working capital management hindalco

ASUMMER TRAINING PROJECT REPORT On “ANALYSIS OF WORKING CAPITAL RATIO OF HINDALCO” SUBMITTED IN THE PARTIAL FULFILLMENT FOR THE AWARD Of DEGREE OF MASTER IN BUSINESS ADMINISTRATION 2013-15 UNDER THE GUIDANCE OF: Ms. Ethi Jain Professor, RDIAS SUBMITTED BY: CHHAVU AGARWAL ROLL NO: 5680303913 BATCH NO: 2013-15 RUKMINI DEVI INSTITUTE OF ADVANCED STUDIES An ISO 9001:2008 Certified Institute NAAC Accredited Grade A (Approved by AICTE, HRD Ministry, Govt. of India) Affiliated to Guru Gobind Singh Indraprastha University, Delhi 2A & 2B, Madhuban Chowk, Outer Ring Road, Phase-1, Delhi-110085. STUDENT DECLARATION This to certify that I have completed the project titled “ANALYSIS OF WORKING CAPITAL RATIO OF HINDALCO” under the guidance of “Ms. Ethi Jain “ in the partial fulfillment of the requirement for the award of the degree of “Master in Business Administration” from “Rukmini Devi Institute of Advanced Studies, New Delhi.” This is an original work and I have not submitted it earlier elsewhere. Name: CHHAVI GUPTA Enrollment No: 5860303913 CERTIFICATE This is to certify that the project titled “ANALYSIS OF WORKING CAPITAL RATIO OF HINDALCO” is an academic work done by “CHHAVI GUPTA” submitted in the partial fulfillment of the requirement for the award of the degree of “Masters in Business Administration” from “Rukmini Devi Institute of Advanced Studies, New Delhi.” under my guidance and direction. To the best of my knowledge and belief the data and information presented by him in the project has not been submitted earlier elsewhere. Ms. Ethi Jain Professor-RDIAS ACKNOWLEDGEMENT I offer my sincere thanks and humble regards to Rukmini Devi Institute Of Advanced Studies, GGSIP University, New Delhi for imparting us very valuable professional training in MBA. I pay my gratitude and sincere regards to Ms. Ethi Jain, my project Guide for giving me the cream of his knowledge. I am thankful to him as he has been a constant source of advice, motivation and inspiration. I am also thankful to him for giving his suggestions and encouragement throughout the project work. I take the opportunity to express my gratitude and thanks to our computer Lab staff and library staff for providing me opportunity to utilize their resources for the completion of the project. I am also thankful to my family and friends for constantly motivating me to complete the project and providing me an environment which enhanced my knowledge CHAPTER 1 INTRODUCTION TO ORGANIZATION 1.1 INDUSTRY PROFILE Aluminum Industry in India Indian Aluminium Industry is a highly concentrated industry with the top 5 companies constituting the majority of the country's production. With the growing demand of Aluminium, the industry is also growing at an enviable pace. India ranks fifth in terms of aluminum production and accounts for 5 percent of the total production worldwide In fact; Aluminum production in India is currently outpacing the demand. Although India's per capita use of aluminum is 1.2 Kilograms as compared to 10.6 in China, 12.4 in the USA and the global average of 11.2 Kilograms. The Background Though the existence of Aluminum was first established in the year 1808, it took almost 46 years to make its production commercially viable. The research work of several years resulted in extracting the aluminum from the ore. Aluminum is third most available element in the earth constituting almost 7.3% by mass. Currently it is also the second most used metal in the world after steel. Due to the consistent growth of Indian economy at a rate of 8%, the demand for metals, used for various sectors, is also on the higher side. As a result, the Indian aluminum industry is also growing consistently. In FY09, the aluminum industry in India saw a growth of about 9%. The production of aluminum started in India in 1938 when the Aluminum Corporation of India's plant was commissioned. The plant which was set up with a financial and technical collaboration with Alcan, Canada had a capacity of producing 2,500 ton per annum. Hindustan Aluminum Corporation (Hindalco) was set up in UP in the year 1959; it had a capacity of producing 20,000 ton per annum. In 1965, a public sector enterprise Malco which had a capacity of 10,000 ton per annum was commissioned; by 1987, National Aluminum Company (NALCO) was commissioned to produce aluminum. It had a capacity of producing 0.218 million ton. During the 1970s, the government started regulating and controlling the Indian aluminum industry. Restrictions in entry and price distribution controls were quite common in the Indian aluminum sector. Aluminum Control Order was implemented where the aluminum producers had to sell 50% of their products for electrical usages. However, in 1989, the order was removed as the government decontrolling was revoked. With de-licensing of industry in 1991, the liberal import of technologies and capital goods was started. The liberalization resulted in a growth rate of 12% of the industry, comparing to the growth rate of 6% during the 1980 The Production The global aluminum production which was 41.93 million tons in 2010 increased to 45.54million tonnes in 2011, as per CRU Monitor-Aluminium. The Global aluminum production is forecast to increase by about 8.23% i.e. to 49.28 million tons in 2012. The world aluminum consumption in 2010 and 2011 was 40.96 million tones and 44.88 million tons respectively. India produced 15.25 lakh tones aluminum in 2009-10 and 16.29 lakh tons in 2010-11 which approximately was about 3.6 % of world production. The Consumption India's primary aluminum production capacity is expected to increase from 1.7 tonnes per annum (tpa) at present to 4.7 tpa by end-2017, with much of the forecast expansion in capacity and production targeted for export markets. Aluminium production capacity is forecast to increase by 8.7 tpa to 13.3 tpa, with around 4 tpa of capacity surplus to domestic requirements. The Major Players The Indian aluminum industry is dominated by four or five companies that constitute the majority of India's aluminum production. Following are the major players in the Indian aluminum industry: • Hindustan Aluminum Company (HINDALCO) • National Aluminum Company (NALCO) • Bharat Aluminum Company (BALCO) • MALCO • INDAL Aluminium Companies in India           Hindalco Hindustan Zinc Jindal Stainless Kennametal India Nalco Malco Ratanamani Metal Sujana Metal Products Balco Ind 1.2 COMPANY PROFILE HINDALCO: General Overview HINDALCO was set up in collaboration with Kaiser Aluminium and Chemicals Corporation USA, in a record time of 18 month. Hindalco started its commercial production in the year 1962 with aluminum facility at Renukoot in the eastern part of Uttar Pradesh with a capacity of 20,000 tons per annum. Over the year, it has grown into the largest integrated Aluminium manufacturer in the country. The company has grown manifold and managed by Board of Directors, with Shri Kumar Mangalam Birla as a chairman of the Board of Directors. Mr. Debu Bhattacharya, the managing Director, leads the entire Aluminium and copper business of the group. Day to day affairs of the company is managed by professional executives headed by Shri Ratan k Shah as the Chief Operations Officer, Aluminium and power. HINDALCO ranks as a largest Aluminium producer In India, who’s more than 58 % sale is in the value added product and has more than 40% in total market share. Hindalco’s integrated operations and operational efficiency have enabled the company to be one of the world’s lowest cost producers of Aluminium. HINDALCO also own a large Captive power thermal plant at Renusagar that meets the power requirement of the company very effectively. Hindalco currently has a primary Aluminium capacity of 3,45,000 tonnes. 9 Organization Mission To relentlessly pursue the creation of superior shareholder value, by exceeding customer expectation profitably, unleashing employee potential, while being a responsible corporate citizen, adhering to our values. Organization values — Path to excellence Honesty in every action On the foundation of integrity, doing whatever it takes to deliver, as promised 10 Missionary zeal arising out of an emotional engagement with work Thinking and working together across functional silos, hierarchy levels, businesses and geographies Objectives Of The Study 11 a) To analyze the working capital of Hindalco Industries Ltd. b)To determine the liquidity and profitability of the company with the help of Ratio Analysis c) To suggest measures for improvement if necessary in the management of Working Capital. Need For the Study An analysis of working capital and research work into the topic will help the organization to find out lacunas in the field of working capital management and take vital decisions. So the proposed study to analyze the working capital of Hindalco Industries Ltd. is significant. Milestones 12 1958 - Incorporation of Hindalco Industries Limited. 1962 - Commencement of production of Renukoot (Uttar Pradesh, India) with aninitial capacity of 20000 mpta of aluminium metal and 40000 mtpa of alumina. 1965 - Downstream capacities commissioned (rolling and extrusion mills at Renukoot) 1967 - Commissioning of Renusagar power plant – a strategic and farsighted more. 1991 - Beginning of major expansion programme. 1994 - A huge expansion, modernization and diversification programme taken off 1998 - Mr. Kumar Mangalam Birla takes over as chairman of Indal Board . 1999 - Aluminium alloy wheels production commenced at Silvassa Brownfield expansion of metal capacity of Renukoot to 242,000 tpa . 2000 – Acquisition of controlling stake in Indian aluminium company limited (Indal) with 74.6 percent equity holding. 2001 - Hindalco enters the Asia Top 25‘list of the CEO Asia Annual Report Survey .The only Indian company in 2001. 2002 - Brownfield expansion at an outlay of Rs 1,000 crore-ninth potline commissioned. - Amalgamation of Indo Gulf Corporation Ltd‘s copper business Birla copper, with Hindalco with effect from, April 2002. - Open offer of aquire additional equity to make Indal a wholly – owned subsidiary. 2003 - Hindalco acquires nifty copper mine through Aditya Birla Minerals Ltd. (ABML . Formerly, Birla minerals Resources Pty Ltd.) - ABML acquires the Mt. Goodson Copper mines in November 2003. -The amalgamation of Indo Gulf‘s copper business with Hindalco become effective from 12 th February 2003. - Equity stake in Indal increased to 96.5 per cent through an open offer. 13 2004 - Scheme of arrangement announced to merge Indal with Hindalco Copper smelter expansion to 250,0000 tpa . 2005- All business of Indal expect for the kollur foil plant in Andhra Pradesh merged with Hindalco Industries Limited. - In September 2005 the company split its shares in a ratio of 10:1 to enhance liquidity and encourage participation from retail investors. - Aditya Birla Group to set up a world-class aluminium perfect in Orissa at a project cost of about Rs.11, 000 crore. - MoUS signed with state governments of Orissa and Jharkhand for setting up greenfield alumina refining, smelting and power plants commissioned copper 3rd expansion taking total capacity to 500,000 tpa. 2006 - Joint venture with Almix USA for manufacture of high strength aluminiumallays. Signed on MOU with the government of Madhya Pradesh for green field Aluminium melter in Siddhi. - Hindalco completes the largest right issues in the history of Indian capital market with a total size of Rs. 22,266 million. - Hindalco announce 10:1 stock split .Each shares with face value of Rs 10 split into 10 shares of Rs 1 each. - In May 2006, enters into a joint venture with Essar power (M.P.) Ltd to overlap and operate coal mines in Madhya Pradesh. - In May 2006 the company‘s copper mining subsidiary ,Aditya Birla Minerals Limited ( Formerly Birla Mineral Resources Pty Ltd .) come out with an equity offering and subsequent listing on the Australian stock exchange (ASX). - In March 2006, acquired an aluminium rolling mill and wire rods facility situated at Mouda (Nagpur) from Asset Reconstruction company (India) Ltd (ARCIL), belonging to Rennor Aluminium Company Ltd. 14 2007 - Novelis become a Hindalco subsidiary with the completion of the acquisition process. The transition make Hindalco the world’s largest aluminium rolling capacity and one of the biggest producers of primary aluminium in Asia . - Acquisition of Alcon‘s 45 percent equity stake in the Utkal Alumina project , makes Hindalco the 100 % project owner. 2008 - Alumina expansion at Muri. 2009 - Hindalco Industries, Aditya Birla group flagship firm, has decided to cut its overseas and is restructuring its capital Expenditure in India in an effort to stabilize operations. As part of this overall plan, Novelist, which Hindalco acquired for billion in2007, is closing its sheet mill at Rogers tone in the UK, involving 440 job losses. 2010 - Hindalco ranked ninth across industries on Forbes Asia's Fab 50. Companies list of Asia's 50 most valued companies. - Hindalco and Birla White declared winners in the Golden Peacock Awards for Corporate Social Responsibility 2010 by an international jury, headed by Justice P.M. Bhagwati, the erst while Chief Justice of India - Hindalco wins Amity International Business School’s, ‘Amity corporate Excellence Award for Corporate Social Responsibility.’ - Hindalco - Novelis Inc. Announces Pricing of .5 Billion Senior Unsecured Notes. 2011- The Company is setting up a Greenfield Aluminium Smelter Project in Madhya Pradesh (Mahan project) with a capacity of 359,000 TPA of aluminium supported by 900 MW capative power plant at a cost (Including financing cost ) of Rs.10500 Crore. - An Imminent name in aluminium production in India, Hindalco Industries has recently got Government approval for cutting down the Forest of Orrisa , Rayagada district .The proposed Reason for acquiring this green clearance is an alumina refinery project to be set up in Rayagada that would involve an investment up to Rs. 6000 crore . 2012- Hindalco Industries, an integral part of the Aditya Birla Group announced it is expecting to commence its 1.5 million tons per Annum (MTPA) alumina refinery by January 2013, located in Orissa. THE ADITYA BIRLA GROUP 15 Aditya Birla group, with the turnover of over US $ 40 billion and 136,000 employees, is among top three leading business houses in india. The Aditya birla group is India’s first truly MNC whose over 30% of revenues flow from its operations across the world. The group is transactional conglomerate with 72 state-of-the-art manufacturing units and sectoral span, in India, Thiland, Indonesia, Malaysia, Philippines, Egypt, Canada, Australia, China. (33 countries) Over 66 units in India as well as abroad (in Thiland, Indonesia, Malaysia, Philippines, Egypt, Canada, Australia, China) and international trading operations spanning several countries included Singapore, Dubai, Russia, Vietnam, Myanmar, and China make it India’s first truly multinational conglomerate. Commited to being a global benchmark group, the aditya birla group recheches out to the core sector in india in industrial integral to the naton’s growth – cement, aluminum, fertilizers, viscose staple fibre, branded apparel, viscose filament yarn, Non – ferrous metals, industrial chemicals, carbon black, powder, telecommunication, sponge iron, insulators and financial services The Aditya birla group enjoys a front runner position: Globally  A metals powerhouse among the world’s most cost efficient Alluminium and copper producers.         Hindalco–Novelis from its fold in fortune 500 company. Aluminium rolling company. It ranks as No.1 in viscose staple fibre The largest single location palm oil producer The third largest producer of insulators The third largest producer of carbon black The eleventh largest producer of cement and the largest in single geography The largest single location copper smelter Among the world’s top 15 BPO’s and among India’s top three Among the best energy efficient fertilizer plants In Asia  The largest integrated aluminum producer In India 16       A premier branded garment player The second largest chore – alkali sector Among the top five mobile communication company Among the top three supermarket chains in the retail market Second largest player of viscous filament yarn Second largest private sector insurance company and a leading assests management company. Group Vision “To be the premium metals major, global in size and reach, with a passion for excellence” Group Mission “To relentlessly pursue the creation of superior shareholder value by exceeding customer expectations profitability, unleashing employee potential and being a responsible corporate citizen adhering to our values. Group Values “Integrity, Commitment, Passion, Seamlessness, Speed” Aditya Birla Group: Presence In India       A premier branded garments player The second largest player in viscose filament yarn The second largest in the chlor-alkali sector Among the top five mobile telephony companies A leading player in life insurance & asset management Among the top three supermarket chains in the retail business Group Companies     Grasim Industries Ltd. Hindalco Industries Ltd. Aditya Birla Nuvo Ltd. Ultra Tech Cement Ltd. Indian companies:- 17     PSI Data Systems Aditya Birla Minacs Worldwide Ltd Essel Mining & Industries Ltd. Idea Cellular Ltd.Aditya Birla Insulators Product Profile Aluminium Hindalco's major products include standard and specialty grade aluminas and hydrates, aluminium ingots, billets, wire rods, flat rolled products, extrusions and foil. The integrated facility at Renukoot houses an alumina refinery and an aluminium smelter, along with facilities for the production of semifabricated products namely: redraw rods, flat rolled products and extrusions. The plant is backed by a co-generation power unit and a 742 MW captive power plant at Renusagar to ensure the continuous supply of power for smelter and other operations. A strong presence across the value chain and synergies between operations has given us a dominant share in the value-added products market. As a step towards expanding the market for value-added products and services, we have launched various brands in recent years — Everlast roofing sheets, Freshwrap kitchen foil and Freshpak semi-rigid containers. Copper Birla Copper, Hindalco’s copper unit, is located at Dahej in Gujarat, India. The unit has the unique distinction of being the largest single-location copper smelter in the world. The smelter uses state-of-the-art technology and has a capacity of 500,000 tpa. Birla Copper also produces precious metals, fertilizers and sulphuric and 18 phosphoric acid. The unit has captive power plants for continuous power generation and a captive jetty to facilitate logistics and transportation. Birla Copper upholds its longstanding reputation for quality copper cathodes and continuous cast copper rods by assuring its management processes meet the highest standards. It has acquired certifications such as ISO-9001:2000, ISO-14001:2004 and OHSAS-18001:2007. Mines Hindalco acquired two Australian copper mines, Nifty and Mt. Gordon, in 2003. The Birla Nifty copper mine consists of an underground mine, heap leach pads and a solvent extraction and electro winning (SXEW) processing plant, which reduces copper cathode. The Mt. Gordon copper operation consists of an underground mine and a copper concentrate plant. Until recently, the operation produced copper cathode through the ferric leach process. In 2004, a copper concentrator was commissioned to provide concentrate for use at Hindalco's operations in Dahej. During FY2009, Mt. Gordon produced 17,815 tones of copper in concentrate. Both Nifty and Mt. Gordon have a long-term life of mine off-take agreement with Hindalco for supply of copper concentrate to the copper smelter at Dahej. Cornerstones Of Growth 19 Hindalco’s well-crafted growth and integration hinges on the three cornerstones of cost, they are competitiveness, quality and global reach. Company also committed to the triple bottom line accountability of economic, environment and social factors. Care for the community around our operating units is best exemplified by our deep-rooted social commitment. HINDALCO Product Range PRIMARY ALUMINIUM Ingots Hindalco produces high-purity ingots through smelting. Alloy ingots of various grades are also produced and m 20 A leading player in the extrusions industry in India, Hindalco offers a wide range of alloys, including hard alloys and some special alloys for the defense and space sectors. Hindalco’s extrusions capacity stands at 46,000 tap. Hindalco has two extrusion plants in India, one in Renukoot, Uttar Pradesh, and the other in Alupuram, Kerala. Both plants have well-established manufacturing processes and QA systems honed over five decades of experience. Extrusions are manufactured from high-quality billets made out of virgin in-house metal and offer the widest range of shapes and alloys. Hindalco Extrusions is a leading brand for a wide spectrum of industries, including architectural, electrical, industrial, transport, and defense and consumer durables industries. We export extrusions primarily to the US, Canada, Germany, the UK, France, the Netherlands, South Africa, UAE, Singapore, Malaysia, Sri Lanka and Bangladesh . Quality accreditations  ISO 9001:2000 Quality Management System  The company has ISO 2002 Certification since 1994  ISO 14001 Environment Management System since 1998.OHSAS 18001:1999 Occupational Health and Safety Assessment Series  Hindalco has accorded the Star Trading House status in India.  Hindalco's aluminium metal is accepted for delivery under the High Grade Aluminium Contract on the London Metal Exchange (LME).  Hindalco’s copper quality standards are also internationally recognized and registered on the LME with Grade A accreditation 21 PRODUCTION CAPACITY Alumina 700000 TPA RENUKOOT 350000 TPA BELGAUM 450000 TPA MURI Aluminium 345000 TPA RENUKOOT 161400 TPA HIRAKUD Extrusions 230000 TPA RENUKOOT 8000 TPA ALUPURAM Flat Rolled Products 80000 TPA RENUKOOT 45000 TPA BELUR 50000 TPA TALOJA 30000 TPA MOUDA Redraw Rods 22 56400 TPA RENUKOOT Foil & Packing 30000 TPA SILVASSA 4000 TPA KOLLUR Captive Power 742 MW RENUKOOT 638 MW HIRAKUD 84 MW RENUKOOT COGEN 30 MW MURI Application of Aluminium In India           Automotive industry Aviation industry Railways Ship building industry Transportation industry Dairy industry Packing industry Electrical industry Household utensils Consumer durable products 23 Major Aluminium Producer Industries In India COMPANY OWNERSHIP LOCATION CAPACITY Hindalco A B Group Renukoot Alpuram Hirakud Belgaum 345,000 14,000 65,000 31,000 NALCO Public sector Angul 345,000 BALCO Sterlight Kobra 350,000 MALCO Sterlight Mettur 40,000 THEORATICAL BACKGROUND Working Capital Working capital refers to the cash a business requires for day-to-day operations, or more specifically, for financing the conversion of raw material into finished goods, which the company sells for payment. 24 Among the most important items of working capital are levels of inventory, accounts receivable and accounts payable. Analysts look at these items for sings of a company’s efficiency and financial strength. Funds are also needed for short-term purposes for the purpose of raw materials, payment of wages and other day-to-day expenses, etc. These funds are known as working capital. In simple words, working capital refers to that part of the firm’s capital, which is required for financing short- term or current assets such as cash, marketable securities, debtors and inventories. Working capital is a valuation metric that is calculated as current assets minus current liabilities. Working capital is also known as operating capitals. Current Assets and Current Liabilities This includes three accounts, which are of special importance.These accounts represent the areas of the business where managers have the most direct impact:  Accounts receivable (current assets)  Inventory (current assets), and  Account payable (current liabilities) In addition, the current (payable within 12 months) portion of debts is critical, because it represents a shorts- term claims to current assets. Common types of short-term debt are bank loans and lines of credit. I. Current assets: This is any cash or assets that can be quickly turned into cash. This includes prepaid expenses, accounts receivable, most securities and your inventory. Constituents of Current Assets:  Cash in Hand and Bank Balances 25             Bill Receivables Sundry Debtors (Less provision for bad debts) Short terms Loans & Advances Inventories of stocks Raw Material Work in Process Stores and Spares Finished Goods Coal & Fuel Bills Temporary Investments of Surplus Funds Prepaid Expenses Payables Accrued Income II. Current liabilities: Sundry This is a for liability in the immediate future. This including wages, taxes account payable. Provision Taxation Creditors Constituents of Current Liabilities:        Bills Payable Sundry Creditors or Accounts Payables Short Terms Loans Advances & Deposit Dividend Payable Bank Overdraft Provision for taxes Constituents of Current Liabilities Current Liabilities Dividend Payable Short Term Loans 26 Bank Overdraft The basic objective of financial management is to maximize shareholder’s wealth. For this it is necessary to generate sufficient profits. The extent to it, which the profit can be, earn, largely depend on the magnitude of sales. However sales do not convert into cash instantly. There is invariable the time gap between the sale of goods and receipt of cash. There is, therefore, a need for working capital in the form of CA to deal with the problem arising. Out of the lack of immediate realization of cash again goods sold. Therefore, sufficient WC is necessary to sustain sales activity. Need For Working Capital Every business needs some amount of working capital. The need arise due to the time gap between production and realization of cost from sales. There is an operating cycle involved in the sales and realization of cash. There were time gap in purchase of raw materials and sales and realization cash. The working capital is needed for the following purpose: 27      For the purchase of raw materials and spares. To pay wages and salaries. To incur day to day expenses and overhead costs like fuel, power and office expenses. To provide credit facilities to customers. To maintain the inventories of raw materials, work in progress, stores and spares and finished goods. A new concern need a lot of liquid funds to meet initial expenses like promotion, formation etc. The amount needed as working capital in a new concern depends on its size, ambitions of its promoters. Greater the size of the business unit, larger will be the need of working capital needed goes on increasing the growth and expansion of business till it attain maturity. At maturity the amount of working capital needed is called as normal working capital. 