a project report on working capital2
DESCRIPTION
HINDALKO RENUKUTTRANSCRIPT
A PROJECT REPORT ON
WORKING CAPITAL MANAGEMENT
OF HINDALCO INDUSTRIES
LTD.
YEAR 2014
Submitted To: - Submitted By:-
Vimal Raheja PANKAJ KUMAR GUPTA
PREFACE
Acknowledgement
Table of Content
ADITYA BIRLA GROUP
Aditya birla group, with the turnover of over US $ 40 billion and
136,000 employees, is among top three leading business houses in
India. The Group has been ranked Number 4 in the global ‘Top
Companies for Leaders’ survey and ranked Number 1 in Asia Pacific
for 2011. ‘Top Companies for Leaders’ is the most comprehensive
study of organizational leadership in the world conducted by Aon
Hewitt, Fortune Magazine, and RBL (a strategic HR and Leadership
Advisory firm).The Aditya birla group is India’s first truly MNC whose
over 30% of revenues flow from its operations across the world.
The group is transactional conglomerate with 72 state-of-the-art manufacturing units and
sectoral span, in India, Thailand, Indonesia, Malaysia, Philippines, Egypt, Canada, Australia,
China. (36 countries) Over 66 units in India as well as abroad (in Thailand, Indonesia, Malaysia,
Philippines, Egypt, Canada, Australia, China) and international trading operations spanning
several countries included Singapore, Dubai, Russia, Vietnam, Myanmar, and China make it
India’s first truly multinational conglomerate.
The Aditya Birla group enjoys a front runner position:
Globally:-
A metals powerhouse among the world’s most cost efficient Aluminium and copper producers. Hindalco–Novelis from its fold in fortune 500 company. It is the largest Aluminium rolling company.
It ranks as No.1 in viscose staple fiber The largest single location palm oil producer The third largest producer of insulators The third largest producer of carbon black The eleventh largest producer of cement and the largest in single geography The largest single location copper smelter Among the world’s top 15 BPO’s and among India’s top three Among the best energy efficient fertilizer plants The largest Indian MNC with manufacturing operations in the USA
IN ASIA:- The largest integrated aluminium producer Among the best energy-efficient fertilizer plants in Asia
IN INDIA:- A premier branded garment player The second largest chore – alkali sector Among the top five mobile communication company Among the top three supermarket chains in the retail market Second largest player of viscous filament yarn Second largest private sector insurance company and a leading assests
management company Among the top 6 BPO companies
GROUP VISION
“To be the premium metals major, global in size and reach, with a passion for excellence”
GROUP MISSION
“To relentlessly pursue the creation of superior shareholder value by exceeding customer expectations profitability, unleashing employee potential and being a responsible corporate
citizen adhering to our values.”
GROUP VALUES
“Integrity, Commitment, Passion, Seamlessness, Speed”
HINDALCO INDUSTRIES LTD.
INTRODUCTION:-
An industry leader in aluminium and copperAn industry leader in aluminium and copper, Hindalco Industries Limited, the metals flagship company of the Aditya Birla Group is the world's largest aluminium rolling company and one of the biggest producers of primary aluminium in Asia. the visionary — late Mr. G.D. Birla set up India's first integrated aluminium facility at Renukoot, in the eastern fringe of Uttar Pradesh, India. It was backed by a captive thermal power plant at Renusagar in 1967. Hindalco attained its leadership position in the aluminium industry under the dynamic leadership of the late Mr. Aditya Vikram Birla — a formidable force in the Indian industry. In 1958, The Company was Incorporated on 15th December, at Mumbai to manufacture alumina, aluminium and aluminium fabricated items. The Company was formed by the house of Birlas in collaboration with the Kaiser Organisation of U.S.A.
Manufacturing Location:- The Kollur foil plant ( Andhra Pradesh). In 2008, consequent to the acquisition of Indal by Hindalco. Other locations are:- Belur(west Bengal), Dahej, Hirakud(Orissa), Belgaum, Silvassa(orissa), Taloja(maharashtra), Alupuram(kerala), Renukoot(u.p) , Muri(Jharkhand).
And it was through the vision and guidance of Mr. Kumar Mangalam Birla, the Group Chairman that the business segments of aluminium and copper are consolidated to make Hindalco the non-ferrous metals powerhouse it is today. Later acquisitions and mergers, with Indal, Birla Copper and the Nifty and Mt. Gordon copper mines in Australia, strengthened our position in value-added alumina, aluminium and copper products.
The acquisition of Novelis Inc. in 2007 positioned us among the top five aluminium majors worldwide and the largest vertically integrated aluminium company in India. Today we are a metals powerhouse with high-end rolling capabilities and a global footprint in 13 countries. Our consolidated turnover of USD 15.85 billion (Rs. 72,078 crore) places us in the Fortune 500 league.
Nearly 1,000 aluminium panels make up the outer shell of 'Spaceship Earth', the world's most famous geodesic dome, at the Walt Disney World's Epcot Centre, Florida.
Operations in 5 continents, reaching customers in more than 50 countries. One of the world’s leading low cost producers of aluminium. One of the world’s leading largest custom copper smelters at a single location. Birla Copper is the only manufacturer of the 19 mm diameter copper rod in India. This
rod is used for groove conductors and profiles. Largest integrated aluminium producer in the world.
OUR VISION , MISSION AND VALUES
Our vision
“To strengthen our position as a premium Aluminium company, sustaining Domestic
Leadership and Global Competitiveness through Innovation, Quality and Value Added
Growth”
Our mission
“To pursue the creation of value for our Customers, Shareholders, Employees and society
at large”
Our values — Path to excellence
INTEGRITY
Honesty in every action
COMMITMENT
Deliver on the promise
PASSION
Energized action.
SEAMLESSNESS
Boundary less in letter and spirit
SPEED
One step ahead.
MANAGEMENT TEAM
Board of Directors
Mr. Kumar Mangalam Birla, Chairman
Mrs. Rajashree Birla
Mr. C. M. Maniar
Mr. M. M. Bhagat
Mr. K. N. Bhandari
Mr. A. K. Agarwala
Mr. N. J. Jhaveri
Mr. Ram Charan
Mr. Jagdish Khattar
Mr. D. Bhattacharya, Managing Director
Mr. M. Damodaran
CHEIF FINANCIAL OFFICER Mr. Praveen Maheshwari
Head – Corporate Projects & Procurement Cell
Mr. B.B Jha
Company Secretary
Mr. Anil Malik
Chief People Officer
Mr. Vineet Kaul
Business / Unit Head
Mr. Dinesh Kumar Kohly,
Chief Operating Officer (Renukoot & Renusagar Unit)
HISTORY OF HINDALCO INDUSTRIES LIMITED
Hindalco embarked on its journey in 1958. Its first real contribution to the vision of an industrial India occurred four years later, when the visionary — late Mr. G.D. Birla set up India's first integrated aluminium facility at Renukoot, in the eastern fringe of Uttar Pradesh, India. It was backed by a captive thermal power plant at Renusagar in 1967. Hindalco attained its leadership position in the aluminium industry under the dynamic leadership of the late Mr. Aditya Vikram Birla — a formidable force in the Indian industry.
And it was through the vision and guidance of Mr. Kumar Mangalam Birla, the Group Chairman that the business segments of aluminium and copper are consolidated to make Hindalco the non-ferrous metals powerhouse it is today. This was achieved in part by expansion through mergers and acquisitions with companies such as Indal and Birla Copper. Hindalco also secured copper reserves and amplified its operating base by acquiring the Australian Nifty and Mt. Gordon copper mines. Over the years, Hindalco has grown into the largest vertically integrated aluminium company in the country and among the largest primary producers of aluminium in Asia. Its copper smelter is today the world's largest custom smelter at a single location.
In 2007, the landmark acquisition of Novelis Inc., the world's largest aluminium rolling company, placed Hindalco's footprint across the globe, securing it a rank amongst the top five global aluminium majors and also placing it in the Fortune 500 league.
Nearly 1,000 aluminium panels make up the outer shell of 'Spaceship Earth', the world's most famous geodesic dome, at the Walt Disney World's Epcot Center, Florida.
