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The report has been intended to reflect some of the basic issues covered under the “Working Capital Management” of Hindalco Industries Ltd., a first truly MNC in India. All the aspects have been formulated and presented on the basis of the ideas and information gathered by the investigator during the span of project training. This gives a practical exposure of the content under topic, what has already been studied in classroom in theoretical form. This report has been written in response to comprehensive study conducted on the topic. The reports mentions and evaluates various aspects, pertaining to the working capital management of the company. After a thorough analysis of various facts and stand figures, a set of conclusion has been given the prime considerations, while compiling the report and are authoritative and authentic. We make sure that anyone who goes through the report will learn how much we have learnt so for, and can get the benefit of the same.
WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.
In an organization, be it an industry, a school or society, no outcomes can be achieved by one man working in isolation. It’s always a group working and achieving the outcome in totality. It is the outcome of all the guidance and support that I received from this organization. I would take this opportunity to acknowledge a debt of deep gratitude to many people for their valuable assistance and continuous support during the course of my Summer Internship Program. We convey our sincere thanks to Mr. S. K. Das, General Manager (Training) for allowing us to pursue summer training in this prestigious organization. We are also thankful to Mr. Ajay Joshi, Vice President (Finance & Account), and other members of the accounts department for providing necessary help whenever required for the completion of the project. We are thankful to our guide Mr. Vimal Raheja, for his valuable guidance and his precious time he devoted for mentoring us, without which this project would not have been successful. We are also thankful to the librarian for allowing us access to valuable journals and reports which gave life-blood to our project. Last, but not the least, we would like to thank our institute for providing us an opportunity to work with such a prestigious organization.
WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.
KAMLESHWAR POKHRAIL (NEW DELHI INSTITUTE OF MANAGEMENT) VIKRAM SINGH (NEW DELHI INSTITUTE OF MANAGEMENT)
Hindalco Industries Pvt. Ltd.
WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.
Mr. G. D. Birla and Mr. Aditya Birla, Our founding fathers. We live by their values. Integrity, Commitment, Passion, Seamlessness and Speed.
Table of Content
Chairman’s Foreword Profile of the company Introduction History
Vision, Mission & Values Awards and Recognitions
6 7 8 10 12 14 15 15 18 19 20 21 22 24 25 27 32 33 33 34 35 35 35 36 37
Product Profile • Indian Roots • Joint Venture • International Companies • Aluminium • Copper • Mines • Production Capacity • Share Of Net Sales Structure of Finance Department Management Team Accounting policy Working Capital Current Assets Current Liabilities Purpose Of Working Capital Classification of Working Capital Gross Working Capital Net Working Capital Permanent Working Capital Temporary Working Capital Working Capital Cycle 4
WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. Trade Off Between Profitability & Risks Determinants of Working Capital at Hindalco Estimating Working Capital Requirement Estimation of component of WC Percentage of Sales method Working Capital Finance WC Financing at Hindalco Statement Working Capital 38 39 42 44 45 51 52 Ratio Analysis Liquidity Ratio Leverage Ratio Turnover Ratio Profitability Ratio Conclusion References 54 57 61 65 72 73 5 .
We carry forth this vision of the people. on their talent. on their initiative. to motivate them to greater heights.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. to work as a team. on their ability to lead and coordinate with others. It also depends on the ability of the organization. The success or failure of an organization depends on people.” 6 . CHAIRMAN’S FOREWORD “Time and again. on human beings. the supremacy of the human element cannot be over emphasized.
sponge iron. Canada. Brazil. A US $29. France. belonging to 30 different nationalities. In India the Group has been adjudged “The Best Employer in India and among the top 20 in Asia" by the Hewitt-Economic Times and Wall Street Journal Study 2007. non-ferrous metals. Italy.000 employees. The group is driven by a performance ethic pegged on value creation for its multiple stake holders. insulators and financial services. the Aditya Birla Group is in the league of Fortune 500. The Group operates in 25 countries — India. A premium conglomerate. Australia. fertilizers. chemicals. UK.2 billion corporation. Such as viscose staple fiber. It is anchored by an extraordinary force of 130. carbon black. China. Hungary. Thailand. Switzerland. Over 50% of its revenues flow from its overseas operations. (KUMAR MANGALAM BIRLA) PROFILE OF THE COMPANY Introduction The Aditya Birla group is India’s first truly multinational corporation with global in vision and rooted in India’s value.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. viscose filament yarn. cement. Egypt. Germany. 7 . USA. Laos. branded apparel. Luxembourg. the Aditya Birla Group is a dominant player in all of the sectors in which it operates.
000 MTPA of aluminum metal and 40. Malaysia and Korea. 1965 Downstream capacities commissioned (rolling and extrusion mills at Renukoot). Not just for today but for prosperity as well. Dubai. He always believed in teamwork. Singapore. The success ion torch was successfully carried on by his son. but globally. Kumar Manglam Birla. a Chartered Accountant. Bangladesh. Kumar Manglam Birla. In the year 1943.B. is the chairman of the Aditya Birla Group which includes a number of companies within and outside the country. son of Late. 1962 Commencement of production at Renukoot (Uttar Pradesh) with an initial capacity of 20. Myanmar. Shri Basant Kumar Birla. It was A.V. Aditya Vikram Birla. He died on 1st October 1995 leaving behind Birla Empire. Philippines. In the words of A. His numerous qualities inspired those who were associated with him. Indonesia.000 MTPA of alumina. Birla (as he was popularly known) translated his words into outstanding accomplishments. The foundation stone of the Aditya Birla Group was laid down by the great visionary and the founding father of Indian Industry Late. A. 1967 Commission of Renusagar Power Plant. and an M.” A. Late.a strategic and farsighted move. Birla who made the Birla group everywhere. V. the man behind the Birla Empire was born. His perseverance enabled him to succeed against all odds.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. Vietnam. V. V. He thrived on challenges and possessed a great vision. History 1958 Incorporation of Hindalco Industries Limited.A from Harvard University. 8 . Shri Ghanshyam Das Birla. Birla: “Density beckons that we do something that we continue to create not just for our country. Birla took over the charges as the Chairman of the group.
2006 Hindalco announces 10:1 stock split. 2002 The amalgamation of Indo Gulf Corporation Limited copper business. (ABML. taking capacity to 5. 2000 Acquisition in controlling stake in Indian Aluminium Company Limited (Indal) with 74.266 million. Kumar Mangalam Birla takes over as chairman of Indal board.000 TPA.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. 10 per share split into 10 shares of Re.5% through an open offer. smelter and power plant. merged with Hindalco Industries Ltd.) ABML acquires the Mount Gordon Copper Mines in November 2003. Brownfield expansion of metal capacity at Renukoot to 242.6% equity holding. Ltd. 2004 Copper smelter expansion to 2. 2003 Hindalco acquires Nifty Copper Mine in March 2003 through Aditya Birla Minerals Ltd.000 TPA 2005 All business of Indal. Hindalco completes largest Right issue in the history of Indian capital market with total size of Rs. 1998 Foil Plant at Silvassa goes on stream. Brownfield expansion of aluminium smelter at Renukoot to 345.000 TPA. Each share with face value of Rs.50. 1995 Mr. 1 each. 1991 Beginning of major expansion programme. formally Birla Minerals Pvt. Equity stake in Indal increased to 96. 1999 Aluminium alloy wheels production commenced at Silvassa. with Birla Copper. Hindalco attains ISO 14001 EMS certification. except for the Kollur Foil Plant in Andhra Pardesh.00. MoUs signed with state government of Orissa and Jharkhand for setting up Greenfield alumina refining.22. with Hindalco with the effect of 1st April 2002. 9 .000 TPA. Commissioned Copper III expansion.
Joint venture with Almex USA for manufacture of high strength aluminium alloys for application in aerospace . Signed an MoU with the Government of Madhya Pradesh for Greenfield aluminium smelter in Siddhi district of the state. with a presence in 11 countries outside India. global in size and reach. sporting goods and surface transport industries.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. making Hindalco the largest in aluminium rolling and among the global top five metals major. 2007 Successful acquisition of Novelis. VALUES 10 . MISSION To relentlessly pursue the creation of superior shareholder value. unleashing employee potential. by exceeding customer expectation profitably. while being a responsible corporate citizen. VISION. thereby making Hindalco the 100% project owner. and creating value for its stakeholders. on Australia Stock Exchange. excelling in everything we do. Acquisition of Alcan’s 45% equity stake in the Utkal Alumina project. MISSION & VALUES VISION To be a premium metals major. Equity offering and subsequent listing of Aditya Birla Minerals Ltd. adhering to our values.
11 .WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.
AWARDS AND RECOGNITIONS 12 .WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.
institute of directors. Green tech. Mumbai.L. 2008. Institute of Directors.J. Golden Peacock National Quality Award. foundation. Management IMC Ram Krishna Bajaj National Quality Award Trophy. Hindalco Hirakud Complex earned the Pollution Control Appreciation Award presented by the Orissa state Pollution Control Board. A.P. Abdul Kalam. 2009. Golden Peacock Environment award. Shah National Award for Economics of Quality given by Quality Council of India. Green tech. foundation. International Asia pacific quality award. Hon. ISO 9001Software Development) and BS7799 (Information security). Dr. New Delhi 2009. Asia pacific quality organization in 2009. Hindalco won the prestigious “D. Government of India. 13 . Green tech gold award for environment. Hindalco’s Renukoot IT functions is the first in the group as well as in India to be recommended for all these certification in an integrated manner.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. presented by President of India. on 9 February 2007. New Delhi 2008. National Energy Conservation Award -2006 was presented by the ministry of power. 2008. Indian merchant’s Chamber Ram Krishna National Quality Award Trust. Green tech gold award for environment. The IT department of Hindalco received prestigious IT certificate BSI15000 (IT services).
