Working Capital Management for

Infrastructure Firm

Mentor:Ms. Punjika RathiAsst. ProfessorDepartment of MBA

Presented by:-

Amit Kumar Roy

1014370005

Introduction:-

Background Information:--The Company is primarily engaged in construction of roads.

-A typical road construction project takes 18 to 36 months.

-Revenues as per financial statements for 2009-10 are Rs. 11,700 million.

-Summary of revenue recognised

Sales: Rs. 11,700 million

WIP reduced from cost: Rs. 5,036 million

Scope Of Study• Infrastructure Firm being a capital intensive sector

requires huge amount of Circulating capital.• The prime objective of study was to analyse the

methods used for financing of projects for construction firm.

• Operating Cycle for an infrastructure firm is lenghty and hence it resorts to financing sources either from Banks or NBFC’s.

Strategic Analysis of Infra co.:-

Strategic Analysis of Infra co.:-

Working-Capital & Sources

• Working Capital is a financial metric, which represents operating liquidity available to a business organization & decisions relating to working capital & short-term finance are referred to as working capital management.

 Cash CreditWorking Capital Demand Loan (WCDL).Standby Line Of Credit (SLC)

Letter Of Credit.Bank Guarantee.HP Finance.Term Loan.

Methodology Of Study

Factoring:- Factoring is the purchase of accounts receivable by a factoring company at a discount, in order to provide a business with immediate cash to fund its growth. Factoring provides short term financial accommodation to the client .

Client (Seller)Client

(Seller)Customer (Buyer)

Customer (Buyer)

FactorFactor

Sends Invoice

Place order

Delivery of Goods & Invoice

Pays

Pays upto80%

Fixes Customerlimits

Methodology Of Study

Letter Of Credit:- also known as Documentary credit. It can be defined as an arrangement whereby bank acting at the request and on the instruction of a customer facilitates his purchase of goods.

Methodology Of Study

Bank Guarantee:- A bank guarantee is a written contract given by a bank on the behalf of a customer. By issuing this guarantee, a bank takes responsibility for payment of a sum of money in case, if it is not paid by the customer on whose behalf the guarantee has been issued. In return, a bank gets some commission for issuing the guarantee.

Bank offers guarantee in the form of Bid security, Performance security (< 5 yrs), Advance security & Financial security.L/c Vs. B/g: In a B/g, three parties are involved; the bank, the person to whom the guarantee is given and the person on whose behalf the bank is giving guarantee. In case of a L/c, there four parties involved; issuing bank, advising bank, the applicant (importer) and the beneficiary (exporter).

Methodology Of Study

Hypothecation Purchase Finance:- In a HP transaction the loan amount is paid in installments over a fixed period of time. Often to secure a deal a down payment has to be paid by the borrower to the financer apart from hypothecating the equipment financed. The down payment is 10-25 % of the cost of the equipment, which can be a large amount for the company to shell out at once. The asset is legally the property of the CCL. The lender also charges an interest on the amount borrowed and the borrower bears the cost of maintenance. However one of the important advantages of HP finance is that the borrower is allowed to claim the depreciation and finance charges (interest) for tax advantages.

It serves as major mode of CAPEX financing sources alongwith other sources such as Lease and Term loan Finance.

Methodology Of Study

STEPS OF HP FINANCE: Searching for available/potential financers. Negotiation on deal Rate Tenure Terms After negotiation, formal sanction letter given by the financer. v Documentation of loan:Loan application form Loan agreement Board resolution PGSB (personal guarantee security bow), if so required. Post dated cheques for loan repayment. Margin money cheques to be paid as down payment. After documentation, financers responsibility is to: Issue D.O (delivery order) to the supplier of the equipment. Make payments to supplier on receipt of original invoices &insurance.

Methodology Of Study

Corporate Loans:- are broadly of two types: Short term corporate loans- are the loans issued for

a period of 12 months along with a moratorium period i.e. a period for which EMI is paid irrespective of interest.

Long-term corporate loans- is loans, which can range from a period exceeding 12 months.

The rate of interest charged on such loans is determined by rating rationale of the body carrying out the rating process for e.g. CARE, CRISIL etc.

The rate of interest may broadly be classified as:- BASE RATE: The minimum rate of interest that is charged by

the bank. For e.g. base rate for SBI is around 9.25%. PRIME LENDING RATE: It is the average rate of interest

charged by the bank. For e.g. L&T Infra PLR is 14.25% ± spread. Companies past performances, financial data, and ranking mainly determine the spread by external agencies etc.

Conclusion:-• Working capital finance for a capital-intensive infrastructure

is carried out by fund based and non-fund based sources. However the company is also provided with choice of fungiblity i.e. percentage of NFB sources which can be converted to FB sources as allowed by the banks or NBFC’s.

• The drawing power of the company is calculated based on monthly select operation data (MSOD) for stock & inventory calculations and preparation of CMA (credit monitoring assessment) statement. These cumulatively determine the MPBF .

• L/C is applicable in pre-defined transactions whereby the predefined amount of credit is issued by the potential financer.

Conclusion:-• Factoring: In the same way factoring option will be

best suited when organization is having option to have credit of 90 days or 180 days.

• Bank Guarantee: It is applicable in bidding process or mobilization or performance guarantee issues. Under such financing sources the amount is generally high and the company has the benefit of paying only the guarantee charges.

• Hypothecation financing: it is carried out to secure a deal a down payment has to be paid by the borrower to the financer apart from hypothecating the equipment financed. The down payment is 10-25 % of the cost of the equipment

Refrences:-• Pandey, I.M., Financial management, Vikas

publication, 2011.• Barratt, Michael, and Andy Mottershead.

Business Studies. Pearson Education Limited, 2000.

• www.candcinfrastructure.com• www.care.ac.in/candc• www.crisil.ac.in• Hoang, Paul. Business and Management. Victoria:

IBID Press, 2007• www.kpmg.org/candc

Amit Kumar RoyMBA 2nd year1014370005