Operations in 5 continents, reaching customers in more than 50 countries. One of the world’s leading low cost producers of aluminium. One of the world’s leading largest custom copper smelters at a single location. Birla Copper is the only manufacturer of the 19 mm diameter copper rod in India. This
rod is used for groove conductors and profiles. Largest integrated aluminium producer in the world.
1958
The Company was Incorporated on 15th December 1958, at Mumbai to Manufacture alumina,
aluminium and aluminium fabricated items.
The Company was formed by the house of Birla’s in collaboration with the Kaiser Organization
of U.S.A. According to the Company's agreement with Kaiser Aluminium and Chemical
Corporation, the Collaborators agreed to allot to the Collaborators 4,80,000 fully paid-up equity
shares of Rs 10 each.
The Company also concluded Technical Advisers and Consultant Agreements with Kaiser
Aluminium Technical Services Inc., California, who agreed to train the Indian technical
personnel, to supply the Company necessary technical advice, to assist in operating the plant
including aluminium fabrication and to provide information for a period of 20 years on all
technical matters. An agreement was also entered into with Henry J. Kaiser Company for such
design, engineering procurement and related services with regard to the construction of the plant
at Rihand as were to be performed outside India and with Kaiser Engineers Overseas
Corporation for such services to be rendered in India.
1962 - Commencement of production at Renukoot (Uttar Pradesh) with an initial capacity of
20,000 MTPA of aluminum metal and 40,000 MTPA alumina
1965 - Downstream capacities commissioned (rolling and extrusion mills at Renukoot)
1967 - Commission of Renusagar Power Plant- a strategic and farsighted move.
1991 - Beginning of major expansion programme.
1995 - Mr. Kumar Mangalam Birla takes over as chairman of Hindalco board.
1998 - Foil Plant at Silvassa goes on stream.
1999 - Aluminium alloy wheels production commenced at Silvassa.
Brownfield expansion of metal capacity at Renukoot to 2,42,000 TPA
2000 - Acquisition in controlling stake in Indian Aluminum Company Limited (Indal) with
74.6% equity holding.
2002 - The amalgamation of Indo Gulf Corporation Limited copper business, the Birla Copper
with Hindalco with the effect of 1st April 2002
2003
Hindalco acquires Nifty copper mine in March 2003 through Aditya Birla Minarals Ltd (ABML,
formally Birla Minerals Pvt Ltd)
ABML acquires the Mount Gordon Copper Mines in November 2003.
Equity stake in Indal increased to 96.5% through an open offer.
Brownfield expansion of aluminum smelter at Remukoot to 3,45,000 TPA
2004 - Copper smelter expansion to 2,50,000 TPA
MOU signed with state government of Orissa and Jharkahand for setting up Greenfield aluminua
refining, smelter and power plant.
2006
Hindalco announces 10:1 stock split . Each share with face value of Rs 10 per share split into 10
shares of Re.1 each. Hindalco completes largest Right issue in the history of Indian capital
market with total size of Rs 22,266 million. Equity offering and subsequent lisition of birla
Minarals Ltd. On Australia stock Exchange.
Joint venture with Alumex USA for manufacture of high strength aluminium alloys for
application in aerospace, sporting goods and surface transport industries.
2007
Successful acquisition of Novelis, making Hindalco the largest in aluminium rolling and among
the global top five metals major, with the presence in 11 countries outside India. Acquision of
Alcan’s 45% equity stake in the Utkal Alumina project, theerby making Hindalco the 100%
project owner.
2008
The company has issued rights in the ratio of 3:7at a premium of Rs.95/- Per Share.
2009
Hindalco Industries, Aditya Birla group flagship firm, has decided to cut its overseas operations
and is restructuring its capital Expenditure in India in an effort to stabilize operations. As part of
this overall plan, Novelis, which Hindalco acquired for billion 2007, is closing its sheet mill at
Rogers tone in the UK, involving 440 job losses.
2010
Hindalco ranked ninth across industries on Forbes Asia's Fab 50 Companies list of Asia's 50
most valued companies.
Hindalco has entered into an agreement with Coal India Ltd (CIL) for securing mine-specific
coal supplies to the Renukoot facility of Hindalco at 10 % premium over the agreed price.
Hindalco Industries Ltd has announced that its subsidiary - Utkal Alumina International Ltd.
(UAIL) has tied up a debt of Rs. 4,906 Crore from a group of banks.
Hindalco Industries Ltd, Utkal Alumina International Ltd. (UAIL), 100% subsidiary of Hindalco,
is setting up a 1.5 MPTA alumina Refinery in Rayagada district of Orissa. The project will feed
the alumina requirements of the Mahan and the Aditya smelters presently Under construction.
Hindalco - Novelis Inc. Announces Pricing of .5 Billion Senior Unsecured Notes.
2011
The Company is setting up a Greenfield Aluminium Smelter Project in Madhya Pradesh
(Mahan Project) with a capacity of 359,000 TPA of aluminium supported by 900 MW captive
power plant at a cost(Including financing cost) of Rs. 10,500 Crs.
An Imminent name in aluminium production in India, Hindalco Industries has recently got
Government approval for cutting down the Forest of Orrisa, Rayagada district. The proposed
reason for acquiring this green clearance is an alumina refinery project to be set up in Rayagada
that would involve an investment up to Rs. 6,000 Crore.
2012
Hindalco Industries, an integral part of the Aditya Birla Group announced it is expecting to
commence its 1.5 million tons per Annum (MTPA) alumina refinery by January 2013, located
in Orissa.
Moving against the trend of avoiding any plan by companies amid global economic slowdown,
Hindalco Industries has achieved financial closure for Rs 9,896 crore debt for its Greenfield
smelter project at Lapanga in Odissa in one of the largest syndication in Recent times.
BUSINESS OUTLOOKS
This Company has successfully demonstrated benefit of integrated approach with low cost upstream operations and significant abilities and reach in downstream business. The robustness of Novelis’ de-risked business model by virtue of its geographic spread – strong presence in emerging markets, product portfolio – with a strong proportion of recession proof and yet high potential beverage cans in the product mix and focused approach to leverage the status of preferred vendor to global auto majors have withstood these uncertain times. Hindalco’s aggressive expansion programme has made a significant headway, despite tough ground conditions at its project locations.
Greenfield Projects:- Greenfield Projects have made significant progress during the year despite tough ground conditions at the project locations.
• Utkal Alumina International Ltd (UAIL): The construction of the alumina refinery, along with a 90 MW captive co-generation plant is in progress at UAIL, a 100% subsidiary of the Company. The output from UAIL would be sufficient to feed alumina to the Mahan and the Aditya Smelters.
• Mahan Aluminium Project: This 359 KTPA Aluminium Smelter, along with 900 MW CPP, is coming up in Bargwan, Madhya Pradesh. The project is on the verge of commissioning. Mahan Aluminium project and Utkal Alumina project are now close to the stage of commissioning. These projects will re-define Hindalco’s aluminium business since all these projects will have a world beating cost structure. The Group of Ministers constituted by the Government of India to consider environmental and developmental issues related to coal mining etc, has reported to have recommended granting of forest clearance by the Ministry of Environment &Forest [MoEF] for Mahan Coal block on certain conditions.
• The Aditya Aluminium and Refinery project: A 359 ktpa, Aluminium smelter along with a 900 MW captive power plant, identical to the Mahan Project, is coming up in Odisha. The project is slated for completion in 2013. A coal block has been allotted for this project jointly with Mahanadi Coal Fields Limited and Neyveli Lignite Corporation Limited. Alumina Refinery along with a cogen plant, is also coming up.
• The Jharkhand Aluminium project: Aluminium smelter along with a captive power plant is coming up in Sonahatu, Jharkhand. The land acquisition process has already begun. For this project the Tubed coal mine has been allotted to the project jointly with Tata power.
