aswini simha-working capital mgmt.1

8/6/2019 Aswini Simha-Working Capital Mgmt.1

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Working Capital Management & Profitability Analysis of Kennametal Widia India________________________________________________________________

M. P. Birla Institute of Management, Associate Bharatiya Vidya Bhavan

1

A Study ofWorking Capital Management

& Profitability Analysisof Kennametal Widia India

A Dissertation submitted in partial fulfillment of the requirement for theaward of M.B.A Degree of Bangalore University

By

Ashwini Simha

Reg.No. 02XQCM6011

Under the Guidance of

Prof Sadhu Handa

M.P.Birla Institute of ManagementAssociate Bharatiya Vidya Bhavan#43, Race Course Road

Bangalore 560001

October 2004


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DECLARATION

I hereby declare that this project work embodied in this dissertation

entitled A Study of Working Capital Management & Profitability

Analysis Of Kennametal Widia India has been carried out by me

under the guidance and supervision of Prof.Sadhu Handa, M.P.B.I.M

Bangalore.

I also declare that this dissertation has not been submitted to any

University/Institution for the award of any Degree/Diploma.

Place: Bangalore (ASHWINI SIMHA)

Date: 13th

September 2004


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CERTIFICATE

I hereby certify that the project work embodied in this dissertation

entitled A Study of Working Capital Management & Profitability

Analysis of Kennametal Widia India has been undertaken and

completed by Ms.Ashwini Simha under my guidance and supervision.

I also certify that she has fulfilled all the requirements under the covenant governing thesubmission of dissertation to the Bangalore University for the award of M.B.A Degree.

Place: Bangalore (Professor Sadhu Handa)

Date: M.P.B.I.M

Bangalore 560001


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CERTIFICATE

This is to certify that the project work embodied in this dissertation entitledA Study of Working Capital Management & Profitability Analysis ofKennametal Widia India has been carried out by Miss. Ashwini Simha underthe guidance of Prof. Sadhu Handa, Faculty, M.P.B.I.M Bangalore

Place: Bangalore (Dr. N.S. Malavalli)

Date: PRINCIPAL


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ACKNOWLEDGEMENT

I take this opportunity to thank Dr N.S.Mallavalli, Principal, M.P.BirlaInstitute of Management for having given this opportunity to conductthis dissertation. I would like to express my deep sense of gratitude tomy guide Prof.Sadhu Handa for providing me with sufficientinteraction, and information and for guiding me during the course ofmy dissertation.

I hereby extend my sincere thanks Mr.Selvarajan and Mr.Varadaraj,

Kennametal Widia India for their valuable inputs.

I would like to thank all the personnel of Kennametal Widia India for

their cooperation and for providing the relevant data required.

Last but not the least; I would also like to thank my family and friends

for their support and encouragement throughout the project.

Ashwini Simha


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CONTENTS

EXECUTIVE SUMMARY 1

1 INTRODUCTION1.1 BACKGROUND OF THE STUDY 31.2 STATEMENT OF THE PROBLEM 41.3 NEED & SIGNIFICANCE OF THE STUDY 51.4 OBJECTIVES OF THE STUDY 9

2 COMPANY PROFILE 102.1 VISION 122.2 MISSION 122.3 PRODUCT RANGE 13

3 REVIEW OF LITERATURE3.1 PURPOSE OF LITERATURE REVIEW 163.2 METHODOLOGY OF LITERATURE REVIEW 163.3 CONCLUSIONS 17

4 RESEARCH METHDOLOGY4.1 TYPE OF RESEARCH 184.2 INSTRUMENTATION TECHNIQUES 184.3 ACTUAL DATA COLLECTION 194.4 TOOLS FOR ANALYSIS OF DATA 194.5 OTHER SOFTWARE USED FOR DATA ANALYSIS 194.6 LIMITATIONS OF THE STUDY 20

5 PRESENTATION, ANALYSIS & INTERPRETATION OF DATA5.1 GENERAL INDICATORS 215.2 LIQUIDITY ANALYSIS 295.3 ACTIVITY RATIOS 325.4 LEVERAGE RATIOS 405.5 PROFITABILITY RATIOS 455.6 INVENTORY MANAGEMENT 565.7 ACCOUNTS RECEIVABLE MANAGEMENT 60

6 SUMMARY AND CONCLUSION6.1 CONCLUSIONS FROM STUDY 706.2 SUGGESTIONS FOR FURTHER RESEARCH 74

7 SUPPLEMENTARY PAGES 757.1 BIBLIOGRAPHY7.2 ANNEXURE


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LIST OF TABLES AND GRAPHS

5.1.1: COMPONENTS OF CURRENT ASSETS

5.1.2: COMPONENTS OF CURRENT LIABILITIES

5.1.3: NET WORKING CAPITAL

5.1.4: OPERATING CYCLE

5.2.1: CURRENT RATIO

5.2.2: QUICK RATIO

5.3.1: WORKING CAPITAL TURNOVER RATIO

5.3.2: DEBTOR TURNOVER RATIO

5.3.3: CREDITORS TURNOVER RATIO

5.3.4: CURRENT ASSETS TURNOVER RATIO

5.3.5: FIXED ASSETS TURNOVER RATIO

5.4.1: DEBT EQUITY RATIO

5.4.2: DEBT TO CAPITAL EMPLOYED

5.4.3: INTEREST COVERAGE RATIO

5.4.1: OPERATING PROFIT MARGIN RATIO

5.4.2: COST STRUCTURE

5.4.3: COST STRUCTURE EXPRESSED AS A PERCENTAGE OF SALES5.4.4: RETURN ON INVESTMENT5.4.5: ECONOMIC VALUE ADDED5.4.5: RETURN ON CAPITAL EMPLOYED (ROCE)5.5.1:COMPONENTS OF INVENTORY5.5.2:INVENTORY TURNOVER RATIO5.6.1:TREND IN RECEIVABLE & PAYABLE PERIOD

5.1:CONSOLIDATED STATEMENT SHOWING CA, CL & WC OF

KENNAMETAL WIDIA INDIA

5.2: TREND ANALYSIS OF CA, CL & WC AT KENNAMETAL WIDIA INDIA

5.3:COMMON SIZE STATEMENT OF CA & CL


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EXECUTIVE SUMMARY

The research is conducted as the case study of KENNAMETAL-WIDIA INDIA

LIMITED. Kennametal Widia India is engaged in the manufacture of a wide range

of tungsten carbide products and is a forerunner in the field of hard metal

technology. The industry scenario is such that it has a long selling cycle, and

Kennametal Widia is no exception. Hence it has a continuously increasing

turnover. Kennametal Widia belongs to an industry where the operating cycle is

long and the working capital requirements are high. In such a scenario it dwells

upon the management of the company to play according to the dynamics of theindustry in such a way that it leads to an advantage to the company. The

management should workout the optimal level of working capital, which gives an

ideal trade-off between liquidity and profitability. Hence this study is conducted

with an objective to analyze the various components of current assets and

liabilities, the extent of funds tied up in each, the trend changes, the efficiency

with which each component is managed and the overall efficiency of working

capital management and its impact on profitability. The study has also tried to

find a relation between working capital and economic value added during the

period of study.

At Kennametal Widia, the working capital management has shown a dramatic

improvement in the period of study. The management has realized the

importance of liquidity and cash balances as the real goals of the business.

