IMPACT OF WORKING CAPITAL MANAGEMENT & WORKING CAPITAL LEVERAGE CHAPTER-1 INTRODUCTION1.1 Introduction of the study Working capital management (WCM) is the management of short term financing requirement of firm. This includes maintaining optimum balance of working capital components receivable, inventory and payables and using the cash efficiently for day-to-day operations. Optimization of working capital balance means minimizing the working capital requirements and realizing maximum possible revenues. Efficient WCM increase firms free cash flow, which in turn increases the firms growth opportunities and return to shareholders. Even though firms traditionally are focused on long term capital budgeting and capital structure, the recent trend is that many companies across different industries focus on WCM efficiency.Empirical result shows that ineffective management of working capital management is one of the important factors causing industrial sickness. Modern financial management aims at reducing the level of current assets without ignoring the risk of stock outs. Efficient management of working capital is thus an important indicator of sound health of an organization which requires reduction of unnecessary blocking capital of in order to bring down the cost of financing. In the light of the above, an attempt is made in this study to look into the working capital management in iron mining industry.1.2 Statement of the problem Working capital management is very important component of corporate finance because it directly affects profitability of a company. Efficient management of working capital means management of various components of working capital in such a way that an adequate amount of working capital is maintained for smooth running of a firm and for fulfillment of twin objectives of profitability and liquidity. Hence, the topic selected in the studying THE IMPACT OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY AND WORKING CAPITAL LEVERAGE ON ASSETS IN IRON MINING INDUSTRY, NMDC LTD ( NATIONAL MINERAL DEVELOPMENT CORPORATION), AT DONIMALI.1.3 Need of the studyWorking capital is the life blood and nerve center of business. Working capital is very essential to maintain smooth running of a business. No business can run successfully without an adequate amount of working capital. The main advantages or importance of working capital are as follows:1. Strengthen the short term solvencyWorking capital helps to operate the business smoothly without any financial problem for making the payment of short-term liabilities. Purchase of raw materials and payment of salary, wages and overhead can be made without any delay. Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production.2. Enhance GoodwillSufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill. Goodwill is enhanced because all current liabilities and operating expenses are paid on time.3. Regular supply of Raw MaterialQuick payment of credit purchase of raw material ensures the regular supply of raw materials from suppliers. Suppliers are satisfied by payment on time. It ensures regular supply of raw materials and continuous production.4. Smooth business operationWorking capital is really a life blood of any business organization which maintains the firm in well condition. Any day to day financial requirement can be met without any shortage of fund. All expenses and current liabilities are paid on time.5. Ability to face crisisAdequate working capital enables a firm to face business crisis in emergencies such as depression.

1.4 Objectives of the studyStudy of Working capital is the most widely used and powerful technique of financial analysis. The main objective of present study is to know the financial condition of the company. To analyze the investment in various current assets of the company. To compute working capital ratios. To compute profitability ratios. To analyze the impact of working capital on profitability.1.5 Scope of the studyThe scope of project is only on Donimalai (DIOM) branch of NMDC Ltd. The data collected and analyzed for previous 4 years, from 2010-11 to 2013-14. This study made only on limited area, i.e. DIOM of NMDC Ltd.1.6 Research methodology Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying how research is done systematically. In that various steps, those are generally adopted by researcher in studying his problem along with the logic behind them. The procedures by which researchers go about their work of describing, explaining and predicting phenomenon are called Methodology. Research design : Descriptive and Analytical Research.Data collection sources: Primary and Secondary data.Primary Data: The Primary Data is that, which is collected for first time which is original in nature. In this study the Primary Data has been collected from personal interaction with finance manager and other staff members.

Secondary Data: The Secondary Data are those which have already collected and stored. Secondary data easily get those secondary from records, annual reports of the company etc. It will save the time, money and efforts to collect data. The major source of data for this project was collected through annual reports, profit and loss account of 4 years period & some more information collected from internet and text sources.Data analysis tools: Current ratio, Quick ratio, Return on total assets, working capital turnover ratio, inventory turnover ratio.1.7 Review of LiteratureWorking capital management can be considered as an important source of profitability of a firm. Many researchers investigated the impact of working capital management on profitability.1. Smith (1980) conducted a study on profitability and liquidity and suggested that working capital management directly influence risk and profitability of a firm. Hence it can be inferred that effective working capital management can increase the financial strength of a business.2. Soenen (1993) also performed an analysis of working capital management and its relationship with financial performance. His study was based on firms and after the study he suggested that if the length of net trade cycle increases then it affects the return on investment negatively.3. Lamberson (1995) observed the impact of economic activity on the working capital management policy. For this he took a sample of 50 small firms of us for a time period of 12 years i.e. 1980-1991. He found tha,t economic expansion do not cause an increase in the investment of working capital during a specific period.4. Afza and Nazir (2008) reviewed their previous study to estimate the impact of different type of working capital management policies on financial performance of firms in different sectors. For this they used a sample of 263 non-financial firms belonging to 17 different sectors listed at KSE from 1998-2003.5. Danuletiu (2010) conducted an analysis on 20 companies of alba country. He assessed the effect of working capital management efficiency on the financial performance of these companies for a period of five years i.e. 2004 to 2008. For his analysis he used Net Working Capital (NWC) as a measure of long- term financial balance, Working Capital Necessary (WCN) as a measure of short- term financial balance and Net Treasury (NTt) a difference of both NWC and WCN.6. Singh and asress (2011) also examined the effect of working capital solvency level on profitability by their study a sample of 449 Indian manufacturing firms. The study was based on a period of 10years i.e. 1999-2008. For this purpose, Working Capital Requirement (WCR) was selected as dependent variable and Total Operating Cost (TOC), Cyles (n) and operational breakeven point (obep) as independent variables.1.8 Limitation of the studyThe study conducted and done is analytical subject to the following limitation The study is mainly carried out based on the secondary data provided on the financial statement. The financial statement is generally based on historical or original cost. The current economic condition is ignored.