Brownfield Projects: There were important developments in India w.r.t. your Company’s strategic goal of higher VAP proportion. The Hirakud FRP project has made a significant progress. This project, which involved relocation of some equipments from a closed facility of Novelis, will be the first and the only facility that will have the capability to produce canbody stock in India. This facility will take Hindalco’s FRP play on a higher plateau in terms of capability and profitability in the coming years.
PRODUCTS
Billets:-these are top quality billets with a smooth surface
finish. Billets are used mainly for producing extrusion products and forgings. Hindalco’s metal is
aregistered brand at London Metal Exchange.
Alloy Ingots:-these products are used in automobile industry
as well as electrical applications. These are further melted and processed into a large number of
products for various downstream applications.
Alloy Wheels:- hindalco manufactures
world class alloy wheels. Branded as aura alloy wheels , these high
performance wheels are available for nearly all vehicles running on
the Indian roads.maruti Suzuki, tat motors, fiat india and HM-Mitsubhisi. Hindalco was awarded
the prestigious ISO/TS 16949:2002 certification by RWTUV.
Rolled product:- Hindalco has become the world's largest aluminium rolling
company with its acquisition of Novelis, the global leader in value-added high-end
aluminium flat rolled products and aluminium can recycling. The combined volume of sales
of flat rolled products in the world market is about 3 million tonnes, and the market share is
more than 20 per cent.
SALES RATIO
Domestic Market
Aluminum Catheter .12%
Ingot 44.20%
Wire Rod 23.38%
Extrusion 7.48%
Rolled 13.56%
Vanadium 1.78%
Total 90.00%
Export Market
Ingot 1.26%
Wire Rod .35%
Extrusion .01%
Rolled 7.84%
Total 10.00%
COMPETITORS
NATIONAL ALUMINIUM COMPANY LIMITED(NALCO)
Incorporated in 1981 as a public sector enterprise government of india , NALCO is Asia’s largest
integrated aluminium , encompassing boxite , alumina , refining , aluminium smelting and
casting, power generation , rail and port operations .Commissioned during 1985-87,NALCO has
emerged to be a star performer in production and export of aluminium, and more significantly ,
in propelling in self-sustained growth.
MADRAS ALUMINIUM COMPANY LTD(MALCO)
MALCO is a part of Vedanta resources, a London listed metals and mining major with
aluminium with copper and zinc in operations in U.K, india and Australia. MALCO is a primary
aluminium producer in south india with operations emcompasses mining , refining, smelting and
power generation, MALCO is surging ahead to achieve global recognition in aluminium
production.
MAN INDUSTRIES LTD
Man industries ltd. is a member of the man group, UK. The organization has been expanding,
integrating and growing at a speed of excellence.
STERLITE INDUSTRIES LTD.
Sterlite industries ltd. is the principal subsidiary of Vedanta resources plc, a FTSE 100
diversified global natural resources major. Sterlite produces copper aluminium, zinc, led, silver
& commercial energy. They have strong balance with capital employed of rs. 58255 crores, and
a strong cash flow of rs. 8400 crores and gearing of 27% as at march 31st 2012.
SIGNIFICANCE OF THE STUDY
The study basically aims to find out the financial performance of the hindalco industries ltd.
Knowledge of the current financial position are vital for a company’s future course of action. It
includes familiarizing with the various financial management policies, standards, accounting
system, financial practices, internal control system and other salient features of the company.
RESEARCH METHODOLOGY
RESEARCH DESIGN
The study was carried on a explorative basis using accounting and financial data. the procedure followed in this study consist of following steps;
The research include figurative and diagrammatic interpretation for the ease of comparison.
Understanding of aluminium industry in global and domestic scenario. Determining the demand and supply in near future to understand the future prospect of
the industry. Evaluating hindalco’s position in aluminium industry.
RESEARCH METHODOLOGY
Research methodology used here is purely explorative. it is used when one is seeking into the general nature of the problem, possible decision alternatives and relevant variables that need to be considered.this resistance is also useful for establishing priorities among research questions and learning about practical problems of carrying out research.
The research methodology is highly flexible,unstructured and qualitative. Exploratory research hypothesis are either vague or ill defined,or they do not exist at all.
SAMPLING PLAN
There has been no sampling plan as such as the study involved understanding the various process and analysing them .The study involve the detailed analysis of secondary data calculated from various sources and therefore no sample size and plan has been considered.
DATA SOURCE:
Data has been collected through literature survey and expert opinion. Literature survey includes the collection of data from various sources like books and study material. The part of data is collected from primary sources and other from secondary sources.
PRIMARY SOURCES:
Information gathered by interview and discussing with the head and employees of departments and my project guide.
SECONDARY SOURCES:
Company annual report. Company websites. Published information on the related topics. Internal circulation booklets.
DATA ANALYSIS:
Different statistical tools are used like ms- word and ms-excel used for the analysis of data and also consulted by some related books.
INTRODUCTION:FINANCIAL MANAGEMENT
Finance refers to the management of flows of money through an organization. Finance is defined
as the provision of money at the time when it is required. Every enterprise, need finance to carry
on its operations and to achieve its target. Without adequate finance no enterprise can possibly
accomplish its objectives. Therefore, here we are going to analyze the capital structure of the
hindalco industries ltd.
Finance is regarded as the lifeblood of a business enterprise. This is because in the modern
money oriented economy, finance is one of the basic foundations of all kinds of economic
activities. It is the master key, which provides access to the entire source for being employed in
manufacturing and merchandising activities. It has rightly been said that business needs money
to more money. However, it is also true that money begets more money, only when it is properly
managed. Hence, efficient management of every business enterprise is closely linked efficient
management of its finances. In this study, an attempt has been made to conduct an analysis and
interpretation of the financial performance of the Hindalco Industries Limited for the period from
2011-12 to 2013-14. The study includes an attempt to analyze the annual report of Hindalco
Industries Ltd. for evaluating its physical, financial and operating performance. The researcher
intends to cover the working capital management, capital structure, financial management and
accounting policies and practices of the company.
The methodology adopted in this study includes ratio analysis, comparative balance sheets, cash
flow statements, schedule of working capital changes and trend analysis using secondary data.
Therefore, to measure the profitability, identifying the trends and achievements and assessing the
growth potential of Hindalco Industries Ltd. will reveal its overall strength and competency.
Hence, the researcher intends to cover the financial an in-depth study of financial management
system of the company for the reference period The way in which the study is conducted and the
interpretations drawn gives room for real and practical experience of financial practices that
guides the industry and economy in general. The test of success of a business enterprise is its
ability to earn profit and continue its operation and growth. Profit may be considered as an index
of success.
Financial planning results in the formation of the financial plan. It is primarily a statement
estimating the amount of capital and determining its composition.
Financial analysis is the process of identifying the financial strength and weakness of the firm by
properly establishing relationship between the item of balance sheet and P/L account. According
to Kennedy and Memuilez, "The analysis and interpretation of financial statement are an attempt
to determine the significance and meaning of the financial statements data so that a forecast may
be made of the prospects for future earning capacity, ability to pay interest and debt maturities
and profitability of a sound dividend policy.
2.1 MEANING OF WORKING CAPITAL
Working Capital is commonly defined as the difference between current assets and current liabilities. Efficient working capital management requires that firms should operate with some amount of working capital, the exact amount varying from firm to firm and depending, among other things on the nature of industry.
Capital required for a business can be classified in two main categories viz.
1) Fixed Capital2) Working Capital
Every business needs funds for two purposes – for establishment and to carry out its day-to-day operations. Long-term funds are required to create production facilities, through purchase of fixed assets such as plants and machinery, land, building, furniture, etc. Investments in these assets represent that part of firm’s capital which is blocked on permanent or fixed basis and is called fixed capital. Funds are also needed for short-term purpose for the purchase of raw material, payment of wages and other day-to-day expenses etc. These funds are known as working capital. In simple words, working capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such as cash, marketable securities, debtors and inventories. Funds thus invested in current assets keep revolving fast and are being constantly converted into cash and these cash flows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short-term capital.
