy Conservation Award

43 1996 Steel Ministers’ Trophy for “Best Safety Performance”

48

PERFORMANCE OF RINL AT A GLANCE:

PRODUCTION PERFORMANCE:

Achieving new targets year after year in production has

become a part of the work culture.

The production performance of VSP in the last four years is as

follows:

YEAR HOT METALLIQUIDSTEEL

SALABLESTEEL

2000-2001 3165 2909 2507

2001-2002 3485 3080 2757

2002-2003 3941 3356 3056

2003-2004 4055 3508 3169

2004-2005 3920 3560 3173

2005-2006 4153 3603 3237

2006-2007 4046 3606 3290

49

2007-2008 39133322 3074

2008-2009 3546 3145 2701

PRODUCTION PERFORMANCE CHART– (‘000 TONS):

Figure of production performance-3.a

50

COMMERCIAL PERFORMANCE:

The commercial performance of VSP for the past four years is as follows:

Commercial Performance (In crores):

YEAR

SALES

TURNOVER

DOMESTIC

SALES EXPORTS

2000-2001 3436 3122 322

2001-2002 4081 3710 371

2002-2003 5059 4433 626

2003-2004 6174 5406 768

2004-2005 8181 7933 248

2005-2006 8469 8026 443

2006-2007 9131 8487 424

2007-2008 10433 9878 555

2008-2009 10411 10332 78

(Rupees in Crores)

51

Commercial Performance Line Chart (In crores):

Figure of commercial performance-3.b

FINANCIAL PERFORMANCE:

VSP had to bear the burnt of huge project cost right from the day of

its inception. This has affected the company’s balance sheet due to very

high interest burden. The company, in spite of making operating profit

every year had to report net loss during all financial years. This on the

other hand had resulted in making VSP to take great care in planning the

financial resources.

52

The financial performance of VSP for the past ten years is as follows:

FINANCIAL PERFORMANCE (In crores):

YEAR

GROSS

MARGIN

CASH

PROFIT

NET

PROFIT

2000-2001 504 153 (-) 291

2001-2002 690 400 (-) 75

2002-2003 1049 915 521

2003-2004 2073 2024 1547

2004-2005 3271 3260 2008

2005-2006 2383 2355 1252

2006-2007 2633 2584 1363

2007-2008 3515 3483 1943

2008-2009 2356 2267 1336

FINANCIAL PERFORMANCE LINE CHART (In crores):53

Figure of Financial performance-3.c

54

Manpower at a Glance in VSP

2004-2005 2005-2006

As on 31/3/2005 As on 30/04/2006 As on 31/05/2006Executives

Works Projects

MinesOthers

32571994145

511067

32252142227

531103

35202140227

531100

Junior officersWorks

ProjectsMines

Others

1255925

2120

280

1105776

2722

280

1104775

2722

280Non Executives Works

ProjectsMines

Others

1210110778

73289961

1193210673

74281904

1192310676

62281904

Total Works Projects

MinesOthers

1661313697

239360

2317

1656113590

328356

2287

1654713591

316356

2284

55

Manpower at a Glance in VSP

2006-2007 2007-2008 2008-2009

As on 31/3/2007 As on 31/03/2008 As on 31/03/09Executives

Works Projects

MinesOthers

38602362263

561179

42082577275

641290

45342745316

711402

Junior officersWorks

ProjectsMines

Others

814559

1822

215

761564

1021

166

684504

1322

145Non Executives Works

ProjectsMines

Others

1172710533

642732857

1144910302

61263823

1200710476

63267

1201Total Works

ProjectsMines

Others

1640113454

345351

2251

1641613443

346348

2279

1722513725

392360

2748

56

Organisational Chart of Visakhapatnam Steel Plant

CHAIRMAN-CUM-MANAGING DIRECTOR

57

ED(Works)

ED(M M)

GM(Mktg.)

GM(Mines)

DGM(IT)

GM (Maint.)

GM(Automn.)

GM (IT & SC)

GM(Power)

ED(Projects)

GM(PM&MIS)

ED(Projects)

GM(CSM)

DGM(CA & CS)

DGM(F&A)IA & SV

ED(F & A)

GM(Projects)

GM (Operations)

GM (Elect.)

Director(Projects)

Director(Personnel)

Director(Finance)

Director(Commercial)

Director(Operations)

CVO

GM(M & HS)

GM(MS)

Director(Projects)

ED(P & IR)

GM(Corp. Pers&Coord.)

GM(P & A)

GM(Trg&HRD

)Comm.dt(CISF)

GM(Vigilance)

GM (Corp Planning)

GM(TIC)

GM (CD & Logistics)

GM(Const.)

GM(Utilities)

GM(E & S)

58

CHAPTER- IV

PROJECT PLANNING

4.1 INTRODUCTION:- An efficient allocation of capital is the most important finance

function in the modern times. It involves decisions to commit the firm’s

funds to the long - term assets. Capital budgeting for investment decisions

59

is of considerable importance to the firm since they tend to determine its

value by influencing its growth, evaluation of capital budgeting decisions.