CHAPTER-2 INDUSTRY PROFILE2.1 IntroductionIron is the second most abundant metallic element in the Earths crust and accounts for 5.6% of the lithosphere. The principal minerals of iron are the oxides (Hematite and magnetite), hydroxide (limonite and goethite), carbonate (siderite) and supplied (pyrite). Iron, like most metals, is found in the earths crust only in the form of an ore, i.e. combined with other elements such as oxygen or sulfur.Hematite and magnetite are two important iron ore from which iron is extracted. Of these, hematite is considered to be superior owing to its high grade. It is the basic raw material for iron and steel industry. Steel is an alloy that consists mostly of iron and has carbon content between 0.2% and 2.1% by weight, depending on the grade. Steel is crucial to the development of any modern economy and is considered to be the backbone of human civilization. The level of per capita consumption of steel is treated as an important index of the level of socioeconomic development and living standards of the people in any country. It is a product of large and technologically complex industry having strong forward and backward linkages in term of material flow and income generation.HistoryIndia is one of the earliest manufacturers and users of iron and steel in the world. This is indicated from a number of references available in the annals of metallurgical history. A survey of literature reveals many documentary evidences, such as making of various surgical instruments in the 3rd/4th century B.C. by Sushrut, presentation of a gift of 30lb of Indian iron by King Porus to Alexander the great on the bank of Jhelum (around 326 B.C.) and the use of different weapons in various shapes and sizes in the ancient tomes.

The first signs of use of iron come from the Sumerians and the Egyptians, where around 4000 B.C., a few items, such as the tips of spears, daggers and ornaments, were being fashioned from iron recovered from meteorites. Because meteorites fall from the sky some linguists have conjectured that the English word iron (OE isem), which has cognates in many northern and western European languages, derives from the Etruscan aisar which means the god.Summary India is one of the leading producers of iron ore, with estimated total resources of over 28.5 billion tons (bt) of hematite (Fe203) and magnetite (Fe304) taken together. Of the 294 iron ore mines in 2012, compared to 336 in 2010, 34 were in public sector while the remaining 260 were owned by private firms in 2012. In 2013, production was estimated at 142.9 million tons (Mt), which is expected to increase to 284Mt in 2020 growing at compound annual growth rate (CAGR) of 7.4%. Simultaneously, iron ore consumption over the forecast period (2014-2020) is projected to increase to 238.3Mt in 2020.Indian scenario India is an important producer of iron ore in the world contributing more than 7% of the production and ranking fourth in term of quantity produced fallowing China, Brazil and Australia. As per UNFC system (United Nations Framework Classification) as on 1.4.2005, India possesses total hematite resources of 14630 Mt of which 7004 Mt are reserves and 7626 Mt are remaining resource. Major hematite resources are located mainly in Jharkhand-4036 Mt (28%), Orissa-4761 Mt (33%), Chattisgarh-2731 Mt (19%), Karnataka-1676 Mt (11%) and Goa-713 Mt (5%). The balance resources are spread over the state of Maharashtra, Madhya Pradesh, Andhra Pradesh, Rajasthan, Uttar Pradesh and Assam and altogether contain around 4% of hematite. Total resources of iron ore in India as on 1.4.2010 is about 28562 Mt.

Future ScenarioTotal reserves of iron ore in India, including magnetite have been estimated at approximately 17 billion tons. Fortunately, ores are of a fairly good quality.Current ScenarioIndias iron ore exports have gone down by 28.16% during April-December of the current fiscal to 11.17 Mt as gloom continues over the sector due to the regular scenario mineral industries. India, once the third largest exporter of iron ore, had exported 15.55 Mt of the mineral in the corresponding period of last fiscal, data released by Federation of Indian Mineral Industries (FIMI) showed. We expect the situation to continue as long as government policy does not change.Indian iron ore exports have been hurt badly in last few years due to mining bans in Goa and Karnataka, which led to drastic fall in domestic production as well. Increase in export duty to 30 percent on both types of iron ore, lumps and fines, in December 2012, had also impacted the sector.Presently, low grade iron ore (or fine) are being exported from Odisha, Jharkhand, Rajasthan and Madhya Pradesh as mining is still banned in Goa. Export of mineral is not permitted from Karnataka at present.The Goa government had issued a notification to sell about 15 Mt iron ore through exports, as per a Supreme Court order. However, none of it is expected to be exported.Industry is estimating that Indias total iron ore production in the present fiscal will be around 140 Mt, almost the same last year.

Iron Ore Mining Companies in India National Mineral Development Corporation Ltd (NMDC Ltd). Odisha Mining Corporation Ltd. Sesa Sterlite Ltd. Steel Authority of India Ltd. Tata Steel Ltd. Goa Iron ore mining.