2.2 CLASSIFICATION OF WORKING CAPITAL
Working capital may be classified on two bases :-
A) On the basis of Concept :-
On the basis of concept, working capital can be classified as,
Gross Working Capital Net Working Capital
B) On the basis of Time :-
On the basis of time, working capital can be classified as,
Permanent or Fixed Working Capital Temporary or Variable Working Capital
Gross Working Capital :-
The Gross working Capital is the Capital invested in the total current assets of the enterprises. Current assets are those assets, which can be converted into cash within a short period, normally an accounting year.
Gross Working Capital = Total Current Assets
Net Working Capital :-
The term Net Working Capital refers to the excess of current assets over current liabilities, or
Net Working Capital = Current Assets – Current Liabilities
Net Working Capital can be positive or negative. When the current assets exceed the current liabilities the working capital is positive and the working capital results when the current liabilities are more than the current assets. Current liabilities are those liabilities, which are intended to be paid in the ordinary course of business within a short period of normally one accounting year out of the current assets of the income of the business. The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital. Both the concepts have their own merits.
The gross concept is sometime preferred to the concept of working capital for the following reasons-
It enables the enterprise to provide correct amount of working capital at correct time. Every management is more interested in total current assets with which it has to operate then the
sources from where it is made available. It takes into consideration of the fact every increase in the funds of the enterprise would increase
its working capital. The concept is also useful in determining the rate of return on investments in working capital. The net working capital concept, however, is also important for the following reasons- It is a qualitative concept, which indicates the firm’s ability to meet its operating expenses the
short-term liabilities. It indicates the margin of protection available to short term creditors. It is an indicator of financial soundness of enterprise.
It suggests the need of financing a part of working capital requirement out of the permanent sources of funds.
Permanent or Fixed Working Capital :-
Permanent or Fixed Working Capital is the minimum amount, which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. Every firm has to maintain a minimum level of current assets is called permanent or fixed working capital as this part of working capital is permanently blocked in current assets. As the business grow the requirement of working capital also increases due to increase in current assets. The permanent working capital can further be classified as regular working capital and reserve working capital:
1. Regular working capital: This is the amount of working capital required for the continuous operations of an enterprise. It refers to the excess of the current assets over current liabilities.
2. Reserve working capital: it is the excess amount over the requirement for regular working capital which may be provided for contingencies that may arise at unstated period such as strikes, rise in prices, depression etc.
Temporary or Variable Working Capital :-
Temporary or variable working capital is the amount of working capital, which is required to meet the seasonal demands and some special exigencies. Variable working capital can further be classified as seasonal working capital and special working capital. The capital required to meet the seasonal need of the enterprise is called the seasonal working capital. Special working capital is that part of the working capital which is required to meet special exigencies such as launching of extensive marketing campaign for conducting research etc.
Temporary working capital differs from permanent working capital in the sense that it is required for short periods and cannot be permanently employed gainfully in business. It is further classified as seasonal working capital and special working capital :
1. Seasonal working capital : it is required to meet the seasonal needs of the enterprise such as, a textile dealer would require large amount of funds a few months before Diwali.
2. Special working capital: it is that part of working capital which is required to meet special emergency such as launching of extensive marketing campaigns for conducting research etc.
2.3 WORKING CAPITAL CYCLE
Under this “Working capital is represented by the excess of current assets over current liabilities identifying the relatively liquid portion of the total enterprise capital which constitutes a margin for meeting obligation within the ordinary operating cycle of the business”
The duration or time required to complete the sequence of events right from purchase of raw materials / goods for cash to the realization of sales in cash is called the Working Capital Cycle.
During this cycle, capital converted from one form to another form such as cash----------raw material----------finished goods----------debtors or bill receivable----------cash.
Working capital cycle also called circulating capital. The speed with which the working cycle completes one cycle determines the requirements of working capital. Longer the cycle larger is the requirement of working capital.
2.4 NEED AND OBJECTIVES FOR WORKING CAPITAL
Every business needs some amount of working capital. The need for working capital arises due to time gap between production and realization of cash from sales. This is an operating cycle involved in sales and realization of cash. There are time gaps in purchase of raw material and production, production and sales, realization of cash.
2.5 Importance of good working capital management
From a company’s point of view, excess working capital means operating inefficiency. Money that is tied up in inventory or money that customer still owed to the company cannot be used to payoff any of the company’s obligation. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period, slow collection may signal an underline problem in the company’s operations.
Advantages of adequate working capital
Solvency of the business: adequate working capital helps in maintaining solvency of the business by providing an uninterrupted flow of production. Goodwill
Goodwill: sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill.
Easy loans: a concern having adequate working capital, high solvency and good credit standing can arrange loans from banks and others on easy and favourable terms.
Regular payment of salaries, wages and other day to day commitments: a company which has ample working capital can make regular payment of salaries, wages and other day to day commitments which raises the morale of its employees, increases their efficiency, reduces wastage’s and costs and enhances production and profits.
Cash discounts: adequate working capital also enables a concern to avail cash discounts on the purchases and hence it reduces costs.
Exploitation of favourable market condition: only concerns with adequate working capital can exploit favourable market conditions such as purchasing its requirements in bulk when the prices are lower and by holding its inventories for higher prices.
Quick and regular return on investment: every investor wants a quick and regular return on his investments.
Disadvantages of excessive working capital
Excessive working capital means idle funds which earn no profits for the business and hence the business cannot earn a proper rate of return on its investments.
Excessive working capital implies excessive debtors and defective credit policy which may cause higher incidence of bad debts.
When there is excessive working capital, relations with banks and other financial institutions may not be maintained.
Disadvantages of inadequate working capital
Unable to adapt to changes: it is unable to finance the development of new products or the alteration in production techniques needed when new opportunity occur.
Cash discounts are lost: some companies will try to persuade their debtors to pay early by offering them a cash discount off the price owed. The advantages of being able to offer a credit line to customers are forgone.
Financial reputation is lost: a company with a good reputation can expect cooperation from trade creditors at times of financial difficulty. Conversely, a company with a bad reputation can expect credit controllers in the trade to be on their guard if it attempt to exceed the credit limit they have set. At such times, a credit controller may cut-off supplies of raw material to a factory, thus seriously disrupting production.
2.6 Approaches of financial working capital
AGGRESSIVE APPROACHES OF FINANCING WORKING CAPITAL
The aggressive method is where a company predominantely finance all its fluctuating current assets and most of its permanent current assets using short term source of finance and it is only a small proportion of its permanent current assets that is financed using long-term source. The company that used more short term source of finance and less long term source of finance will incur less cost but with a corresponding high risk. This has the effect of increasing its profitability but with a potential risk of facing liquidity problem. Such short term source of finance be withdrawn a or renewed on unfavourable terms.
CONSERVATIVE APPROACHES OF FINANCING WORKING CAPITAL
The other extreme method of financing working capital is where a company decided to use mainly long term sources of finance of very little short terms of finance to finance its working capital. This option means that the company’s finance is going to be relatively high cost( that is sacrificing low cost finance) but low risk; this will make the company’s profile profit to be low but does not run the risk of being faced with liquidity problem as a result of withdrawal of its source of finance.
The conservative method is where a company predominantely finance all its permanent current assets and most of its fluctuating current assets using long term source of finance and it is only a small proportion of its fluctuating current assets that is finance using short term source of finance.
Thus, working capital is needed for the following purposes:-
For the purchase of raw material, component and spare. To pay wages and salaries. To incur day-to-day expenses and overhead costs such as fuel, power and office expenses etc. To meet the selling costs such as packing, advertising etc. To provide credit facilities to the customers. To maintain the inventories of raw materials, work-in-progress, store, spares, and finished stock.
For studying the need of working capital in a business, one has to study business under varying circumstances such as new concern, as a growing and one, which has attained maturity. A new concern requires a lot of funds to meet its initial requirement such as promotion and formation etc. These expenses are called preliminary expenses and are capitalized. The amount needed for working capital depends upon the size of the company and the ambition of its promoters. Greater
the size of the business unit generally will be the requirement of the working capital. The requirement of the working capital goes on increasing with the growth and expansion of the business until it gains maturity. At maturity, the amount of working capital required is called normal working capital.