“ICWAI National Award for Excellence in Cost Management -2005” presented by the Institute of Cost and Work Accountants of India. organized by quality Circle Forum of India. safety and health. Hindalco Hirakud Power Plant team bagged second prize at the state level CII Orissa Award 2006 for best practices in environment. Renukoot Complex named the winner of National Safety Award 2005 for the second consecutive year. pollution control and overall performance during the Mines Safety Week. Hindalco Hirakud. Hirakud Power Plant team received the State Safety Award 2006 for their act of bravery in saving lives and preventive a disaster by their proactive initiative to arrest the chlorine leakage at the railway Colony in Sambalpur. Bauxite and coal mines. The Company’s fabrication plant’s hot mill team won the prestigious Qualtch Award for their project “reduction of time in work role change in time.” Hindalco. Chhattisgarh and Orissa) have won a host of award in safety. s Quality Circle ‘jagruti’ bagged national level honors at the 20th National Convection of Quality Circles. Renukoot has won the National Award for Excellence in Water Management 2006 organized by CII. Maharashtra. environment. in all regions (Jharkhand. 14 .WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.
LTD. ULTRA TECH CEMENT LTD. Sponge iron. cement. Carbon Black. Textiles IDEA CELLULAR LTD. BIRLA SUN LIFE INSURANCE Insurance CO. PSI DATA SYSTEMS Application development. Rayon grade pulp. Viscous filament yarn. TANFAC INDUSTRIES LTD.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. Aluminium and copper INDIAN ALUMINIUM Aluminium foil COMPANY LTD. BIHAR CAUSTIC AND Caustic soda CHEMICALS LTD. Cellular Telecommunication ADITYA BIRLA INSULATOR Insulators LTD. Ordinary Portland Cement. Portland pozzolana cement and grey Portland cement. Portland blast furnace slag cement. Product Profile Indian Roots PRODUCTS/SERVICES Viscose staple fiber. Textiles. BIRLA SUN LIFE ASSET Mutual Funds MANAGEMENT COMPANT LTD. ADITYA BIRLA NUVO Garments. SHREE DIGVIJAY CEMENT Cement and Clinker HINDALCO INDUSTRIES LTD. Fluorine Chemicals BIRLA SUN LIFE Investment Planning DISTRIBUTION COMPANY Services LTD. Maintenance & Enhancement Solutions TRANS WORKS Customer Relationship 15 COMPANY GRASIM . Chemicals.
PARTNERS Sun Life (CANADA) PRODUCTS Insurance Solutions (TIDCO) Tamil Nadu Fluorine Industrial Development Corporation Sun Life (CANADA) Mutual Funds Sun Life (CANADA) Investment Planning Solution International companies Thailand • • • • • • Thai Rayon Indo Thai Synthetics Thai Acrylic fiber Thai Carbon Black Aditya Birla Chemicals (Thailand) Ltd. Advisory Services ADTYA BIRLA RETAIL Multi-Format Stores HI-TECH CARBON Carbon Black MADURA GARMENTS Garments Joint Venture COMPANY Birla Sun Life Insurance Company Ltd. Birla Sun Life Distribution Company Ltd. Asset-based finance.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. Tanfac Industries Ltd. Management (CRM) services (inbound & outbound) BIRLA GLOBAL FINANCE LTD. Birla Sun life Asset Management Company Ltd. corporate finance and investment banking BIRLA INSURANCE ADVISORY Non-life Insurance SERVICES LTD. Thai Peroxide Philippines • Indo Phil Textile Mills 16 .
• • • • • • • • • • • Indo Phil Cotton Mills Indo Phil Acrylic Mfg.E China • • • Liaoning Birla Carbon Birla Jingwei fiber Company Ltd. 17 .WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. North and South America. Pan Century Surfactant Inc. Canada • • AV Cell Inc. Av Nakawick Inc. Aditya Birla Grasun Chemical (Fangchenggang) Ltd. Europe and Asia Novelis Inc. Corp. Indonesia PT Indo Bharat Rayon PT Elegant Textile Industry PT sunrise Bumi Textile PT Indo Liberty Textile PT Indo Raya Kimia Egypt Alexandria Carbon Black Company S.A. Australia • Aditya Birla Minerals Ltd. Laos • • • Birla Laos Pulp and Paper Plantation Company Ltd.E Alexandria Fiber Company S.A.
The company exports about 17% of its total sales volume of aluminum. 63% in rolled products. primary aluminum ingots. The Aluminium division’s product range includes alumina chemicals. rolled products. The company’s metal is accepted for delivery under the high-grade aluminum contract on the LONDON METAL EXCHANGE (LME). It enjoys domestic market share of 42% in primary aluminum. wire rods. 44% in foils & 31% wheels. furniture’s. ladders. Freshwrapp for kitchen foils and ever last for roofing sheets. foils and alloy wheels.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. the aluminum gallery. Hindalco has launched several brands in recent years. which include Aura for alloy wheels. Our exclusive showroom. extrusions. seeks to promote Hindalco products to its customers. As a step towards expanding the market for value-added products and services. roofing sheets & ceilings &cladding panels. Hindalco’s products are well received not only in the domestic market but also in the international market. The company’s alumina chemical business is a leader in manufacturing and marketing of specialty alumina and alumina hydrate products in the country. It is a platform for the company to showcase quality products to a quality audience in an appropriate ambience. This company has significant market share in all the segments in which it operates. and billets. 20% in extrusions. HINDALCO’S PRODUCT PROFILE • • • Hindalco is a leading domestic player in two metal business segments Aluminium & Copper. The exhibits include products like windows. These specialty 18 • • • . doors.
The foil plant at Kollur. Western Europe & the Asian region. The company also exports these alumina chemicals to over 30 countries covering North America. In India. It has also made successful forays in to the export markets of the Middle East. A co-generation plant and a 770 mw captive power plant at Renusagar to ensure continuous and consistent supply of power for smelter and other operations back the plant. Hindalco enjoys a leadership position in specialty alumina. di-ammonium phosphate. billets. aluminum ingots. Korea and Taiwan.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. redraw rods. Mouda (Maharashtra) etc. namely. having built over 40% of the domestic market shares within 3 years it’s commissioning. China. wire rods etc. enjoys a leadership position in India. primary aluminum and downstream products. croyloite. 19 • • • . Hindalco’s major products include standard and specialty grade alumina and hydrates. The Copper plant produces world-class copper cathodes. other phosphoric fertilizers and phosphor-gypsum are also produced at this plant. products find wide range in diversified industries including water treatment chemicals. continues cast copper rods and precious metals. conveyor belts and cables. among others. Hindalco’s copper division at Dahej in Gujarat. Andhra Pradesh is the only remaining entity with the erstwhile Indal after the merger of Indal with Hindalco. Other facilities include an aluminum smelter at Hirakud (Orissa) with a captive power plant. glass. Southeast Asia. The integrated facility at Renukoot (Uttar Pradesh) houses an alumina refinery and an aluminum smelter along with facilities for production of semi-fabricated products. • • • ALUMINUM • Hindalco is the world’s largest aluminum rolling company and one of the biggest producers of primary aluminum in Asia. flat rolled products and extrusions. phosphoric acid. ceramics. refractories. Birla copper. alumina refineries at Muri (Jharkhand) and Belgaum (Karnataka) and rolling mills at Belur (west Bengal) and Taloja. fillers & plastics. Sulphuric acid.
Aluminum smelter capacity of 325. In India. Hindalco was among the first few alloy wheels companies to have obtained the ISO/TS 16949 certification to meet the stringent standard of the automobile industry. All Hindalco units are ISO 9001:2000 and 14001 certified.7 Billion) project for a smelter-power complex in the Siddhi district of Madhya Pradesh. These have been recognized by the government of India’s Department of Scientific and Industrial Research (DSIR). The company has two R&D centers: the Belgaum Research and Development center in Taloja. Hindalco has launched several brands in recent years. Maharashtra. As a step towards expanding the market for valueadded products and services. Exports account for more than 20% of total sales of aluminum products. ever last roofing sheets & Freshwrapp and Freshpakk household foils for packaging.44 billion ($1 billion) Greenfield joint venture with Alcan Inc.5 million-tone alumina refinery is to be set up in Doragurha. and several have attained the OHSAS 18001 – the occupational health and safety certification. of Canada in which Hindalco holds 55 % equity. ORRISA INTERNATIONAL A Rs. 77 billion ($ 1. Hindalco’s products are well accepted in international markets. sourcing Bauxite from the rich reserves of Baphlimali in Rayagada. Rayagada district of Orissa.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. A strong presence across the value chain and synergies in operations have been given Hindalco a dominant share of the domestic value-added products market. These include the Aura aluminum Alloy wheels for cars. Apart from being a dominant player in the domestic market. the company enjoys a leadership position in specialty alumina and hydrates as well as primary aluminum and downstream semi-fabricated products. • The aluminum alloy wheels plant is located at Silvassa (Dadar and Nagar Haveli). • • • UTKAL ALUMINA LIMITED. MADHYA PRADESH A Rs. The proposed 1.000 TPA supported by a 750 mw coal 20 .