2.2 Company Profile (NMDC LTD, OVERALL)Incorporated in 1958 as a Government of India fully owned public enterprise. NMDC is under the administrative control of the Ministry of Steel, Government of India. Since inception involved in the exploration of wide range of minerals including iron ore, copper, rock phosphate, lime stone, dolomite, gypsum, bentonite, magnetite, diamond, tin, tungsten, graphite, beach sands etc.NMDC is India's single largest iron ore producer, presently producing about 30 million tonnes of iron ore from 3 fully mechanized mines viz., Bailadila Deposit-14/11C, Bailadila Deposit-5, 10/11A (Chhattisgarh State) and Donimalai Iron Ore Mines (Karnataka State). NMDC Projects have following accreditations ISO 9001: 2008 - QMS Certification for all its iron ore mines and R&D Centre ISO 14001:2004 - EMS Certification for all its production mines OHSAS 18001:2007 - OHMS Certification for all its production minesStrong back up of an ISO 9001 certified R&D Centre, which has been declared as the "Centre of Excellence" in the field of mineral processing by the Expert Group of UNIDO.NMDC has made valuable and substantial contribution to the National efforts in the mineral sector during the last five decades and has been accorded the status of schedule-A Public Sector Company. In recognition to the Company's growing status and consistent excellent performance, the Company has been categorized by the Department of Public Enterprises as "NAVRATNA" Public Sector Enterprise in 2008.

Consistent profit making and dividend paying company.

Results2011-122012-132013-14

Iron Ore Production (L+F)27.26 MT27.18 MT30.02 MT

Iron Ore Sales (L+F)27.30 MT26.27 MT30.50 MT

IncomeRs 13,301 croreRs 13,127 croreRs. 14.167 crore

Profit before taxRs. 10,759 croreRs. 9,465 croreRs. 9,759 crore

No. of Employees5924 (31.03.12)5777 (31.03.13)5664 (31.03.14)

The story of NMDC is woven around the dreamy hills and the deep jungle land of Bastar in Chhattisgarh, known as Dandakaranya from the epic periods. The Bailadila iron ore range - "The hump of an ox" - in the local dialect, was remote, inaccessible and replete with wild life. The range contains 1200 million tonnes of high grade iron ore distributed in 14 deposits. The entire area was brought to the mainstream of civilization by the spectacular effort of NMDC by opening-up of mines. Today, Bailadila is a name to reckon with in the world iron ore market because of its super high grade iron ore. Bailadila complex possesses the world's best grade of hard lumpy ore having +66% iron content, with negligible deleterious material and the best physical and metallurgical properties needed for steel making.NMDC is presently producing about 20 million tonnes of iron ore from its Bailadila sector mines and 10 million tonnes from Donimalai sector mines.

Because of its excellent chemical and metallurgical properties, the calibrated ore from Bailadila deposits has substituted the iron ore pellets in sponge iron making and hence became an important raw material for three major gas-based sponge iron steel producers like Essar Steel, Ispat industries and Vikram Ispat. In addition to these three, the entire requirement of the Visakhapatnam Steel Plant is also being met from Bailadila.The demand for steel will continue to grow in the years to come and this in turn would call for increased demand for iron ore. NMDC is gearing itself to meet the expected increase in demand by enhancing production capabilities of existing mines and opening up new mines - Deposit -11B in Bailadila sector and Kumaraswamy in Donimalai sector. The production capability would increase to around 50 million tonnes per year in coming years.For Value addition NMDC is in the process of developing a 3 mtpa steel plant at Jagdalpur and 2 pellet plants at Donimalai (1.2 mtpa) and at Bacheli (2 mtpa). Besides, NMDC has acquired Sponge Iron India Limited with plan for expansion to produce billets.Foreign Venture: M/s NMDC has also prestigious foregin venture also such as: Exploration of gold in Madagascer. Exploration of gold in Tanzania. Exploration of diamond in Namibia.India is in 4th place among twenty top crude steel producing countries in world in previous years. Still India keeps its place in global market.

Achievement of NMDC during the year 2013-14(Overall) Turnover Rs. 12,058 Crore

Profit before tax (Including discounted operation)Rs. 9,759 Crore

Cash profitRs. 9,865 Crore

Net profit Rs. 6,420 Crore

Total assets Rs. 31,477 Crore

Net worth Rs. 29,983 Crore

Book value per share Rs. 75.62

Earnings per share Rs. 16.19

Return on capital employed 27%

Return on net worth 21%

Dividend Interim l ll Final

300%550%..

Value added per employee Rs. 178.54 Lakh

Output per man shift (Iron Ore) 30.47 Tonnes

Introduction to DIOM (Donimalai Iron Ore Mines)

The saga of NMDC includes the pioneering exploration activity carried out for developing iron ore mines in Karnataka in various regions like Kudremukh, Donimalai, Bababudan, Kumaraswamy and Ramandurg. NMDC developed the Donimalai mine in this area to export ore to Japan and South Korea. ISO 9002 Certification awarded in February, 1999.Commissioned:October, 1977

Average grade:+ 65% Fe

Balance reserves:27.92 million tonnes(April,08)

Product:Lump 31.5 mm +6.3mm Fines: -10mm

Capacity:4.0 million tonnes of ROM ore/year

Port of Export:a. Chennai outer harbor. Capable of handling ships of 1,30,000 DWT - 532 Kms. rail Linkb. Marmagoa port, Goa. Capable of handling panamax size vessels - 370 Kms rail link

No. Of. Employees 1286 (as on 30/04/2012)

Company Profile (Donimalai Iron Ore Mines)