28 Classification Of Working Capital Classification of Working Capital Working capital may be classified in two ways:  On the basis of time  On the basis of concept I. On the basis of time: There are two concept of working capital; a. Gross Working Capital On the basis of CONCEPT On the basis of TIME b. Net Working Capital a) Gross Working Capital Gross working capital refers to the firm’s investment in current assets. Current assets are assets, which can be converted into cash with in an accounting year. The main components of current assets are cash, debtors, marketable securities and stock. The Gross Working Capital concept focuses attention on two aspect of current asset management.  Optimum investment in current assets  Financing of current assets Permenent Net Working Temporary Gross Working Capital Working Capital in assets should be to avoid two-danger Working The consideration of level of investment point: Capital excessive and Capital inadequate in current assets. Investment in current assets should be just adequate, not more nor less to the needs of business firm. Excessive investment in current assets should be avoided as its impairing firm’s profitability. On the other hand inadequate amount of working capital can threaten solvency of the firm. Another aspect of gross working capital points of the need of arranging funds to finance current assets. Whenever a need for working capital arises, financing arrangement should be made quickly. Similarly Regular Reserve Special Seasonal arising shall be Capital invested inWorking short-term securities. Working Capital Working CapitalWorking Capital b) Net Working Capital 29 Net working capital refers to the difference between currents assets and current liabilities. Current liabilities are those claims of outsiders, which are expected to mature for payment with in an accounting year. Current liabilities include creditors; bills payable and outstanding expenses. Net working capital is a qualitative concept. It indicate the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent source of funds as share, debenture, long-term debts etc. It covers the question of judicial mix of long and short-term funds for financing current assets. In order to protect their interests, short-term creditors like a company to maintain a positive NWC. Conventionally the ratio of current assets and Current liabilities is 2:1. A negative Net working capital means a negative liquidity, which may prove to be harmful to company’s solvency makes it unsafe and unsound. Net working capital = Current assets - Current liabilities II. On the basis of concept:There are two concept of working capital, they are; a) Permanent working capital b) Temporary or variable working capital a) Permanent working capital Permanent of fixed working capital is the minimum amount, which required ensuring effective utilization of fixed facilities and for maintaining the circulation of current assets. There is always a minimum level of current assets, which is consciously required by the enterprise to carry out normal business operations. Every firm has to maintain a minimum level of raw materials, work-in-progress, finished goods and cash balances. This minimum level of current assets is called permanent or fixed working capital as this part of capital is permanently blocked in current assets. Characteristics Of Permanent Working Capital 30  Amount of permanent working capital remains in the business is one form or the other. The supplier of such working capital should not accept its return during the lifetime of the firm.  It grows with the size of the firm.  Permanent working capital is permanently needed for the business. b) Temporary or variable working capital This is also known as the fluctuating working capital or variable working capital. Temporary working capital is the extra working capital needed to support the changing production and sales activity of the firm. Cash Debtors (Receivable) Raw Materials, Labour, Overheads WORKING CAPITAL CYCLE 31 Finished Goods Work-inprogress Working capital cycle indicate the length of time between a company’s paying for material, entering into stock and receiving the cash form sales of finished goods. It can be determined by adding the number of days required for each stage in the cycle. For example, Hindalco company hold raw material on an average for 120 days; it gets credit from supplier for 30 days, production process needs 30 days, finished goods for held for 60 days and credit extended to debtor. The total of all these, 240 days, i.e., 120+30+30+60 days is the total working capital cycle. The determination of working capital cycle helps in forecast, control and management of working capital. The duration of working capital cycle may vary depending on the nature of business. Estimation of working capital requirement 32 There is no set rule or formula to determine working capital requirement of the firm. The quantum of working capital requirement of a company largely depends upon aforesaid factors. A finance manager in order to estimate the working capital requirement of the firm has to keep in mind the above factors. Besides he can apply any of the following techniques for assessing working capital requirement – 1. Estimation of component of working capital 2. Percentage of sales method 3. Operating cycle approach TECHNIQUE (1): -Estimation of component of working capital Since working capital is the excess of current assets over current liabilities, estimating amount of different constituents of working capital can makes an assessment of working capital requirement. For example, inventories, account receivables, cash, debtors, creditors etc. 1. Inventories: - The average amount of raw material to be kept in stock will depend upon quality of raw material required for production during a particular period and average time taken in obtaining fresh delivery. Suitable adjustment may have to be made for incontinency and seasonal factor. It can be calculated by following formula : Budget Production × Cost of Raw material × Average inventory holding period (Units) (Per unit) (Months or days) 12(months) OR 365 (Days) 2. Work-in-progress: - The cost of work-in-progress includes raw material, wages and other overheads in determining the amount of work-in-progress the time period for which the goods will be in process, is most important. Work-in-process is normally equivalent to 50% of total cost of production. Symbolically; Budget production × Estimated WIP × Average WIP time span (Units) (Per unit) (Month or days) 12(months) OR 365 (Days) 3. Finished Goods: - The period for which finished goods have to remain in the warehouse before is an important factor determining the amount locked up in finished goods. It summed up as: 33 Budget Production × cost of goods produced ×finished goods holding period (Units) (Per unit)(Exclude DEP.) (Months or Days) 12(months) OR 365 (Days) 4. Sundry Debtors: - The amount of fund locked up in sundry debtors will be computed on the basis of credit sales and time lag in collection payment. It should be estimated in relation to total cost price as follows:- Budgeted credit sales (Units) × Cost of sales × Average collection period Excl. Dep. (Per unit) (Months or Days) 12(months) OR 365 (Days) 5. Cash or Bank balance: - The amount of money which to be kept as cash in hand or cash at bank can be estimated on the basis of past experience. 6. Sundry creditors: - The lag in payment of supplier of raw materials, goods etc and the likely credit purchases made during them to help in estimating the amount of creditor – Budgeted creditor × raw mat. Requirement × Credit period allowed (Units) (Units) (Months or days) 12(months) OR 365 (Days) 7. Outstanding Expenses: - The time lag in payment of wages and other expenses will help in estimating the amount of outstanding expenses as follow – Budgeted production × Labor cost × Time lag in paymt. of Exp. (Units) (Per unit) (Months or Days) 12(months) OR 365 (Days) TECHNIQUE (2): -Percentage of sale method This is a traditional and simple method of estimating working capital requirement. According to this method, on the basis of past experience between sales and working capital requirement, a ratio can be determined for estimating the working capital requirement in future 34 For Example, if in the past experience shows that working capital has been 30% of sales and it is sales for the next year would amount to 1, 00,000, the amount of working capital can be estimated to Rs. 30,000 , the basic criticism of this method is that its presumes a linear relationship between sales and working capital. This is neither true in all cases nor the method is universally accepted. The following table shows how the companies estimate their working capital requirement by using percentage of the sale method for the year 2012: - PERCENTAGE OF SALE METHOD Items Sales Inventories Sundry debtors Cash & bank Bal. Other current assets Loan & advances Total Rs. (in millions) % of sales 28053.24 3903.96 13.91 1427.45 5.08 722.30 2.58 355.78 5.88 1647.65 1.27 36110.38 128.72 23615.15 84.17 919.88 3.28 Less : Liabilities Provisions 35 Total Net current assets Miscellaneous Exp. 24535.03 87.45 16479.44 58.74 730.28 2.60 Analysis:From this method we can conclude the data, how much working capital (in percentage) Hindalco need in the next year. This gives help to control the working capital level. This is an important aspect to control the cost of finished goods through reduce the cost of inventories. Operating Cycle Approach:According to this approach working capital requirement is depends upon the operating cycle business. The operating cycle begins with the acquisition of raw material and with the collection of receivables. It may be broadly classified into four stages:  Raw material and store storage stage  Work-in-progress stages  Finished goods storage stage  Receivable collection stage The duration of operating cycle for the purposes of estimating working capital requirements equivalent to the sum of the duration of each of these stages less credit period allowed by the superior of the firm. Symbolically: Here, O = Duration of operating cycle R = Raw material storage period W = Work-in-progress period F = Finished goods storage period D = Debt collection period C = Creditors payment period 36 The above can be calculated as follows: Average Stock of raw material × 365 days R= Average raw material store consumption Average Work in progress inventory × 365 days W= Average cost of production Average finished goods inventory × 365 days F= Average cost of goods sold Average books of debts × 365 days D= Average credit sales 37 Average trade creditor × 365 days C= Average credit purchases After completing the period of one operating cycle total number of operating cycle that can be completed during a year can be computed by dividing 365 days with the number of operating days in a cycle. SYMBOLICALLY: N = 365/O Here, N = numbers of operating cycles O = duration of operating cycles Total operating expenditures WCR = Number of operating cycles in a year       The working capital has the following components, which are in several forms of current assets: Cash in hand Cash at bank Stock of raw material Stock of finished goods Value of debtors Miscellaneous current assets (short term investment, loans & advances. Components of working capital Basis of valuation 38 1. Stock of raw material Purchase cost of raw material 2. Stock of work in progress At cost or market value, whichever is lower 3. Stock of finished goods Cost of production 4. Debtors Cost of sales or sales value 5. Cash Working expenses II: Working Capital Management Every business needs investment to procure fixed assets, which remain in use for a longer period. Money invested in these assets is called ‘long term funds’ or ‘fixed capital’. Business also needs funds for short-term purposes to finance current operations. Investment in short term assets like cash, inventories debtors etc. is called ‘short term funds’ or ‘working capital’. The working capital is categorized as fund needed for carrying out day-to-day operations of the business smoothly. The management of the working capital is equally important as the management of long term financial investment. Every running business needs working capital. Even a business which is fully equipped with all types of fixed assets required is bound to collapse without1) 2) 3) 4) Adequate supply of raw materials for processing. Cash to pay for wages, power and other costs. Creating a stock of finished goods to feed the market demand regularly. The ability to grant credit to its customers. All these require working capital. “Working capital is like the lifeblood of a business” The business will not be able to carry on day-to-day activities without the availability of adequate working capital. 