Towards this end, serious measures have been initiated to bring down the

working capital by 37% within a span of two years. Better inventory management,adopting a pullpush strategy to bring the manufacturing in tune with the

marketing requirement etc are few of the strategies that the company has

adopted. It is learnt that by the various corrective actions initiated by the

company, the performance in the current year is back to track with operating

margin of 15%.


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During the period of study the company has had a change in management, which

has seen dramatic changes in the handling of working capital and the overall

outlook of the company. The study shows that the company is gradually moving

from a conservative working capital management policy to an aggressive policy.The synergy created by the takeover will be reflected in the companys

performance in the coming years.

To conclude, a healthy working capital position is the sine-qua-non of a

successful business. The short-term solvency of the firm depends upon proper

and efficient management of working capital. Efficient working capital

management will not only increase the profitability of the firm but also in the long

run create value to the stakeholders of the firm.


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CHAPTER 1: INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Importance of the working capital

The developing economies are generally faced with the problem of inefficient

utilization of resources available to them. Capital is the scarcest productive

resource in such economies and proper utilization of these resources promotes

the rate of growth, cuts down the cost of production and above all improves the

efficiency of the productive system. Fixed capital and working capital are the

dominant contributors to the total capital of the developing country. Fixed capital

investment generates production capacity whereas working capital makes the

utilization of that capacity possible. Thus the study of working capital behavior

occupies an important place in financial management. Working capital has

acquired a great significance and sound position for the twin objects of

"Profitability and Liquidity".

WORKING CAPITAL -- THE FLESH AND BLOOD OF BUSINESS

Every business needs funds for two purposes - for its establishment and to carry

out day-to-day operations. Accordingly, funds needed for a business can be

broadly classified under:

Fixed capital (long term needs)

Working capital (short-term needs)

Fixed capital forms the skeleton of any business; working capital is its flesh and

blood.


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Long-term funds are required to create production facilities through purchase of

fixed assets such as plant, machinery, land, building, furniture etc. Investment in

these assets represent a part of the firms capital that is blocked more or less on

a permanent or fixed basis and hence is called fixed capital.

Funds are also required for short-term purposes like purchase of raw materials,

payment of wages, salaries and other expenses. These funds are known as

working capital. Working capital is what makes a company work. It is impossible

to carry on any business only with fixed assets; working capital is a must.Inadequacy of working capital takes any business to death.

1.2 STATEMENT OF THE PROBLEM

Kennametal Widia India is engaged in the manufacture of a wide range of

tungsten carbide products and is a forerunner in the field of hard metal

technology. Since the industry scenario is such that it has a long selling cycle,Kennametal Widia is no exception. Hence it has a continuously increasing

turnover. In a manufacturing engineering industry to which Kennametal Widia

belongs the operating cycle is long and the working capital requirements are

high. In such a scenario it dwells upon the management of the company to play

CURRENT

ASSETS

FIXED

ASSETS

SHORT TERMCAPITAL

LONG TERMCAPITAL

LONG TERM

CAPITAL


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according to the dynamics of the industry in such a way that it leads to an

advantage to the company. The management should workout the optimal level of

working capital, which gives an ideal trade-off between risk, return and

profitability. The short-term solvency of the firm depends upon propermanagement of working capital. This study is conducted to analyze the

efficiency of working capital management and its impact profitability at

Kennametal Widia India.

1.3 NEED & SIGNIFICANCE OF THE STUDY

The management of assets in any organization is an essential part of overall

management. The enterprises, at the time of formation attaches great importance

to fixed assets management, as a part of investment decision-making. However,

in the overall day-to-day financial management, after the initial investment, the

management gives more importance to managing working capital. If we look at

any financial statement it will be evident that the investment in fixed assets

remain more or less static but the working capital is constantly changing.

A healthy working capital position is the sine-qua-non of a successful

business. This is reflected in adequate inventories, lowest level of debtors,

minimum utilization of bank facilities for working capital, etc. thus the

study of working capital management occupies an important place in

financial management.

Effective management of working capital compels finance managers to seek

interdepartmental coordination for inventories (purchase, supply planning,manufacturing, marketing, logistics), debtors (marketing), creditors (purchase

and manufacturing), cash (finance and other managers). The time lag between

the purchase of raw materials and the realization of cash from debtors forces the

company to find money to finance its operations during that period.


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Working capital management has dual objectives, which are likely to pull in

opposite directionsliquidity and profitability.

The management has to strike a delicate balance between the two objectives of

liquidity and profitability. Working capital should be maintained at a satisfactory

level, neither inadequate nor excessive. Current assets should be sufficiently in

excess of current liabilities to constitute a margin or buffer for maturing the

obligations within the operating cycle of business.

An inadequacy of working capital may lead the firm to insolvency and excessive

of working capital take the cost of profitability. Short-term creditors wish the

company to have more current assets than current liabilities. It is conventional

rule to maintain the level of current assets at twice the level of current liabilities.

The level of working capital should be judiciously determined because any

shortage in working capital apart from threats of solvency leads to deprivation of

opportunities of earnings that are open to an enterprise. On the other hand

excessive availability of working capital leads to higher cost of operation in terms

of financing cost. Different strategies have to be employed for inventorymanagement, credit management and cash management to maintain a balance

between the twin objectives of working capital management.

The nature and size of business, the length of the manufacturing cycle and

marketing conditions would be largely influencing the working capital needs of

the concern. A hotel industry where materials are procured on credit and the

finished goods are sold in cash would require a low level of working capital

whereas an engineering industry under a competitive atmosphere would require

a higher level of working capital. A concern, manufacturing a consumer non-

durable products, having very short manufacturing cycle, would need a lower

working capital than a concern manufacturing consumer durable products,

requiring longer manufacturing cycle. The product line, whether having a


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monopoly or facing competition, extent of distribution networks, credit policy of

the industry, seasonality or otherwise of a product also leads to substantial

changes in the need for working capital. Apart from these, the managements

planned extent of growth due to vast unexplored market etc also largely influencethe requirement of working capital.

There is generally an impression that the entire need for working capital is purely

short-term. But, in fact, there are two clearly distinct elements:

Long- term Working Capital: This represents the amount of funds needed to

keep a company running in order to satisfy demand at its lowest point. The value,

which represents the long-term working capital, stays with the business process

all the time. It is for all practical purposes as permanent as fixed assets. In other

words, it consists of the minimum currents assets to be maintained at all times.

The size of the permanent working capital varies directly with the size of the firm.

Short-term Working Capital: This varies directly with the level of activity

achieved by a company. The volume of operations decides the quantum of short-

term working capital. It also changes from one form to another; from cash toinventory to debtors back to cash. Temporary working capital should be obtained

from sources, which will allow its return when it is not in use.


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GROSS

Work

Working capital management deals with the most dynamic field in finance, which

needs constant interaction between finance and other functional managers. The

finance manager acting alone cannot improve a companys working capital

situation. The ultimate long-term solution for a difficult working capital does not lie

with the banks; rather, it lies with the manufacturing, marketing and finance

activities.

Manufacturing has an important role to play in operating with minimum

inventories; the purchase department should be able to obtain the best possibleterms from suppliers. The marketing department should negotiate with customers

for the best terms. The finance manager should be able to coordinate and

achieve optimal utilization of operating funds at the lowest interest cost. Thus,

working capital management has come to be known as the cash triangle.