2.7 FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENT
A firm should have neither low nor high working capital. Low working capital involves more risk and more returns, high working capital involves less risk and less returns. Risk here refers to technical insolvency while returns refer to increased profits/earnings. The amount of working capital is determined by a wide variety of factors.
Nature of business Seasonality of operations Production cycle Production policy Credit Policy Market conditions Conditions of supply Length of production cycle Rate of stock turn over Rate of growth and expansion of business Price level changes Magnitude of profit
Nature of Business:
The working capital requirement of a firm depends on the nature of the business. For example, a firm involved in sale of services rather than manufacturing or a firm is allowing only cash sales. In the first instance, no investment is required in either raw materials or WIP or finished goods, while in the second instance there exist no receivables as there is immediate realization of cash. Hence the requirement of working capital will be lower.
Seasonality of Operations:
If the product of the firm has a seasonal demand like refrigerators, the firms need high working capital in the periods of summer, as the demand for the refrigerators is more and the firm needs low working capital in the periods of winter, as the demand for the product is low.
Production Cycle:
The term production cycle refers to the time involved in the manufacture of goods. It covers the time span between the procurement of the raw materials and the completion of the manufacturing process leading to the production of goods. As funds are necessarily tied up during the production cycle, the production cycle has a bearing on the quantum of working capital. The longer the time span of production cycle, the larger will be the funds tied up and therefore the larger the working capital needed and vice versa.
Production Policy:
The quantum of working capital is also determined by production policy. In case of the firms having seasonal demand of the products like refrigerators, air coolers etc., and the production policy of the firm determines the amount of working capital requirement. If the firm has production policy to carry production at a steady level to meet the peak demand, this will result in a large accumulation of finished goods (inventories) during the off-seasons and the abrupt sale during the peak season. The progressive accumulation of finished goods will naturally require an increasing amount of working capital. If the firm has production policy to produce only when there is a demand then the firm needs low working capital during the slack season and high working capital during season.
Credit Policy:
The level of the working capital is also determined by the credit policy, as the firm’s credit policy determines the amount of receivables. If the firm has a liberal credit policy, then the firm needs high working capital and the firm needs low working capital if the company’s credit policy does not allow it to extend credit to the buyers.
Market Conditions:
The working capital requirements are also determined by the market conditions. In case of the high degree of competition prevailing in the market the firm has to maintain larger inventories as customers are not inclined to wait for the product. This needs higher working capital requirements. If there is good demand for the product and the competition is weak, a firm can manage with smaller inventory of finished goods, as customers can wait for the product if it is not available in the market. Thus, a firm can manage with low inventory and will need low working capital requirements.
Conditions of Supply:
The availability of raw materials and spares also determine the level of working capital. If there is ready availability of raw materials and spares, a firm can maintain minimum inventory and need less working capital. If the supply of raw materials is unpredictable, then the firm has to
acquire stocks as and when they are available for ensuring continuous production. Thus, the firm needs to maintain larger inventory average and needs larger requirement of Working capital.
Length of Production Cycle:
The longer the manufacturing time, the raw materials and other supplies have to be carried for a longer time in the process with progressive increment of labor and service costs before the final product is obtained. Therefore, working capital is directly proportional to the length of the manufacturing process.
Rate of Stock Turn Over:
There is an inverse co-relationship between the quantum of working capital and the velocity or speed with which the sales are affected. A form having a higher rate of stock turnover will need lower amount of working capital as compared to a firm having a low rate of turnover.
Rate of Growth and Expansion of Business:
The larger size businesses require more permanent and variable working capital in comparison to small businesses. If a company is growing, its working capital requirements will also go on increasing. Thus, the growing concerns require more working capitals compared to the stable industries.
Price Level changes:
Price level changes also affect working capital needs. If the prices of different goods increase, to maintain same level of production, more working capital is needed.
Magnitude of Profit:
Magnitude of profit is different for businesses. Nature of product, control on the market and ability of managers etc. determine the quantum of profit. If the profit margin is high, it will help to arrange funds internally, which will also increase the working capital.
Other factors:
1. Management Ability2. Irregularities of supply3. Import policy4. Asset structure
5. Importance of labor6. Operating efficiency
Steps involved in working capital management:
Forecasting the Amount of Working Capital Determining the Sources of Working
Objectives of Working Capital Management:
Deciding Optimum Level of Investment in various WC Assets. Decide Optimal Mix of Short Term and Long Term Capital Decide Appropriate means of Short Term Financing
2.8 SOURCES OF WORKING CAPITAL
The company can choose to finance its current assets by
Long term sources Short term sources A combination of them
Long term sources of permanent working capital include equity and preference shares, retained earnings, debentures and other long term debts from public deposits and financial institution. The long term working capital needs should meet through long term means of financing. Financing through long term means provides stability, reduces risks or payment and increases liquidity of the business concern. Various types of long term sources of working capital are summarized as follow:
1. Issue of shares: It is the primary and most important sources of regular or permanent working capital. Issuing equity shares as it does not create and burden on the income of the concern. Nor the concern is obliged to refund capital should preferably raise permanent working capital.
2. Retained earnings: Retain earning accumulated profits are permanent sources of regular working capital. It is regular and cheapest. It creates not charge on future profits of the enterprise.
3. Issue of debentures: It creates a fixed charge on future earnings of the company. Company is obliged to pay interest. Management should make wise choice in procuring funds by issue of debentures.
4. Long term debt: Company can raise fund from accepting public deposits, debts from financial institution like banks, corporations etc. The cost is higher than the other financial tools.
5. Other sources: Sale of idle fixed asset, securities received from employees and customers are examples of other sources of finance.
Short term sources of temporary working capital
Temporary working capital is required to meet the day to day business expenditures. The variable working capital would finance from short term sources of funds. And only the period needed. It has the benefits of, low cost and establishes closer relationship with banker.
Some sources of temporary working capital are given below:
1. Commercial bank: A commercial bank constitutes significant sources for short term or temporary working capital. This will be in the form of short term loans, cash credit, and overdraft and though discounting the bills of exchange.
2. Public deposits: Most of the companies in recent years depend on this source to meet their short term working capital requirements ranging from six months to three years.
3. Various credits: Trade credit, business credit papers and customer credit are other sources of short term working capital. Credit from suppliers, advances from customers, bills of exchanges, etc helps to raise temporary working capital.
4. Reserves and other funds: Various funds of the company like depreciation fund. Provision for tax and other provisions kept with the company can be used as temporary working capital. The company should meet its working capital needs through both long term and short term funds. It will be appropriate to meet at least 2/3 of the permanent working capital equipments from long term sources, whereas the variable working capital should be financed from short term sources. The working capital financing mix should be designed in such a way that the overall cost of working capital is the lowest, and the funds are available on time and for the period they are really required.
SOURCES OF ADDITIONAL WORKING CAPITAL
Sources of additional working capital include the following:
Existing cash reserves Profits (when you secure it as cash) Payables (credit from suppliers) New equity or loan from shareholder Bank overdrafts line of credit Long term loans
If we have insufficient working capital and try to increase sales, we can easily over stretch the financial resources of the business. This is called overtrading. Early warning signs include:
Pressure on existing cash Exceptional cash generating activities. Offering high discounts for clear cash payment
Bank overdraft exceeds authorized limit Seeking greater overdrafts or lines of credit Part paying suppliers or there creditor Management pre occupation with surviving rather than managing.
WORKING CAPITAL MANAGEMENT
ATHINDALCO
3.1 MANAGEMENT OF WORKING CAPITAL
Management of working capital means management of all aspects of current assets and current liabilities. Basically, Working capital management is concerned with the problems that arise in attempting to manage the current assets, current liabilities and the inter relationship that exist between them.
Financial management should determine the quantum and structure of current assets. It should also see that current assets are financed from the proper sources. Management should also see that current liabilities are paid in time, while managing the working capital.
The main objective of working capital management is to manage current assets and current liabilities in a manner so that working capital can be kept in a satisfactory level. It is also taken into account that the working capital should be neither excessive nor inadequate. The amount of current assets should be adequate to pay the current liabilities in time and adequate security margin can be maintained. Accordingly, proper balance among the different constituents of current assets is maintained so that no current has more than required amount invested in it.