39 Working capital, also known as net working capital, is a financial metric which represents operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. It is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called as working capital deficit. A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivables and payable and cash. Calculations Current assets and current liabilities include three accounts which are of special importance. These accounts represent the areas of business where the managers have the most direct impactAccounts receivable (current assets) Inventory (current assets), and Accounts payable (current liabilities) The current portion of debt (payable within 12 months) is critical, because it represent a short term claim to current assets and is often secured by long term assets. Common types of short-term debts are bank loans and lines of credit. An increase in working capital indicates that the business has either increased current assets (that is received cash, or other current assets) or has increased current liabilities, for example paid off some short-term creditors.  Current assets- this is any cash or assets that can be quickly turned into cash. This includes prepaid expenses, accounts receivables, most securities and your inventory. Constituents of current assets Cash in hand and bank balances 40  Bill receivables  Sundry debtors (less provision for bad debts)  Short term loans and advances  Inventories of stock Raw material Work in process Stores and spares Finished goods Coal and fuel  Temporary investments of surplus funds  Prepaid expenses  Accrued expenses  Current liabilities- This is a liability in the immediate future. This includes wages, taxes and accounts payable. Constituents of current liabilities      Bills payable Sundry creditors or accounts payable Short term loans, advances & deposits. Dividend payable Bank overdraft Provision for taxation, if it does not amount to appropriation of profits Current assets – current liabilities (excluding deferred tax assets/liabilities, excess cash, surplus assets and/or deposit balances) Working Capital Management Decision relating to working capital and short term financing are referred to as working capital management. These involves managing the relationship between a firm’s short term assets and short term liabilities. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flows to satisfy both maturing short-term debt and upcoming operational expenses. Decision criteria 41 By definition, working capital management entails short term decisions- generally related to next one year period- which are “reversible”. These decisions are therefore not taken on the same basis as capital investment decisions (NPV or related, as above) rather they will be based on cash flows and/or profitability. One measure of cash flow is provided by the cash conversion cycle- the net number of days from the outlay of cash for raw material for receiving payment from the customers. As a management tool this metric makes explicit the inter-relatedness of decision relating to inventories, accounts receivables and payables and cash. Because this number effectively corresponds to the time that the firms cash is tied up in operations and unavailable for other activities, management generally aims at a low net count. In this context, the most useful measure of profitability is return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; return on equity (ROE) shows this result for the firm’s shareholders. Firm value is enhanced when, and if, the return on capital, which results from working capital management, exceeds the cost of capital, which results from capital investments decisions as above. ROC measures are therefore useful as a management tool, in that they link short-term policy with long-term decision making. See economic value added (EVA). Management of working capital Measurement will use a combination of policies and techniques for the management of working capital. These policies aims at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short term financing, such as cash flows and returns are acceptable. Cash management- Identify the cash balance which allows for the business to meet day to day expenses, but reducing cash holdings costs. Inventory management- Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials- and minimizes reordering costs- and hence increases cash flows; see supply chain management; just in time (JIT); economic order quantity (EOQ); Economic production quantity. 42 Debtors management- Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence return on capital (or vice versa) see discount and allowances. Short term financing- Identify the appropriate source of financing, given the cash conversion cycle; the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to “convert debtors to cash” through “factoring”. Component of working capital management Inventory Management Inventory includes all types of stocks. For effective working capital management, inventory needs to be managed effectively. The level of inventory should be such that the total cost of ordering and holding inventory is the least. Simultaneously, stock out costs should also be minimized. Business, therefore, should fix the minimum safety stock level, re-order level and ordering quantity so that the inventory cost is reduced and its management becomes efficient. INVENTORY MANAGEMENT IN HINDALCO Hindalco produces normal production cycle items against the firm orders from customers. Because of this as well as sizeable raw materials and compulsory bulk purchase of items, the company has to carry high level of inventories. A low inventory turnover ratio is 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. A high inventory turnover ratio implies 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 43 indicate better liquidity, but it can also indicate a shortage or inadequate inventory levels, which may lead to a loss in business. Receivables’ Management Given a choice, every business would prefer selling its produce on cash basis. However, due to factors like trade policies, prevailing marketing conditions, etc., businesses are compelled to sell their goods on credit. In certain circumstances a business may deliberately extend credit as a strategy of increasing sales. Extending credit means creating a current asset in the form of ‘Debtors’or ‘Accounts Receivable’. Investment in this type of current assets needs proper and effective management as it gives rise to costs such as: i. Cost of carrying receivable (payment of interest etc.) ii. Cost of bad debt losses Thus the objective of any management policy pertaining to accounts receivables would be to ensure that the benefits arising due to the receivables are more than the cost incurred for receivables and the gap between benefit and cost increases resulting in increased profits. An effective control of receivables helps a great deal in properly managing it. Each business should, therefore, try to find out average credit extended to its client using the below given formula DEBTORS MANAGEMENT IN HINDALCO Hindalco is one of the leading producers of aluminium and copper. Our aluminium units across the globe encompass the entire gamut of operations, from bauxite mining, alumina refining and aluminium smelting to downstream rolling, extrusions, foils, along with captive power plants and coal mines. Its debt policy is not very flexible. It has been observed that there is no exceeding six months in past few years. The reason behind this may be that most of its customers are big corporate over the world. In most of the contracts, payments of Hindalco are made in following stages: Payment Terms: 44    Advance from customers. At the time of dispatch of goods. At the time of MRC(Material Receipt at Site) However, the above terms may vary from contract to contract Each business should project expected sales and expected investment in receivables based on various factors, which influence the working capital requirement. From this it would be possible to find out the average credit days using the above given formula. A business should continuously try to monitor the credit days and see that the average credit offered to clients is not crossing the budgeted period. Otherwise, the requirement of investment in the working capital would increase and, as a result, activities may get squeezed and this may lead to cash crisis. Cash Management Cash is the most liquid current asset. It is of vital importance to the daily operations of business. While the proportion of assets held in the form of cash is very small, its efficient management is crucial to the solvency of the business. Therefore, planning cash and controlling its use are very important tasks. Cash budgeting is a useful device for this purpose. Cash Budget Cash budget basically incorporates estimates of future inflows and outflows of cash over a projected short period of time which may usually be a year, a half or a quarter year. Effective cash management is facilitated if the cash budget is further broken down into month, week or even on daily basis. There are two components of cash budget (i) cash inflows and (ii) cash outflows. The main sources for these flows are given here under: Cash Inflows: (a) Cash sales 45 (b) Cash received from debtors (c) Cash received from loans, deposits, etc. (d) Cash receipt of other revenue income (e) Cash received from sale of investments or assets Cash Outflows: (a) Cash purchases (b) Cash payment to creditors (c) Cash payment for other revenue Expenditure (d) Cash payment for assets creation (e) Cash payment for withdrawals, taxes (f) Repayment of loans, etc. Now let us understand the means to finance the working capital. Working capital or current assets are those assets, which unlike fixed assets change their forms rapidly. Due to this nature, they need to be financed through short-term funds. Short-term funds are also called current liabilities. The following are the major sources of raising short-term funds Cash Management It is the duty of the finance manager to provide adequate cash to all segments of the organization. At the same time, he/she has also to ensure that no funds are blocked in idle cash as this will involve cost 46 in terms of interest to the concern. A sound cash management scheme has to maintain the twin objective of liquidity and cost. Motives For Holding Cash In spite of the fact that cash does not earn any substantial return for the business, it is held by the concern with the following motives.  Transaction motive: A company enters a variety of business transactions resulting both inflow and outflow of cash; at times the cash outflow exceed the cash inflow. In order to meet the business obligations in such situation, it is necessary to maintain adequate cash balance. Thus, a firm with the motive of making routine business payments maintains cash balance.  Precautionary motive: A firm holds cash balance to meet sudden cash needs arising out of unexpected contingencies such as floods, strikes, obsolesces; sharp increase in prices of raw materials, presentation of bills of payment earlier than expected date more amount of cash will be kept by the firm if there is more possibility of such contingencies.  Speculative motive: Hindalco also keeps cash balance to take advantage of unexpected business opportunities. Such motive is there of speculative nature.  Compensation motive: Banks provide certain services to their customers free of charge. So they usually require the customers to keep minimum cash balance with them which enables them to earn interest and compensate for the free services rendered. Reasons Of Cash Management Cash management involves the following four basic problems.  Controlling level of cash: One of the basic objectives of cash management is to minimize the level of cash balances with the firm. This objective is sought to be achieved by means of the following: 47  Preparing cash budget: Cash budget is the most important device for planning and controlling the use of cash. It involves the future receipts and payments of the firm. On the basis of this information the finance manager can determine the future cash needs of the firm.  Providing for unpredictable discrepancies: Cash budget shows discrepancies between cash receipts and payments on the basis of normal business activities.  Availability of alternative source of funds: A firm may not require keep large cash balance, if it has arrangements with banks for borrowing money in times of emergencies.  Controlling of cash inflow: In order to prevent fraudulent diversion of cash receipt and speeding up collections of cash, an adequate control on cash inflow is necessary. A properly installed check system can, to a great extent, minimize the possibility of fraudulent diversion of cash. Speedier collection of cash can be made possible by adoption of the following two techniques  Concentration banking system: It is a system of decentralizing collection of account receivables. According to this system, Hindalco’s branch offices are authorized to collect the payment from the customers, and deposit in the local bank accounts. This system facilities fast movement of funds. This system is good in case of the firms having their spread over a large area.  