KINDS OF WORKINGCAPITAL

ON THE BASISOF CONCEPTS

ON THE BASISOF TIME

GROSSWORKINGCAPITAL

NET WORKINGCAPITAL

FIXED WORKINGCAPITAL

SPECIALWORKINGCAPITAL

SEASONALWORKINGCAPITAL

RESERVEWORKINGCAPITAL

REGULARWORKINGCAPITAL

TEMPORARYWORKINGCAPITAL


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MARKETING FINANCE

(CREDIT) (CASH FLOWS)

FLOWS)

MANUFACTURING (INVENTORY)

Fig. The Cash Triangle

Due to the factors mentioned above the management of working capital becomes

one of the most significant jobs of the finance manger. In this project the various

components of current assets and liabilities, the extent of funds tied up in each,

the trend of changes in funds tied up with each component, the efficiency with

each component are managed and overall efficiency of working capital

management and its impact on profitability is studied.

1.4 OBJECTIVE OF THE STUDY:

The objective of the project is to study

The different components of current assets and liabilities and the extent

of funds tied up in each

The trend of changes of each component

To find out the relationship between working capital and profitability

To find out the impact of Working Capital on Economic Value Addition to

the stake holder

CASH


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CHAPTER 2: COMPANY PROFILE

2.1 BACK GROUND

The success story WIDIA began more than 70 years ago. It was 1926, that

WIDIA came to be known world over. The Krupp group of industries West

Germany, developed tungsten carbide commercially for the first time in the

world. The substance was found to be as hard as diamond and could even

substitute it in many applications. So the name Widia was coined from WIE

DIAMANT-German for like diamond.

The Bangalore division went on stream in 1967 and has grown by leaps and

bounds since then. From a Rs 7.1 lakhs turnover at inception, the company has

notched up an impressive Rs 216 crores in 2001. With the active involvement of

the employees and executives Widia is sure that the company will grow to

greater heights and continue to be the market leader despite tough competition,

both domestic and global.

WIDIA (INDIA), where German precision, Indian excellence and American

management principles join hands to create a formidable force in the Indian

industry. A force that asserts itself as the largest subsidiary of WIDIA GmbH,

wholly owned by Milacron Inc., USA.

At the helm of affairs at WIDIA (INDIA) and based in Bangalore, is a fleet of the

best engineers and metallurgists working in unison, uncompromising in anendeavour to bring out the best to help their customers enhance productivity and

cut down production costs. A full fledged R & D center works in constant pursuit

to offer the right tooling solution for every individual machining application,

however complex it may be.


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Today WIDIA has almost become a generic name, synonymous with tungsten

carbide the world over and has been making significant contribution towards the

growth of core sectors of Indian industries such as Automobiles, HeavyEngineering, Railways, Power Generation, Aviation and Mining. The product

range of WIDIA encompasses more than 20,000 products covering Metal

Cutting, Metal Forming and Mining. Keeping pace with modernization and

emerging technological trends new products are aggressively introduced. WIDIA

INDIA decided in 1984 to manufacture Machine Tools including CNC machines.

The Machine Tool division - WIDMA was thus formed specializing in the design

of Special Purpose Machines, to suit specific requirements of customers.

WIDIA was acquired in 2002 by Kennametal of United States of America

who are No.1 in USA. Thus WIDIA INDIA enjoys the multifaceted expertise

of Kennametal.

Today KENNAMETAL WIDIA INDIA is:

A customer driven company.

An ISO 9001 certified company. A market leader in the country with a wide range of products.

A company with a turn over of over Rs.210/-crores.

A company with a share capital of Rs. 21,97,82,400/-.

Having a strong customer base and is the market leader in India.

It has

A dedicated team of people.

Leadership in export of carbide tools.

Specialization in carbides, ceramics and SPMs.

Institutionalized R & D.


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KENNAMETAL WIDIA INDIA is a FERA company with 77% of the share holding

being owned by Meturit AG, which is fully owned by Kennametal Inc., USA.

Public holds 23%. The board of directors consists of 7 Directors at present, ofwhom two are whole time Directors viz. Managing Director & CEO Executive

Director- Finance & Administration.

2.2VISION STATEMENT OF KENNAMETAL WIDIA INDIA

To achieve profitable growth of more than 10% per year and to maintain marketleadership

2.3 MISSION OF KENNAMETAL WIDIA INDIA

Be responsive to customer needs and develop, manufacture and supply

high tech. quality products and services to enhance their productivity and

reduce costs

Train, motivate and provide a growth oriented environment to employees

and encourage team work, mutual co-operation and support team

members to achieve peak performance

Encourage innovation and creativity to stay ahead of the competition

Give necessary support to suppliers, sub-contractors and business

associates, to enable them to meet the companies requirements on a

continual basis

Be systematic and cost effective in working and ensure adequate profits to

satisfy shareholders and provide resources for continuous growth

Control pollution and environment deterioration fro improving quality of life

Meet commitments to the Government, Community and Society at large


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METAL CUTTING TOOLS:

WIDAX Tool holders

WIDAX Boring Bars and cartridgesWIDAFLEX and ROTAFLEX Tooling System

WIDA Hard metal Tips and Tipped Tools

WIDATRONIC Tool Monitoring Systems

WIDAX Milling Cutters and End mills

WIDIA Carbide Tipped Circular Saws

WIDAX BW / BW-S Drills

WIDIA Gun drills and BTA Drill Heads

WIDIA Lugged Reamers and Hole Mills

TiN / TiAIN Coated Drills

WIDAX Progroove and Twin groove Systems

WIDIA Hardmetal Inserts

WIDALON Coated Inserts

WIDIALOX Ceramic Inserts

CBN and PCD Inserts

METAL FORMING TOOLS:

WIDIA Cold Heading Dies

WIDIA Hot Forging Dies

WIDIA Extrusion Dies

WIDIA Blanking Tools

WIDIA Bar and Tube Drawing Dies

WIDIA Rolls for Wire Rod Mills

WIDIA Hardmetal Pellets and Blanks

WIDIALOX Ceramic Wear Parts

WIDIA Tungsten Copper Electrical Contacts


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MINING TOOLS:

WIDIA Tungsten Carbide Rock Roller Bits

WIDIA Milled Tooth Rock Roller Bits

Rhino Button Bits for Down the Hole Hammers

WIDIA Flat and Round Cutter Picks

WIDIA Coal Auger Drills

WIDIA Button Type Drifter Bits

WIDIAROC Integral Drill Rods and Knock on Bits

WIDIA Mining Tips and Wear parts

WELDUR and WIDIAROC Hard Facing Alloys

SPECIAL PURPOSE MACHINES:

WIDMA Deep Hole Drilling Machines

WIDMA Deep Hole Drilling, Boring, Skiving and Roller Burnishing

Machine

WIDMA 6 Axis and 4 Axis CNC Tool and cutter Grinder

WIDMA CNC Hob Grinding Machine

WIDMA CNC Valve Seat Generating and Valve Guide ReamingMachine

WIDMA CNC Cylinder Block Boring Machine

WIDMA Fine Boring Machine

WIDALASER Laser Marking Machine

WIDAFELS Work Handling System

What makes KENNAMETAL WIDIA different from the competitors? The special

KENNAMETAL WIDIA touch a feeling for the customers needs and the

prompt, appropriate response to them. A large percentage of KENNAMETAL

WIDIAs products are in fact Specials which have been tailor-made to suit

specific requirements of customers.