. India has limited proven copper reserves.Birla Nifty Pvt. Power is generated for in house use.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. Ltd. as also by product facilities for the fertilizers and precious metals. 21 . 78 billion ($1. COPPER Hindalco’s Birla Copper unit at Dahej in Gujarat is the world’s largest single location custom copper smelter with 500. Netherland. The coal for the power plant will be sourced from Mahan Coal Company ltd. based captive power plant. Unlike aluminum. in the form of cathodes and continuous cast rods and byproducts. The copper business segment comprises primarily production (through copper smelting. The division also owns two copper mines in Australia. Birla copper sources copper concentrate from various countries.7billion) project for a smelter-power complex in the Latehar district.000 TPA supported by captive thermal power of 750 mw. The plant is backed by captive power plants. Ltd.000 TPA capacities. In 2005. and Indonesia and South America. Copper concentrates are imported through a captive jetty at Dahej. Aluminum smelter capacity of 325. the Dahej copper plant was accredited with OHSAS18001 certification by KPMG. selenium and platinum group mix) and DAP and NPK complexes. a joint venture between Hindalco and Essar Group for mining of coal from the Mahan Coal block. JHARKAND A Rs. In Western Australia and Birla Mount Gordon Pvt. and refining) and sale of copper. Hence. oxygen plants. In Queensland through its 51 % subsidiary – Aditya Birla Minerals Ltd. silver. including Australia. A captive jetty with cargo handling capacity of over 4 million TPA facilities easy input of copper concentrate and other imported raw material. as well as operating jetty services and other logistical activities related to sales and distribution of products. converting. precious metals (gold.
99%) and consistent quality. Birla Nifty’s copper cathodes capacity is 25. The Precious Metal Refinery at Dahej produces gold. and copper tubes for consumer durable Goods. the London metal exchange had listed Birla copper as A grade copper brand. DAP and NKP complexes and precious metals. Aditya Birla Minerals (ABML) is entering a period of rapid growth is continues in nature. framed for its rich copper ore deposits. Birla copper is an ISO 9001 company and has also received the ISO 14001 and OSHAS 18001 certification. 2003. which produces copper cathodes. MINES Two copper mines in Australia were acquired in 2003. Revenues are derived primarily from the sale of copper. With the start up of the NIFTY sulphide operation and its progressive ramp up during FY 2007. commonly known as PGM. known for high purity(99.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. The Nifty sulphide operation commenced ore production from stopping in December 2005 and concentrate production in March 2006. Aditya Birla Minerals Limited (ABML) also has exploration rights in the Patterson province of Western Australia. A copper sulphide deposit is located at the lower levels of the Nifty open pit mine and an underground mine and concentrator have been developed to mine & process ore from this deposit. these are largely used in the manufacture of copper rods for the wire and cable industry. The residues after extraction of these precious metals contain traces of platinum and palladium that are sold as Platinum Group Metals mix. heap leach pads and a solvent extraction and electro winning (SEXW) processing plant. 22 . Birla Nifty mine consist of an open. Effective 30th Jan. silver and selenium. Birla Mt. Gordon operations consist of Mammoth underground and Esperanza open pit mines it has ability to produce both coppers in concentrate through a standard floatation plant and copper cathodes through a ferric leach plant. Hindalco Birla copper cathodes is a trusted brand.000 TPA.pit mine.
000 TPA (Belgaum) 373.000 TPA (Renukoot) 110.000 TPA Extrusion 27. PRODUCTION CAPACITY Division Alumina Chemicals Capacity 1.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.700 TPA (Renukoot) 8.700 TPA Rolled Product 2.000 TPA (Alupuram) 80000 TPA (Renukoot) 30000 TPA (Mouda) 45000 TPA (Belur & Taloja) 40000 TPA (Renukoot) 10000 TPA (Alupuram) 14400 TPA ( Mouda) Silvassa Silvassa Primary Aluminium 489.000 TPA (Renukoot) 102000 TPA (Hirakud) 14000 TPA (Alupuram) 19.000 TPA Wire rods 64000 TPA Aluminium foils Aluminium wheels 11000 TPA 300.00.000pcs 23 .160.000 TPA (Muri) 350.000 TPA Location 700.
Power Copper cathodes 1087.000 TPA Renukoot Renusagar Hirakud Dahej Share of Net Sales Value 2007-08 24 .00.2 MW 5.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.
25 .WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.
WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. STRUCTURE OF FINANCE DEPARTMENT JOINT EXECUTIVE PRESIDENT (FINANCE & VICE PRESIDENT (FINANCE & GENERAL MANAGER MANAGER DEPUTY MANAGER ASSISTANT MANAGER ACCOUNT OFFICER 26 .
ASSISTANT A/C OFFICER SR. B. A. K. ASSISTANT ASSISTANT MANAGEMENT TEAM BOARD OF DIRECTORS Mr. Managing Director CHIEF FINANCIAL OFFICER Mr. Debu Bhattacharya. Group Executive President & CFO ADVISOR Mr. S. Chief People Officer COMPANY SECRETARY Mr. Bhagat Mr. S. Kasliwal CORPORATE Mr. Vineet Kaul.K.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. R. Kumar Manglam Birla. Chairman Mrs. S. M. Anil Malik 27 . N. Maniar Mr. K. Ram Senior President (Corporate Project) Mr. M. J. N. Talukdar. E. Rajashree Birla Mr. Jhaveri EXECUTIVE DIRECTOR Mr. Desai Mr. Bhandari Mr. Agarwala Mr. C. R. Kothari Mr. M.
K. Chief Marketing Officer Auditors Singhi & Co. Mr. Anil Kumar Sinha. D. President (Foil & Alloy Wheels) Mr. Unit Head (Renusagar Power Division) Aditya Aluminium Mr. Shankar Ray. Mr. Kolkatta 28 . Sharma. President & Chief Operating Officer N. Chief Marketing Officer (Primary Metal. Mr. Nanabhoy & Co. Shashi K. CEO Mr. Dhulkhed. S. M. Dilip Gaur. Maudgal. KEY EXECUTIVES ALUMINIUM BUSINESS Mr. Joint Executive President (F & C) Vijay Sapra. President (Human Resource) Mr. Pandey. N. Rolled Products. Patnaik. Kohly. President (Business Projects) RENUKOOT UNIT Mr. Mumbai Mani & Co.. S. Group Executive President Shambhu Sharma. Chief Operating Officer Copper Business Mr. Paliwal. Bhatia. S. Mr. Renukoot Ashok Machher. M. Joint President Chemicals & International Trade Mr. Vice-President Alumina Plant G..M. Mr. President (Operations) Mr. Vinod Sood . N.. S. Kolkatta Cost Auditors R.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. Jena. M. R. Extrusions) Mr. Joint President (Finance and Commercial) J. Mr. Botha. Chief Officer – Operations. P. Joint Executive President (Commercial) B. Mr.
Accounting Convention The financial statements are prepared under the historical cost convention. Fixed Assets (a) Tangible Assets are stated at cost less accumulated depreciation and impairment loss. 29 . (c) Machinery spares which can be used only in connection with an item of Fixed Asset and whose use is not of regular nature are written off over the estimated useful life of the relevant asset. (b) Intangible Assets are stated at cost less accumulated amortization. Accounting Policy 1. on an accrual basis and in accordance with the generally accepted accounting principles in India. 1956 of India. Use of Estimates The preparation of financial statements require estimates and assumptions to be made that affect the reported amount of assets and liabilities on the date of the financial statements and the reported amount of revenues and expenses during the reporting period. 3.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. Cost includes any directly attributable expenditure on making the asset ready for its intended use. Cost comprises of purchase price and any attributable cost of bringing the assets to its working condition for its intended use. Difference between the actual results and estimates are recognized in the period in which the results are known / materialized. the applicable mandatory Accounting Standards as notified by the Companies (Accounting Standard) Rules. 2006 and the relevant provisions of the Companies Act. 2. if any.
whichever is lower’. for diminution in value considered to be other than temporary in nature. Investments (a) Long term Investments are carried at cost after deducting provision. Inventories (a) Inventories of stores and spare parts are valued at or below cost after providing for cost of obsolescence and other anticipated losses. Impairment An asset is treated as impaired when the carrying cost of the asset exceeds its recoverable value being higher of value in use and net selling price. if any. 5. An impairment loss is recognized as an expense in the Profit and Loss Account in the year in which an asset is identified as impaired. (b) Inventories of items other than those stated above are valued ‘A t cost or Net Realizable Value. 7. 4. 8. Depreciation and Amortization (a) Depreciation on Tangible Fixed Assets has been provided using Straight Line Method at the rates and manner prescribed under Schedule VI of Companies Act. (b) Mining Rights and leasehold land are amortized over the period of lease on straightline basis. The impairment loss recognized in prior accounting period is reversed if there has been an improvement in recoverable amount.1956 of India. Cost is generally 30 . (c) Intangible assets are amortized over their estimated useful lives on straight line basis. wherever considered necessary. (b) Current investments are stated at lower of cost and fair value.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. Leases Lease payments under an operating lease are recognized as expense in the statement of profit and loss account as per terms of lease agreement. Value in use is computed at net present value of cash flow expected over the balance useful life of the assets. 6.