Lock box system: This system is more popular in the U.S.A. and is further step in speeding up collection of cash. This system has been devised to element delay arising in cash of the concentration banking system on account of a time gap between actual receipt of cheques by the regional collection centers and its deposits in the local bank account. Under this system company hire a post office box and instruct its customers for their remits to the box. It also reduces the chances of frauds in the cash collection process and controls the cash inflows better. In order to avoid the unnecessary pockets of idle funds, the company should maintain minimum number of bank accounts.  Controlling outflows of cash: An efficient control over cash outflows is equally important for conserving cash and reducing financial requirements. Control over cash outflows signifies slow disbursement. In order to control the outflows of cash efficiently, a firm should keep in view the following considerations: 48 Centralized system for cash payments should be followed as compared to decentralized system in cash of collections. All payments should be made from a single control account, i.e. from the central office of the company. 1) Supplier’s Credit At times, business gets raw material on credit from the suppliers. The cost of raw material is paid after some time, i.e. upon completion of the credit period. Thus, without having an outflow of cash the business is in a position to use raw material and continue the activities. The credit given by the suppliers of raw materials is for a short period and is considered current liabilities. These funds should be used for creating current assets like stock of raw material, work in process, finished goods, etc. 2) Bank Loan for Working Capital This is a major source for raising short-term funds. Banks extend loans tobusinesses to help them create necessary current assets so as to achieve the required business level. The loans are available for creating the following current assets:     Stock of Raw Materials Stock of Work in Process Stock of Finished Goods Debtors Banks give short-term loans against these assets, keeping some security margin.The advances given by banks against current assets are short-term in nature and banks have the right to ask for immediate repayment if they consider doing so. Thus bank loans for creation of current assets are also current liabilities. 3) Promoter’s Fund 49 It is advisable to finance a portion of current assets from the promoter’s funds They are long-term funds and, therefore do not require immediate repayment. These funds increase the liquidity of the business. Ratio Analysis Ratio Analysis is the most commonly and widely used tool of financial analysis. Ratio Analysis is used to interpret the financial statement so that the strength and weaknesses of a firm as well as its historical performance and current financial condition can be determined. A Financial Ratio is defined as, the relationship between two accounting figures, expressed mathematically. Ratio Analysis makes related information comparable. It helps to summaries large quantities of financial data’s and to make, quantitative judgments about financial performance. Classification Of Ratios In view of the financial management have been classified as below:     Liquidity ratios Activity ratios Solvency ratios Profitability ratios LIQUIDITY RATIOS The liquidity Ratio measures the ability of firm to meet its short-term obligations and reflect its shortterm financial strength/ solvency of firm. Liquidity Ratio is generally based on the relationship between current assets and current liabilities. Some important liquidity ratios are: (a) Current Ratio : 50 The current ratio is the ratio of total current assets to total current liabilities. It is calculated by dividing current assets by current liabilities. Current Ratio = Current Assets / Current Liabilities It measures the short-term solvency of the firm; the higher current ratio measures the higher margin of safety. (b) Quick Ratio or Liquid Ratio : It is a measurement of firm’s ability to convert its current assets quickly into cash in order to meet its current liabilities. Ratiois=ratio Quick Assets / quick Current Liabilities The acidQuick test ratio between assets and current liabilities and calculated by dividing the quick assets by current liabilities. Quick assets are that which can be converted into cash immediately at a short notice without a loss of value. (c) Cash Ratio : Since cash ratio is the most liquid asset, a financial analyst may examine cash ratio and if equivalent to current liabilities. Trade investment or marketable securities are equivalent of cash. Therefore, they may be included in the computation of cash ratio. Cash Ratio = Cash balance / Current Liabilities 51 ACTIVITY RATIOS Activity ratios that measure a firm's ability to convert different accounts within their balance sheets into cash or sales. Activity ratios help investors evaluate a firm’s ability to effectively and efficiently manage its operations and assets. The most commonly used activity ratios include: (a) Stock turnover ratio : This ratio is a relationship between the cost of goods sold during a particular period of time and the cost of average inventory during a particular period. It is expressed in number of times. Stock turnover ratio / Inventory turnover ratio indicates the number of time the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. This ratio indicates whether investment in stock is within proper limit or not. Inventory Turnover Ratio = Cost of goods sold / Average inventory (b) Debtors turnover ratio : This ratio indicates the velocity of debt collection of a firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year. Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors (c) Average Collection Period : The Debtors / Receivable Turnover ratio when calculated in terms of days is known as Average Collection Period or Debtors Collection Period Ratio. 52 The average collection period ratio represents the average number of days for which a firm has to wait before its debtors are converted into cash. Average collection period = (Trade Debtors × No. of Working Days) / Net Credit Sales (d) Working capital turnover ratio : This ratio indicates the velocity of the utilization of net working capital. This ratio represents the number of times the working capital is turned over in the course of year. Working Capital Turnover Ratio = Cost of Sales / Net Working Capital (e) Fixed assets turnover ratio: This ratio is also known as sales to fixed assets ratio. This ratio measures the efficiency and profit earning capacity of the concern. Higher the ratio, greater is the intensive utilization of fixed assets. Lower ratio means under-utilization of fixed assets. 53 Fixed Assets Turnover Ratio = Cost of Sales / Net Fixed Assets SOLVENCY RATIOS Solvency ratios measure the financial soundness of a business and how well the company can satisfy its short- and long-term obligations. Solvency ratios help investors assess a company’s ability to meet its long-term obligations. They also tell investors how the company has been financed (debt or equity) and whether that is changing over time. Some solvency Ratios are; (a) Debt-to-Equity ratio: This ratio indicates the relationship between the external equities or outsiders funds and the internal equities or shareholder’s funds. It is also known as external internal equity ratio. It is determined to ascertain soundness of the long term financial policies of the company. Total long term debt /Shareholders’ funds (b) Interest coverage ratio This ratio is also known as debt service ratio or debt service coverage ratio. This ratio relates the fixed interest charges to the income earned by the business. It indicates whether the business has earned sufficient profits to pay periodically the interest charges. It is calculated by using the following formula. 54 Interest Coverage Ratio = Net Profit before Interest and Tax / Fixed Interest Charges PROFITABILITY RATIOS Profitability reflects the final result of business operations. Poor operational performance may indicate poor sales and hence poor profit. A lower profitability may arise due to the lack of control over the expenses. Some profitability ratios are; (a) Gross Profit Ratio: Gross profit ratio is the result of the relationship between price, sales value and cost. The gross profit ratio can also be used in determining the extent of loss caused by theft, spoilage, damage etc. A high ratio of gross profit is sign of good management, as it implies that the cost of production is relatively low or vice- versa. Gross Profit Ratio =Gross Profit / Net Sales * 100 (b) Net Profit Ratio : Net profit ratio measures the relationship between net profit and sales of a firm. It shows the overall efficiency of production, administration, financing. This ratio shows the earning left for shareholders as a percentage of net sales. Profit Ratio = Net Profit / Sales * 100 (c) Operating Profit Ratio : 55 This ratio is complementary of net profit ratio. It is computed to overcome the limitation of net profit ratio. This ratio measures the relationship between operating profit and sale Operating Profit Ratio = Operating / Sales * 100 This ratio indicates an average operating margin on a sale of Rs. 100 what portion of sales is left to cover non- operating expenses to pay dividends and to create reserves. (d) Return on Investment or Return on Capital Employed Ratio : The prime objective of making investments in any business is to obtain satisfactory return on capital invested. Hence, the return on capital employed is used as a measure of success of a business in realizing this objective. Return on capital employed establishes the relationship between the profit and the capital employed. It indicates the percentage of return on capital employed in the business and it can be used to show the overall profitability and efficiency of the business. Gross capital employed = Fixed assets + Investments + Current assets Net capital employed = Fixed assets + Investments + Working capital* (e) *Working capital = current assets − current liabilities. Divi den d Yield Ratio: Dividend yield ratio is the relationship between dividends per share and the market value of the shares. Shareholders are real owners of a company and they are interested in real sense in the earnings distributed and paid to them as dividend. Therefore, dividend yield ratio is calculated to evaluate the relationship between dividends per share paid and the market value of the shares. Dividend Yield Ratio = Dividend per Share / Market Value Per Share 56 (f) Dividend Payout Ratio : Dividend pay-out ratio is calculated to find the extent to which earnings per share have been used for paying dividend and to know what portion of earnings has been retained in the business. It is an important ratio because ploughing back of profits enables a company to grow and pay more dividends in future. Dividend Payout Ratio = Dividend per Equity Share / Earnings per Share A complementary of this ratio is retained earnings ratio. Retained earnings ratio is calculated by using the following formula: Retained Earnings Ratio = Retained Earnings Per Share / Earning Per Share (g) Earnings Per Share (EPS) Ratio : Earnings per share ratio (EPS Ratio) are small variation of return on equity capital ratio and are calculated by dividing the net profit after taxes and preference dividend by the total number of equity shares. Earnings per share Ratio = (Net profit after tax − Preference dividend) / No. Of equity shares 57 CHAPTER 2 LITERATURE REVIEW 2.1 THE SCENARIO OF RATIO ANALYSIS Ratios are highly essential profit tools in financial analysis that help financial analysts implement plans that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. 58 Although ratios report mostly on past performances, they can be predictive too, and provide lead indications of potential problem areas. Ratio analysis is primarily used to compare a company's financial figures over a period of time, a method sometimes called trend analysis. Through trend analysis, you can identify trends, good and bad, and adjust your business practices accordingly. You can also see how your ratios stack up against other businesses, both in and out of your industry. There are several considerations you must be aware of when comparing ratios from one financial period to another or when comparing the financial ratios of two or more companies.  If you are making a comparative analysis of a company's financial statements over a certain period of time, make an appropriate allowance for any changes in accounting policies that occurred during the same time span.  When comparing your business with others in your industry, allow for any material differences in accounting policies between your company and industry norms.  