Donimalai Iron ore mine is an operating unit of National Mineral Development Corporation Ltd is committed to achieve sustained consistency in quality of Iron ore mined, processed and produced by adopting and continuously improving scientific quality management systems through active involvement of all the employees to ensure optimum satisfaction of all the stake holders.N.M.D.C developed the Donimalai mine in this area to export ore to Japan and South Korea. From above information a common question will arise in new persons mind. I.e. where is this Donimalai Iron Ore Mine situated in India? Answer for that question is;

Forming part of Narasingapura village panchayat, Donimalai is situated in Sandur taluk of Bellary District in Karnataka. It is an approachable by road from Sandur, which is 10 kms away.Donimalai derives its name from the shape of hill in the local language i.e. Kannada, Doni means BOAT and Malai means HILL. The hill range is in the shape of inverted boat and hence named as Donimalai.Construction of Donimalai started in 1972 and commercial production started in 1977 October, which is connected by rail and road to all major cities in the country. The basic mineral of iron at Donimalai in hematite and from this different product like basic grade lump ore, fine ore are produced after processing of Run Off Mine Ore ( ROM ).The Donimalai Mine came into operation with a capital investment of Rs.41 crores of which foreign exchange component is Rs 2.4 crores. An about 7 million tons of excavation is done per annum.Valued customers of DIOM Rashtriya Ispat Nigam Ltd., (VSP) KIOCL Ltd., Essar Steels Ltd., JSW Steel Ltd., Ispat Industries Ltd., CG based Sponge Iron Units. Welspun Max Steel Ltd., Visveswaraya Iron & Steel Plant. Aparant Iron & Steel Co. Ltd., Tata Metalliks Ltd., Southern Iron & Steel Co. Ltd., MMTC Ltd., Vikram Sponge Iron Ltd.,Social Service of DIOM1. Construction of Multipurpose community hall. 2. Construction of Anganavaadi schools & class rooms.3. Providing electrical fitting & water supply.4. Visit of doctor to nearby village, health camps.5. Providing bus facility for marketing, attending schools by student in different region like Sandur, Yeswanth pura.6. Free hospital facilities to their employees as well as to their family members.7. Financial assistance to farmers in the year 2005.8. Donation for development of Jubilee Park at Bellary.9. Temple renovation work, repairs and maintenance work of road.

Various Department in DIOM- NMDC Ltd.There are seven departments:1. Personnel department.2. Mining department.3. Materials management department.4. Information system.5. Civil department.6. Finance department.7. Service department.1. Personnel department Establishment section:This section deals with attendances particulars of employees, workmens and medical facilities. It also deals with bills, scholarship to children of the employees, calculation of the gratuity, insurance or salary certificate, services certificate etc., of the employees working in NMDC. Estate section:This section deals with preparation of seniority list of the employees, allotment of houses according to the seniority of the employees, allotment of houses on rental basis, outside parties calculation of rent etc.2. Mining department This is very big department consisting of 202 staff consisting workmen, junior officer, executive headed by DGM. Mining, heavy earth moving machineries are run in the field, records, conducting weekly meetings deals by this department. The main aim is to achieve quality production with available resources in fixed time. Maintenance and services are also taken care by this department. Plant divisions:Plants in NMDC, DIOM divided into 3 i.e. crushing plant where ore is crushed, screening plant where ore is screened and loading plant where ore is loaded into wagons. The plant mechanical aspects headed by charges of respective plants. Service division:This department mainly deals with the electrical work of the township i.e. wiring, attending to the complaints, taking care of sub stations etc.3. Material departmentThis department is divided into 3 department i.e. purchase section, stores section and inventory control section. Purchase section:This section deals with purchase of required items for the project. The purchase are made on the basis of issue of limited tender enquires and receiving quotations, scrutiny of offers by committee, placing order etc. Stores section:The stores section is divided into 2 i.e. Main stores and Valley stores (sub store). The main stores deals with maintaining stock of heavy earth moving equipments i.e. spares, parts etc., maintaining of records etc., the valley stores also deals with keeping stock of spares and materials etc. Inventory control:This section deals with maintaining records of items according to value, code vendor etc. this section also deals with the items of moving and non-moving nature.

4. Finance and accounts department Establishment: maintaining attendance, bills, medical bills and other miscellaneous works are taken care by this department. Compilation section: budget cost, final reports, balance sheet, profit and loss accounts etc. are prepared in this section. Budget costing: budget for capital items, moving and non-moving items, their costs etc. are worked out in this section.2.3 Vision, Mission, Quality Policy and PromotersVision:Donimalai iron ore mine is an operating unit of NMDC Ltd is committed to achieve sustained consistency in quality of iron ore mine, processed and produced by adopting continually improving scientific quality management system through achieves involvement of all the employees to ensure optimum satisfaction of all the stakeholders.Mission:To emerge as a global environment friendly mining organisation with International Standards of excellence, rendering optimum satisfaction to all its stake holders.Quality Policy:Donimalai iron ore mine, an operating unit of NMDC Ltd, is committed to achieve sustained consistency in quality of iron ore mined, processed and produced by adopting and continually improving scientific quality management system through active involvement of all employees to ensure optimum satisfaction of all stakeholders.

Promoters: Central government of India (90%). And other shareholders (10%).2.4 Production and ServicesDonimalai iron ore mines has the fallowing range of products. LumpDonimalai iron ore lump size 6mm-30mm. Fines Donimalai iron ore fines size is 10mm.