11. gratuity). Long term employee benefits (e. In determining the amount of borrowing costs eligible for capitalization during a period. Employee Stock Option Scheme In respect of stock option granted pursuant to the company’s stock option schemes. Export incentive. are accounted on acceptance basis. 12. determined on weighted average cost basis and wherever required. Net Realizable Value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale.g. long-service leave) and post employments benefits (e. the intrinsic value of the options (excess of market price of the share over the exercise price of the option) is treated as employee compensation cost and is charged over the vesting period of the option. are recognized as expense based on actuarial valuation at year end using the Projected unit credit method. 13. 10. Dividend income on investments is accounted for when the right to receive the payment is established. Other borrowing costs are recognized as expenses in the period in which they are incurred. appropriate overheads are taken into account. Employee benefits Employee benefits of short-term nature are recognized as expense as and when it accrues. certain insurance.g. Actuarial gain and losses are recognized immediately in the Profit & Loss account. any income earned on the temporary 31 . Revenue Recognition Sales revenue is recognized on transfer of significant risk and rewards of the ownership of the goods to the buyer and stated at net of trade discount and rebates.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. Borrowing Cost Borrowing costs directly attributable to the acquisition or construction of qualifying assets are capitalized. both funded and unfunded. (c) Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. railway and other claims where quantum of accruals can not be ascertained with reasonable certainty.
(c) Transactions covered by cross currency swap and option contracts to be settled on future dates are recognized at the year end rates of the underlying foreign currency. 1961. Portion of the cash flow to the extent of underlying physical transactions having not been completed is carried in Raw Materials Inventory till the completion of the underlying physical transaction.In respect of transactions covered by Forward Exchange Contracts. Assets procured for research and development activities are generally capitalized. Effects arising out of swap contracts are adjusted on the date of settlement.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. subject to the consideration of prudence. Taxation Provision for current income tax is made in accordance with the Income-tax Act. 15. Fringe benefit tax (FBT) is accounted for on the estimated value of fringe benefits for the period as per the related provisions of the Income-tax Act. aluminium and precious metals) are minimized by hedging on futures market. (b) The Company uses derivative financial instruments such as forward exchange contracts and currency swaps and options to hedge its risks associated with foreign currency fluctuations. alumina. 32 . on timing difference. 16. being the difference between taxable income and accounting income that originate in one period and are capable of reversal in one or more subsequent periods. 14. The results of metal hedging contracts /transactions are recorded at their settlement as part of raw material cost or sales as the case may be. investment of those borrowings is deducted from the borrowing costs incurred. Research and Development Expenditure incurred during research phase is charged to revenue when no intangible asset arises from such research. Derivative Instruments (a) Risks associated with fluctuations in the price of the Company’s products (copper. Deferred tax liabilities and assets are recognized at substantively enacted tax rates. the difference between the forward rate and the exchange rate at the inception of contract is recognized as income or expense over the life of the contract.
if any. (a) The provision for excise duty and sales tax are on account of legal matters. No provision is recognized or disclosure for contingent liability is made when there is a possible obligation or a present obligation and the likelihood of outflow of resources is remote. Contingent Asset is neither recognized nor disclosed in the financial statements. (III) The Company has given undertakings to various Financial Institutions and Banks. for. (b) Provision for others is on account of dispute pertaining to non-supply of material to a customer. Contingent Liabilities and Contingent Assets Provision is recognized when there is a present obligation as a result of a past event that probably requires an outflow of resources and a reliable estimate can be made of the amount of the obligation.i) Non disposal of equity shares of Aditya Birla Chemicals (India) Limited (Formerly known as.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. Bihar Caustic & Chemicals Ltd) till the Institutional Loans are repaid in full in addition to finance the cost over run. 18. 17. as relevant. in respect of an on-going project of the Company for which the loan has been taken. require an outflow of resources. till the Institutional loans are repaid in full. 33 . The amount of provision is estimated by the Company considering the facts and circumstances of each case for which cash flow will be determined on settlement of these matters. ii) Non disposal of equity shares of IDEA Cellular Ltd. Other capital grants are credited to Capital Reserve. but probably will not. Government Grants Government Grants are recognized when there is a reasonable assurance that the same will be received. Provisions. Disclosure for contingent liability is made when there is a possible obligation or a present obligation that may. where the Company anticipates probable outflow. Revenue grants are recognized in the Profit and Loss Account. Capital grants relating to specific fixed assets are reduced from the gross value of the respective fixed assets.
Short Life Span 34 . In simple words. debtors and inventories.term or current assets such as cash. payment of wages and other day-to-day expenses. It is required for day-to-day operations. for the purpose of raw materials. Working capital is also known as Operating Capitals. WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES Funds are also needed for short-term purposes. etc. WORKING CAPITAL Working capital refers to the amount of capital which is readily available to an organization. which is required for financing short. • Liquid Assets (cash and bank deposits) • 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 Temporary Investments of Surplus Funds Prepaid Expenses Accrued Income Characteristics of current assets: In the management of working capital two characteristics of current assets must be in born in mind.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. or more specifically. these components of working capital are reported under the following headings: CURRENT ASSETS: This is any cash or asset that can be quickly converted into cash. account receivables. Among the most important items of Working Capital are levels of inventory. In a department’s statement of financial position. This includes prepaid expenses. Working Capital refers to that part of the firm’s capital. These funds are known as Working Capital. marketable securities. for financing the conversion of raw material into finished goods. most securities and your inventory. accounts receivable and accounts payable.
• Bank Overdraft • Bills Payables • Sundry Creditors or Accounts Payable • Short Term Loans. advertising etc. • To provide credit facility to the customers. Swift Transformation into other assets forms. finished goods generally sold on credit or cash. 35 . • To incur day-to-day expenses and overheads costs such as fuel. Current liabilities: Current Liabilities are those claims of outsiders which are expected to mature for payment within the accounting year. components and spares. Current assets have a short life span. sales and collections and degree of synchronization among them. work-in –progress. Cash balance may be held idle for a week or account receivables may have a life span of 30 to 60 days. production. • To meet the selling cost as packaging. • To maintain the inventories of raw materials.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. • Other short term liabilities Purpose of working capital • For the purchase of raw materials. raw materials are transformed in to finished goods. The life of current assets depends upon the time required in the activities of procurement. power etc. • To pay wages and salaries. if it is does not amount to appropriation of profits. This is a liability in the immediate future. Each current asset is used for acquiring raw material. Advances & Deposits • Dividend Payable • Provision for Taxation. stores and spares and finished goods. and investments may be held for 30 to 100 days.
Reserve WC 36 .WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.
WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. CLASSIFICATION OF WORKING CAPITAL 37 .
The Gross Working Capital concept focuses attention on two aspects of current assets management. A negative NWC means a negative liquidity. Current assets are assets. The main components of current assets are cash. which can be converted into cash within an accounting year. • Optimum investment in current assets. ON THE BASIS OF TIME On the basis of time it may be classified as: • Permanent Working Capital • Temporary Working Capital Permanent Working Capital Permanent or fixed working capital is the minimum amount. NET WORKING CAPITAL Net working capital refers to the difference between current assets and current liabilities. Conventionally the ratio of CA and CL is 2:1. In order to protect their interests. short-term creditors like a company to maintain a positive NWC. ON THE BASIS OF CONCEPT There are two concepts of working capital – • Gross Working Capital • Net Working Capital GROSS WORKING CAPITAL Gross working capital refers to the firm’s investment in current assets. long term debts etc. Every firm has to maintain a minimum level of raw material. • Financing of current assets. WIP. Current liabilities are those claims of outsiders. It indicates the liquidity position of the firm and suggest the extent to which working capital needs may be financed by permanent source of funds such as shares. It poses a threat on the company’s solvency and makes it unsafe and unsound. It is a qualitative concept. debentures. It concerns the question of judicial mix of long and short-term funds for financing current assets. debtors.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. marketable securities and stock. It can be positive or negative. There is always a minimum level of current assets which is continuously required by the enterprise to carry out normal business operation. which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. which are expected to mature for payment with in an accounting year. which may prove to be harmful to company. finished goods and 38 . reputation.
This minimum level of current assets is called Permanent or Fixed Working Capital as this part of capital is permanently blocked in current assets. over and above permanent working capital. cash balance. Temporary working capital depends upon the changes in production and sales. It represents additional assets required at different items during the operation of the year. Temporary current assets financed from short term sources Total assets Permanent Current Assets Fixed Assets Long term Finance 0 Time 39 .WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. TEMPORARY OR VARIABLE WORKING CAPITAL Temporary working capital is the extra WC needed to support the changing production and sales activity.
Overheads Finished Goods 40 Work-in-progress . control and management of working capital. finished goods for held for 60 days and credit extended to debtor. and Conversion of finished goods stock into account receivables through sales. 120+30+30+60days is the total working capital cycle. Cash Debtors (Receivable) Raw Materials. Labor. The operation cycle (working capital) consists of the following events. WORKING CAPITAL CYCLE Working capital cycle indicates the length of time between a company’s paying for materials. which continue throughout the life of business. 240days. Hindalco Company holds raw-material on an average for 120 days. The duration of working capital cycle may vary depending on the nature of business. It can be determined by adding the number of days required for each stage in the cycle. entering into stock and receiving the cash from sales of finished goods. Conversion of work-in-progress into finished goods. Conversion of cash into raw materials. The determination of working capital cycle helps in the forecast..e.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. it gets credit from supplier for 30 days. Conversion of raw materials into work –in-progress. Conversion of account receivables into cash. i. production process needs 30 days. The total of all these. For example.