4.2 NATURE OF INVESTMENT DECISIONS:- The investment decisions of a firm are generally known as the capital

budgeting, or capital expenditure decisions. A capital budgeting decision

may be defined as the firm’s decision to invest its current funds most

effectively in the long- term assets in anticipation of an expended flow of

benefits over a series of years. The long-term assets are those that affect the

firm’s operational beyond the one year period.

Investment decisions generally include expansion, acquisition

modernization and replacement of the long-term assets. Sale of a division or

business (Divestment) is also an investment decision. Decision like the

change in the methods of sales distribution, or an advertisement campaign

or a research and development program have long-term implications for the

firm’s expenditures and benefit, and therefore, they should also be

evaluated as investment decisions.

The following are the features of investment decisions.

The exchange of current funds for future benefits.

The funds are invested in long-term assets.

The feature benefits will occur to the firm over a series of years.

4.3 OBJECTIVES OF INVESTMENT DECISIONS:-

Understand the nature and importance of investment

decisions.

Explain the methods of calculating net present value (NPV) and

internal rate of return (IRR)

Show the implicated of net present value (NPV) and internal

rate of

return (IRR)

Describe the Non- DCF evaluation Criteria. Payback period and

accounting rate of return (ARR).

Institute the competition of the discounted payback.

Compare and contract NPV and IRR and emphasize the

superiority of

NPV rule.

60

4.4 PROCESS OF INVESTMENT DECISIONS:-

Capital Budgeting is a complex process which may be divided into the

following phases.

Capital Budgeting Process:-

1. Identification of investment proposal.

2. Screening the proposal.

3. Evaluation of various proposals.

4. Fixing priorities.

5. Final approval & preparation of capital expenditure

budget.

6. Implementing proposal.

7. Performance review.

Identification of investment proposal:-

The capital budgeting process begins with the identification of

investment proposal. The proposal or idea about potential investment

opportunities may originate from the top of management or may come from

the rank and file workers of any department or from any officers of the

organization. The departmental head analyses the various proposals in the

light of the corporate strategies and submits the suitable proposals to the

capital expenditures planning committee in case of large organization or to

the officers a concerned with the corporate strategies and submits the

suitable proposals to the capital expenditures. Capital expenditures

planning committee in the case of large organization or the officers

concerned with the process of long-term investment decision.

Screening the proposal:-

The expenditures planning committee screens the various proposals

received from different departments. The committee view these proposals

61

form various angles to ensure that these are in accordance with the

corporate strategies or selection criterion of the firm and also do not lead to

the department imbalances.

Evaluation of various proposals:-

The next step in the capital budgeting process is to evaluate the profitability

of various proposals. There are many method which may be used for this

purpose such as pay back period method, rate of return method, net present

value method, internal rate of return, etc. All these method of evaluating

profitability of capital investment proposals have been discussed in detail

separately in the page of this chapter. It should be classified as below.

i. Independent proposals.

ii. Contingent or dependent proposals and

iii. Mutually exclusive proposals.

Fixing priorities:-

After evaluating various proposals, the unprofitable proposals may be

rejected straight away. But it may not be possible for the firm to invest

immediately in the all the acceptable proposals due to limitation of funds.

Hence, it is very essentials to rank the various proposals and to establish

priorities after considering urgency, risk and profitability involved there in.

Final approval & preparation of capital expenditure budget:-

Proposals meeting the evaluation and other criteria are finally approved to

be included in the capital expenditure budget. However, a proposal

involving smaller investment may be decides at the lower levels for

expenditure action. The capital expenditures a budget lays down the amount

of the estimation expenditures to be incurred on fixed assets during the

budget period.

62

Implementing proposals:-

Translating an investment proposal into a concrete project is a

complex, time consuming, and risk- fraught task.

1. Adequate formulation of projects

The major reason for delay is insinuate formulation of projects put

differently, if necessary homework in terms of preliminary comprehensive

and detailed formulation of the project.

2. Use of the principle of responsibility accounting

Assigning specific responsibility to project managers for completing

the project within the defined time-frame and cost limits is helpful for

expeditious execution and cost control.

3. Use of Network Techniques

For project planning and control several network techniques like

PERT (Programme Evaluation Review Techniques) and CPM (Critical Path

Method) are available.

Performance Review:-

Performance review, or post – completion audit, is a feedback device.

It is a means for comparing actual performance with projected

performance. It may be conducted, most appropriately. When the

operations of the project have stabilized.

It is useful several ways.

I. It throws light on how realistic were the assumptions underlying the

project.

II. It provided a documented log of experience that is highly valuable for

decision making.

63

4.5 Importance of Investment Decisions:-

Investment decisions require special attention because of the

following reasons.

They influence the firm’s growth in the long term.

They affect the risk of the firm.

They involve commitment of large amount of funds.

They are irreversible, or reversible at substantial loss.

They are among the most difficult decisions to make.

4.6 Types of investment decisions:-

There are many ways to classify investments one classification is as

follows;

Expansion of existing business.

Expansion of new business.

Replacement and modernization.

Expansion and diversifications

A company may add capacity to its existing product lines to expand

existing operations. For example, the Visakhapatnam Steel Plant (VSP) may

increase its plant capacity to manufactures more liquid steel. It is an

example of related diversification.