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3.3 CONCLUSION

The review of the literature provided a solid guideline to conduct the study. It

provided the secondary data required and the adequate guideline for the nature

of the primary data.


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CHAPTER 4: METHODOLOGY

4.1 TYPE OF RESEARCH

This project A Study on Working Capital Management & Profitability

Analysis of Kennametal Widia India is considered as an analytical research.

Analytical Research is defined as the research in which, researcher has to use

facts or information already available, and analyze these to make a critical

evaluation of the facts, figures, data or material.

The project includes finding of primary data and secondary data. It includes

surveys and fact-finding enquiries. So, the project basically covers description of

state of affairs, as it exists at present. Here in this case, the researcher does not

have control over the variables. Here, the job done as a researcher is to use the

facts and information already available. The research is done with the aid of the

annual reports, the company database textbooks and the observation and

interaction being the only source of primary data whatever is used. The same set

of information is analyzed to make the critical evaluation of the material.

With the given nature of research this is an analytical type of research wherein

the analysis of the existing set of affairs are used to arrive the effect of working

capital management on the return and profitability of the company.

4.2 INSTRUMENTATION TECHNIQUES

The techniques used for the collections of the financial statements, data and

other information as follows. The primary data were collected by interaction and

observation. The secondary data were collected from the published annual

reports, budgeted manuals and the audited balance sheet and profit and loss

account, database of the company.


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4.3 ACTUAL COLLECTION OF DATA

The project makes use of both the primary as well as secondary data.

Primary data were collected by observation and interaction. In the course of time,

the finance manager and his executives, the purchase manager and his

executives and the store manager and his executives provided very appreciable

co-operation during the interaction.

As for the secondary data, the various published materials were used along with

the database. The annual reports, fact-sheets, budgeted manuals and the

audited balance sheet and profit and loss account, accounting and financial

database of the company.

4.4 TOOLS USED FOR ANALYSIS OF DATA

The data were analyzed using the following financial tools and techniques

Ratio analysis

Common size statements Statement of changes in working capital

4.5 OTHER SOFTWARE USED FOR DATA ANALYSIS

The application software used for the typing of data, analysis of data, and

presentations of different charts, tables, graphs etc is Microsoft Word and Excel.

MS Excel made a very handy tool for the analysis of the data. It was rigorously

made use of during the calculation and comparisons among the data, graphical

and tabular presentation, calculation of various ratios, their analysis etc.


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4.6 LIMITATIONS OF THE STUDY

The analysis is limited to just three years of data study (from Jan 1, 2000to June 30, 2003) for financial analysis

The study conducted deals only with impact of working capital on

profitability without taking into consideration the risk involved

The study conducted throws light only on the impact of working capital on

a minuscule part of strategic management namely EVA.

The figures and facts claimed in the annual reports and in other forms are

taken at face value


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CHAPTER 5:PRESENTATION, ANALYSIS AND

INTERPRETATION OF DATA

5.1 GENERAL INDICATORS

COMPONENTS OF CURRENT ASSETS

Current assets means assets that will either be used up or converted into cash

within a year' s time or normal operating cycle of the business whichever is

longer. They include cash and bank balances, marketable securities, inventory of

raw materials, semi-finished and finished goods, debtors, bills receivables and

pre-paid expenses.

TABLE 5.1.1: COMPONENTS OF CURRENT ASSETS

(Rs. Crores)

PARTICULARS 2000 2001 2003

INVENTORIES 66.39 88.51 50.10

SUNDRY DEBTORS 80.87 77.53 55.30

CASH & BANK BALANCES 9.92 45.25 11.44

LOANS & ADVANCES 20.38 22.52 15.26

TOTAL CURRENTS ASSETS 177.56 233.81 132.10

INCREASE/(DECREASE) IN CA -- 56.25 (101.71)

%INCREASE/(DECREASE) IN CA -- 31.67 (43.50)


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GRAPH 5.1.1: COMPONENTS OF CURRENT ASSETS

0%

20%

40%

60%

80%

100%

%s

2000 2001 2003

YEARS

COMPONENTS OF CURRENT ASSETS

INVENTORIES SUNDRY DEBTORS

CASH & BANK BALANCES LOANS & ADVANCES

The table shows the composition of current assets in three years. There has

been an increase in current assets in the year 2001 compared to the other years.

This is due to increase in inventory level in that year. The year 2003 has seen a

sharp decrease in current assets. There is a decrease in all the components of

current assets right from inventory to loans and advances in 2003. This has led

to overall decrease in current assets by 43.5% compared to the previous year.

COMPONENTS OF CURRENT LIABILITIES

Current liabilities are those liabilities or obligations, which are expected to

mature in the next twelve months. They include short-term loans and advances,

accounts payable / sundry creditors, provision for taxation, outstanding expenses

and dividend payable.


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TABLE 5.1.2: COMPONENTS OF CURRENT LIABILITIES

(Rs. Crores)

CURRENT LIABILITIES (CL) 2000 2001 2003

SUNDRY CREDITORS 24.90 26.59 38.49

ADVANCES FROM CUSTOMERS 3.03 2.82 3.99

UNCLAIMED DIVIDENDS 0.07 0.10 0.12

OTHER LIABILITIES 18.93 48.80 4.32

PROVISIONS 6.94 2.91 7.11

TOTAL CURRENT LIABILITIES 53.87 81.22 54.00

INCREASE/(DECREASE) IN CL -- 27.35 (27.19)

%INCREASE/(DECREASE) IN CL -- 0.51 (0.33)

GRAPH 5.1.2: COMPONENTS OF CURRENT LIABILITIES

0%20%40%60%80%

100%

%s

2000 2001 2003

YEAR

COMPONENTS OF CURRENT LIABILITIES

SUNDRY CREDITORS ADVANCES FROM CUSTOMERS

UNCLAIMED DIVIDENDS OTHER LIABILITIES

PROVISIONS

The table shows the composition of current liabilities in three years. There has

been an increase in current assets in the year 2001 compared to the other years.

This is due to increase in other liabilities level in that year. The year 2003 has

seen a sharp decrease in current liabilities 33% compared to the previous year.


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NET WORKING CAPITAL

Net working capital (NWC) represents the excess of current assets over current

liabilities. The greater the amount of net working capital, the greater the liquidity

of the firm. However, the problem of net working capital as the measure of

liquidity is that the change in net working capital does not necessarily reflect the

change in liquidity of the firm.

TABLE 5.1.3: NET WORKING CAPITAL

(Rs. Crore)

PARTICULAR 2000 2001 2003

CURRENT ASSETS 177.56 233.81 132.1

CURRENT LIABILITIES 53.87 81.22 54.03

NET WORKING CAPITAL (NWC) 123.69 152.59 78.07

INCREASE/(DECREASE) IN NWC -- 28.9 (74.52)

%INCREASE/(DECREASE) IN NWC -- 23.36 (48.83)


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GRAPH 5.1.3: NET WORKING CAPITAL

0

50

100

150

200

2000 2001 2003

YEAR

NET WORKING CAPITAL (NWC)

NET WORKING CAPITAL (NWC)

The table shows that the net working capital at Widia has increased in 2001 by

23.36% compared to the previous year. There has been a decrease in NWC forthe year 2003 compared to 2001 by 48.83%. This decrease in NWC in 2003 is

due to better inventory management and focus on collections.


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OPERATING CYCLE

The operating cycle represents the time taken for cash spent on raw materials to

come back to the business in the form of cash from collection of sale proceeds.