C. Lower level of WC increase the risk but have the potentiality of increasing the profitability also. means the firm does not have sufficient fund for running its operations. If this ratio is high then profitability is low and risk is high. Effect of quantum Current Assets on Profitability & Risk:If we want to know effect of level of current assets at profitability. which earn no profit for the firm. The term profitability use in the context is measured by profit after expenses. If the ratio is high then profitability is minimum and risk is also minimum. Trade-off between Profitability and Risk In evaluating the firm’s working capital position an important consideration is the trade-off between profitability and risk. If the ratio of CA/TA is lower than profitability is high as well as risk is high.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. Excessive WC means the firm has idle funds. Inadequate W. and lowering down the profitability. It should neither be excessive nor inadequate. In other words the level of NWC has a bearing on profitability as well as risk. A firm must have adequate WORKING CAPITAL. It is assured that greater the amount of NWC. This situation decreases both risk and profitability of the firm. The term risk is defined as the profitability that a firm will become technically insolvent so that it will not able to meet its obligation when they due for payment. 41 . Effect of quantum Current Liability at the Profitability and Risk:The effect of current liability at the profitability and risk can be shown by the ratio of CL/TA. Conversely lower level of NWC and liquidity are associated with increasing level of risk. If this ratio is low then profitability is high and risk is low. which ultimately results in production interruptions. for that we check the ratio of CA/TA. the less risk prone the firm is. or greater the NWC the more liquid is the firm and therefore the less likely it to become technically insolvent.
00 * 100)/17061.19 = 7739. Work –in. therefore larger working capital needed. Hindalco’s investment in working capital are as follows: Current Asset Total Assets CA to TA Ratio = 7.51 = 31. Coal. The longer time span production cycle will be longer.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.51 = (CA×100)/TA = (7739.00 NET WORKING CAPITAL TO TOTAL ASSETS RATIO = (NWC×100)/TA = (5871. NWC = CA-CL Production Cycle Production cycle is concern with procurement of raw materials to the completion of manufacturing process leading to the production of finished goods.739.50% High level of investment in working capital due to a lot of investment in raw materials like Bauxite.91 – 1868. Funds have to be necessarily ties up during the process of manufacturing necessitating enhanced to working capital. 42 . Determinants of Working Capital at Hindalco Nature of Business Company business is manufacturing of Aluminum and aluminum product so this firm needed – A good amount of investment in working capital.91 = 5871. Fuel.91*100)/17016.51 =34.progress and stores of finished goods. fund will be tie up for a longer span of time.91 = 17016.
The policies influence the requirements for the working capital in two ways – (1)Through credit terms granted to customers/ buyer of goods I. due to purchase of additional raw material and machinery to complete the increasing demand of product and for the cover the lag between sales and receipt of cash. hence production continues throughout the year thereby no extra working capital is involved. The company produce primary product continuously and semi products and extrusions are produced as the order of customers. Production Policy A production policy is also determining the quantum of working capital. Production policy may be of two types – (1)Speedy production policy (2)Variable production policy In case of Hindalco demand for aluminum and aluminum product manufactured by Hindalco is prevailing throughout the year. due to decrease in level of inventories and book of debts. There are two economic conditions. which affect quantum of working capital – (1)If there is boom condition in economy. then needed more working capital 43 . Credit Policy Credit policy is relating to sales and purchase of product. is near about 30 days. The production cycle of Hindalco Industries Ltd.This situation will also follow for the Hindalco Industries. If give more credit to customer/ buyer. which also affect the working capital. (2)If there is recession condition in economy it leads a fall in the quantum of working capital. more working capital will be needed. So there is no question of seasonal demand of product.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. Note: . It breaks up in following ways: Raw material Storage period = 21 days Work-in-progress period = 05 days Finished Goods storage period = 04 days Total = 30 days Business Cycle Fluctuations in economy or business may lead quantum of working capital.
The implication of changing price level on working capital position varies from company to company depending on nature of its operations. Working capital need is in fact assessed in advance in reference to the business plan. The prevailing trade policies are as well as the changing economic condition affect the credit terms fixed by an enterprise. standing in the market and their relevant considerations. Availability of Raw Material If availability of raw material is irregular then a larger amount of working capital is needed because a lot of amount invested in the raw material for the smooth production process and vice-versa. If this is not liberal then needed more working capital. In Hindalco credit period as follows: Buyers Direct Customer Agent/ Stockiest Credit period received as Raw materials Stores and spares Product (Primary) Nil 15 days Product (Semi fabricated) 45 days 45 days 15. Price Level Change Changes in the price level also affect the requirement of working capital. If give less credit to customer/ buyer. 44 . The need for increased working capital does not follow the growth of business operation but precedes it. Profit Level In the Hindalco maximum working capital is arranged by the internal source. So the change in profit level is not affected by the working capital level. then needed less working capital (2)Credit terms available to a firm I. However the price rise does not have uniform affect on all commodities.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. II. II. Rising price necessitates the use of more funds for maintaining the existing level of activity.30 days 30 days Growth and Expansion Growth and Diversification of business call for larger volume of working fund. If this is liberal then needed less working capital.
though management cannot control rise in price. Suitable adjustment may have to be 45 . Estimation of component of working capital Since working capital is the excess of current assets over current liability.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. Percentage of sales method 3. workin-progress and finished goods. Change in the price level of crude oil also make a deep impact on working capital of Indian industries. so it’s also affect the working capital of Hindalco Industries. Operating Efficiency The operating efficiency of the management is also an important determinant of the level of working capital. it can ensure the efficient utilization of recourses by eliminating waste. Efficiency of operations accelerates the pace of cash cycle and improves the working capital turnover. he can apply any of the following techniques for assessing working capital requirement – 1. account receivables. Estimating Working Capital Requirement There is no set of rules or formula to determine working capital requirements of the firm. The estimation of each of these as follow – I. For example inventories. cash account payable etc. The Quantum of working capital requirement of a company largely depends upon aforesaid factors. Inventories: The term inventories include stock of raw materials. Estimation of component of working capital 2. Operating Cycle approach. improving co-ordination etc. Stock of raw materials: The average amount of raw material to be kept in stock will depend upon quantity of raw material required for production during in a particular period and average time taken in obtaining a fresh delivery. estimating amount of different constituents of working capital can make an assessment of the working capital requirement. Besides. A finance manager in order to estimate the working capital requirement of the firm has to keep in mind few factors.
It is summed up as: Budget Production × Cost of goods produced × Finished goods holding period (Unit) excluded Dep. (Per Unit) (Months or days) 12 or 365 days Sundry debtors: The amount of funds locked up in sundry debtors will be computed on basis of credit sales and time lag in collection payment. Symbolically Budgeted production ×Cost of material 100% ×WIP period p. It should be estimated in relation to total cost price as follows: Budgeted credit sales (Units) Cost of sales period Excl. Work-in-progress: The cost of work-in-progress includes raw materials. wages and other overheads in determining the amount of work-in-progress the time period for which goods will be in process. Dep.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. Cash and Bank Balance: The required cash balance can be determined with the help of preparation of cash budget. (Units) (Per Unit) (Month or days) 12 months or 365 days II.a (Unit) (Per Unit) (Months or days) 12 or 365 days Finished goods .a. It can be calculated by following formula: Budgeted Production ×Material Cost × Raw Material holdings period p.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. is most important. made provide for in contingency and seasonal factor. Work-in-progress is normally equivalent is 50% of total cost of production. Proper cash budget should be prepared and continuous monitoring of 46 × × Average collection (Months or days) . (Per Unit) 12or 365 days 1.
Cost × Time lag in payment of Exp. if the past experience show that working capital has been 30% of sales and if sales for the next year would amount to Rs. over the years. For example. this method cannot be recommended for universal application because the assumption of linear relationship between sales and working capital may not hold well in all cases. working capital is determined on the basis of past experience.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. It should be kept in view that cash balance are the most liquid asset and temporary cash surplus should be properly invested in short term marketable investments to maximize the return on capital employed. This method is simple. If. the amount of working capital can be estimated to Rs. This is neither true in all cases nor the method is universally accepted. In this method. 2. the relationship between sales and working capital is found to be stable. 47 . 30. the same is required. goods etc. However. easy to understand and useful for projecting relatively short-term changes in working capital.000.1. Sundry Creditors: The lag in payment of suppliers of raw materials.00. (Units) (Per Unit) (Months or days) 12 or 365 days Percentage of Sales Method It is a traditional and simple method of determining the level of working capital and its components. then this relationship may be taken as a base for determining the working capital for future. and the likely credit purchases made during the to help in estimating the amount of creditors – Budgeted Creditors × Raw material requirement × Credit period allowed by suppliers (Units) (Units) (Months or days) 12 or 365 days Outstanding Expenses: The time lag in payment of wages and other expenses will help in estimating amount of outstanding expenses as follows Budgeted production × labor & Oh. For meeting the day to day expenses it is necessary to maintain certain amount of cash balance for smooth flow of operation.000 the basic criticism of this method is that its presumes a linear relationship between sales and working capital.