ProductionAchievement% of change

2012-132013-14

Iron ore (lakh tonnes)271.84300.2510.45%

Sponge iron (tonnes)36289.0029734.36(-)18.06%

2.5 Area of OperationStatutory auditorsOn the basis of comptroller and auditor general of India, New Delhi, and the company appointed the fallowing firms of chartered accountants as statutory auditors of the company for the year 2013-14.SL.NoUnitStatutory Auditors

1Head office, R & D Center, SIU & ConsolidationM/s, Venugopal &ChenoyChartered AccountantsHyderabad 500 001

2Kirandul, Bacheli, Raipur, NSP, JagdalpurCentral work shopVizag officeM/s, Brahmayya & Co,Chartered AccountantsVisakhapatnam 530 003

3DonimalaiM/s, P K Subramaniam & Co,Chartered AccountantsRaichur 584 001

4PannaM/s, Gopal Gupta & Co,Chartered AccountantsAllahabad 211 001

2.6 Infrastructure Facilities Fully mechanized mines:1. Infrastructure Construction of roads and bridges. Electrification of home lights & public buildings. Construction of house for slum dwellers. Provision of drinking water.

2. Health care Free medical treatment at project hospitals. Medical camps.

3. Literacy and education NMDC is siksha sahayog yojana. Residential school at nagarnar. Education improvement program. Balika siksha yojana.2.7 Competitors Jindal iron and steel company limited. Kudremukh Iron Ore Company limited. Sesa Goa limited. Resurgere mines & minerals India limited. Essel mining & industry limited.

2.8 SWOT AnalysisStrengths Larger reserves of high grade of iron ore consisting principally of hematite ore with Fe content of predominantly > 64%. Largest producer of iron ore by volume. Resources making the Company a low cost producer - the Company's cost of production are competitive with those of the leading iron ore producers in the world. The Company is seeking to further cover its cost across all of its operations. Financial strength characterized by high net worth, zero debt, good credit rating. Good work culture - skilled, experienced and dedicated workforce. Good Brand image of NMDC's iron ore in domestic/international market. Highly mechanized iron ore mines. Availability of technology and infrastructure of existing projects in Bailadila to add new projects in the area with comparatively less investment. Core competence in iron ore mining. Developing expertise in international acquisition space.Weakness Geographically remote location of the projects acting as deterrent in attracting and retaining talent and also for reaching supplies and services. Delay in forest and environmental and other clearances affecting time schedules for opening and commissioning new mines and affecting our investment plans. Extreme foggy weather conditions causing stoppage of mining operations at Bailadila complex during monsoon months. The Company has not diversified into other sector. As such, any adverse impact on the mining sector hits the profitability of the Company.

Opportunities Continue diversifying and expanding its mining activities and products. Expand and establish its presence as an integrated producer of iron and steel. Continue to be a low cost, efficient and environmentally friendly mining Company. Augment resources, improve infrastructure and enhance technology through joint ventures and commercial tie-ups - the company seeks to augment its resources and reserves, improve its infrastructure and enhance its technology through joint ventures and commercial tie-ups. Financial powers for investment in new projects as a Navaratna Company.Threats Disturbances due to Maoists activities in Bailadila area. Intense competition from private sector in securing fresh mining leases, resulting in denial of leases in many cases and litigation delaying actions. Inability to secure additional reserves of iron ore that can be mined at competitive costs or cannot mine existing reserves at competitive costs, profitability and operating margins may be affected. Entry of MNCs and other Indian private companies into iron ore mining. The industry being cyclic in nature, NMDC is exposed to sharp fluctuations in demand for its products. The Company faces risks in respect of high inventory of stocks and its disposal.

2.9 Future growth and prospects Bailadila deposit-11/B: As part of plan to enhance production, the construction of Deposit 11B mine at an expanded capacity of 7.0 Million Tons of ROM per annum has been taken up. Kumaraswamy Iron Ore Project: As an addition to present Donimalai Iron Ore Mine and augmenting production capacity towards achieving the target of 50 MTPA in NMDC and 12 MTPA in Karnataka, the construction of Kumaraswamy Iron Ore Mine with capacity of 7.0 MTPA was taken up with an estimated capital outlay of Rs. 898.55 Crs. MECON is appointed as EPCM consultant. The entire project is being executed through six packages. Orders are placed for Crushing Plant Package, Downhill conveyor Package, Electrics and Substation package and Service Centre facilities packages and the works are in progress. Civil works are completed for Primary & Secondary Crusher house, Dumper platform, Mine office Building. Erection & trial runs of Primary & Secondary Crusher is completed. Civil & Structural works of Downhill conveyor system are under progress. The project is expected to be complete during the FY 2014-15. MTPA Pellet Plant at Donimalai: One of the main objectives of this project is to prolong the life of Tailing Dam at Donimalai by using the slimes for making pellets. M N Dastur & Co. is appointed as EPCM consultant. Execution of Project is divided into Six Packages. The estimated capital expenditure is Rs.572 Crores. All the packages are ordered. Major civil works completed. Major Technological equipment erection is completed and some of the equipment trial runs taken. Project is scheduled to be completed in FY 2014-15. Doubling of Railway Line: NMDC has entered into a MoU with Indian Railways on 21.12.2012 for the above work of 150 km length at an estimated cost of Rs.826.57 Crores at 2010-11 price level for which an amount of Rs.75 Crores has been deposited by NMDC during May 2013.

Steel Plant at Bellary: In pursuance of the MoU signed between the Government of Karnataka and your Company, action for setting up of 3 MTPA Integrated Steel Plant at Bellary, in the State of Karnataka has been initiated by the Company. Acquisition of about 3000 acres of land for the proposed steel plant through Karnataka Industrial Areas Development Board (KIADB) was under progress subsequent to publication of statutory preliminary notifications in the gazette of Karnataka in this respect.