In case of a manufacturing firm, the following are the sequence of events, which

is termed as operating cycle of the manufacturing firm.

Conversion of cash into raw materials

Conversion of raw materials in WIP

Conversion of WIP into finished goods

Conversion of finished goods into Accounts receivables

Conversion of accounts receivables into cash

The term cash or operating cycle contains the length of time necessary to

complete the following cycle events:

Conversion of cash into inventory

Conversion of inventory into receivableConversion of receivable into cash


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Fig: Operating Cycle

TABLE 5.1.4: OPERATING CYCLE

(Days)

2000 2001 2003

RM PERIOD 52 41 73

S&S PERIOD 77 73 21

WIP PERIOD 39 48 36

FG PERIOD 89 113 47

DEBT PERIOD 126 134 145

GROSS OPERATING CYCLE 383 409 322

CREDIT PERIOD * 147 119 225

NET OPERATING CYCLE 236 290 97

* Credit Period: This includes advances from customers. The company as a

conscious decision on policy solicits for advances for all the special orders to

take care of the cost of the materials to be procured. As on 30th June 2003, the

advance amount received from customers in Rs. 4.7 crore. This has impact of

50 days in bringing down the net operating cycle.

CASH

RAW MATERIALSCOLLECTION PHASE

WORK-IN- PROGRES

FINISHED GOODS

DEBTORS


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GRAPH 5.1.4: OPERATING CYCLE

OPERATING CYCLE

236290

97

0

100

200

300

400

2000 2001 2003

YEAR

DAYS

2000

2001

2003

The operating cycle had increased from 236 days to 290 days in 2001. But in

2003 the operating cycle has reduced drastically to 97 days. This is due to good

management by the company in 2003. The stock of raw materials was equivalent

to 1.7 months in 2000. It has increased to 2.4 months in 2003. The stores and

spares holding period have reduced to a great extent from 2.4 months in 2001 to0.7 a month in 2003. There has been a better management in the WIP level as

well as FG holding level in 2003. The debt collection period is gradual on the rise

over the years. The credit payment period also has increased in 2003 compared

to the previous years. All these have led to a lower operating cycle in 2003

compared to the previous. The lower the operating cycle the better. It indicates

the efficient management of inventory and stores in the company. The company

is moving towards better management and control of working capital

components, which is indicated by a lower operating cycle.


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5.2 LIQUIDITY ANALYSIS

CURRENT RATIO:

The current ratio is an indicator of the firm' s commitment to meet its short-term

liabilities. The current ratio is an index of the concern' s financial stability since itshows the extent of working capital, which is the amount by which the current

assets exceed the current liabilities. A very high current ratio would indicate

inadequate employment of funds while a poor current ratio is a danger signal to

the management. It shows that business is trading beyond its resources.

TABLE 5.2.1: CURRENT RATIO

(Rs. Crores)

PARTICULAR 2000 2001 2003

CURRENT ASSETS 177.56 233.81 132.1



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QUICK RATIO

Quick ratio is a refinement over current ratio as it shows the instant ability to

meet the current liabilities. Liquid assets means all the current assets lessinventories, sticky debts, etc., i.e. such assets as can be quickly converted into

cash. The general norm for a healthy quick ratio is 1:1. This ratio is also known

as acid-test ratio.

TABLE 5.2.2: QUICK RATIO

(Rs Crores)

GRAPH 5.2.2: QUICK RATIO


LIQUID ASSETS 111.2 145.3 82.0


QUICK RATIO 2.1 1.8 1.5


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0.0

0.5

1.0

1.5

2.0

2.5

RATIO

2000 2001 2003

YEAR

QUICK RATIO

At Widia the quick ratio is maintained above the normal norms. The ratio is 2.1:1

for the year 2000. Though the ratio is absolutely strong and favourable from the

creditors point of view, at the same time it shows the underperformance on the

part of the management to utilize the resources and funds properly. But through

the years there has been a better utilization of the resources and funds by the

management and hence the quick ratio is 1.8:1 in 2001 and 1.5:1 in 2003.

5.3ACTIVITY RATIOS

WORKING CAPITAL TURNOVER RATIO:

This ratio indicates whether or not working capital has been effectively utilized in

making sales. If a firm makes higher volume of sales with relatively small amount

of working capital, it is an indicator of the operating efficiency of the company.

TABLE 5.3.1: WORKING CAPITAL TURNOVER RATIO

(Rs. Crores)


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PARTICULARS2000 2001 2003

SALES 234.47 210.98 208.44

NET WORKING CAPITAL 123.69 152.59 78.07

W.C. TURNOVER (TIMES) 1.90 1.38 2.67

GRAPH 5.3.1: W.C TURNOVER

0.000.50

1.00

1.50

2.00

2.50

3.00

RATIO

2000 2001 2003

YEAR

W.C. TURNOVER (TIMES)


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In the year 2000 the working capital turnover was 1.89, which came down to 1.38

in 2001 due to rising prices in raw material and a general slump in the industry. In

2002-2003 the working capital turnover ratio grew to 2.66, which is very good. It

indicates that effective methods were employed in the usage of working capital inthat year when compared to the previous years.

DEBTORS TURNOVER RATIO

The average collection period indicates the number of days of credit being given

to a companys customers. The ratio indicates the extent to which the debts have

been collected in time. An increase in the period will result in greater blockage of

funds in debtors. Debtors collection period measures the quality of debtors since

it measures the rapidity or the slowness with which money is collected from them

a shorter collection period implies prompt payment by debtors.

It reduces the chances of bad debts. A longer collection period implies too liberal

and inefficient credit collection performance. However, in order to measure a

firms credit and collection efficiency, its average should be compared with the

average of the industry. It should be neither too liberal nor too restrictive. A

restrictive policy will result in lower sales, which will reduce profits.It is difficult to provide a standard collection period of debtors. It depends upon

the nature of the industry, seasonal character of the business and credit policies

of the firm. In general, the amount of receivables should not exceed 3-4 months

credit sales.

TABLE 5.3.2: DEBTOR TURNOVER RATIO

(Rs. Crore)

PARTICULARS/YEAR 2000 2001 2003

SALES 234.47 210.98 208.44


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AVERAGE DEBTORS 77.24 79.2 66.42

DEBTOR TURNOVER RATIO 3.04 2.66 3.14

AVERAGE COLLECTION PERIOD (DAYS) 120 137 116

GRAPH 5.3.2: DEBTOR TURNOVER RATIO

GRAPH 5.3.3: AVERAGE COLLECTION PERIOD

2.40

2.60

2.80

3.00

3.20

RATIO

2000 2001 2003

YEAR

DEBTOR TURNOVER RATIO

DEBTOR TURNOVER RATIO


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AVERAGE COLLECTION PERIOD

100

110

120

130

140

2000 2001 2003

YEAR

DAYS

AVERAGE COLLECTION PERIOD

The table and the graphs show that the debtor turnover ratio had come down in

the year 2001 when compared to the previous year. The year 2002-2003 saw a

sharp increase in the debtor turnover ratio indicating that the debts are being

collected on time. The average collection period saw a drastic change in the year

2003 where it decreased to 116 days, the lowest when compared to the previous

years.

