Rajasthan Cement Limited

FORE School of Management

Jayesh Goswami 242005
Akhilesh Joshi - 242003

PGDM- International Business Finance

Project Appraisal
Background for the Case
The Case is been written by Dr. Ambrish
Gupta, and is registered with the Case center
of North America.
Rajasthan Company Limited (RCL) is a Newly
incorporated company in Kotputli, Jaipur.
Company appoints Rajeev Kulveer Singh &
Associates (RKS) in March 2011 for carrying the
market feasibility study for them.
Purpose for the case
Collect data and relevant information for the
given case from different sources.
Assess the projected demand/supply gap and
decide the plants installed capacity.
Determine the Selling price which support to get
the funding and establish itself firmly in market.
Project Gross revenue, selling cost and net profit
for the project.
Decide market strategy to be followed (price
skimming/Price penetration).
Job for Rajeev Kulveer Singh &
Associates
Does the market exits for new cement plants? If
yes with what capacity & the cost of the project.
Selling price for RCL ? How pricing to help to get
established in market.
How pricing to help in getting the funding?
Projecting for the revenue, cost and profits.
Suggested capacity and pricing.
Retail pricing strategy Price skimming or price
penetration.
Department Related Parliamentary standing
committee on Commerce (DRPSCC)
Guidance from DIPP, Ministry of commerce and
Industry.
Written material from CMA, BAI, NCCBM,
CRRI, IRC, JK Cement, Ambuja Cement and
ACC.
Report on demand from NCAER.
Oral evidence from industry experts.
Exclusive study from Tariff Commission of
India (TCI) on costing of cement and
cartelization in cement industry.
 Various
Govt./Non
DIPP RKC RCL
Govt.
Institute
DemandSupply Trends and Market
Potential in the Industry.
Steady growth for cement industry in India.
Cement industry in India (182MT/year) is
second largest in world. (china being leader with
1,400MT/year).
Per capita consumption in India 178kg for china
1050kg.
Positive correlation between cement
consumption and growing economies.
Only industry not to get impacted by global
economic slowdown.
 Historic Demand & Supply
(fig in Million Tonnes)
Year>>> 2005-06 2006-07 2007-08 2008-09 2009-10
Domestic Demand 135.56 149.34 164.03 177.98 196.12
Exports 5.98 5.89 3.65 3.2 2.27
Total Demand 141.54 155.23 167.68 181.18 198.39
Production (Supply) 141.81 155.64 168.31 181.61 201.37
Projected Demand/Supply
CAGR for 2007-08 is 11.58%,
2014-15 forecast calculated based on CAGR of
10.5%.
Projected Demand & Supply
(fig in Million Tonnes)
Year>>>
2010-11 2011-12 2012-13 2013-14 2014-15 2019-20
Domestic Demand 231.66 257.61 290 323.59 361.07 624.48
Production (Supply) 222.51 245.87 271.69 300.22 331.74 546.54
Projected Demand/Supply
Projected demand shows the increasing trend.
The group projects to reach 290MT by 2012-13.
One MT capacity requires INR 500 Cr.
Industry expects total investment during 5 years
span (2007-08 to 2012-13) of INR 55,000 Cr. (of
which INR 30,000 cr. Investment already done.
Liberalization in Cement Industry
First cement company set up in Porbundar,
Gujarat in 1914 with production capacity of
1,000 tones/annum.
Controls removed in 1989, Industry de-licensed
in 1991.
During 1999-00 total capacity added up is 100
million tones. (which is 8times the existing
capacity), seen rapid technology advancement
Plant Capacity and Utilization
Plant Capacityand Utilization
Year >> 2005-06 2006-07 2007-08 2008-09 2009-10
Plant capacity (in Million Tones) 157.35 165.64 179.1 205.96 240.85
Capacity untilization 90% 94% 94% 88% 84%
Production (in Million Tones) 141.81 155.64 168.31 181.61 201.37
Production Growth 11.16% 9.75% 8.14% 7.90% 12.67%
Plant Capacity and Utilization
Tariff Commission reported that cement
industry is the only growing despite the global
economic downturn.
India faces regional imbalance in production of
cement due to the limitation of sources material.
In India production concentrates at:
5% Andhra Pradesh
7% 16% Rajasthan