When comparing ratios from various fiscal periods or companies, inquire about the types of accounting policies used. Different accounting methods can result in a wide variety of reported figures.  Determine whether ratios were calculated before or after adjustments were made to the balance sheet or income statement, such as non-recurring items and inventory or pro forma adjustments. In many cases, these adjustments can significantly affect the ratios.  Carefully examine any departures from industry norms. Ratio Analysis is a useful tool in the following aspects: Evaluation of Liquidity: The ability of a firm to meet its short term payment commitments is called liquidity. Current Ratio and Quick Ratio help to assets the short-term solvency (liquidity) of the firm. 59 Evaluation of Profitability: Profitability ratios i.e. Gross Profit Ratio, Operating Profit Ratio, Net Profit Ratio are basic indicators of the profitability of the firm. In addition, various profitability indicators like Return on Capital Employed (ROCE), Earnings per share (EPS), Return on Assets (ROA) etc. are used to assess the financial performance. Evaluation of Operating Efficiency: Ratios throw light on the degree of efficiency in the management and utilization of assets and resources. These are indicated by activity or performance or turnover ratios e.g. Stock Turnover Ratio, Debtors Turnover Ratio. These indicate the ability of the firm to generate revenue (sales) per rupee of investment in its assets. Evaluation of Financial Strength: Long-term solvency strength is indicated by Capital Structure Ratios like Debt-Equity Ratio, Gearing Ratio, Leverage Ratios etc. These ratios signify the effect of various sources of finance e.g. debt, preference and equity. They also show whether the firm is exposed to serious financial strain or is justified in the use of debt funds. Inter-firm and Intra-firm comparison: Comparison of the firm’s ratios with the industry average will help evaluate the firm’s position vis-à-vis the industry. It will help in analyzing the firm’s strengths and weaknesses and take corrective action. Trend Analysis of ratios over a period of years will indicate the direction of the firm’s financial policies. Budgeting: Ratios are not mere post-modern of operations. They help in depicting future financial positions. Ratios have predictor value and are helpful in planning and forecasting the business activities of a firm for future periods, e.g. estimation of working capital requirements. 2.2 LIMITATION OF RATIO ANALYSIS (a) Window Dressing: Ratios depict the picture of performance at a particular point of time. Sometimes, a business can make year-end adjustments in order to result in favorable ratios (e.g. current ratio, operating profit ratio, debt-equity ratio etc.) 60 (b) Impact of Inflation: Financial Statements are affected by inflation. Ratios may not depict the correct picture. For example, fixed assets are accounted at historical cost while profits are measured in current rupee terms. In inflationary situations, the Return on Assets or Return on Capital Employed may be very high due to less investment in fixed assets. Ratios may not indicate the true position in such situations. (c) Product Line diversification: Detailed ratios for different divisions, products and market segments etc. may not be available to the users in order to make an informed judgment. For example, loss in one product may be set off by substantial profits in another product line. But, the overall net profit ratio may be favorable. (d) Impact of Seasonal Factors: When the operations do not follow a uniform pattern during the financial period, ratios may not indicate the correct situation. For example, if the peak supply season of a business is between Februarys to June, it will hold substantial stocks on the balance sheet date. This will lead to a very favorable current ratio on that date. But the position for the rest of the year may be entirely different. (e) Differences in Accounting Policies: Different firms follow different accounting policies, e.g. rate and methods of depreciation. Strait-jacket comparison of ratios may lead to misleading results. (f) Lack of Standards: Even though some norms can be set for ratios, there is no uniformity as to what an “ideal” ratio is. Generally it is said that Current Ratio should be 2:1. But if a firm supplies mainly to Government Departments where debt collection period is high, a Current Ratio of 4:1 or 5:1, may also be considered normal. (g) High or Low: A number by itself cannot be “high” or “low”. Hence, a ratio by itself cannot become “good” or “bad”. The line of difference between “good ratio” and “bad ratio” is very thin. (h) Interdependence: Financial Ratios cannot be considered in isolation. Decision taken on the basis of one ratio may be incorrect when a set of ratios are analyzed. From the above discussion, it is felt that, the ratio is a measuring device to judge the growth, development and present condition of a concern. Further, it is found that, Each and every ratio 61 indicates the financial position as well as it is also helpful for taking several management decisions for the future period effectively and efficiently. 2.3 CAPITAL INVESTMENT DECISIONS Capital investment decisions are long-term corporate finance decisions relating to fixed assets and capital structure. Decisions are based on several inter-related criteria. Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present value when valued using an appropriate discount rate. These projects must also be financed appropriately. If no such opportunities exist, maximizing shareholder value dictates that management returns excess cash to shareholders. Capital investment decisions thus comprise an investment decision, a financing decision, and a dividend decision. The investment decision Management must allocate limited resources between competing opportunities ("projects") in a process known as capital budgeting. Making this capital allocation decision requires estimating the value of each opportunity or project: a function of the size, timing and predictability of future cash flows. Project valuation In general, each project's value will be estimated using a discounted cash flow (DCF) valuation, and the opportunity with the highest value, as measured by the resultant net present value (NPV) will be selected (applied to Corporate Finance by Joel Dean in 1951. This requires estimating the size and timing of all of the incremental cash flows resulting from the project. These future cash flows are then discounted to determine their present value. These present values are then summed, and this sum net of the initial investment outlay is the NPV. The NPV is greatly affected by the discount rate. Thus identifying the proper discount rate—the project "hurdle rate"—is critical to making the right decision. The hurdle rate is the minimum acceptable return on an investment—i.e. the project appropriate discount rate. The hurdle rate should reflect the riskiness of the investment, typically measured by volatility of cash flows, and must take into account the financing mix. Managers use models such as the CAPM or the APT to estimate a discount rate 62 appropriate for a particular project, and use the weighted average cost of capital (WACC) to reflect the financing mix selected. (A common error in choosing a discount rate for a project is to apply a WACC that applies to the entire firm. Such an approach may not be appropriate where the risk of a particular project differs markedly from that of the firm's existing portfolio of assets.) In conjunction with NPV, there are several other measures used as (secondary) selection criteria in corporate finance. These are visible from the DCF and include discounted payback period, IRR, Modified IRR, equivalent annuity, capital efficiency, and ROI. 2.4 CAPITAL VERSUS INVESTMENT What is investment? Strictly speaking, investment is the change in capital stock during a period. Consequently, unlike capital, investment is a flow term and not a stock term. This means that while capital is measured at a point in time, while investment can only be measured over a period of time. If we ask "what is capital right now?” We might get an answer along the lines of N10 trillion. But if we ask "what is investment right now?” This cannot be answered. The quantity of a flow always depends on the period in consideration. Thus, we can answer "what is investment this month?" (And might be told it is N10 million) or "what is investment this year?" (And might be told N1 billion). We can calculate the investment flow in a period as the difference between the capital stock at the end of the period and the capital stock at the beginning of the period. Thus, the investment flow at time period t can be defined as: It = Kt - Kt-1 63 Where Kt is the stock of capital at the end of period t and K t-1 is the stock of capital at the end of period t-1 (and thus at the beginning of period t). How is the theory of investment different from the theory of capital? If all capital is circulating capital, so that it is completely used up within a period, then no capital built up during the previous period can be brought over into next period. In this special case, the theory of capital and the theory of investment become one and the same thing. With fixed capital, the story is different -- and more complicated as there seems to be two decisions that must be addressed: the amount of capital and the amount of investment. These are different decisions. One is about the desired level of capital stock. The other is about the desired rate of investment flow. The decisions governing one will inevitably affect the other, but it is not necessarily the case that one is reducible to the other. There are effectively two ways of thinking about investment. At the risk of annoying some people, we shall refer to these as the "Hayekian" and "Keynesian" perspectives. The Hayekian perspective conceives of investment as the adjustment to equilibrium and thus the optimal amount of investment is effectively a decision on the optimal speed of adjustment. A firm may decide it needs a factory (the "capital stock" decision), but its decision on how fast to build it, how much to spend each month building it, etc. -- effectively, the "investment" decision -- is a separate consideration. Naturally, the capital decision influences the investment decision: a firm which has N 10 billion of capital and decides that it needs N 15 billion of capital, therefore requires investment of N 5 billion. But if this adjustment can be done "instantly", then there is really no actual investment decision to speak of. We just change the capital stock automatically. The capital decision governs everything. 64 CHAPTER 3 Research Methodology 3.1 RESEARCH DESIGN  Analytical research is used in the project. Analytical research is a type of research that utilises critical thinking to find out facts about a given topic and from the answers obtained develop new and useful ways of doing things. Critical thinking is a method of thinking that puts assumptions into question to decide whether a given claim is true or false 65  The research method selected for the study is a combination of a survey and an industrial study. The survey research method is described hereunder that: 1) It is a design in which primary data is gathered from members of the sample that represents a specific population; 2) It is a design in which a structure and systematic research instrument like a questionnaire or an interview schedule is utilized together with the primary data; 3) It is a method in which the researcher manipulates no explanatory variables because they have already occurred and so they cannot be manipulated; 4) Data are not directly from the subjects. 5) The subjects give the data the natural settings of their workplaces; 6) The answers of the respondents are assumed to be largely unaffected of the content in which they are brought; 7) The impacts of the confounding factors are “controlled” statistically; and 8) The aim of the research may span from the exploration phenomena to hypotheses testing (stone 1995). The survey research method has some merit, which are to be articulated hereunder: In the survey research method, the sample of the respondents are selected in such a way as to make it low due to the utilization of big sample sizes, which results in generally low sample errors. The survey research method also has the merit that data collection takes place in the “natural” settings of the workplace rather than an activated laboratory. Data are not directly from the respondents. The advantage that the survey yields data that suggests new hypothesis is very illuminating. There is also the merit that a set of systematic data collection instruments such as questionnaire interview schedules and observation gadgets can either be used alone or in conjunction with other instruments (stone, 1995). 3.2 Collection of Data 66 For carrying out the study of this particular topic the data have been collected basically from two major sources. They are; Secondary Sources:The secondary data have been collected from the available sources of the company and external sources for the period under study. These include: Annual Reports of Hindalco Industries Ltd.  