CREDITORS TURNOVER RATIO

The creditors turnover ratio indicates the speed with which the payments for

credit purchases are made to the creditors. It indicates the promptness or

otherwise in making payment of credit purchases. A higher creditors turnover

ratio or a lower credit period enjoyed ratio signifies that the creditors are being

paid promptly, thus enhancing the credit worthiness of the company. However, avery favourable ratio to this effect also shows that the business is not taking full

advantage of credit facilities, which can be allowed by creditors.

TABLE 5.3.3: CREDITORS TURNOVER RATIO


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(Rs. Crore)


PURCHASES 69.3 90 103

AVERAGE CREDITORS 22.92 25.75 32.54

CREDITORS TURNOVER RATIO 3.02 3.50 3.17

AVERAGE PAYMENT PERIOD (DAYS) 121 104 115

GRAPH 5.3.4 CREDITORS TURNOVER RATIO

2.60

2.80

3.00

3.20

3.40

3.60

RATIO

2000 2001 2003

YEAR



GRAPH 5.3.5: AVERAGE PAYMENT PERIOD


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AVERAGE PAYMENT PERIOD

95

100

105

110

115

120

125

2000 2001 2003

YEAR

DAYS

AVERAGE PAYMENT PERIOD

The table shows that the credit turnover ratio is moreover constant over the

years, with an average of 3.2, which is very good. It shows that the company has

maintained the average payment period at 113 days.

CURRENT ASSETS TURNOVER RATIO

The current assets turnover ratio gives the relationship between a companys

sales and current assets. A decrease in this ratio is a good indication of the

performance of the company. It shows the ability of the company to realize the

cash from debtors as well as the less amount of money blocked in inventories.

TABLE 5.3.4: CURRENT ASSETS TURNOVER RATIO

(Rs. Crore)


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CURENT ASSETS 177.56 233.81 132.1

SALES 234.47 210.98 208.44

CURRENT ASSETS TURNOVER RATIO 0.76 1.11 0.63

GRAPH 5.3.6: CURRENT ASSETS TURNOVER RATIO

0.00

0.50

1.00

1.50

RATIO

2000 2001 2003

YEAR



The table shows that the ratio has increased in 2001 indicating high sales. The

ratio has decreased in the year 2003from 1.11 to 0.63 indicating the good

performance of the company. It shows the ability of the company to realize the

cash from debtors as well as the less amount of money blocked in inventories

FIXED ASSETS TURNOVER RATIO


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DEBT TO EQUITY RATIO

The debt equity ratio is a very important ratio which highlights a companyscapital structure in a nutshell. This ratio is determined to ascertain the

soundness of the long term financial policies of the company. It also reveals

the relation between long-term debt and proprietors fund of the concern. It

shows the efficiency of the management in financial planning. The ratio also

indicates the extent to which the firm depends upon outsiders for its existence.

The ratio provides a margin of safety to the creditors. It tells the owners the

extent to which they can gain the benefits or maintain control with a limited

investment. Indian financial institutions usually permit a debt-equity of 2:1. A

very high debt equity ratio is not desirable because it entails correspondingly

heavy interest payment and loan repayment commitments.

TABLE 5.4.1: DEBT EQUITY RATIO

(Rs. Crore)

PARTICULARS / YEAR 2000 2001 2003

DEBT 9.03 47.9 23.8

EQUITY 170.77 165.5 118.8

DEBT TO EQUITY RATIO 0.1:1 0.3:1 0.2:1

GRAPH 5.4.1: DEBT EQUITY RATIO


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0.0

0.1

0.2

0.3

RATIO

2000 2001 2003

YEAR



The debt-equity ratio was highest in the year 2001. It decreased to 0.2:1 in 2003.

This is a significant improvement on the part of the management to promote

shareholders fund.

DEBT TO CAPITAL EMPLOYED

Debt to capital employed ratio indicates the proportion of total debt, including

both short-term and long-term in the total capital employed. It is necessary to

keep a watch on this ratio so that the company does not end up in an over

leveraged situation, which in extreme cases leads to bankruptcy.

TABLE 5.4.2: DEBT TO CAPITAL EMPLOYED

(Rs. Crore)


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DEBT 9.03 47.9 23.8

CAPITAL EMPLOYED 179.8 213.4 142.6

DEBT TO CAPITAL EMPLOYED 0.05 0.22 0.17

GRAPH 5.4.2:DEBT TO CAPITAL EMPLOYED

0.00

0.05

0.10

0.15

0.20

0.25

RATIO

2000 2001 2003

YEAR



The year 2001 saw an increase in this ratio, which is alarming, but the year 2003

the ratio decreased to 0.17 from 0.22, which is a good sign.

INTEREST COVERAGE RATIO


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The interest coverage ratio indicates the number of times the companys profits

before interest and taxes cover the liability interest. The higher the cover, the

better it is for the companys lenders.

TABLE 5.4.3: INTEREST COVERAGE RATIO

(Rs. Crore)


EBIT 40.44 21.7 10.38

DEPRECIATION 9.9 10.2 16.1

EBIT + DEPRECIATION 50.3 31.9 26.5

INTEREST 5.95 6.77 6.82

INTEREST COVERAGE RATIO 8.5 4.7 3.9

GRAPH 5.4.3: INTEREST COVERAGE RATIO


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0.0

2.0

4.0

6.08.0

10.0

RATIO

2000 2001 2003

YEAR



The table shows that the interest coverage appears pretty healthy and thus the

company has a greater ability to meet or pay the interest burden of outsiders.


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5.4 PROFITABILITY RATIO

OPERATING PROFIT MARGIN RATIO

The operating profit margin shows the return on sales. This is one of the very key

factors, which indicates the operating efficiency and earning capacity of the

organisation. From the business perspective the return on sales should be at

least twice the interest rate prevailing. This will ensure adequate return for therisk the entrepreneur takes in investing and running the business.

TABLE 5.4.1: OPERATING PROFIT MARGIN RATIO

(Rs Crores)


SALES 234.47 210.98 208.44

OPERATING PROFIT 40.44 21.7 10.38

OPERATING PROFIT MARGIN 17.2 10.3 5.0


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GRAPH 5.4.1: OPERATING PROFIT MARGIN RATIO

0.0

5.0

10.0

15.0

20.0

%RATIO

2000 2001 2003

YEAR

OPERATING PROFIT MARGIN

OPERATING PROFIT MARGIN RATIO

At Kennametal Widia, the return on sales has come down 16.9% to 1.3%. This is

mainly on account of various restructuring efforts and drastic cut in the output

(about 35%) to bring down the very high level of inventories held. It is learnt thatthe situation of 2002-2003 was a temporary phenomena and the company is

back on track with current year performance of about 12% operating margin.


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TABLE 5.4.2: COST STRUCTURE

(Rs. Crores)


MATERIALS 49.8 53.5 105.5

LABOUR COST 43.4 43.9 66.3

MANFG & OTHER EXP 60.19 60.5 84.5


INTEREST 5.95 6.7 6.8

PROFIT 34.49 14.9 3.6

SALES & INCOME 203.7 189.7 282.8

TABLE 5.4.3: COST STRUCTURE EXPRESSED AS A PERCENTAGE OF SALES

(%)


MATERIALS 24.5 28.2 37.3

LABOUR COST 21.3 23.1 23.4

MANFG & OTHER EXP 29.6 31.9 29.9


INTEREST 2.9 3.5 2.4

PROFIT 16.9 7.9 1.3

SALES & INCOME 100 100 100

The increase in material cost percentage to the sales has had an impact on the

profitability of the company. Actions to bring down the same by improving sales


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realization, procurement cost reduction and inventory write down due to

obsolescence are required. The labour cost of 23% is also high as compared to

general engineering industry norms of about 15%. Restructuring of the

organisation and achieving substantial growth are the ultimate solutions inbringing down the labour cost.