A firm mat expand is activities in a new business expansion of a new

business requires investment in new products and new kind of production

activating within the firm. If packing manufacturing company invests in a

new plant and machinery to produce ball bearings, which the firm has not

manufactured before, this represents expansion of new business or

unrelated diversification. Sometimes a company acquires existing firms to

expand its business.

Replacement and modernization.

The main objective of modernization and replacement is to improve

operating efficiency reduce costs. Cost savings will reflect in the increased

profits, but the firm’s revenue may remain unchanged. Assets become

outdated and absolute with technological changes. The firm must decide to

64

replace those assets with new assets that operate more economically.

Replacement decisions help to introduce more efficient and economical

assets and therefore, are also called cost- reduction investments.

How ever replacement decisions that involve substantial

modernization and technological improvements expand revenues as well as

reduce costs.

Yet another useful way to classify investments is as follows;

Mutually exclusive investments

Independent investments

Contingent investments

Mutually exclusive investments

Mutually exclusive investments serve the same purpose and compete

with each other. If one investment understands others will have to be

excluded. Accompany May, for example, either use a more labour- intensive,

semi- automatic machine, or employ a more capital intensive, highly

automatic machine for production.

Independent investments

Independent investments serve different purposes and do not

compete with each other. For example, a heavy engineering company may

have been considering expansion of its plant capacity to manufacture

additional excavators and addition of new production facilities to

manufacture a new product.

Contingent Investments

Contingent investments are dependent projects; the choice of one

investment necessitates understanding one or more other investments for

example, if a company decides to build a factory in a remote, backward area,

it may have to invest in houses, roads, hospitals, schools, etc., and the total

expenditure will be treated as one single investment.

4.7 Investment Evaluation Criteria:-

65

Three steps are involved in the evaluation of investment.

Estimation of cash flows

Estimation of the required rate of return

(the opportunity cost of capital )

Application of a decision rule for making the choice.

Evaluation Criteria:-

A number of investment criteria (or capital budgeting techniques) are

in use in practice. They may be grouped in the following two categories.

Capital budgeting techniques:

Capital Budgeting Techniques

DCF Criteria Non – DCF Criteria

NPV I.R.R. P. IPaybac

k period

Accounting Rate of Return

66

Non DCF Criteria:-

Payback period (PB):

The payback period (PB) is one of the most popular and widely

recognized traditional methods of evaluating investment proposals. Pay

back is the number of years required to recover the original cash outlay

invested in a project.

If the project generates constant annual cash inflows, the payback

period can be computed by dividing cash outlay by the annual cash inflow.

Co : Initial Investment

C : Annual Cash in flow

In case of UN equal cash inflows, the payback period can be found out

by adding up the cash inflows until the total is equal to the initial cash

outlay.

Payback = Initial Investment Co Annual cash flow C

67

Accounting Rate of Return (ARR):

The accounting rate of return (ARR) also known as the return on

investment (ROI) uses accounting information, as revealed by financial

statements, to measure the profitability of an investment. The Accounting

rate of return is the ratio of the average after fax profit divided by the

average investment. The average investment would be equal to half of the

original investment if it were depreciated constantly.

A R R = x 100

DCF Criteria:

Net Present Valued Method (NPV):

The NPV present value (NPV) method is the classic economic method of

evaluating the investment proposals. If is a DCF technique that explicitly

recognizes the time value at different time periods differ in value and are

comparable only when their equipment present values- are found out.

N P V = - Co

Average income

Average

C1 + C2 + C3 + … … … + Cn

68

N P V = Σ - Co

Where

N P V = Net present value

Cfi = Cash flows occurring at time

k = the discount rate

n = life of the project in years

Co = Cash out lay

Internal Rate of Return (IRR):

The internal rate of return (IRR) method is another discounted cash

flow technique which takes account of the magnitude and thing of cash

flows, other terms used to describe the IRR method are yield on an

investment, marginal efficiency of capital, rate of return over cost, time-

adjusted rate of internal return and soon.

N P V = Σ +

Where

Cfi = Cash flows occurring at different point of time

k = the discount rate

n = life of the project in years

Co = Cash out lay

SV & WC = Salvage value and Working Capital at the end of the n years.

I R R = L + (H – L)

Ci (1+k)i

n

i = 0

Cfi SV+WC (1+k)i (1+k)n

n

i = 0

A (A – B)

69

Where

L : Lower discount rate at which NPV is positive

H : Higher discount rate at which NPV is negative

A : NPV at lower discount rate, L

B : NPV at higher discount rate, H

Profitability Index (PI):-

Yet another time- adjusted method of evaluating the investment

proposals is the benefit- cost (B/C.) ratio or profitability index (PI)

Profitability Index is the ratio of the present valued of cash inflows, at the

required rate of return, to the initial cash out flow of the investment.

P I =

Where PV: Present Value

4.8 Cost Effective Analysis:-

In the cost effectiveness analysis the project selection or

technological choice, only the costs of two or more alternative choices are

considered treating the benefits as identical. This approach is used when

the acquisition of how to minimize the costs for undertaking an activity at a

PV of cash inflow

Initial Cash

70

given discount rates in case the benefits and operating costs are given, one

can minimize the capital cost to obtain given discount.

4.9 Project Planning:

The planning of a project is a technically pre- determined set of inter

related activities involving the effective use of given material, human,

technological and financial resources over a given period of time. Which in

association with other development projects result in the achievement of

certain predetermined objectives such as the production of specified goods

& services?