2 8437. Analysis: - After determination the quantum of working capital the firm has to decide how it is to be financed.010.97 0. Items Net Sales Inventories Sundry Debtors Cash and Bank Balances Other Current Assets Loans and advances Total Less: Liabilities Provisions Total Net Current assets Miscellaneous Expenditure Rs in millions 192. The working capital requirement of concern can be classified as: Permanent or Long-term working capital requirements Temporary or Short-term working capital requirements Working Capital Finance Financing of Permanent or Long-term working capital Permanent working capital should be financed in such a manner that the enterprise may have its uninterrupted use for a 48 .1 8031.5 77399. Raw materials.4 60 % Of sales 21. finished goods and receivables critically fluctuates during the year. The need for financing arises mainly because investment in working capital/ current assets.42 1.e.8 15730.03 0.00 0. Although long-term fund partly finance current assets and provide the margin money for working capital.39 2.81 40.64 -- From this method we can conclude the data. WIP.7 50678. how much working capital (in percentage) Hindalco needs in next year.03 0.2 517. This helps to control the working capital level.4 12012. i. This is an important aspect to control the cost of finished goods through reduce the cost of inventories. such assets/ working capital is virtually exclusively supported by sort term sources.60 0.27 40701.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.40 0.1 18689.6 26720.
Preference shares carry preferential rights in respect of dividend at a fix rate and in regard to the repayment of capital at the time of winding of the company. There are five important sources of working capital: Share Debenture Public Deposit Ploughing back of profits Loan from financial institutions Shares A company can issue various types of shares such as equity shares. According to the Companies Act 1956. Loan from Financial Institutions Financial institution is such as Commercial Bank. Debenture A debenture is an instrument issued by the company. preference shares. and deferred shares.. Industrial Finance Corporation of India.C. State 49 . this method of finance has a number of advantages as it is the cheapest rather than cost free source of finance. Public Deposit Public deposit is the fixed deposit accepted by a business enterprise directly from the public.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. fix rate of interest paid on debenture. It is also an important method of raising long term or permanent working capital. It is an internal source of finance and is most suitable for an established firm for its expansion modernization and replacement etc. L. This is source of short term financing. Ploughing Back of Profits Ploughing back of profits means the reinvestment by concern of its surplus earnings in its business. sufficiently long period. however a public company cannot issue deferred shares. Equity shares do not have any fixed commitment charged and dividend on these shares to be paid subject to the availability of sufficient profits. As for the possible a company should raise the maximum amount of permanent capital by the issue of shares.I. The interest on debenture is against profit and loss account. The debenture holder is the creditor of the company. The debentures are generally given floating charge on the assets of the company. When the debentures are secure they are paid on priority to other creditors. State Financial Corporation.
• The availability and magnitude of trade credit is related to the size of operation of the firm in terms of sales and purchases. Financing of Temporary or Short-term Financing • • • Trade credit Bank Credit Factoring and commercial paper Trade credit Trade credit refers to the credit extended by the suppliers of goods and services in the normal course of business sales of the firm according to the trade practices. • Trade credit is an informal source of finance. which are granted an open account basis. This source of finance is more suitable to meet the medium-term demand of working capital. Advantages • Trade credit is easily almost automatically available. It represents documentary evidence of credit purchases.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. • Bills payable create a legally enforceable on the buyer to pay on maturity obligation. credit is free from the restriction associated with formal/-negotiated source of finance/ credit. cash is not paid immediately for purchase that after and agreed period of time. • A variant of accounts payable is bills/ notes payables. • It is flexible and spontaneous source of finance. Such credit appears in the record of buyer as sundry creditor/ account payable. Thus deferral of payment represents a source of finance for credit purchases. • Bills payable can be rediscounted and the seller does not necessarily have to hold it till maturity to receive payment. 50 . Industrial development corporations. Features of Trade Credit • Trade credit is an informal arrangement between buyer and seller. Industrial Development Corporation of India etc. • Not requiring negotiations and formal agreement. These institutions also provide medium-term and short-term loans. • There are no legal instrument/acknowledgements of debt.
it represents the most important source for financing of current assets. They can also be renewed from time to time. Similarly the payment can be made when ever desired during the period. Forms of bank credit Bank • • • • • provides working capital finance in five ways – Cash credit/ overdrafts Loans Purchase and discount bills Letter of Credit Working capital term loans • Cash credit/ overdrafts: Under this the bank specifies a predetermined borrowing/ credit limit. For example. The bill financing is intended to link credit with sale and package of goods and thus eliminates the cope for misuse or diversion of credit to other purpose. This form of bank financing of working capital is highly attractive to the borrower because: • It is flexible in that although borrowed funds repayable on the demands • The borrower has freedom to draw the amount in advance as and when required while the interest liabilities only on the amount actually outstanding. buying goods on credit from supplier raising cash credit from by hypothecating the same goods. Within the specified limit any numbers of drawls/drawing are possible to the extent of his requirement periodically. The borrower can draw up to the stipulated credit/overdrafts limit. The interest is determined on the basis of the running balance accentually utilized by the borrowers and not on the sanctioned limit. the bank satisfied itself about the credit worthiness of drawer and the 51 . Before discounting the bill. It also leads to double financing. Loans are repayable on demand or in periodic installments.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. • Bills Purchased/ discounted: The cash credit arrangement give rise to the unhealthily practices. In fact. The borrower pays interest on the total amount. The amount made available under this arrangement is covered by the cash credit and over draft limit. • Loans: Under these arrangements the entire amount of borrowing is credited to the current account of the borrower or released on cash. Bank Credit Bank credit is primary institutional source of working capital finance in India.
WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. genuineness of the bill. The discounting banker asks the drawer of the bill to have his bill accepted by the drawer (buyer) bank before discounting it. The later grant accepting again the cash credit limit, earlier fixed by it on basis of borrowing value of stocks. Therefore the buyer who buys goods on credit cannot issue the same goods as a source of obtaining additional bank credit. • Term Loan of working capital: Under this arrangement bank advance loans for 3-7 years payable to yearly or half yearly installments. • Letter of Credit: This is an indirect form of working capital financing and a bank assumes only the risk, the credit being provided by supplier itself. The purchaser of goods on credit obtains the letter of credit from a bank. The bank undertakes the responsibility to make payment to the suppliers in cash the buyer fails to meet his obligations. Thus, the modus operandi of letter of credit is the supplier sell goods on credit/ extend credit (financed) to the purchased, the bank give guarantee and bears risk only in case of default by the purchaser.
Modes of Security
Banks provide credit on the basis of following modes of securities – I. Hypothecation II. Pledge III. Lien IV. Mortgage V. Charge
1. Hypothecation: Under this bank provide credit to borrower against
security of movable property usually inventory of goods. Although the bank does not have physical possession of goods, it has legal right to sell the goods to realize the outstanding loan.
Unlike hypothecation under pledge the goods are in the custody of bank the borrower offers the security is called a ‘Pawnor’, while the bank is called ‘Pawnee’, the Pawnor would be responsible for any loss or damage if he uses the pledge goods for his own purpose. In case of non-payment of lone, the bank enjoys right to sales the goods.
It refers to the right of a party to retain goods belonging to other party until a debt due to him is paid. It can be of two types – Particular Lien 52
WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. General Lien
4. Mortgage: 5. Charge:
It is the transfer of interest in any immovable property for the purpose of securing the amount given as loan. Where immoveable property of one person is by the act of party or by the operation of law need security for payment of money to another and the transaction does not amount to mortgage, the later person is said to have a charge on the property and all the provision of simple mortgage will apply to such a charge.
Commercial paper is short term unsecured negotiable instrument, consisting of promissory notes with affix maturity, it is issued on a discount on face value basis but it can also be issued in interest bearing form commercial paper when issued by a company directly to the investor is called a direct paper. The companies announce current rates of commercial papers of various maturities, and investors select those maturities, which closely approximate there holding period.
A commercial paper has several advantages for both the issuers and the investor as follows: It is simple instrument and hardly involves any documentation. It is flexible in term of maturity, which can be tailored to match the cash flow of the issuer. The investor can get higher returns than what they can get from the banking system. As negotiable and transferable instruments, they are highly liquid.
Factoring provide resource to finance receivables as well as facilities the collection of receivable. Factoring can be defined as an arrangement in which receivables arising out of sale of goods/ service or sold by a firm to a factor (a financial intermediary). Henceforth the factor becomes responsible for all credit, sales accounting and debt collection from the buyers. If any of the debtors fails to pay the dues as a result of his financial inability/insolvency/ bankruptcy, the factor has to absorb the losses.
WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.
Realization of credit sales is the main function of factoring services. The factor work between sellers and buyers and sometimes with the sellers banks together.
The main function of the factor can be classified into five categories – • Financing facilities/ Trade debts • Maintenance/ administration of sales ledger • Collection facilities of account receivables • Assumption of credit risk/ credit control and credit restrictions • Provision of advisory services
• • • • • • • • •
Impact on balance sheet Off balance sheet financing Reduction in current liabilities Improvement in current ratio Higher credit standing Improved efficiency More time for planning and production Reduction of cost and expenses Additional source.
WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.