Management of working capital affects profitability, risk and liquidity of the business significantly. Management should, therefore, maintain proper balance among these factors while managing working capital. If the quantum of working capital is more, it will increase liquidity, but decrease profitability and risk. If business wants to earn more profit, it will have to bear higher risk. Risk means inability of the firm to pay current liabilities in time.
Thus, Working Capital Management refers to the management of current assets, namely cash, inventories, receivables and administration of current liabilities.
Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital. These policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short term financing, such that cash flows and returns are acceptable.
CASH MANAGEMENT : - Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.
DEBTORS MANAGEMENT :- Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances.
SHORT TERM FINANCING : - Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".
Cash budgets and cash flow forecasts
CASH FORECAST
A cash forecasts is an estimate of cash receipts and payments for a future period under existing
conditions. Every type of cash inflow and receipts, along with their timings, must be forecast.
Cash receipts and payments differ from sales and cost of sales in the income statement because:
1. Not all cash receipts or payment affect the income statement.
2. Some income statement items are derived from accounting conventions and are not cash
flows.
3. The timing of cash receipts and payments does not coincide with the income statement
accounting period.
CASH BUDGET
A cash budget is a commitment to a plan for cash receipts and payments for a future period after
taking any action necessary to bring the forecast into line with the overall business plan.
Cash budget are used to:
1. Assess and integrate operating budgets.
2. Plan for cash shortage and surplus.
3. Compare with actual spending.
Companies are likely to prepare a cash budget as part of the annual master budget, but
then to continually prepare revised cash forecasts throughout the year, as a means of
monitoring and managing cash flows.
SHORT TERM CASH
INVENTORY MANAGEMENT
INVENTORY MANAGEMENT: - Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow. An efficient system of inventory management will determine (a) what to purchase (b) how much to purchase (c) from where to purchase (d) where to store, etc.
Costs associated with inventory:
Purchase cost Ordering costs/set-up cost Carrying cost Stock out cost
NEED FOR INVENTORY MANAGEMENT
Successful inventory management involves creating a purchasing plan that will ensure that items are available when they are needed (but that neither too much nor too little is purchased) and keeping track of existing inventory and its use. Two common inventory management strategies are just-in-time method, where companies plan to receive items as they are needed rather than maintaining high inventory levels, and material requirement planning, which schedules material deliveries based on sales forecasts.
COSTS OF HIGH INVENTORY LEVELS
Keeping inventory levels high is expensive due to:
Purchase costs Holding costs (storage, stores administration, risk of theft/ damage / obsolescence)
COSTS OF LOW INVENTORY LEVELS
If inventory levels are kept too low, the business faces alternative problems:
Stock-outs (lost contribution, production stoppages, emergency orders) High re-order costs/ set-up costs Lost quantity discount
CLASSIFICATION OF INVENTORIES IN HINDALCO
Raw material ( bauxite , coal, caustic soda ) Work in progress ( alumina ) Consumable inventories (fresh wrap, super wrap etc) Finished products ( extrusions, rolled aluminium , aluminium sheets etc )
Working Capital Management is three dimensional in nature:-
1. It is concerned with the formulation. It is policies with regard to profitability, liquidity and risk.2. It is concerned with the decisions about the composition and level of current assets.3. It is concerned with the decisions about the composition and level of current liabilities.
3.2 WORKING CAPITAL MANAGEMENT AT HINDALCO INDUSTRY LTD.
To maintain the optimum level of working capital in such a big organisation is really a challenging task. The three basic components that determine the level of working capital in any organisation are:-
Cash Debtors B/R Inventory
On the basis of my research in Hindalco, Renukoot these basic components are managed in the organisation, in the under mentioned manner.
RECEIVABLES MANAGEMENT
The term receivables management may be define as collection of steps and procedure required to properly weigh the costs and benefit attached with the credit policies. It is consist of matching
the costs of increasing sales (particularly credit sales) with the benefits arising out of increased sales with the objective of maximizing the return on investment of the firm.
IMPORTANCE OF RECEIVABLES MANAGEMENT
The importance of receivables management is as follows:
1. Determining credit policy: the optimum credit policy is determined by the trade off between liquidity and profitability.
2. Evaluating the credit applicants: it should lay down clear cut guideline and procedure for granting credit to individual customers. This function will include the following steps:
Collection of credit information about the customers
Investigation in the credit capacity of those customers
Credit analysis
Fixing credit limits for each of them
Deciding collection procedure
3. Determining collection policies and methods: to recover the amount due from customer in time, a firm may follow any of the following methods:Direct and strict collection from customers on due data Bill discounting with commercial banksTaking the assistance of captive finance companies.
4. Control and analysis of receivables: in order to analyse the size of investments in the current assets from time to time following ratios may be very helpful:
Debtor’s turnover ratio Average collection period Ageing schedule of debtors Ratio of credit sale AR outstanding at any time.
DEBTORS/RECEIVABLES MANAGEMENT IN HINDALCO
Hindalco, generally does not sell its products on a credit basis to its customers except to Indian oil corporation ltd. And a few other customers. They provide credit based on the negotiations done by the buyers for the standard number of days i.e. 7,15, 21, 30.
Following are the types of financing undertaken by Hindalco:
1. Advance /bank guarantee (BG)- Under this bank guarantees to pay an agreed amount to Hindalco. This is the most preferred mode of sales for Hindalco. In case of BG ,
the credit period should not exceed 30 days from the date of invoice. Hindalco will try to bring this 21 days by end of FY’15.
2. Trade finance- in order to bridge its funding requirements, Hindalco negotiates with its consortium of banks to provide short term loans, for purchasing raw materials, processing and packaging of the commodities, which it pays back when it gets the money from its customers.
3. Letter of credit- it is a non-funded finance facility provided by the banks which is also called as documentary credit. The bank lends its guarantee of payment to the buyer. The bank also guarantees payment to the seller provided the ships the goods and complies with the terms of agreement. Here seller takes credits risk on the bank instead of buyers. The importer gets credit from the bank and does not have to make advance payments.
RATIO ANALYSIS OF HINDALCO
Financial ratios are relatively easy way to get a basic understanding of the financial health of an organization. They range from the very simple to the complex, and the relevance of many of the ratios depends on the nature of the organization and therefore should only be compared with similar companies.
1. PROFITABILITY RATIOS:
Return on Total Assets (ROTA):
Ratio measuring the operating profitability of a firm, expressed as a percentage of the operating assets. ROTA indicates a firm’s ability to efficiently allocate and manage its resources but (unlike ’return on equity’) ignores the firm’s liabilities. It is calculated by
ROTA = (Income before Interest and Tax/ Total Assets)*100
Particulars 2014 2013 2012
EBIT1685.38 2046.63 2736.95
Total Assets73769.95 66618.56 55647.62
ROTA2.28 3.0 4.9
Interpretation:-
Return on Capital Employed (ROCE):
A ratio that indicates the efficiency and profitability of a company’s capital investments. ROCE should always be higher than the rate at which the company borrows; otherwise any increase in borrowing will reduce shareholders’ earnings.
ROCE = (EBIT/ Capital Employed)*100
Particulars 2014 2013 2012
EBIT1685.38 2046.63 2736.95
Capital Employed59308 47829
ROCE3.45 5.72
Interpretation:-
Return on Equity (ROE):
The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporations’ profitability by revealing how much profit a company generates with the money shareholders’ have invested.
ROE= {(PAT)/ Net Worth}*100
Net Worth= Share Capital+ General Reserves – Misc. Expenditure
(Rs. In Crores)
Particulars 2014 2013 2012
PAT 1413.33 1699.20 2237.20
NET WORTH 33,972 32,032
ROE 5.00 6.98
INTERPRETATION: Due to decrease in financial leverage Net Worth of company has increased. Also the future maintainable profit has not increased in the same proportion as the Net Worth of the company thus ROE for the company has gone down.
2. MARGIN RATIOS
It is the amount of profit (at the gross, operating, pre tax or net income level) generated by the company as a percent of the sales generated. The objective of margin analysis is to detect consistency or positive/negative trends in a company’s earnings.