Project planning is spread over a period of time and is not a one shot

activity. The important stages in the life of a project are:

It’s Identification

It’s initial formulation

It’s evaluation (Whether to select or to project)

It’s final formulation

71

It’s implementation

It’s completion and operation

The time taken for the entire process is the gestation period of the

project. The period of the project. The process of identification of a project

begins when we are seriously trying to overcome certain problems. They

may be non- utilization to overcome available funds. Plant capacity,

expansion etc

Contents of the project report:

1. Market and marketing

2. Site of the project

3. Project engineering dealing with technical aspects of the

project.

4. Location and layout of the project building

5. Building

6. Production capacity.

7. Work Schedule

72

Details of the cost of the Project:-

1. Cost of land

2. Cost of Building

3. Cost of plant and machinery

4. Engineering know how fee

5. Expenses on training Erection supervision

6. Miscellaneous fixed assets

7. Preliminary expenses

8. Pre-operative expenses

9. Provision for contingencies

CHAPTER- V

73

PROJECT FINANCE

74

Project financing is considered right from the time of the conception

of the project. The proposal of the project progress working capital, so, in

general a project is considered as a ‘mini firm’ is a part and parcel of the

organization.

5.1 Sources of Finance:

Loan Financing

Security Financing

Internal Financing

5.1.1. Loan Financing:

(a) Short- Term Loans & Credits

Short – Term Loans & Credits are raised by a firm for meeting its

working capital requirements. These are generally for a short period not

exceeding the accounting period i.e., one – year.

Types of Short Term Loans & Credits:

1. Trade Credit.

2. Installment Credit.

3. Advances.

4. Commercial papers

5. Commercial banks

6. Cash Credits

7. Over Drafts

8. Public Deposits.

(b) Term Loans:

Term loans are given by the financial institutions and banks, which

form the primary source of long term debt for both private as well as the

Government organizations. Term loans are generally employed to finance

the acquisition of fixed assets that are generally repayable in less than 10

75

years. In addition to short- term loans, company will raise medium term and

long term loans.

5.1.2. Security Financing:

Corporate Securities can be classified into two categories.

(a) Ownership Securities or capital stock.

(b) Creditor ship Securities or debt Capital.

(a) Ownership Securities or capital Stock:

Types of Ownership Securities or Capital Stock:

i) Equity Capital:

Equity Capital is also known as owner’s capital in a firm. The holders

of these shares are the real owners of the company. They have a control over

the working of the company. Different ways to raise the equity capital.

o Initial public offering.

o Seasoned offering

o Rights issue.

o Private placement

o Preferential allotment.

ii) Preference Capital:

These shares have certain preferences as compared to other type of

shares.

1. Payment of Divided

2. Repayment of the capital at the time of liquidation of the

company.

b) Types of Creditor ship Securities:

i) Debentures:

76

Debentures are an alternative to the term loans and are instruments

for raising the debt finance. Debenture holders are the creditors of a

company and the company and the company have the obligations to pay the

interest and principal at specified times. Debentures provide more

flexibility, with respect to maturity, interest rate, security and repayment

Debentures may be fixed rate of interest or floating rate or may be zero

rates. Debentures & Ownership Securities help the management of the

company to reduce the cost of capital.

5.1.3. Internal Financing:

A new company can raise finance only through external sources such

as shares, debentures, loans and public deposits. For existing company they

need to raise funds through internal source. Such as retained earnings

depreciation as a source of funds. Some other innovative source of finance.

Venture Capital

Seed Capital

Bridge Finance

Lease Financing

Euro- Issues

a) Equity Capital:

1. Infusion of Government equity either from budgetary resources or

from Steel Development Funds (SDF).

2. Induction of equity by agencies/ companies who are setting up

separate stand alone blast furnaces or blast furnace based steel

plant complexes without captive coke oven plant.

3. Equity by overseas buyer suppliers of coking coal.

4. Equity by overseas buyer of coke, whom may hedge initial capital

invested and assured by buy – back arrangement for limited

number of years.

b) Loan Capital:

77

1. Loan capital from financial installations like TDBI, IFCI, ICICI etc.,

guaranteed by the central Government who is the owner of RINI.

2. Surplus credit by major supplier of plant & equipment.

3. Providing loan by agencies that enter into an assured buy- back

arrangement at the terms and condition mutually agreed upon.

CHAPTER- VI

EVALUATION OF CAPITAL

BUDGETING

78

PROJECT EXPANSION OF VSP:

VSP is operating at 6.3 M.T. of liquid steel at present. It is framed to

Enhance its capacity to produce 6.3M.T of liquid steel by expansion.

The estimated cost of expansion is:

Approved cost: 8692 Crs (Base Jun, 05)

Debt component: 4346Crs.

Assumed in calculation as per rate as 5.5%.