Working Capital Financing at Hindalco
In Hindalco working capital requirement is finance basically through following sources – • Internal funds • Short term securities and interest thereon • Bank loan (1) An internal fund denotes the funds generated through operation of the firm i.e., through sales turnover. This is major source of financing working capital requirement of the firm. (2) On account of uncertainties attached with generation of funds through sales, the company has invested in several short-term securities to meets its day-to-day requirements of funds. The maturity of these securities is from source of financing WCR.
Hindalco has Short-term Investment in:
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 at the year ended 31.03.08 amount to Rs. 40,508.81 Lacs. Besides above, the company has various credit arrangements with banks to finance the daily WCR. These are of following types: Cash credit Purchase/ discounting of bills Working capital term loan Letter of credit
The Company has cash credit facilities with various banks. The administrative of this is done at the principal office at Renukoot. However, it’s Regional and Area offices are authorized to utilize the cash credit facilities up to the limit described by the principal office.
256.44 12.13 Debtors Cash & 2.62 9.279.527.531.18 7.822.094.7 50678.66) 28.49 44.745.950.2 517.08 11.398.469.007.21 21.085.93 21.862.02 6.4 1016.25 2006 40.764.32 1.913.49 2007 Rs.611.873.42 Loan & advances Total (B) Current Liabilities Liabilities Provisions Total Working Capital Increase/ (Decrease) W.40 8.85 2.96 56 .93 19.43 Sundry 5.516.69 2009 40701.A.26 18689.484.172.01 9.C.841.582.28 41.85 37. Purchase/ Discounting of Bills The company also purchases and discounts the bills issued by its customers to meet the daily requirements. Particulars 2004 (A) Current Assets Inventories 11.537.95 1.60 78.67 4.713.98 25.045. in million 2008 50.8 15730.181.500.027.22 8.14 15.41 40.963.979.368.95 8. 236.09 38.527.742.508.18 18.794.947. Statement of Working Capital As per financial records of Hindalco Industries Ltd up to 31st March 2009.96 1.1 8031.88 12.1 43.77 623.153.782. Working Capital Term Loan Letter of Credit The company’s Export/ Import operations are done through LOC.66 31.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.655.57 2005 23.917.39 16.89 27.325.69 422.55 (4.88 40.04 9.22 1.783.573.4 12012.995.972.650.41 73.5 77399.414.06 15.34 7.2 8437.447.188.060.57 28. 8.009.02 Bank Balance Other C.79 9.81 3.23 10.20 77.6 26720.
00 50.000.000.000.00 20.000.00 70.00 1 2 3 4 5 Current Assets Current Liability WorkingCapital 57 .00 60.000.00 10.000.000.00 40.000.00 30.000.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.00 80. C hartTitle 90.
Ratio analysis facilitates the presentation of the information of financial statement in simplified. investors. Ratio analysis is a very powerful analytical tool useful for measuring performance of an organization. to make an evaluation of certain aspects of the firm’s performance. The following ratio may be calculated for the purpose of analyzing the working capital of Hindalco: Liquidity Ratio Leverage Ratio Turnover Ratio Profitability Ratio Liquidity Ratio 58 . Ratios depict the areas in which a particular business is competitively advantaged or disadvantaged through comparing ratio to those of other businesses of the same size within the same industry. Ratio analysis is a process of comparison of one figure against another. which make a ratio. creditors etc. Ration analysis concentrates on the interrelationship among the figures appearing in the financial statements. Ratios normally pinpoint a business firm’s strengths and weakness in two ways: Ratio provide an easy way to compare present performance with past.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. concise and summarized from ratio are the systematic numerical calculation of the relationship of one fact with other to measure the profitability. RATIO ANALYSIS A Ratio is a quotient of two numbers and the relation expressed between two accounting figures is known as accounting ratio. The calculation of ratio is a relatively easy and simple task but the proper analysis and interpretation of the ratio can be made only by the skilled analyst. Ratio analysis allows interested parties like shareholders. The ratio analysis helps the management to analyze the past performance of the firm and to make further projection. operational efficiency and financial soundness of the business.
25 73. quantitative and qualitative concepts.181.764.40 78.368.537.69 Current Liability 10.32 1.862.783. A current ratio of 1.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.74 1.027.93 31. Hence the liquidity position of the Hindalco for the three years (2004.49 77.57 44..007. Current Assets Current Ratio = Current Liability Year 2004 2005 2006 2007 2008 Current Assets 28.88 Ratio(CA/CL) 2.07 Current Ratio for the Year 2004-2008 3 2 1 0 1 2 3 4 5 Ratio(CA/CL) s e m i T Year Interpretation The ideal current ratio is 2: 1.93 2. structure and utilization of liquid assets and in the qualitative aspects. Current Ratio This ratio measures the solvency of the company in the short term. The corporate liquidity has two dimension viz. Current assets are those assets which can be converted into cash within a year. It refers to the ability to pay in cash. 06.527. & 08) is gone well and 59 . A current ratio of 2:1 indicates a highly solvent position.18 25.516. Liquidity is defined as the ability to realize value in money.85 38. Current liabilities and provisions are those liabilities that are payable within a year.78 2.28 40. it is the ability to meet all present and potential demands on cash from any source in a manner that minimizes cost and maximizes the value of the firm. the most liquid of assets. The quantitative aspect includes the quantum. the obligation that are due.33:1 is considered by banks as the minimum acceptable level for providing working capital finance.
in year 2005.181.18 25.50 1 2 3 4 5 Ratio(CA/CL) s e m i T Year Interpretation The ideal liquidity Ratio is 1. But.83.00 0.07 32. 0.527.019.63 Current Liability 10.949.72 Quick Ratio for the Year 2004-2008 2.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. satisfactory.50 1. the quick ratio is 0.85 38. the other current asset must be sufficient to meet other current liabilities.28 40. Quick Ratio Quick ratio is used as a measure of the company’s ability to meet its current obligations. Cash Ratio 60 . In year 2005 and 2007 the current ratio is 1. Liquidity position of Hindalco for two years is quite satisfactory. Liquid Assets Quick Ratio = Current Liability Liquid Asset = Current Assets.Inventories Year 2004 2005 2006 2007 2008 Liquid Assets 16.93 31.14 21. This does not show a good sign for the enterprise because it shows that company is not able to meet its current liabilities on time.88 Ratio(LA/CL) 1.630.076.007.78 and 1.86 0.72 which is not satisfactory figure.61 0.86 and 0.537.02 0.61 34.26 27. 2007 and 2008. Since bank overdraft is secured by the inventories.93 which is unsatisfactory for Hindalco.368.537. Hence.83 1.00 1.
50 1 2 3 4 5 s e m i T Ratio(CMS/CL) Year Interpretation The cash position of the company for the year 2004 and 2008 is marvellous but if we see for the year 2005.623.181.00 0. 2006 & 2007 are not good.183.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.537.698.39 14. they may be included in the computation of the cash ratio.50 2. While debt finance is a cheaper source of finance but it is riskier also.00 1.93 31. This shows that company is not able to meet its current liability but there is nothing to be worried about the small amount of cash available with the Industry as in India.50 1. like bankers and raw material suppliers.23 Cash Ratio for the Year 2004-2008 2.28 40. Cash + Marketable Security Cash Ratio = Current Liabilities Year 2004 2005 2006 2007 2008 Cash +Marketable Security 23. are more 61 .50 1.18 25.68 0.389. Cash ratio is the relationship between cash and current liabilities since cash is the most liquid asset. therefore.67 20.007.562.58 0.25 0.368.40 Current Liability 10. financial institution and can easily draw cash. These ratios help in assessing the risk arising from the use of debt capital. firms have credit limits sanctioned from banks.88 Ratio(CMS/CL) 2. A leverage ratio reveals the firm’s ability to meet its obligations in long run.85 38. Trade investment or marketable securities are equivalent of cash. Leverage Ratio Leverage refers to the use of debt finance. The short term creditor.527.43 46.42 21.
35 29.36 D e b t E q u ity R a tio fo r th e Y e a r 2 0 0 -2 0 0 8 4 0. and vice-versa.75 96.30 0. Long Term Debt Debt Equity Ratio = Shareholders Fund Year 2004 2005 2006 2007 2008 Long –term debt 17.50 0. If the proportion of debt to equity is low.20 0. are more concern with the firm’s long term financial strength. like debenture holders.03 62.259. The higher the gearing.054.579 76.665. long term creditors. financial institutions etc. power etc.60 0. fertilizer.37 174.40 0.062.23 Shareholders Fund 68. In fact.523.3 0.102.358.180.15 Ratio(LTD/SF) 0. a firm should have a strong short as well as long term financial position. Debt Equity Ratio This ratio indicates the relationship between loan funds and net worth of the company. A debt-equity ratio of 2:1 is the norm accepted by financial institutions for financing of projects.52 124. On the other hand.25 0. which is known as ‘gearing’.39 0. the more volatile the return to the shareholders.52 0.47 64. concern with the firm’s current debt paying ability. Higher debt-equity ratio of 3:1 may be permitted for highly capital intensive industries like petrochemical.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.480.10 1 2 3 4 5 s e m i T Ratio(LTD/ SF) Year Interpretation 62 .38 28. a company is said to be low geared.