Positive profit margin analysis translates into positive investment quality. To a large degree, it is the quality, and growth, of a company’s earnings that drive its stock price.
Gross Margin Percentage (GMP):
A financial metric used to assess a firm’s financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings.
GMP = (Gross Profit/Sales)*100
(Rs. In Crores)
Particulars 2014 2013 2012
SALES 26,592.56 23,757.14 19,456.98
GROSS PROFIT 2237 2595 2265
GMP 8.41 10.92 11.64
INTERPRETATION: In the above case a decline can be seen in the GP ratio which is due to the reason that increase in sales has not resulted in an increase in GP which has gone down year after year and due to the increase in the cost of production.
Operating Profit Margin (OPM):
A ratio used to measure a company’s pricing strategy and operating efficiency. Operating margin is a measurement of what proportion of a company’s revenue is left over after paying for variable costs of production such as wages, raw materials etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt.
Operating margin gives analysts an idea of how much a company makes (before interest and taxes) on each dollar of sales. When looking at operating margin to determine the quality of a company, it is best to look at the change in operating margin over time and to compare the
company’s yearly or quarterly figures to those of its competitors. If a company’s margin is increasing, it is earning more per dollar of sales. The higher the margin, the better.
OPM= (Operating Profit/Sales)*100
(Rs. In Crores)
Particulars 2014 2013 2012
SALES 26,592.56 23,757.14 19,456.98
OPERATING PROFIT 3105 3155 2950
OPM 11.67 13.22 15.11
INTERPRETATION: As the ratio measures the quantum and extent of expenditure incurred in producing and selling the goods. The operating profit margin has decreased as compared to the previous years. The Operating profit has not been able to match the increase in sales. It means the level of operating expenses have not been able to match the increase in sales. High operating profit margin shows that company is in good state and has healthy margins. But due to inflation the operating expenses has increased considerably.
Net Profit Margin (NPM):
A ratio of profitability calculated as net income divided by revenues or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings. Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors.
Looking at the earnings of a company often doesn’t tell the entire story. Increased earnings are good, but an increase does not mean that the profit margin of a company is improving. For instance, if a company has costs that have increased at a greater rate than sales, it leads to a lower profit margin. This is an indication that costs need to be under better control.
NPM = (Profit After Tax/ Sales)*100
(Rs. In Crores)
Particulars 2014 2013 2012
SALES 26,592.56 23,757.14 19,456.98
PAT 2237.20 2136.92 1915.63
NPM 8.41 8.96 9.81
Interpretation: The reduction in Net profit margin primarily is due to high increase in interest paid during the year and cost of sales has increased considerably with the increase in sales.
3. ACTIVITY RATIOS
INVENTORY TURNOVER RATIO:- It is also called stock turnover ratio and shows the relation between cost of goods sold during the year and average inventory held during the year by the firm.
Inventory turnover ratio = Cost of goods sold Average inventory
Cost of goods sold = Opening stock + Purchases- Closing StockOr
Net Sales – Gross profit
Average Inventory = (Opening Stock+ Closing Stock)/2
Particulars 2014 2013 2012COGS 26166 24010 24220Average inventory 8308.59 7722.73 7697.13I.T.R 3.14 3.38 3.80
Days of inventory holding: 360/365
I/T ratio
For, 2011-12: 365/3.80 = 96 2012-13: 365/3.38 = 108 2013-14: 365/3.14 = 116
The inventory holding period of Hindalco Industries ltd. had decreased in previous year but in FY14 it has been able to recover its position in the metal industry and compared to its Competitors like Nalco and Sterlite.
DEBTOR TURNOVER RATIO:- It throws light on the collection and the credit policies of the firm. R/T ratio reveals the velocity of receivables collection by matching the annual credit sales to average receivables as follows:
Receivables turnover ratio = Annual Net Credit Sales/ Average receivables
Particulars 2014 2013 2012Net credit salesAverage receivablesD.T.R 17.71 19.72
Average collection period: 360/365
R/T Ratio
For, 2009-10 : 365/ 14.89 = 24.51
2010-11 : 365/ 19.01 = 19.2
2011-12 : 365/18.63 = 19.5
The average receivable period can be meaningfully evaluated in terms of credit policy of the firm. The average receivable period Of Hindalco Industries has decreased over the couple of years which is good for the company as the money will be readily available and which allow the company to invest timely and generate high margins.
WORKING CAPITAL TURNOVER RATIO:- It denotes the velocity or utilization of the working capital of the firm during a year.
It can be calculated as:
Working Capital turnover ratio =Annual net sales Average working capital
The higher will be the working capital ratio, lower is the investment in working capital and higher will be the profitability.
A high WCT Ratio reflects the better utilisation of working capital of the firm. However, a High WCT ratio also implies a low net working capital in relation to the sales volume and implies overtrading by the firm in relation to Net Working capital. This may be the risky proposition.
Particulars 2014 2013 2012Net sales 27851 26057 26597Average working capital
4685.05 5206.63 3222.2
W.C.T.R 5.9 5.0 8.25
Interpretation:
Total Asset turnover Ratio: This ratio measures per rupee sales generated by per rupee of tangible asset maintained by the firm.
It can be calculated as :
Total asset turnover ratio = Net sales Average tangible asset
particulars 2014 2013 2012
Net sales 27851 26057 26597
Average tangible assets 11725.65 15160.29
T.A.T.R 0.45 0.57
Interpretation:- The Total Asset turnover ratio of Hindalco Industries has improved over the year which is a good sign. This means that more sales have been generated per rupee of the tangible assets
4. LIQUIDITY RATIOS
CURRENT RATIO :- It is the most common and popular measure of studying the liquidity of a firm. It can be calculated as
Current ratio = Total Current Assets Total Current Liabilities
Total current assets include those assets which are in the form of cash or convertible into cash within the period of 1 year. It also includes prepaid expenses and short term investments.
Total current liabilities include all types of liabilities which will mature within a period of 1 year, e.g. bank overdraft, bills payable, creditors, provision of tax, proposed and unclaimed dividend.
Particulars 2014 2013 2012C.A 21,951.89 20150.03 16479.44C.L 12,581.79 9736.76 10035.04C.R 1.74:1 2.06:1 1.64:1
Interpretation:-
QUICK RATIO :- Quick ratio is used as a measure of the company ability to meet its current obligations. Since bank overdraft is secured by the inventories the other current assets must be sufficient to meet other current liabilities.
Quick ratio = liquid assets / current liability
Liquid assets = current assets - inventories
PARTICULARS 2014 2013 2012Liquid assets 13,037.31 12447.42 8736.58Current liabilities 12,581.79 9736.76 10035.04Quick ratio 1.03:1 1.27:1 0.87:1
Interpretation :-
5. CAPITAL STRUCTURE AND SOLVENCY RATIOS
One of many ratios used to measure a company’s ability to meet long-term obligations. The solvency ratio measures the size of a company’s after tax income, excluding non-cash depreciation expenses as compared to the firm’s total debt obligations. It provides a measurement of hoe likely a continue meeting its debt obligations. Acceptable solvency ratios will vary from industry to industry, but as a general rule of thumb, a solvency ratio of greater than 20% is considered financially healthy.
Generally speaking, the lower a company’s solvency ratio, the greater the probability that the company will default on its debt obligations.
Debt-Equity Ratio:
A measure of a company’s financial leverage is calculated by dividing its total liabilities by stockholders’ equity. It indicates what proportion of equity and debt the company is using to finance its assets. Sometimes only interest- bearing, long-term debt is used instead of total liabilities in the calculation.
A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. If more debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders.
DEBT EQUITY RATIO = TOTAL DEBT/ NET WORTH
Particulars 2014 2013 2012
TOTAL DEBT24,144.77 14,571.91
NET WORTH33,972.39 32,032.47
D/E RATIO0.72 0.46
Interpretation:- The Debt Equity Ratio is very high and has increased as compared to the previous years. Thus there is considerable increase in the leverage of the company but still the most of the operations are financed through shareholder’s equity.