How expansion will affect the capacity in positive way:

Project Schedule:

Divided in two stage Time

Stage –I 36 Months

Stage-II Structural mills -48 Months

79

Pay Back Period:

Sl.No Years

Income (Profit

After Tax)Depreci

ationCash

InflowsCumulative

Cash In Flows1 2005-06 1493 474 1967 19672 2006-07 1316 474 1790 37573 2007-08 1457 527 1984 57414 2008-09 2645 874 3519 92605 2009-10 3022 919 3941 132016 2010-11 3100 924 4024 172257 2011-12 3331 685 4016 212418 2012-13 3519 507 4026 252679 2013-14 3553 513 4066 29333

10 2014-15 3619 518 4137 3347011 2015-16 3686 524 4210 3768012 2016-17 3755 529 4284 4196413 2017-18 3839 535 4374 4633814 2018-19 3931 540 4471 50809

80

15 2019-20 4030 546 4576 55385$

(a) Cash Outlay : 8692

(b) Payback Period : INITIAL INVESTMENT

ANNUAL CASH FLOW

= 3 + 2951

3519

= 3.10 years

Pay Back Period:

It is assumed that the profit earning of the project will start from

2008-09.

Taken consideration of (incremental adjusted cash flow) i.e. expansion

Base year, for calculation PAY BACK PERIOD.

Estimated profits are taken from the data provided.

For CIF we have deducted depreciation from profit &then

Cumulative profit.

So the projected payback period is calculated as 3.10 years.

We should increase this period with same exception as there

May be any additional factor and other cause so rounding of

3.10 to 4 years will be right, so that it will give more assistance

To the calculation.

81

Average Rate of Return:

SL.No Years Income DepreciationCash Inflows (Before

depreciation)

1 2005-06 1967 474 1493

2 2006-07 1790 474 1316

3 2007-08 1984 527 1457

4 2008-09 3519 874 2645

5 2009-10 3941 919 3022

6 2010-11 4024 924 3100

7 2011-12 4016 685 3331

8 2012-13 4026 507 3519

9 2013-14 4066 513 3553

10 2014-15 4137 518 3619

11 2015-16 4210 524 3686

12 2016-17 4284 529 3755

13 2017-18 4374 535 3839

14 2018-19 4471 540 3931

82

15 2019-20 4576 546 4030

A R R = Average profit

x 100Average investment

Average Profit=Total cash inflows

No. of years

46296 = 3086.4

15

Average investment:

here the additional working capital is also taken the consideration while calculating the ARR.

Average investment = investment

+ Ad. WC2

8692 + 702

2

= 5048

A R R = 3086.4

x 1005048

= 61.14%

R O I = Average Annual profit

x 100Total initial investment

R O I = 3086.4

x 1008692

83

R O I = 35.51%

It is more calculation taking total profit and taking average of

it. It

Show the return on an average as what an average income of the firm

on

Long run basis with certain assumption 61.14% for any firm at long run is

Good but there must be some decrease as future is not certain.

84

NPV:

Sl.No YearsCash

Inflows DCF(19%)Present Values of

Inflows

1 2005-06 1967 0.840 1652.28

2 2006-07 1790 0.706 1263.74

3 2007-08 1984 0.593 1176.51

4 2008-09 3519 0.499 1755.98

5 2009-10 3941 0.419 1651.28

6 2010-11 4024 0.352 1416.45

7 2011-12 4016 0.296 1188.74

8 2012-13 4026 0.249 1002.47

9 2013-14 4066 0.209 849.79

10 2014-15 4137 0.176 728.11

11 2015-16 4210 0.148 623.08

12 2016-17 4284 0.124 531.22

13 2017-18 4374 0.104 454.90

14 2018-19 4471 0.088 393.45

15 2019-20 4576 0.074 338.62

Total Present Values of Inflows 15026.62

N P V = Total Present Value of Cash inflows – Total Outlay

= 15026.62 – 8692

= 6334.62

It is the factor of Re.1 calculation at the end of the year. It will be

Value of Re.1 at the end of the year which is based interest rate, cost of

Capital and market state which is called as discounted rate to get an

Discounted rate to get an approximate decision.

It should be taken in every calculation of project so that an

approximate. Decision can be taken. As it is more reliable the simple cash

inflows (profits).

85

Internal Rate of Return:

Discount rate taken as 18%

(in crores)

Sl.No YearsCash

Inflows DCF(18%)

Present Values of Inflows

1 2005-06 1967 0.847 1666.049

2 2006-07 1790 0.718 1285.220

3 2007-08 1984 0.609 1208.256

4 2008-09 3519 0.516 1815.804

5 2009-10 3941 0.437 1722.217

6 2010-11 4024 0.370 1488.880

7 2011-12 4016 0.314 1261.024

8 2012-13 4026 0.266 1070.916

9 2013-14 4066 0.225 914.850

10 2014-15 4137 0.191 790.167

11 2015-16 4210 0.162 682.020

12 2016-17 4284 0.137 586.908

13 2017-18 4374 0.116 507.384

14 2018-19 4471 0.099 442.629

15 2019-20 4576 0.084 384.384

Total Present Values of Inflows 15826.708

86

Discount rate taken as 35% (in crores)

