Determinant of Profitability in Indian Cement Industry: An Economic Analysis

Abstract

Efficiency of any organization can be judge through its profitability. Profitability of the firm is highly influenced by internal and external variables, i.e., size of organizations, liquidity management, growth of organizations, component of costs and inflation rate. In the present paper an attempt has been made to identify which variable are judging the profitability of Indian Cement Industry. The study covers the all listed cement firms working in India for the period of 2001 to 2008. To determinant profitability backward regression analysis were used on the variables of the study. The result of the study shows that liquidity, age of the firm, operating profit ratio, interest rate and inflation rate has played a vital role in the determination of the profitability of Indian Cement Industry. (ProQuest: ... denotes formula omitted.) INTRODUCTION The capitalist firm being one of the prime economic institutions of a modern economy, analysis of its profitability assumes immense significance. Analysis of the determinants of firm's profitability is of utmost importance to all stakeholders of a firm, especially to its common equity investors. Though a firm's profitability determinant by the internal and external variables. In this study, we remain confined to the determinant the profitability of the large firm engaged in the Indian Cement Sector. From corporate finance literature the identified factors are: Growth in size, growth in sales, operating profit ratio, leverage liquidity, receivables turnover, fixed assets turnover, age, interest rates and inflation rate. We will examine how a set of predictor variables that reflect operating characteristics of firms and strategic decisions of firm managers affects multiple measures of profitability of firms. The other important objective of the study is to measure quantitatively the impact of selected number of factors on profitability of Indian Cement Industry. The period of the study spans across die decade of the 2000s from 2000-01 to 2007-08, which will be divided^ into two sub-periods. LITERATURE REVIEW Modern literature in industrial economics suggests two schools of thought explaining performance in terms of profitability: the structure-conduct-performance (SCP) and firm effect models. See Schmalensee (1989) and Mauri and Michaels (1998) for a discussion. In short, the SCP model argues that an exogenously given market structure determines firm behavior and profitability, whereas in firm effect models market structure in endogenous and the result of firm characteristics. The SCP model is embedded in neoclassical theory and based on the notion of a representative firm. Any differences between firms are either transitory or not important, implying that profitability is determined by common structural characteristics of the industry. Bain (1951) proposes the market structure as the principal explanation of firm and industry profitability arguing that the average profitability of firms in highly concentrated industries is higher than in less concentrated industries. The underlying assumption is that concentra tion facilitates collusion and that colluding firms raise price above competitive levels. As pointed out by Bain (1956) , barriers to entry, such as economies of scale or capital requirements, prevent high profits to be eroded by the entry of new firms into the market. In firm effect models on the other hand, the fundamental assumption is that heterogeneity in profitability is due to persistent differences across firms. Within this school of thought, Demsetz (1973) introduces the superior firm hypothesis stating that firms differ with respect to their level of productivity and that these interfirm differences are the major factor behind profit heterogeneity. The logic behind it is that firms operating at relatively higher productivity levels have competitive advantages over less productive competitors which are reflected in their profitability. …

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