Internet  Industry portals Questionnaire As earlier stated, the primary data collection instrument in this study is the questionnaire. In the questionnaire method of primary data collection, heavy dependence is placed on verbal reports from the subjects to get information on the earnings per share and standard set. The questionnaire has a lot of merits. It needs less skill to administer. Questionnaire can be administered to a big number of individuals at the same time. Also with a specific research budget, it is usually possible to cover a broader area. The impersonal nature of a questionnaire, its structure and standardized wording, its order of question, its standardized instructions for recording answers might make one to conclude that it offers some uniformity from one measurement occasion to another (Selltiz et al, 1976). Another merit of questionnaire is that subjects may have a bigger confidence in their anonymity, and thus feel freer to express views they feel might be disapproved. Another attribute of the questionnaire that is sometimes, though not always desirable is that it might place less pressure on the subjects for immediate response (Selltiz et al, 1976). The questionnaire also has some demerits. It has noted that for purpose of giving dependable responses to a questionnaire, respondents must be considerably educated. Thus one of the demerits of the usual 67 questionnaire is that it is appropriate only for with a considerable amount of education. There is also demerit that subject may be reluctant and unable. To report on the particular subject matter. Also, if a subject misinterprets a question or give his or her answer in a batting manner, there is often a little that can be done to ameliorate the situation. In a questionnaire, the information the researcher gets is limited to the fixed alternative answer format, when a specific answer is not available, it can lead to error (Selltiz, 1976). There is also limitation of memory in reporting on past facts. The researcher is not a policeman that can compel answers. That is, the information may not be readily accessible to subject and thus the subject may be reluctant to put forth enough alternative information that he or she is only barely conscious of (Selltiz et al, 1996). In this research project, a structured and undisguised questionnaire is utilized which is made up of two parts namely, the personal data section and the section on the data on the actual subject matter of the work. The questionnaire was undisguised in the sense that the purpose of the data collection which was to collect primary data for writing up the researcher’s ND project was made know to the 200 respondents. The questionnaire was structured in the sense the questions are logically sequenced and are to be asked to the respondents in the same manner and no follow up questions are to be allowed. The structured questionnaire has the merit that it yields data that is easier to analysis than data produced by an unstructured questionnaire. Also the structured nature diminishes both researcher’s and research instrument biases. It however has the demerit that the rigidity of the research instrument diminishes the amount of information that could be got. Interview The method of communication of the research instrument is by means of the personal interview. The method has the merit that it produces a better sample of the population than either mail or the telephone methods. It also has the merit that it gives a very high completion and response rates. It has the merit that the interview has a bigger sensitively misunderstandings by the respondents and gives a chance for clarification of misunderstood questions. It has the merit that it is a very feasible method 68 (Selltiz et al, 1976). The personal interview method has the demerit that it is more costly than the mail or the telephone methods of communication of a questionnaire. Observations In addition to questionnaire and face-to face interviews, observation was also carried out. This was to enable the researcher to witness by herself the officers of this firm and to interact with these people. 3.3 Description of Data Presentation and Analysis Tools The data presentation tools are simple bar charts, histograms, and pictorial tables. The most important parts of a table include; (a) Table numbers (b) Title of the table (c) Caption (d) Stub or the designation of the rows and columns (e) The body of the table. (f) The head note or prefatory note or explanatory just before the title. (g) Source note, which refers to the literally or scientific source of the table (Mills and Walter 1995) Anywise (1994) has observed that a table has the following merits over a prose information that; (f) A table ensures an easy location of the required figure; (g) Comparisons are easily made utilizing a table than a prose information; 69 (h) Patterns or trends within the figures which cannot be visualized in the prose information can be revealed and better depicted by a table; and A table is more concise and takes up a less space than a prose formation: The data is to be analyzed by means of percentage, cross tabulation and the chi-square test of population proportions for testing the two hypotheses. Percentages express the ratio of two sets of data to a common base of 100. The researcher made use of the computer program called SPSS (statistical package for social science) to carry out the computation of the hypothesis testing. 70 CHAPTER 4 Analysis & Interpretation 4.1 ANALYSIS OF DATA Statement Of Working Capital Particulars 2012 2011 71 2010 (A)Current Assets Inventories 7742.86 7652.19 5921.41 Debtors 1427.45 1268.99 1311.87 Cash & bank Bal. 565.19 111.12 139.96 Loan & advances 2976.26 1750.22 1588.62 Total 12711.76 10782.52 8961.86 Liabilities 7949.49 8583.69 6391.19 Provisions 1207.20 644.68 721.49 Total 9156.69 9228.37 7612.68 Working capital (A – B ) 3555.07 1554.15 1349.18 Increase/Dec. in W.C 2000.92 204.97 - (B) Current Liability 72 14000 12000 10000 8000 current assests current liabilities working capital 6000 4000 2000 0 2010 2011 2012 Interpretation: The above data shows that working capital is increasing in comparison to last year which is good for the liquidity of the company. Current assets are increased by 117.89% and current liabilities are decreased by 0.78% in 2012. This means that current assets are adequate to meet its currents liabilities as there is decrease in current liabilities. The current ratio of the company is 1.7. It shows that company is having good liquidity position but they should try to improve it. Working Capital at Hindalco In Hindalco working capital requirement is finance basically through following sources:  Internal funds  Short term liabilities  Bank loan Internal funds: An internal fund denotes the funds generated through operation of the firm. This is the major source of financing working capital requirement of the firm. 73 Short term securities: On account of uncertainties attached with generation of funds through sales or through day to day operations, the company has invested in several short term securities to meet its day to day requirement of funds. The maturity of these securities is form source of financing working capital requirement. Working capital turnover at Hindalco: “Working capital turnover = sales/working capital” Particulars 2012 2011 2010 (A)Current Assets Inventories 7742.86 7652.19 5921.41 Debtors 1427.45 1268.99 1311.87 Cash & bank Bal. 565.19 111.12 139.96 Loan & advances 2976.26 1750.22 1588.62 Total 12711.76 10782.52 8961.86 Liabilities 7949.49 8583.69 6391.19 Provisions 1207.20 644.68 721.49 Total 9156.69 9228.37 7612.68 Working capital 3555.07 1554.15 1349.18 (B) Current Liability 74 Sales 26596.78 23859.21 19393.83 Working capital turnover 8 times 16 times 15 times Graphical representation of working capital turnover: working capital turnover 18 16 16 15 14 12 10 8 working capital turnover 8 6 4 2 0 2012 2011 2010 Interpretation: In the year 2010 the working capital is 1349.18, in 2011 it increases to 1554.15, and in 2012 it increases to 3555.07. It means that in the last year the company’s liquidity is improve and the company become more efficient to pay its current obligations. 75 At the same time if we compare no. of days of net working capital to turnover, it has come down to 8 times from 16 times in previous year. This is the result of good working capital management policies in this year. This improvement does not come accidently but considerable measures have been taken to control working capital in organization in financial year 2011-12. There is direct relation of working capital requirement with Debtors and Inventory. Above data indicates that company has taken certain strategic measures to manage its Debtor and Inventory. After analyzing we find that the inventory is the main factor by which assets are increasing in comparison to liability. The inventory turnover is 5.54 and 5.43 in 2011 and 2012 respectively. The days of turnover are 66 days in 2012 and 68 days in 2011. But if we see the turnover of year 2010 then we came to know that in 2010 the turnover is 2.43, which is almost half of the current year and the days of turnover is 151 days. Following are the measures:Special task forces were built up from Debtors and Inventory Management at senior level. Regular follow up at senior level. A close contact with the customers. Proper age-wise analysis of the debtors. Proper classification between collectible debtors and bad debts. Bad debts written off as early as possible after making all efforts of its collection. Product cycle minimized so that cost of the product does not become high to the agreed amount because of time factor. Formation of specific group in each area to identify the wastage elements and seek participation of all. Formulation of action plan to eliminate/minimize wastage. Identification of corrective actions and their implementation. 76 Debtors Turnover Ratio Receivables turnover ratio measures company's efficiency in collecting its sales on credit and collection policies. This ratio takes in consideration ONLY the credit sales. If the cash sales are included, the ratio will be affected and may lose its significance. It is best to use average accounts receivable to avoid seasonality effects. If the company uses discounts, those discounts must be taken into consideration when calculate net accounts receivable. Accounts receivable represents the indirect interest free loans that the company is providing to its clients. Therefore, it is very important to know how "costly" these loans are for the company. A high receivables turnover ratio implies 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. A low receivables turnover ratio implies 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. Debtor Turnover Ratio = Net sales / Average Debtors Tabular Presentation of Debtors Turnover Ratio Year Net sales Average Debtors Debtors Ratio 2012 26596.78 1427.25 77 18.63 Turnover 2011 23859.21 1268.99 18.80 2010 19393.83 1311.87 14.78 Graphical representation of debtor turnover debtor turnover 20 19 19 18 16 14 14 12 debtor turnover 10 8 6 4 2 0 2012 2011 2010 Interpretation: Here, In spite of increase in sales from 2011 to 2012, total debtors have been increased, which indicated that the company is not having very effective credit policy. But the same case is not for the previous years. 78 Whereas if we analyze the debtor’s turnover ratio, we can say that the company is capable of reducing the period of debtors to turnover. Higher the debtor’s turnover ratio, lesser time it will take to collect debts. In 2012, Period of Debtors to Turnover has been reduced to approx 19 days. Last year also the same debtor turnover is found in the research, it implies that there is not any improvement in turnover in spite of increase in sales. Although the balance of debtor comes down considerably but still there is scope in Debtors Management for the Company STEPS INVOLVED IN MANAGEMENT OF DEBTORS: The following steps are involved in debtor’s management      There should be close contact with the customers. There should be proper age-wise analysis of the debtors. There should be proper classification between collectible Debtor and Bad Debts. Bad debts should be written off as early as possible after making all efforts for its collection. Product cycle should be minimized so that cost of the product should not become high to the agreed amount because of time factor.  There must be a provision of discount for early payment of debts by the customers.  Regular checking of the records of the debtors is essential so as to analyze the current position of that organization.  While making a policy, regarding the debtors the point should be considered that customers having excellent past record, follow the lenient policy which is adopted for doubtful customers.  