6% Madhya Pradesh
Gujarat
Tamil Nadu
13% 15.50%
Maharashtra
Karnataka
9% 9%
Chhattisgarh
Trends in selling Prices
1989 prices started determining via market
forces.
All-India retail price of cement increase by
3.75% since 2008 (INR 240) to 2009 (INR 249).
Cost of Production and Sales
Cost of production of cement is a major factor
for determining price
Cost of cement comprise of 11 heads of expenses.
Structure of cost of production
Cost of head % Cost of Sales
Lime Stone cost
Gypsum/fly, ash/slag cost
56%+
Power, Fuel and stores & spares
Packing expenses
Salaries & wages
Repais & Maintenance
Interest
24%- (Balancing figure)
Depreciation
Overheads (Factory & Admin)
Dealers commission
Cement transportation chanrges 20%+
Cost of Production & Sales
As per tariff commission report cost of 50kg bag
incl. interest & commission is INR 128 (in
India and INR 126 in northern region.
Excise duty is applied on cement minimum of
INR 14.94 depending on the selling price and
VAT.
Tariff Commission: Rates of Excise
duty
Basis Rates
For retails sales price of cement INR 290/- per ton +(2%+1%)
not exceeding 190/bag of 50kg Education cess (min of 14.94)

10% of retail sale price or INR

For retails sales price of cement 290 per ton+ (2%+1%) Education
exceeding 190/bag of 50kg cess whichever is higher.
10% of retail sale price or INR
For institutional sale of cement 290 per ton whichever is higher.
Clinker INR 375/- per ton
Tariff Commission: Rates of VAT

VAT Rates
General 12.5% of retail price
13% + Entry tax @ 1% for MP
14% for Chhattisgarh
Specific
14.5% for Andhra Pradesh
12.5% for Gujarat
RKS Final Report
Capacity utilization in India is 83.9%, whereas in
north region utilization is 88% in 2011 compared
to 97.8% in 2010.
Sales promotion and advertisement to be
provided by the manufacturer company.
Corporate tax rates are 31.5% incl. surcharge for
taxable income over INR 1 cr.
Industry Debt Equity ratio is 0.49:1
RKS Final Report : Marketing Set up
Own Sales Dept.

Stocking with C&F agents/own

warehouses/government warehouse

Dealers/distributors

Sub-dealers/distribution

End users
RKS Final Report : Estimated selling
expenses
Estimated Selling Expenses
Expenses Basis
Cement transport charges @ 20% of cost of sales
Dealers commission and cash discounts @ 2.50% of cost of sales
Sales forces @ 1% of cost of sales
Sales promotion and advertisement expenses @ 2% of cost of sales
Solution on behalf of RKS
Does the market exits for new cement plants? If
yes with what capacity & the cost of the project.
Selling price for RCL ? How pricing to help to get
established in market.
How pricing to help in getting the funding?
Projecting for the revenue, cost and profits.
Suggested capacity and pricing.
Retail pricing strategy Price skimming or price
penetration.
Does the market exits for new cement plants?

As per the geographical definitions available Jaipur forms

part of North India.
Yes Market exits for the New cement plant in North India.
Projected demand supply figures shows the mismatch and
marks the scope for new plant.
If yes with what capacity & the cost of the
project?
Past trends shows the capacity utilization has came down
from 94% to 88% and production growth from 11.16% to
7.9%.
Ministry confirms the growth rate for the industry as 8%
despite global slow down and projected growth for 2009-
2010 at 12.67%.
Rajasthan holds 2ed spot in raw material access
To operate with 85% capacity, with total cost of project
to be INR 500Cr (for total installed capacity of 1million
tonnes)
Selling price for RCL ? How pricing to help to get
established in market
Price for April 2010 should be INR 267/50kg
Bag. (considering growth of 12.67%).
Price is very much less compared to actual price
reported in month of Dec 10 in north India @
INR 330/50kg Bag.
How pricing to help in getting the
funding?
Industry Debt-Equity ratios is 0.49:1
Competitive price helps to generate more sales and
with more sales company can helps to fund its
future expansion plans.
With the competitive price company would be able
to maintain market share as well and enroot the
small financially week companies carrying high
debts.
Healthy revenue structure also helps to get the good
ratings which further helps to reduce the cost of
funds.
 Projecting for the revenue, cost and
profits?

Revenue : - 1mln @ 85% *267=

INR 4,539 Bln Revenue Cost
Tax VAT @ 12.5%= INR 567
Mln.
Profit = 3.97 Bln
Corp. Tax @ 31.5% = 1.25 Bln
Retail pricing strategy Price skimming
or price penetration.
Thanks