SL.No YearsCash

Inflows DCF(35%)Present Values

of Inflows1 2005-06 1967 0.741 1457.5

2 2006-07 1790 0.549 982.71

3 2007-08 1984 0.406 805.5

4 2008-09 3519 0.301 1059.2

5 2009-10 3941 0.223 878.84

6 2010-11 4024 0.165 663.96

7 2011-12 4016 0.122 489.95

8 2012-13 4026 0.091 366.37

9 2013-14 4066 0.067 272.42

10 2014-15 4137 0.050 206.85

11 2015-16 4210 0.037 155.77

12 2016-17 4284 0.027 115.67

13 2017-18 4374 0.020 87.48

14 2018-19 4471 0.015 67.065

15 2019-20 4576 0.011 50.336Total Present Values of Inflows 7659.621

I R R =

L +

A - Cash out lay

X (H – L)

A-B

= 18 +

15826.708 - 8692

X (35-18)

15826.708 – 7659.6921

= 18 +7134.708 X 17

    8167.016  

= 18 + 0.874 X 17

= 32.85

In this calculation, is done on the basis of trail and errors. By taking

87

various percentage of (DCF).So that an appropriate percentage of Internal

Rate of Return can be judge out.

Calculated figure is 32.85%, so we can take it as 35% cause at market

Uncertainty.

Profitability Index Method:

Sl.No YearsCash

Inflows DCF(19%)Present Values of

Inflows1 2005-06 1967 0.840 1652.28

2 2006-07 1790 0.706 1263.74

3 2007-08 1984 0.593 1176.51

4 2008-09 3519 0.499 1755.98

5 2009-10 3941 0.419 1651.28

6 2010-11 4024 0.352 1416.45

7 2011-12 4016 0.296 1188.74

8 2012-13 4026 0.249 1002.47

9 2013-14 4066 0.209 849.79

10 2014-15 4137 0.176 728.11

11 2015-16 4210 0.148 623.08

12 2016-17 4284 0.124 531.22

13 2017-18 4374 0.104 454.90

14 2018-19 4471 0.088 393.45

15 2019-20 4576 0.074 338.62

Total Present Values of Inflows 15026.62

88

In calculation of P.I. simple income is taken in to consideration that’s why

P.I =1.73.

But it is not correct as per practical study. So discounted rate will help to

get

A good path to get an approximate P.I and it will be more reliable than old

Traditional approach.

P. I = Cash InflowsCash Outflows

=15026.62

8692

= 1.73

89

CHAPTER- VII

CAPITAL STRUCTURE

90

Framework for Capital Structure:

The FRICT analysis a financial structure may be evaluated from

various perspectives. From the owners’ point of view, return risk and value

are important consideration. From the strategic point of view, flexibility

assumes great significance. A sound capital structure will be achieved by

balancing all these considerations.

Flexibility:

The capital structure should be determined within the debt capacity

debt capacity of the company, and this capacity should not be exceeded. The

debt capacity of a company depends on its ability to generate future cash

flows, it should have enough cash to pay creditors’ fixed charges and

principal sum and leave some excess cash to meet future contingency. The

capital structure should be flexible. It structure should be flexible. It should

be possible for a company to adapt if warranted by a changed situation. It

should also be possible for a company to adapt its capital structure with a

minimum cost and delay if warranted by changed situation. It should also be

possible for the company to provide funds whenever needed to finance its

profitable activities.

Risk: The risk depends on the variability in the firm’s

operations. It may be caused by the macroeconomic factors and industry

and firm specific factors. The excessive use of debt magnifies the variability

of shareholders earnings, and threatens the solvency of the company.

Income: The capital structure of the company should be most

advantageous to the owners (Shareholders) of the firm. It should create

value; subject to other considerations, it should generate maximum returns

to the shareholders with minimum additional cost.

91

Control: The Capital structure should involve minimum risk of loss of

control of the company. The owners of closely held companies are

particularly concerned about dilution of control.

Timing: The capital structure should be feasible to implement given the

current and future conditions of the capital market. The sequencing of

sources of financing is important. The current decision influences the future

options of raising capital.

The FRICT (Flexibility, Risk, Income, Control and Timing) analysis

provides the general framework for evaluating a firm’s capital structure.

The particular characteristics of a company may reflect some additional

specific features. Further, the emphasis given to each of these features will

differ from company may reflect some additional specific features. Further

the emphasis given to each of these features will differ from company to

company. For example, a company may give more importance to flexibility

than control, while another company may be more concerned about solvency

than any other requirement. Furthermore, the relative importance of these

requirements may change with shifting conditions. The company’s capital

structure should, therefore, be easily adaptable.

APPROACHES TO ESTABLISHMENT TARGET CAPITAL

STRUCTURE

The capital structure will be planned initially when a company is

incorporated. The initial capital structure should be designed very carefully.

The management of Ht Company should set a Target Capital Structure and

the subsequent financing decisions should be made with a view to achieve

the target capital Structure. The company needs funds to finance its

activities continuously. Every time when funds have to be procured, the

financial manager weighs the pros and cons of various sources of finance

and selects the most advantageous sources keeping in view the target

92

capital Consequently, it is being increasingly realized that a company

should plan its capital structure to maximize the use of the funds and to be

able to adapt more easily to the changing conditions.

Theoretically, the financial manager should plan an Optimum Capital

Structure for his company. The optimum capital structure is one that

maximizes the market value of the firm. So far out discussion of the

optimum capital structure has been theoretical. In practice, the optimum

capital structure has been theoretical. In practice, the determination of an

optimum capital structure is a formidable task, and one has to go beyond

the theory. There are significant variations among industries and among

companies within an industry in terms of capital structure. Since a number

of factors influence the capital structure decision of a company, the

judgment of the person making the capital structure decision plays a crucial

part. Two similar companies may have different capital structures if the

decision- makers differ in their judgment of the significance of various

factors.