RETURN ON INVESTMENT (ROI)

The return on capital invested is a concept that measures the profit, which a firm

earns on investing a unit of capital. It is desirable to ascertain this periodically. It

indicates the percentage of return on the total capital employed in the business.

The profit being the net result of all operations, the return on capital expresses all

efficiencies or inefficiencies of a business collectively and thus, is a dependable

measure for judging its overall efficiency or inefficiency. On this basis, there can

be comparison of one company with another and one industry with another. The

return on capital when calculated using earnings before interest and tax, would

show whether the company' s borrowing policy was wise economically and

whether the capital had been employed fruitfully. The business can survive onlywhen the return on capital employed is more than the cost of capital employed in

the business.

TABLE 5.4.4: RETURN ON INVESTMENT

(Rs. Crores)


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EBIT 40.44 11.92 10.38

TOTAL CAPITAL EMPLOYED 179.76 212.46 142.60

RETURN ON INVESTMENT ( % ) 22.50 5.61 7.28

GRAPH 5.4.2: ROI

0.00

5.00

10.00

15.00

20.00

25.00

2000 2001 2003

RETURN ON INVESTMENT ( % )

The table shows the ROI for the years 2000, 2001,2002-2003 (18 months). The

ROI for the year 2001 has dropped drastically to 5.61% from the previous year of

22.49%.

Two reasons can be attributed to this sudden fall in ROI of the company in 2001:

Abnormal raw material price increase in 2001: This price increase could

not be passed on to the customers and the company had to bear the cost.


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There was approximately 15.3 crore drop in the company' s earnings due

to this abnormal hike in the prices of raw material.

Drop in sales in 2001 when compared to 2000: around 10% drop in salesoccurred in the company. Any drop in sales below breakeven sales will

reduce the contribution by more than 50%. This is what happened in

Widia. Sales dropped from Rs.234 crore to Rs.208 crore due to which

earnings went down by approximately Rs.11 cr.

Adding the figures 15.3 crore and 11 crore to the earnings in 2001, 11.92, we get

earnings to be around 38 cr. Using this the ROI when calculated will be 18.2%.

This would have been the ROI figure for the year 2001 if the above instances had

not occurred. The ROI would have been a reasonable at 18.2% as normally ROI

should be around 3 times the bank interest rate.

ECONOMIC VALUE ADDED (EVA)

Economic Value Added (EVA) analysis is a technique of value-basedmanagement. It measures the profitability of a company after taking into account

the cost of capital including equity. It is the post-tax return on capital employed

(adjusted for the tax shield on debt) minus the cost of capital employed. In other

words, EVA is a residual income after charging the company for the cost of

capital provided by lenders and shareholders. It represents the value added to

the shareholders wealth by generating operating profits in excess of cost of

capital employed in the business. EVA is a measure of total factor of

productivity. EVA compels the managers to focus more critically and objectively

on the return they are achieving for investors. Economic Value Added is the

financial performance measure that comes closely than any other to capturing

the true economic profit of an enterprise.


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TABLE 5.4.5: ECONOMIC VALUE ADDED

(Rs Crores)

PARTICULARS/YEAR2000 2001 2003

PAT 42.40 29.22 -21.65

INT 5.95 6.77 6.82

PAT+INT 48.35 35.99 -14.83

1-Tax rate 0.65 0.65 0.65

Cost of capital 0.15 0.15 0.15

CAPITAL 21.98 21.98 21.98

EVA 28.13 20.10 -12.94

GRAPH 5.4.3: ECONOMIC VALUE ADDED (EVA)


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-20.00

-10.00

0.00

10.00

20.00

30.00

EVA

2000 2001 2003

YEAR

ECONOMIC VALUE ADDED (EVA)

EVA

The table and the graph show that the year 2003 has seen a negative economic

value, which indicates that there is value destruction in the year 2003 rather than

value creation when compared to the previous years. The reason for this can be

attributed to several factors. One of the main reasons is that during the year

2002-2003 Widia was taken over by Kennametal, USA and became Kennametal

Widia India. This change in management saw lot of restructuring in the company,

which resulted in heavy one-time, non-recurring costs to the company. This

resulted in lowering the operating profits of the company for that year. Hence the

EVA for the year 2003 is negative.

This is in contrast with the ROI, an indicator of the profit, which a firm earns on

investing a unit of capital, which is positive for the year 2003. The ROI is positive

indicating that the company is getting a good return on investment. But the reality

is that in that particular year 2003 the value has actually been destroyed and the

company has registered a loss. Thus using EVA, one of the new techniques

when compared to the outdated ROI, gives a better picture of the performance

and the efficiency of the company. The investments made in the year will be

fruitful in the coming years. The synergy created due to the takeover will


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definitely create a good and high value to the stakeholders in the near future

itself.

RETURN ON CAPITAL EMPLOYED (ROCE)

Return on Capital Employed (ROCE) is another way of finding the return on

investments. Here the profits are related to the total capital employed. Here the

term capital employed refers to the long-term funds supplied by the creditors and

owners of the firm. Thus the capital employed basis provides a test of profitability

related to the sources of long-term funds. The higher the ratio the more efficient

is the use of capital employed.

TABLE 5.4.5: RETURN ON CAPITAL EMPLOYED (ROCE)

(Rs Crores)


PAT 42.40 29.22 -21.65

Book Capital 21.98 21.98 21.98

ROCE 1.93 1.33 -0.99

GRAPH 5.4.4: RETURN ON CAPITAL EMPLOYED (ROCE)


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-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

ROCE

2000 2001 2003

YEAR

RETURN ON CAPITAL EMPLOYED (ROCE)

ROCE

The table and the graph show that the return on capital employed (ROCE)) is

negative for the year 2003. This is in line with the findings derived from EVA.

ROCE is a better and more consistent way to find the return on capital employed

when compared to return on investment.

5.5 INVENTORY MANAGEMENT


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Inventories constitute the most significant part of the current assets of a large

majority of companies in India. On an average, inventories are approximately

40% of current assets, 50-60% of Working capital and 20-30% of sales. Inventory

management involves a tight ropewalk between two conflicting goals not tohave too high an inventory level, and not to have one, which is too low. An

undertaking neglecting the management of inventories will be jeopardizing its

long run profitability and fail ultimately. The reduction in excessive inventories

carries a favourable impact on the companys profitability.

The various forms of inventories existing in manufacturing companies are raw

materials; work in process and finished goods. The levels to be maintained in

these three depend on the nature of business. The general motives for holding

inventories are:

9The transaction motive, which emphasizes the need to maintain

inventories to facilitate smooth production and sales operation.

9The precautionary motive, which necessitates holding of inventories to

guard against the risk of unpredictable changes in demand and supply

forces and other factors.9The speculative motive, which influences the decision to increase or

reduce inventory levels to take advantage of price fluctuations.

The objectives of inventory management can be broadly classified into operative

and financial objectives. Operating objectives aims at avoiding production

bottlenecks by providing continuous supply of all types of materials, promotion of

manufacturing efficiency and prompt execution of their orders to ensure better

services to customers. The financial objectives of inventory management

includes effecting economy in purchasing through economic order quantity and

taking advantage of favourable markets, maintaining optimum level of investment

in inventories etc.