Reclaimer in operation at Donimalai Mines, NMDC Ltd

2.10 Financial Statement (Overall)

CHAPTER-3 THEORETICAL BACKGROUND OF THE STUDY3.1 Meaning of working capitalThe working capital is refers to the excess of current assets over the current liabilities in the liquid portion of total enterprises capital which constitutes a margin of buffer for maturing obligations with in the ordinary operating cycle of business.The term working capital literally means capital used for conducting the day to day operation. It refers to that part of total capital which is used for carrying out the routine and regular business operations. In short, it is the amount of funds used for financing the short-term operation.Definition of working capitalAccording to principals board of the American Institute of certified public USA has defined:Working capital is sometimes called networking is represented by the excess of current assets over the current liabilities and identified the relatively liquid portion of total enterprises capital which constitutes a margin of buffer for operating cycle of business.According to Weston and Brigham:Working capital refers to a firm investment in short-term assets cash, short-term security, accounts receivables and inventory.3.2 Nature of working capital 1. Current assets and current liabilities.2. Negative or positive in nature.3. Short period.4. Out flow and inflow of cash.

3.3 Factor affecting working capital1. Nature of business.2. Production policy.3. Market condition.4. Seasonal fluctuations.5. Growth and expansion activities.6. Operation efficiency.7. Credit policy.8. Sales growth.9. Dividend policy.3.4 Concept of working capitalThere is two categories of working capital are as follows:

Gross working capital Gross working capital refers to the firms investment in current asset. Current assets are those assets which can be converted into cash within an accounting year or operating cycle and include cash, short-term securities, debtors (accounts receivable or book debts) bills receivable and stock (inventory).Gross working capital concepts focuses attention on two aspects of current assets management Optimize investment in current assets. Financing of current assets.The consideration of the level of investments in current assets should avoid two danger points excessive and inadequate investment in current assets.Net working capital (defined in two ways) It is the excess of current assets over current liabilities. It is that portion of a firms current assets which is financed by long-term funds.Net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors (accounts payable), bills payable and outstanding expenses. Net working capital can be positive or negative. A positive net working capital occurs when current assets are in excess of current liabilities. A negative net working capital occurs when current liabilities are excess of current assets.

3.5 Types of working capital

Permanent/fixed working capital. Temporary/variable working capital. Permanent / fixed working capitalIt refers to that minimum amount of investment amount of investment in all current assets which is required at all times to carry out the minimum level of business activities. In other words, it represents the current assets which are required on a continuing basis over the entire year. This part of working capital is fixed irrespective of changes in the operation.There is a need for current assets for smooth flow of operating cycle which is a continuous process. Hence the need for current assets is felt regularly. In any business certain fixed portion of current asset is always required referred to as permanent or fixed working capital.

It is a type of working capital which keeps on fluctuating from time to time depending on business activities. It indicates the need for additional current asset required at different times.

Temporary or variable or fluctuating working capital Additional inventory has to be procured to support sales during peak sales period. Investment in inventories decreases during depression period.Thus it is extra working capital required to support the changing in the production and sales activities. It is usually financed from short term sources of finance such as bank credit.Working capital may be changed in the fallowing circumstances: Changes in salesThe changes in sales and operating may be either in the form of increase or decrease. An increase in the volume of sales in bound to be accompanied by higher level of cash, inventory and receivable, the decline in sales has exactly the opposites effect a decline in the need for working capital. A change in the operating expenses rises or decline as similar effect as the level of working capital. Policy changesThe second major cause of changes in the level of working capital is policy changes because it is initiated by the management. There is wide choice in the matter of current policy. The term current asset policy may be defined as the relationship between current assets and sales volume. A term fallowing a constructive policy in this aspect having a high level of current assets in relation to sales says deliberately option for less conservative policy and vice-versa. Technology changesTechnology changes can be cause significant in the level of working capital. If a new place emerges as a result of technological development, then shorten the operating cycle.3.6 Operating cycleOperating cycle is defined as the time gap between sales and their actual realization into cash. The operating includes three steps, which is as follows:The first steps, the cash gets converted into inventory. This includes purchases of raw materials, conversion of raw material into work in progress, finished goods and finally the transfer of goods to stock at the end of the manufacturing process.The second step, of the cycle the inventory is connected into receivables as credit sales are made to customers.Third step, presents the stages when receivable are collected this step complete the operating cycle. The firm has moved from cash to inventory to receivables and to cash again.Operating cycle

3.7 Financing of working capital requirementsAnother commonly used source for financing working capital needs is the banking finance. Fallowing forms are help to know about banking finance to fulfill the working capital requirements. Bank overdraft. Cash credit. Bills discounting. Working capital loan. Regulations of bank finance. Tondon committee. Chore committee recommendation.3.8 Estimating working capital requirementsA firm as to ensure a balance between the two and for doing this it is of paramount importance to prepare an estimate of working capital is also known as working capital. A statement showing estimate of working capital is also known as working capital budget. The greatest advantage of preparation of working capital budget is that it facilitates planning of the level of holding current assets.Fallowing steps are taken in predict the working capital requirementsEstimating the current assets In the prediction of working capital it essential to predict the current assets. Current liabilities current assets include the fallowing assets. Stock of raw material, work in progress and finished goods. Sundry debtors.