A totally theoretical model perhaps cannot adequately handle all

those factors, which affect the capital structure decision in practice these

factors are highly psychological, complex and qualitative and do not always

follow accepted theory, since capital markets are not perfect and the

decision has to be taken under imperfect knowledge and risk.

Elements of Capital Structure:

A company formulating its long-term financial policy should first of all,

analyze its current financial structure. The following are the important

elements of the company’s financial structure that need proper security and

analysis.

93

Capital Mix: Firms have to decide about the mix of debt and equity

capital. Debt capital can be mobilized from a variety of sources. How heavily

does the company depend on debt? What is the mix of debt instruments?

Given the company’s risks, is the reliance on the level and instruments of

debt reasonable? Does the firm’s debt policy allow it flexibility to undertake

strategic investments in adverse financial conditions? The firms and

analysis use debt ratios, debt-service coverage ratios, and the funds flow

statement to analyze the capital mix.

1. Net Income Approach (NI Approach):

Accounting to NI Approach, the debt in the capital structure influences

the total value of the enterprise. In other words the overall cost of capital as

well as the total value of the enterprise, in other words, the overall cost of

capital as well as the value of the firm would change with change in debt in

the capital structure.

NI Approach states that if the proportion of debt in the capital

structure in increased, the weighted average cost of capital would decrease

and the market value of the firm would increase. On the other hand a

decrease in the financial leverage will lead to an increase in the overall cost

of capital thus reducing the value of the firm.

2 Net Operating Income Approach (NOI Approach)

NOI Approach is contrary to the NI Approach. It argues that the capital

structure changes do not influence the value of the firm. In other words, the

value of the firm and the overall cost of capital are independent of the

degree of leverage (Debt)

The Net Operating Income Approach has made the following

assumptions.

94

1. The market evaluates the value of the firm as a whole. So the split

between debt and equity is insignificant.

2. Net Operating Income is capitalized at the overall cost of capital (K0)

which is dependent on the business risk. If business risk is assumed

to be constant K0) remains unchanged.

3. Cost of Debt (K0) is constant.

4. Cost of Equity (K0) increases with the degree leverage.

5. Corporate taxes do not exist...

3. Traditional Approach:

First Stage:

In the first stage Overall cost of capital is reduced or the value of the

firm is increased with increasing leverage. Cost of equity (Ke) remains

constant or there may be a slight rise because the increased use of debt

increases the financial risk to shareholders, only to some extent. But this

rise is not sufficient to offset the advantage derived than using cheaper

source of debt. Cost of debt (K0) remains constant since the proportion of

debt is considered to be within reasonable limit. As a result, with the use of

more debt. A cheaper source, the value of the firm increase or the overall

cost of capital decreases with increasing leverage (proportion of debt.)

Second Stage:

95

After reaching a certain level of debt, the degree of leverage has little

or no effect on the value or the overall cost of the firm. This is because the

advantage of low cost debit is offset by increased cost of equity. The cost of

equity is increased due to a higher financial risk. In this stage. Overall cost

of capital is minimum or the value of the firm is maximum.

Third Stage:

Beyond the acceptable limit, if the amount of debt is increased, the

cost of equity would show a great rise thus offsetting advantage of low cost

debt. Further, the cost of debt (Kd) also rises because the firm’s capacity to

borrow decreases. Thus, during this stage, the cost of capital increases or

the value of the firm decreases with leverage.

96

CAPITAL RESTRUCTURING IN VSP

A. FIRST CAPITAL RESTRUCTURING:

Objective:

The ensure viability and to prevent from becoming potentially sick

under sick industrial companies (Special Provisions) Act 1985 as the analysis

made in 1989 indicated non- viability even at 100% capability utilization due

to high capital related charges.

Approval Reference:

10 (13)/89- VSP (Vol- III) Dt. 26th July, 1993

Salient Features:

o Conversion of Rs. 1184 Crs Govt. of India Loans the Equity Capital.

o Conversion of Rs. 1185 Crs Govt. of India loans into 7% non-

cumulative preference shares redeemable at the end of 10 years.

o Conversion of Rs.791, Crs interest due on Govt. of India loans into

interest free loan for a period of seven years.

o Conversion of Govt. of India loans receivable in 1992-1993 into 7% non-

cumulative preference shares redeemable at the end of 10 years

from the date of allotment (Rs. 419 Crs released after 31st July, 1992).

o Conversion of Govt. of India Loans receivable in 1993-94 into

preference shares to be decided after review.

o Waiver of penal interest that become due up to July, 1992 (Rs.149.40.

Crores)

o Govt. of India ensures funds (Rs. 1507 Crs) in the plan period for the

project.

Challenges Set:

100% Capacity utilization by 1996-97.

Net profit with no interest on Govt. of India funds by 1997-98.

Cumulative losses to be wiped out by 2004-05.

97

Benefits from Capital Restructuring:

Reduction of loss by Rs. 432.47 crores annually on account of interest

saving due to conversion of loans to equity capital, preference

capital and interest free loan.