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The various inventory control techniques used are

Setting inventory levels

ABC analysisAgeing schedule

Operating cycle

TABLE 5.5.1:COMPONENTS OF INVENTORY

(Rs. Crores)


RAW MATERIALS (RM) 11.41 12.02 11.83

FINISHED GOODS (FG) 39.58 54.61 22.88

WORK IN PROGRESS (WIP) 15.39 21.87 15.38

TOTAL 66.38 88.50 50.09

GRAPH 5.5.1: COMPONENTS OF INVENTORY


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0%

20%

40%

60%80%

100%

%s

2000 2001 2003

YEAR

COMPONENTS OF INVENTORY

RAW MATERIALS (RM) FINISHED GOODS (FG)

WORK IN PROGRESS (WIP)

At Kennametal Widia, the inventory components are raw material, work in

progress and finished goods. The graph depicts the components of inventory in

Widia and their changes over the years 2000 to 2003. The inventory holding

period has drastically been reduced from 91 days in 2001 to 34 days in 2003

indicating better inventory control and management in the company.

INVENTORY TURNOVER RATIO (ITR):

This ratio reveals the effectiveness of a company' s inventory management.

Higher sales turnover with relatively lower inventory is a desirable situation. This

ratio shows the number of times the inventory is being replaced during the year.

So, higher the ratio the better it is as it indicates efficient inventory management.

TABLE 5.5.2:INVENTORY TURNOVER RATIO(Rs. Crores)


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AVG INVENTORY 62.69 77.44 69.30

SALES 234.47 210.98 208.44

COGS 162 177 273

ITR 2.58 2.29 3.94

INVENTORY HOLDING PERIOD 141 160 93

GRAPH 5.5.2: INVENTORY HOLDING PERIOD

0

50

100

150

200

DAYS

2000 2001 2003

YEAR

INVENTORY HOLDING PERIOD

The ITR of the company is relatively good, the best being in the year 2002-

2003 which is 10.89 shows that in the year 2003 inventory was best managed.

The inventory holding period for the company has decreased drastically from 160

days in 2001 to 93 days in 2002-2003 again indicating the effective management

of inventory.

5.6 ACCOUNTS RECEIVABLES MANAGEMENT


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Accounts receivables constitute a significant portion of the total current assets of

the business next after inventories. They are a direct consequence of trade

credit, which has become an essential marketing tool in modern business. While

the extension of credit is essential for sales promotion, credit sales result inaccounts receivables with all their attendant risks. When a firm sells goods for

cash, payments are received immediately and, therefore, no receivables are

created. However, when a firm sells goods or services on credit, the payments

are postponed to future dates and receivables are created. Usually, the credit

sales are made on an open account, which means that no formal

acknowledgements of debt obligations are taken from buyers. The only

documents evidencing the same are a purchase order, shipping invoice or even

a billing statement. The policy of open account sales facilitates business

transactions and reduces to a great extent the paper work required in connection

with credit sales.

Receivables are asset accounts representing amounts owed to the firm as a

result of sale of goods / services in the ordinary course of business. Receivables

are the result of extension of credit facility to the customers. The objective of

such a facility is to allow the customers as reasonable period of time in whichthey can pay for the goods purchased by them. Receivables are a direct result of

credit sale. Credit sale is resorted to by a firm to push up its sales, which

ultimately result in pushing up the profits earned by the firm. At the same time

selling goods on credit results in blocking of funds in accounts receivables.

Additional funds are, therefore, required for the operation needs of the business,

which involve extra costs in terms of interest. Moreover, increase in receivables

also increases chances of bad debts. Thus creation of accounts receivables is

beneficial as well as dangerous. The finance manager has to follow a policy

which uses cash funds as economically as possible in extending receivables

without adversely affecting the chances of increasing sales and making more

profits. Thus the objective of receivables management is to promote sales and

profits until that point is reached where the return on investment in further funding


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of receivables is less than the cost of funds raised to finance that additional credit

(i.e. cost of capital).

There are many factors, which influence the magnitude, the accountsreceivables in a company like cyclical influences, seasonal sales, and

competitive credit terms.

Credit policy of Kennametal Widia India

The company ended up providing Rs. 34.2 crore towards Bad & Doubtful

receivables, as at the end of Sep 2002, against total receivables of Rs. 102

crore. This amounted to 34% of total receivables and washed off whatever profits

shown in the past couple of years. It is clear that these happenings are due to

lack of clear Credit Policy and extension of indiscreet credits to achieve targets

in the past. Hence, the Company decided to draw a clear set of rules for

extension for credit in the form of a Corporate Credit Policy Document for future

adherence.

Glimpse of the credit policy at WIDIA

The Policy:

It is appropriate to have one policy for Metal Cutting, Metal Forming & Mining (for

product selling) and a separate policy for SPM division (on the basis of project

selling).

1. For Metal cutting, Metal forming and Mining product groups:

Classification of the customers:

The customers are classified across the entire products group as follows


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1. Stockist / Distributor

2. Consumer

3. Government

4. ExportsThey are further sub-classified on the following lines, on the basis of size

and nature of business:

1. Stockiest / Distributor

Master stockist [sales over Rs.50 lac pa]

Major stockist [sales between Rs.25 lac and Rs.50 lac pa]

Others [sales up to Rs.25 lac pa]

2. Consumers

Large business segment [sales over Rs.10 lac pa]

Small and medium business [sales up to Rs.10 lac pa]

Original equipment manufacturer (OEM) [for mining]

3. Government

Consisting only defence, railways and other direct departmental

customers. The customers under this category are classified as

consumers.

4. Exports

Stockist / Distributor

Consumer

Affiliates

Credit Limit

The credit limit is fixed on 2 basis: Firstly in terms of the period and

secondly in terms of monetary limit. The credit period set is 90 days for


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Master Stockist and Large Business Consumers and 60 days to other type

of customers but in practice a 120-day period is set.

GovernmentFor government customers the credit period set can be long as the money is

assured from these the government departments. The payment period

maybe also is long because of the bureaucracy in government departments.

Consumers

For customers a policy which can be followed is that for old customers a

longer period of credit can be given as they are old customers and money is

assured from them and constant remainders can be sent to them if payment

is not made on time and if still they have difficulty in getting payment they

can resort to legal action.

2. For SPM division

In the case of SPM division, it shall rather be called as Sales Policy instead of

Credit Policy.

Classification of Customers:

SPM customers can be classified as:

9Government Customers

9Private Customers

9Exports

Sales PolicyGovernment Customers:

No advance on order acceptance


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80% - 90% of advance payment on acceptance of the machine at their

stores.

10% - 20% balance payment on Commissioning (paid 30 days after

commissioning due to paper work).

Private customers:

15% - 40% advance payment on order acceptance / Design approval

75% - 50% on dispatch of machine (on Performa Invoice for smaller

customers).

10% - 15% balance payment on commissioning.

For all kinds of customers, installation and commissioning should be

completed within 60 days form the date of dispatch and final payment should

be collected within 30 days from completion of commissioning.

Exports:

Newly entered segment, operating with the same terms of Private customers,

but secured by L/Cs.

CONCLUSION

The SBU heads along with the credit Controllers are responsible for strict

adherence to these Credit policy guidelines as it would be important to cover the


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Working Capital Management & Profitabili

aswini simha-working capital mgmt.1

Documents