Any advance payment of expanses. Cash and blank balances.For the forecast the level of inventories, it is necessary to calculate the expected holding period of each type of inventory or stock. In case of debtors, on an average how much credit will be allowed to the debtors should be estimated. For advance payments it is necessary to estimate the amount that will have to be paid as advance. As far as cash and bank balance should be estimated.Estimating the current liabilitiesThe second step in estimating working capital requirement is to estimate the current liabilities. The current liabilities include trade creditors, bills payables, bank overdraft, and expenses due but not paid and other short term liabilities. In estimating creditors and bills payable, how much credit will be allowed by the creditors, should be estimated carefully.

3.9 Working capital leverageWorking capital leverage reflects the sensitivity of return on investment (earning power) to changes in the level of current assets. . To express the formula for working capital leverage we will use the following symbols:Working capital leverage (WCL) = CA / TA CA

CA=value of current assets (gross working capital)CA=change in the level of current assetsFA=value of net assetsTA=value of total assets (TA = CA + FA)EBIT=earnings before interest and taxesROI=return on investment defined as EBIT / TA

If there is decrease in current assets:Working capital leverage (WCL) = CA / TA - CA

If there is increase in current assets:Working capital leverage (WCL) = CA / TA + CA

CHAPTER-4 DATA ANALYSIS AND INTERPRETATION4.1 The investment in various current assets.Table 4.1.1 showing investment in various current assets. (Amount in crores)Particulars/years2011201220132014

CURRENT ASSETS

Inventories 28.0268.67133.2397.97

Trade receivables16.42468.31489.87904.33

Cash and bank balances10.591.443.535.20

Short-term loans and advances20.55127.47142.4843.57

Other current assets00.0120.0260.051

Total current asset75.58

665.90

769.14

1051.12

Graph 4.1.1 showing the total current assets

4.2 Calculation of NET WORKING CAPITALTable 4.2.1 showing Net working capital (Amount in crores)Particulars/years2011201220132014

CURRENT ASSETS

Inventories 28.0268.67133.2397.97

Trade receivables16.42468.31489.87904.33

Cash and bank balances10.591.443.535.20

Short-term loans and advances20.55127.47142.4843.57

Other current assets00.0120.0260.051

Total current asset(A)75.58

665.90

769.14

1051.12

CURRENT LIABILITIES

Trade payable94.5797.80103.04124.32

Other current liabilities92.54204.40211.63216.35

Short term provisions0000

Total current liabilities(B)187.12302.21314.67340.67

NET WORKING CAPITAL(A-B)-111.54363.69454.47710.45

Graph 4.2.1 showing NET WORKING CAPITAL

Interpretation:From the above analysis in the year 2011 there is negative working capital. Negative working capitalmeans that the business currently is unable to meet its short-term liabilities with its current assets. Therefore, an immediate increase in sales or additional capital into the company is necessary in order to continue its operations.From the year 2012 onwards there positive working capital and it has been increasing. Positive working capitalmeans that the business is able to pay off its short-term liabilities. Also, a high working capital can be a signal that the company might be able to expand its operations.

4.3 Computation of Working Capital RatiosCurrent ratio/ Working Capital ratio.This ratio is also called as working capital ratio. It is an index of the short term solvency of concern. It shows the extent to which current assets may diminish in value carrying any losses in respect of the payment to short term creditors. Thus, it is an indication of the ability of enterprise in regard to meeting its current liabilities. A current ratio of 2:1 is considered as satisfactory.

Table 4.3.1 showing current ratio (Amount in crores) YearsCurrent assets (Amt in crore)Current liabilities(Amt in crore)Current ratio

201175.58187.12.40:1

2012665.90302.212.20:1

2013769.14314.672.44:1

20141051.12340.673.08:1

Graph 4.3.1 showing current ratio

Interpretation:From the above analysis, the current ratio is less than 1 in the year 2011. Ifcurrent ratio is below 1(current liabilities exceed current assets), then the company may have problems paying its bills on time. However, low values do not indicate a critical problem but should concern the management.From the year 2012 the current ratio is higher than 2:1 and has been increasing which is considered as acceptable, because the higher the current ratio is, the more capable the company is to pay its obligations.Current ratio gives an idea of company's operating efficiency. A high ratio indicates "safe" liquidity, but also it can be a signal that the company has problems getting paid on its receivable or have long inventory turnover, both symptoms that the company may not be efficiently using its current assets.

Liquid Ratio/ Acid Test Ratio/ Quick RatioQuick ratio is the second ratio to measure the solvency of the company. This ratio is very useful to test the ability of the firm to meet its short term obligation out of short term assets. Quick ratio of 1:1 is considered a fair indication of the good current financial position of enterprise. Quick assets refers to the assets, which can convert into cash as early as possible, it wont take lot of time like current assets.

(Quick Assets = Current Asset-Inventory)Table 4.3.2 showing quick ratio (Amount in crores)YearQuick assets(current assets-inventory)Current liabilitiesRatio

201147.56187.12.25:1

2012597.23302.211.98:1

2013635.91314.672.02:1

2014953.15340.672.80:1

Graph 4.3.2 showing Quick ratio

Interpretation:From the above analysis the quick ratio is less than 1 in the year 2011. Aquick ratio lower than 1:1may indicate that the company relies too much on inventory or other assets to pay its short-term liabilities.From the year 2012 the quick ratio is 1.98 and is been increasing constantly. Ifquick ratio is higher, company may keep too much cash on hand or have a problem collecting its accounts receivable. Higher quick ratio is needed when the company has difficulty borrowing on short-term notes. A quick ratio higher than 1:1 indicates that the business can meet its current financial obligations with the available quick funds on hand.