Reduction of loss by Rs. 149.40 crores on account of interest saving

due to waive of penal interest.

B. SECOND CAPITAL RESTRUCTURING:

Objective:

To prevent becoming potentially sick unit under sick industrial

companies (Special Provision) Act 1985.

Approval Preference:

10 (13)/89- VSP (Vol- III) Dt. 27th May, 1998.

Salient Features:

o Conversion of Rs. 542.47 Crs loan into 7% non – cumulative

preferences capital redeemable after 10 years...

o Conversion of Rs.791, Crs interest free loan to 7% non- cumulative

preference capital with effect from 31.03.1998 redeemable after 2000-01

with repayment schedule to be communicated in due course.

Benefits from capital Restructuring:

o Reduction of loss by Rs. 235.85 Crs on account of interest saving due

to conversion of loans to preference capital retrospectively.

o Interest saving of Rs. 88.47 Crs. Per annum.

o Company could avoid attracting provisions of sick industrial

companies (Special Provisions) Act 1985.

98

CHAPTER – VIII

EVALUATION OF CAPITAL STRUCTURING

99

1 ST Condition:

When 70% of the project expenses is taken through

loans (long term at 5.5%) & rest. 30% as

equity.

Particular Amount

EBIT 1629.000

Less : Interest  

(8692 X 70%) = 6084. 4 Cr X 5.5% as int

334.642

EBT 1294.358

Less : Tax at 35% as on  

1294.358 x 35% 453.025

EAT 841.333

Less: Pref. Share at 7%  322.646

Calculation of EPS:

Project cost 8692 Cr

Its 30% as equity

8692 x 30 % = 2607.6 Cr into Rs. 26076000000

and divide it by face value of equity - 1000 Rs/- share

Total Equity share valueNo of Equity =

Value of the Share

26076000000No of Equity =

1000

= 26076000

For EPS = Earning’s to Equity (E to E)______________________ No of Equity Share

8413330000

100

=26076000

= 322.646

101

2 nd Condition:

When the mix ratio between debt & Equity is change as 70%

equity & 30% as debts. Then the level of impact,

With same assumptions

Particular AmountEBIT 1629.000Less : Interest   (8692 X 30%) = 2607.6 Cr X 5.5% as int 143.418

EBT 1485.582Less : Tax at 35% as on   1485.582 x 35% 519.954

EAT 965.628Less: Pref. Share at 7%  (No – issue of pref. Share) ____

E To E 965.628For EPS – Earning per share 158.706

EPS calculation:

8692 cr X 70% = 6084.4 Cr

Total Equity share valueNo of Equity =

Value of the Share

In Rs. = 60844000000 = 60844000

1000

So EPS = E to E = 9656280000

=

158.706

No of Equity 60844000

102

3 rd Condition:

In this part debt Equity mix are divided in ratio 60:40 as debt as

60% and equity as 40%.

Particular Amount

EBIT 1629.000Less : Interest   (8692 X 60%) = 5215.2 Cr X 5.5% as int 286.836

EBT 1342.164Less : Tax at 35% as on   1342.164 x 35% 469.757

EAT 872.407Less: Pref. Share at 7%  (No – issue of pref. Share) ____

E To E 872.407For EPS – Earning per share 250.922

EPS Calculations:

Project cost = 8692 Cr

40%as equity = 3476.80 Cr

Total Equity share valueNo of Equity =

Value of the Share

in Rs. = 34768000000 = 34768000

1000

For EPS = E to E 8724070000

=

= 250.922

No of Equity 34768000

103

CHAPTER- IX

FINDINGS, SUGGESSIONS

104

FINDINGS:

The project completion cost is estimated to be Rs. 8692. Cr.

The payback period of the project in VSP is 3 years and 10 months.

The payback period is less than the target period so the project may

be accepted.

The NPV of the project is positive than the value of the capital.

The Internal rate of return is Internal rate of 31.85% it is greater than

the cost of capital i.e., 19% so the project accepted.

The profitability index is also more than 3 times returns on

investment so the project is accepted.

The estimated cash flows of the project include interest and tax.

Before expansion the EPS value is Rs. 13,603.6

For only expansion the EPS (at 7 : 3) of VSP is Rs. 322.646

For expansion project the mix of Capital structure (6: 4) is also best for

the company, but equity to be raised and debt to be lowered.

105

SUGGESSIONS

The project completion cost is estimated to be Rs. 8692. Cr.

The payback period of the project in VSP is 3 years and 10 months.

The payback period is less than the target period so the project may

be accepted.

The NPV of the project is positive than the value of the capital.

The Internal rate of return is Internal rate of 31.85 % it is greater than

the cost of capital i.e., 19% so the project accepted.

The best Capital restructuring mix is 70: 30, because it having EPS

(Equity per Share) value is higher than the other mixes.

The company has to maintain at 7: 3 (debt: equity), that is better for

company.

It also maintains 60: 40, but equity to be raised.

106

BIBLIOGRAPHY:

Financial Management - I. M. Pandey

Financial Management - Prasanna Chandra

Financial Management - M. Y. Khan & Jain

URL: http://www.vizagsteel.com

VSP profile & Annual Reports

107