INETREST COVERAGE RATIO
Significance :- A ratio used to determine how easily a company can pay interest on outstanding debt. The lower the ratio, the more the company is burdened by debt expense. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses.
Interest coverage ratio=EBIT/interest
Particulars 2014 2013 2012EBIT 1685.38 2046.63 2736.95Interest 436 294ICR 5.69 10.22
Interpretation:-
Statement of changes in working capital
Particulars Previous year( 2011-2012)
Current year (2012 – 2013)
Effect on working capital
Increase Decrease
(A)Current assets
Inventories
Trade receivable
Loans and advances
Cash and bank balance
Other CA
Current investment
13742.01
7541.05
1721.87
2539.95
1350.89
5528.00
13246.03
8017.17
2158.19
3295.99
1440.24
4859.56
476.12
436.32
756.04
89.35
495.98
668.44
TOTAL(A) 32423.77 33017.18
122.69
381.36
2261.88
413.67
618.79
2196.8865
(B)Current liabilities
Liabilities
Provisions
Short-term borrowings
Trade payable
3726.60
1499.79
4112.70
10433.39
4140.27
1377.10
3731.34
11052.18
TOTAL(B) 19772.48 20300.89
Working capital
Increase/ decrease in W.C
12651.29
65
12716.29
12651.29 12716.29 2261.88 2261.88
Statement of changes in working capital
Particulars Previous year Current year Effect on working capital
(2011-2012) (2012 – 2013)
Increase Decrease
(A)Current assets
Inventories
Investments
Loans and advances
Cash and bank balance
Other CA
Trade receivables
7742.86
4583.40
1647.65
722.30
355.78
1427.45
7702.61
6431.96
2272.42
1497.82
730.18
1515.04
1848.56
624.77
775.52
374.4
87.59
1608.25
5319.09
40.25
244.94
925.48
139.55
1350.22
3968.87
TOTAL(A)16479.44
20150.03
(B)Current liabilities
Short term borrowings
Trade payables
Other CL
Provisions
3456.78
4659.77
998.61
919.88
3701.72
3051.52
1924.09
1059.43
TOTAL 10035.04 9736.76
Working capital
Increase/Decrease working capital
6444.40
3968.87
10413.27
10413.27 5319.09 5319.09
Particulars Previous year(2012-2013)
Current year(2013-2014)
Effect on working capital
Increase Decrease
(A)Current assets
inventories
CASH FLOW STATEMENT OF HINDALCO
(A) Cash flow from operating activities- 31st march,2014
31st march,2013
31st march,2012
Net profit before tax 1,685.38 2046.03 2736.95Adjustment for :Finance costs 711.65 435.98 293.63Depreciation and amortization 823.29 686.95 689.97Impairment loss/(reversal) (net) - 17.25Unrealized foreign exchange(gain)/loss(net) 3.71 6.03Employees stock option scheme (0.09) 0.27 1.29Provisions/(provisions returned back) net 22.70 14.24 39.92Loss/(gain) on derivative transactions(net) (141.45) 17.87 (3.34)Provision/(write back) for diminution in carrying cost of investment(net)Investing activities (net) (1,048.55) (935.54 ) (562.01)Operating profit before w.c changes 2056.64 2289.68 3168.95Changes in w.c :-Change in inventories (1254.54) 40.24 (91.46)Change in trade and other recievables (568.99) 407.48 (1018.06)Change in trade and other payables 2035.35 1638.03 532.12Cash generation from operations 2268.46 284.41 2591.55Payament of direct taxes(net of refunds) (237.09) 636.75 (469.48)Net cash generated/(used)-operating activities
2031.37 352.34 2122.07
(B) cash flow from investment activities-Purchase of fixed assets (3457.58) (5530.84) (7168.16)Sale of fixed assets 10.24 20.69 11.20Purchase of share of subsidiaries(net) (1242.49) (541.58) (520.94)Return of capital from subsidiaries(net) - 66.86Sale of investments(net) 28.65 (1454.91) 623.67Loans/repayment of advances& loans from subsidiaries (net)
577.95 (1249.09) 70.04
Interest received 443.15 254.01 94.09Dividend received 237.04 259.65 456.28
Net cash generated/(used)-investing activities
(3403.05) (8242.07) (6366.69)
(C) cash flow from financing activities-Prepayment of long-term borrowings (14,513.72) (5142.99) -Proceeds from issue of shares(net of expenses)
1623.99 0.40 1.46
Proceeds from issue of share warrants - 541.31
Capital subsidy received 0.50 4.50 -Proceeds of long-term borrowings 16,786.72 14818.09 5969.11Repayment of long-term borrowings (369.63) (1.53) (1.53)Proceeds/(repayment) of short-term borrowings(net)
655.85 258.55 (433.58)
Finance costs paid (2303.12) (1519.85) (1019.18)Dividend paid(including dividend tax) (279.40) (331.01) (324.03)
Net cash generated/(used)-financing activities
1.601.19 8086.16 4733.56
Net increase/(decrease)in cash & cash equivalent
229.51 (508.25) 488.67
Add:-opening cash & cash equivalents 205.38 713.63 224.96Closing cash & cash equivalents 434.89 205.38 713.63
STATEMENT OF WORKING CAPITAL
particulars 2014-13 2013-12 2012-11
Current assetsinventoriesSundry debtorsCash and bank
balanceLoan and advanceOther current assetsTotalLessCurrent liabilities and provision
Current liabilitiesprovisionTotal
Findings
The overall working capital turnover ratio has increased except for the last year. It shows that working capital has been used properly by the company in making more sales.
The quick ratio has fallen below zero which shows that the liquidity position of the company is not good.
The inventory level is very high in the company as we can see that 56% of the total current assets is inventories. Therefore, the main finding of the working capital management study is that the company is more looking to invest in their inventories rather than any other current assets.
The company is also trying to decrease its current liabilities.
Suggestions
The firm has lower level of cash and bank balances as compared to other current assets especially inventories. Therefore, the company should try to reduce the inventory level by enhancing operating cycle.
The material available locally should be minimized to a larger extent as they may be purchased within shorter period of time. This will reduce the block of money as well as increase the liquidity position of the division.
Having an optimum stock level of raw materials, by storing only the required material will help.
The amount invested in inventories should be reduced.
Conclusion
It has been an excellent opportunity for me to carry out the study on Working Capital Management at Hindalco Industries Ltd, Renukoot. It helped me to a great extent to have an insight into the practical realities of the subject.
As per my study, Hindalco Industries is managing its Working Capital quite well. The Finance Department is carrying out its responsibilities efficiently. All the other major department are cooperating and synchronizing their effort for the progress of the company.
A firm should always invest in current assets for smooth and uninterrupted production and sales.
The working capital management changes as per the season, as the company is looking to make stock of Bauxite before commencement of rainy season. This will increase the inventory level which will automatically increase the current assets and ultimately working capital.
Going forward the continuation of the strong performance by aluminium companies seems apprehensive. Volume growth would be visible in the years to come, largely due to continuation of infrastructure spending (including housing), strong demand from the auto sector, which could help in driving demand for value added aluminium products.
The current ratio of Hindalco for the year 2013 is 2.06 ,Which is more thenthe idle of 2:1.This shows the enough liquidity position of an Hindalco to meet its obligations.
For the year 2013 Hindalco shows the Less liquidity of inventory .Thus Hindalco pay more attention of its liquidity of inventory such that they may be utilize more affectively.
In year 2013 Hindalco shows good repayment capacity .But 2013 it decreases in his repayment capacitiy .Thus the company may pay more attention on its credit purchase.
Reducing the rawmaterial conversion period can better control inventories. More attractive discount policy may make speedy collection from debtors.
Bibliography
The data has been collected through certain resources thet are as follows :-
BooksReferred :-
1. Financial Management ( By Khan& Jain)2. Financial Management (By I.M.Pandey)3. Financial Management (BY Brigham & Western)4. Ratio Analysis (By Keith A.Devis)5. Financial and Resource Management (By Maheshwary& Maheshwary)