Inventory/stock turnover ratioIt is ascertain by dividing the cost of goods sold by the average inventory. This ratio is known as Inventory turnover ratio.This ratio establishes the relationship between the cost of goods sold during a given period and average amount of inventory held during that period. This ratio reveals the number of times stock is replaced during a given accounting period.

(COGS=Total Expenses-Selling Expenses) Table 4.3.3 showing Inventory turnover ratio (Amount in crores)YearsCOGS (total expenses-selling expenses)Sales (Iron ore)Ratio

2011411.061931.20.21:1

2012438.321911.47.23:1

2013987.092736.56.36:1

20141057.753140.07.34:1

Pie chart 4.3.3 showing Inventory turnover ratio

Interpretation: Low inventory turnover ratiois a signal of inefficiency, since inventory usually has a rate of return of zero. It also implies either poor sales or excess inventory. A low turnover rate can indicate poor liquidity, possible overstocking, and obsolescence, but it may also reflect a planned inventory buildup in the case of material shortages or in anticipation of rapidly rising prices.High inventory turnover ratioimplies either strong sales or ineffective buying (the company buys too often in small quantities, therefore the buying price is higher).A high inventory turnover ratio can indicate better liquidity, but it can also indicate a shortage or inadequate inventory levels, which may lead to a loss in business.High inventory levels are usual unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble if the prices begin to fall.A good rule of thumb is that if inventory turnover ratio multiply by gross profit margin (in percentage) is 100 percent or higher, then the average inventory is not too high.Debtor Turnover RatioDebtors turnover ratio measures the liquidity of the firms. It is similar to inventory turnover ratio. It is the technique which indicates the number of items debtors are converted into cash and gives the same idea of credit and collection is also high and the amount blocked in debtors is for short period. This ratio shows the efficiency achieved in using the funds invested in receivables. Funds invested in receivable are not available for other profitable uses.It indicates the speed with which debtors are being collected. The higher the turnover ratio indicates the better will be trade credit management or more chance of bad debts and the lower turnover ratio and long collection period reflects the managements inefficiency in collecting the dues or less chance of bad debts.

Table 4.3.4 showing debtors turnover ratio (Amount in crores)YearsSalesDebtors (Trade Receivables)Ratio

20111931.19468.314.08

20121911.471642.461.18

20132736.56489.875.59

20143140.07904.333.47

Graph 4.3.4 showing Debtors turnover ratio

Interpretation: Ahigh receivables turnover ratioimplies either that the company operates on a cash basis or that its extension of credit and collection of accounts receivable are efficient. Also, a high ratio reflects a short lapse of time between sales and the collection of cash, while a low number means collection takes longer.The lower the ratio is the longer receivables are being held and the risk to not be collected increases. Alow receivables turnover ratioimplies that the company should re-assess its credit policies in order to ensure the timely collection of credit sales that is not earning interest for the firm.

Working Capital Turnover RatioWorking capital is concerned directly to the sales. Working capital is excess of current assets over current liabilities. This ratio indicates weather business is being operated on small or large amount of working capital in relation to sales.The efficiency of money used as working capital is determined by computing how many times the working capital is turned over a given period.Table 4.3.5 showing working capital turnover ratio (Amount in crores)YearNet salesNet working capital(As per table 4.2.1)Ratio

20111931.19-111.54-17.31

20121911.47363.695.26

20132736.56454.476.02

20143140.07710.454.42

Graph 4.3.5 showing working capital turnover ratio

4.4 Computation of Profitability RatioThis ratio of net profit sales. It indicates relationship between net profit and net sales in terms of percentage. Net profit is the balance of P&L account which is calculated after charging all operating and non-operating expenses and incomes.

Table 4.4 showing Net Profit Ratio (Amount in crores)YearsNet profitNet salesPercentage

20111527.281931.1979.08%

20121442.151911.4775.44%

20131789.712736.5665.40%

20142155.353140.0768.64%

Graph 4.4 showing Net Profit Ratio

Interpretation:The profit margin ratio directly measures what percentage of sales is made up of net income. In other words, it measures how much profits are produced at a certain level of sales.This ratio also indirectly measures how well a company manages its expenses relative to its net sales. That is why companies strive to achieve higher ratios. They can do this by either generating more revenues why keeping expenses constant or keep revenues constant and lower expenses.Since most of the time generating additionalrevenuesis much more difficult than cutting expenses, managers generally tend to reduce spending budgets to improve their profit ratio.Like most profitability ratios, this ratio is best used to compare like sized companies in the same industry. This ratio is also effective for measuring past performance of a company.

4.5 Computation of Working Capital LeverageWorking capital leverage reflects the sensitivity of return on investment (earning power) to changes in the level of current assets.

Table 4.5 showing various requirement for computation of Working capital leverage (Amount in crores)Particular2011201220132014

Current assets88.54678.92781.351082.89

Net fixed asset240.521640.07175.79201.75

Total asset329.06842.99957.141284.64

Earning before tax1527.281442.151789.712155.35

Note: NMDC Ltd has no Interest to be paid

Table 4.5.2 showing working capital leverage assuming 20% increase in current asset (Amt in crores)YearsCurrent Asset(CA)Total Asset(TA)+ CA(= TA + .20*CA)Working capital leverage

201188.54346.77.25

2012678.92978.77.69

2013781.351113.41.70

20141082.891501.22.72

Graph 4.5 showing working capital leverage assuming 20% increase in current asset

Bellari Institute of Technology & Management, Bellary Page 51