Manage the working capital according to need as recovering the debt from customer as early as possible while, get extension of payment of dues on the company of others as suppliers of raw material as late as possible. Inventory Management in Hindalco Inventory Turnover Ratio: 79 A ratio showing how many times a company’s inventory is sold and replaced over a period. It is calculated as: Stock / Inventory Turnover Ratio Stock Turnover Ratio = Cost of Goods Sold / Average Stock Tabular Presentation of Stock Turnover Ratio Year Cost of Goods Sold Inventory Average Stock Turnover Ratio 2012 20508.2 3698.19 5.54 2011 17871.02 3290.62 5.43 2010 14469.8 5393.81 2.43 80 INVENTORY TURNOVER 6 5.54 5.43 5 4 INVENTORY TURNOVER 3 2.43 2 1 0 2012 2011 2010 Interpretation: The turnover increases due to either increase in sales or minimizing the inventory level. In my research, I find that there is very minor change in the turnover in year 2011 and 2012. The inventory turnover is 5.54 and 5.43 in 2011 and 2012 respectively. The days of turnover are 66 days in 2012 and 68 days in 2011. But if we see the turnover of year 2010 then we came to know that in 2010 the turnover is 2.43, which is almost half of the current year and the days of turnover is 151 days. This suggests that the company is improving year by year in its operation and its sale is also increasing year after year. 81 Analysis of Cash Management with the Help of Certain Ratio’s (1) Current Ratio Current Ratio = Current Assets / Current Liabilities Tabular Presentation Of Current Ratios Current Current Assets Liabilities 2012 16479.44 10035.04 1.64 2011 15929.20 9842.64 1.62 2010 8864.29 6148.42 1.44 Year 82 Current Ratio Current Ratio 1.7 1.65 1.64 1.62 1.6 1.55 Current Ratio 1.5 1.44 1.45 1.4 1.35 1.3 2012 2011 2010 Interpretation: In 2011-12, the current ratio of the company is 1.64, which is higher than the previous year. It indicates that the company’s current liabilities were increased but with the lower rate as compared to current asset. Due to increase in the current liabilities at lower rate and increase in current assets with higher rate as compared to previous year, there is little improvement in current ration but it is favorable for the company because it indicates the company is in position to meet its liabilities. (2) Liquid / Quick / Acid - Test Ratio Quick Ratios = Liquid Assets / Current Liabilities 83 Tabular Presentation of Liquid Ratio Year Liquid Assets Current Liabilities Quick Ratio 2012 8736.2 10035.04 0.87 2011 8277.8 9842.64 0.84 2010 2942.88 6,148.42 0.48 Quick Ratio 1 0.9 0.87 0.84 0.8 0.7 0.6 0.48 0.5 0.4 0.3 0.2 0.1 0 2012 2011 2010 84 Quick Ratio Interpretation: Now we compare the company’s position according to the liquidity ratio. As we know the standard of the liquid ratio is 1:1. In 2011-12 the liquid ratio of the company is 0.87 which is less than the standard ratio this indicates the liquidity position of company is not optimum. But if we compare the data with previous year then there is some improvement observed in the quick ratio. The liquidity ratio follows the same trend in the year further due to large amount of inventories are considered as liquid asset of the company. (3) Cash Ratio Cash Ratios = Cash & Bank Balance / Current Liabilities Tabular Presentation of Cash Ratio Cash & Bank Current Balance Liabilities 2012 722.30 10035.04 0.07 2011 233.39 9842.64 0.02 2010 140.21 6,148.42 0.02 Year 85 Cash Ratios Cash Ratio 0.08 0.07 0.07 0.06 0.05 Cash Ratio 0.04 0.03 0.02 0.02 0.02 2011 2010 0.01 0 2012 Interpretation: Here, the Hindalco cash ratio is 0.07 in 2012 which shows the company carries a small amount of cash. But, at the same time, there is nothing to be worried about the lack of cash if the company has reserve borrowing power. In India, firms have credit limit sanctioned from banks. And can easily draw cash. (4) Fixed Assets Turnover Ratio Fixed Assets Turnover Ratio = Net Sales / Net Fixed Assets 86 Tabular Presentation of Fixed Assets Turnover Ratio Fixed Assets Year Net sales Net Fixed Assets Turnover Ratio 2012 23492 23407 1.00 2011 20705 13615 1.52 2010 19536 11437 1.71 Fixed Asset Turnover Ratio 1.71 1.8 1.52 1.6 1.4 1.2 1 1 Fixed Asset Turnover Ratio 0.8 0.6 0.4 0.2 0 2012 2011 2010 87 Interpretation: This Ratio establishes the relationship between net sales and fixed assets indicating how efficiently they have been used in achieving the sales. It measures the efficiency with which the fixed assets are employed. A higher rate indicates a high degree of efficiency in fixed assets utilization and vice-versa. In the FY 2012 the ratio has decreased to 1.00 when compared to the previous year ratio. (5) Return On Total Assets Return On Total Assets = (Net Profit / Total Assets) * 100 Tabular Presentation of Return on Total Assets Return on Total Year Net Profit Total Assets 2012 2237 55647.62 4.02 2011 2137 46536.34 4.59 2010 1916 20301.9 9.44 88 Assets Return of Total Assets 10 9.44 9 8 7 6 Return of Total Assets 5 4.02 4 4.59 3 2 1 0 2012 2011 2010 Interpretation: This ratio shows the percentage of net profit earned on the total assets. It measures how effectively the assets are employed. It seems that assets are very effectively employed in FY 2011 but less effectively in 2012 and 2010. (6) Net Profit Ratio Net Profit Ratio = (Net Profit / Net sales) * 100 89 Tabular Presentation of Net Profit Ratio Year Net Profit Net sales Net Profit Ratio 2012 2237 26597 8.41 2011 2137 23859 8.96 2010 1916 19536 9.81 Net Profit Ratio 10 9.81 9.5 8.96 9 8.5 Net Profit Ratio 8.41 8 7.5 2012 2011 2010 90 Interpretation: Net Profit Ratio of Hindalco is continuously decreasing, which is not a healthy sign for the company. Net Profit Ratio determines the operational efficiency of the business. In the FY 2010 the ratio was high around 9.81 and again the ratio slipped to around 8.41 in the FY 2012. (7) Operating Profit Ratio Operating Profit Ratio = (Net Operating Profit / Net Sales) * 100 Tabular Presentation of Operating Profit Ratio Operating Profit Year Net Operating Profit Net sales 2012 3105 26597 11.67 2011 3155 23859 13.22 2010 2950 19536 15.10 Ratio Interpretation: This Ratio is an indicator of the overall efficiency of the business. Higher the Operating Profit Ratio better will be the business. It also determines the operational efficiency of the business. The Operating Profit Ratio of Hindalco is continuously decreasing, as the raw material consumption has increased but the sales did not increase in the same proportion. Hindalco has short term investment in: 91 1. Debenture of HPCL unit of UTI, HDFC, ICICI, IDBI, Franklin Templeton Funds, Birla mutual funds, GIC mutual funds and alliance mutual funds, DSP Merrill lynch mutual funds, standard chartered mutual funds, Zurich India mutual funds. The total current investment of the company for the year ended 31.03.12 amount to Rs. 4583.40 cr. 2. Besides above, the company has various credit arrangements with banks to finance the daily working capital requirement. These are of following types: Cash credit Purchase/discounting of bills Working capital term loans Letter of credit 1) Cash credit: The company has cash credit facilities with various banks. The administrative of this is done at the principle office at Renukoot. However its Regional and area offices are authorized to utilize the cash credit facilities up to the limit described by the principle office. 2) Purchase/discounting of bill: The company has also purchase and discounts the bills issued by its customers to meet daily requirements. 3) Working capital term loans 4) Letter of credit: the companies Export/Import operations are done through letter of credit. 92 CHAPTER 5 LIMITATION, SUGGESTION &CONCLUSION 5.1 LIMITATIONS OF THE STUDY 1) As project has to be completed within a short span of time, the scarcity of time was an important hindrance and hence much information could not be gathered , nor evaluated . 2) Another important limitation is that analysis is very much dependent on the company’s internal bulletin. 93 3) There are no well – accepted standards or rules of thumb for all ratios, which can be accepted as norms. It renders interpretation of ratios difficult. While making ratio analysis no consideration is given to price level FINDINGS Through this research work, the researcher was able to discover that 1. Ratios are means for presenting numerical relationships between items or groups of items. A ratio is determined by dividing one item in a relationship with the other. 94 2. Generally, financial ratios are computed from financial statements and so ratios developed for an analysis of a firm’s performance and financial position are subject to the same limitations, which are present in the accounting statements themselves. 3. Ratios are used in the analysis of financial statements of a business in order to reveal underlying economic trends in its activities and to discover its STRENGTHS AND WEAKNESSES as compared with the trends of sister companies. 4. Capital investment decisions are long-term corporate finance decisions relating to fixed assets and capital structure. 5. Making big investment decisions means that we must allocate substantial amounts of major resources of people, time, technology, intellectual capital, and, of course, money 6. The working capital is increasing in comparison to last year which is good for the liquidity of the company. 7. The working capital turnover is decrease in 2012; it means the company is efficient to manage its working capital. 8. The inventory turnover is not much varying from previous year, this shows that the company is not able to do much for inventory management. But if we compare the data with 2010 then they efficiently manage their inventory and able to increase its sale. 9. In spite of increase in sales from 2011 to 2012, total debtors have been increased, which indicated that the company is not having very effective credit policy. But the same case is not for the previous years. 10. The company’s current ratio is increasing in comparison to previous year it shows that the company’s is able to improve its liquidity position in comparison to previous year. 5.2 SUGGESTIONS 1) The company should concentrate more on the Cash and Bank Balance side. As the Reserves and Surplus are decreasing year by year whereas the Debts / Loans are increasing. It should be controlled. 2) Hindalco has been paid the major portion of its earnings as dividend when compared to previous years (2010-11). The enterprise has to retain some more amounts of its earnings for the future use. The enterprise may have some extension plans for future. 95 3) Hindalco will have to consider the steep increase in the Current Liabilities in financial year 200910. The Firm should take measures to control and repay them as far as possible. 4) The company should keep sufficient cash or bank balance in order to meet its liability immediately. Otherwise it will adversely affect the liquidity position of the company. 5) There should be a proper management for the effective utilization of Current Assets and Fixed Assets in order of making sales. 6) Hindalco should develop a proper method for identifying budgeted sales. The raw material consumption is to be controlled according to the budgeted sales. This will helps to increase their operating profit as well as gross profit. 7) The company should focus on the debtors side, as the number of debtors goes on increasing each year. Increasing number of debtors leads to lower working capital. 8) The company should adopt proper sales strategy and their collection facilities. 9) A formal Inventory policy should be drawn out in respect of Raw Materials, as it is a critical area for the Company The overall profitability and efficiency of the business should enhance. Otherwise the business cannot obtain satisfactory return on capital invested and return on Total Assets. 5.3 CONCLUSION Hindalco Industries Limited is a leading Aluminium producing industry under the flag ship of Aditya Birla Group. As the working capital is essential for the smooth running of a business it is important to study whether the Hindalco Industries Ltd. has achieved adequate amount of working capital or not. Maintaining adequate working capital ensures the improvement of profitability. The finance manager always tries to maintain an adequate working capital at every time so as to carry on operations successfully and maximize the return on investment. Better working capital will reduce interest cost. 96 The study has helped to have a clear understanding of the working capital management and also arrived at the following conclusions:      Firm has a good working capital management policy. Firm is able to meet its both short term and long term obligations. Firm is able to continuously decrease its receivables period The firm’s turnover ratio is up to the mark The firm is continuously indulged in expansion policy and is making optimum utilization of funds. BIBLIOGRAPHY BOOKS REFERRED 1) Financial Management – I.M.Pandey, 9th edition; New Delhi:Vikas 2) Fundamentals of Financial Management – R.P.Rustagi, 3rd edition; New Delhi: Galgotia Publishing Company; 2002. 3) Financial Management – Prassanna Chandra 97 MAGAZINE AND JOURNALS 1) 2) 3) 4) Annual Report of FY 2010-11, 2011-12 of Hindalco Industries Ltd. Aditya Kiran Hindalco Sandesh Induction Guide (Training Centre) WEBSITES REFERRED 1) 2) 3) 4) www.hindalco.com www.workingcapital.com www.investopedia.com www.adityabirlagroup.com 98