00 2.957.66 188. Total Asset Total Asset to Debt ratio = Long Term debt Year 2004 2005 2006 2007 2008 Total Assets 114.59 308.38 28.47 64. investment by the proprietors is low.43 151.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.98 Total Assets to Debt Ratio for the Year 2004-2008 7.00 1 2 3 4 5 s e m i T Ratio(TA/LTD) Year Interpretation 63 . In other words.35 29.00 6. From the year 2004 to 2008 the debt equity ratio is good.63 3.89 4.12 6. has good borrowing power.61 Long Term Debt 17.03 62.523.399.259.23 Ratio(TA/LTD) 6.888.713.054.00 3.480.00 5. it means that Hindalco Industries Ltd.77 249.102. Total Assets to Debt Ratio Total assets to debt equity ratio establishes a relationship between total assets and total long term debt it measures the safety of margin available to the providers of long term debt and extend to which debt is covered by the assets.00 1.00 4.65 5.144. A higher ratio represents higher security to lenders for extending long term loans to the business on the other hand a low ratio represents a risky financial position as it mean that the business depends heavily on the outside loans for its existence.
888.713.61 Ratio(SF/TA) 0. In the FY 2004 to 2008.24 Proprietary Ratio for the Year 2004-2008 0. ratio reveals that the Hindalco Industry Ltd.20 1 2 3 4 5 Ratio(SF/TA) s e m i T Year Interpretation In the FY 2004.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.51 0.59 308.60 0.399.180.66 188.51 0.957.43 151. Reserves earmarked specifically for a particular purpose should not be included in calculation of net worth.15 Total Assets 114. the better it is.37 174. Equity Ratio It is the relationship between capital employed and total assets.50 0.77 249.062. the ratio reveals that the Hindalco Industry Ltd. A high proprietary ratio is indicative of strong financial position of the business. has a good safety margin available to the creditors.60 0. The higher the ratio. Shareholder Fund Proprietary Ratio = Total Assets Year 2004 2005 2006 2007 2008 Shareholder Fund 68.40 0.579 76.358.52 124.75 96.2008. Capital Employed Equity ratio = 64 .665. has strong financial position for the business.80 0. Proprietary Ratio It expresses the relationship between shareholder’s net worth and total assets.144.
which shows a consistency in past five years.370. Net Worth Year 2004 2005 2006 2007 2008 Capital Employed 104.68 1.64 1.062.25 125. which in turn means better profitability ratio. Activity or Turnover Ratio Asset management ratios measure how effectively the firm employs its resources. Higher turnover ratio means. 1.52 1.55 respectively.74 270. 1.52.52 124.64.37 174.73 Net Worth 68.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.inventories. better use of resources. 184.108.40.206 1.180.40 1 2 3 4 5 Ratio(CE/NW) Year Interpretation In the FY 2004 to 2008.665.49 209.78 96.50 1.55 Equity Ratio for the year 2004-2008 1. Asset management ratios are used to measure the speed with which various accounts are converted into sales or cash.579 76.030. the ratios are 1.68 & 1. 65 .60 s e m i T 1.962. fixed assets etc.15 Ratio(CE/NW) 1.73 157.880.70 1. These ratios are also called as ‘activity or turnover ratio’ which involve comparison between the level of sales and investments in various accounts. debtors.358.
08 Inventory turnover Ratio for the Year 2004-2008 6.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.52 4. It is important to ensure that the level of stock s is kept as low as possible.01 47.967.83 17.00 3.00 2.00 1. consistent with the need to fulfill customers’ orders in time.76 183.66 5.51 113.10 Ratio(NS/AI) 5. The higher the stock turnover rate or the lower the stock turnover period the better. Hindalco should pay more attention to maintain the stability of this ratio.31 32.348.52 95.964. There is fluctuation in the inventory turnover ratio.232. Net Sales Inventory Turnover ratio = Average Inventory Year 2004 2005 2006 2007 2008 Net Sales 62.27 Average Inventory 10.066. Inventory Turnover Ratio A considerable amount of a company’s capital may be tied up in the financing of raw material.35 4. Debtor Turnover Ratio 66 .129.052. although the ratio vary between companies.34 3. work-in-progress and finished goods.829.010.00 1 2 3 4 5 s e m i T Ratio(NS/AI) Year Interpretation A high inventory turnover ratio indicates brisk sales.88 192.03 42.00 5.083.00 4.
76 183.22 Ratio(NS/SD) 16. The shorter the collection period the better it is and vice-versa.00 1 2 3 4 5 Ratio(NS/SD) s e m i T Year Interpretation The higher the ratio it is better for the company and shows the efficiency of management. It measures whether the amount of resources tied up in debtors is reasonable and whether the company has been efficient in converting debtors into cash.17 12. The higher the ratio.00 10. Average Collection Period It establishes the relationship between number of days in a year (360 days) and debtor turnover ratio.52 95.650.083.484.27 Debtors Turnover Ratio for the Year 2004-2008 20.97 Ratio(360/DTR) 21 days .232. Net sales Debtor turnover ratio = Sundry Debtor Year 2004 2005 2006 2007 2008 Net Sales 62. of days 360 67 Debtors Turnover Ratio 16.88 192.129.02 15.67 12.88 9.010.27 Sundry Debtor 5.01 15.873.51 113.045. the better the position. The company shows the fluctuating order of this ratio from the year 2004-2008 but in year 2004 it shows more satisfactory collection of debt.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. 360 Average Collection Period = Debtor turnover Ratio Year 2004 No.97 7.13 7.611.00 5.13 12.964.00 15.
129.88 9.39 19.51 113.81 Ratio(NS/WC) 3.21 37.27 46 days 39 days 30 days 29 days Average Collection period for the Year 2004-2008 50 40 30 20 10 0 1 2 3 4 5 s y a D Ratio(360/DTR) Year Interpretation The Average collection period is approximately one month from 2004 to 2008 except in the FY 2006.39 4.508.144.582. Net Sales Working Capital Turnover Ratio = Working Capital Year 2004 2005 2006 2007 2008 Net Sales 62.232. One month collection period is short duration hence.52 95.88 192. Working Capital Turnover Ratio This ratio indicates the extent of working capital turned over in achieving sales of the firm.964. it is good and satisfactory. But a very high ratio may indicate over trading.325.74 68 .76 183.it is the whole of the working capital that leads to sales. 2005 2006 2007 2008 360 360 360 360 7.75 4.93 4.010.13 12.32 41.17 12.55 40. Higher the ratio better it is.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. It shows the efficiency or inefficiency in the use of the entire working capital and not merely a part of it viz. capital invested in stock.500.86 2.083.working capital being inadequate for the scale of operation.27 Working Capital 18.
25 30.456.88 192.256.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. So profitability of these years is lower than other years.06 Net Sales 62.86 21. shareholders fund etc.00 3.76 183.27 Ratio(GPx100/NS) 20% 20% 18% 19% 16% 69 .00 2.00 5. Profitability ratio are measured with reference to sale. total asset employed.132. Working Capital Turnover Ratio fot the Year 2004-2008 6.232.69 19. asset management and debt management on operating results.00 1. Gross Profit Ratio The gross profit represents the excess of sales proceeds during the period under observation over their cost.046. before taking into account administration.00 4.083. capital employed.010.964. The profitability ratio shows the combined effects of liquidity. 07 & 08 it was higher.026. Profitability Ratio The purpose of study and analysis of profitability ratios are to help assessing the adequacy of profit earned by the company and also to discover whether profitability is increasing or declining. Gross Profit Gross Profit Ratio = x100 Net Sales Year 2004 2005 2006 2007 2008 Gross Profit 12.51 113.52 95.00 1 2 3 4 5 s e m i T Ratio(NS/WC) Year Interpretation Working Capital turnover ratio in years’ (2004 & 06) is satisfactory because it is under control but in year 2005.75 35. selling and distribution and financing charges.129.
interest is charged above the line while dividends are deducted below the line. the sale does not increase with the same proportion. It is continuously decreasing because cost of goods sold is continuously increasing in the same period.39 Net Sales 62. 2005-06. Gross Profit Ratio for the Year 2004-2008 25% 20% 15% 10% 5% 0% 1 2 3 4 5 g a t n c r e P Ratio(GP*100/NS) Year Interpretation In the FY 2003-04. 20%.25 28.389. As the raw material consumption has increased. This is not good for the enterprise.555.57 16.29 13.964. The convection is to express profit after tax and interest as a percentage of sales.293. Net Profit Ratio The ratio is designed to focus attention on the net profit margin arising from business operations before interest and tax is deducted. Net Profit Net profit Ratio = x100 Net Sales Year 2004 2005 2006 2007 2008 Net Profit 8. 2004-05.76 183.52 95.010.609.88 192.27 Ratio(NPx100/NS) 14% 14% 15% 14% 15% 70 .129.51 113.643.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.083. 2006-07 and 2007-08 the gross profit ratio are 20%. 19% and 16% respectively.232. A drawback is that the percentage which result varies depending on the source employed to finance business activity. 18%.50 25.
Operating Profit Ratio It shows the percentage of operating profit earned on the sales. Higher the operating profits ratio. Net Profit Ratio for the Year 2004-2008 16% 15% 14% 13% 12% 1 2 3 4 5 Ratio(NP/NS) g a t n c r e P Year Interpretation In the FY 2003-04 to 2007-08 net profit ratios are almost constant in each 5 years. It is the indicator of overall efficiency of the business. Operating profit Operating Profit Ratio = Net Sales x100 71 . It helps in determining the operational efficiency of the business. but the sales didn’t increase in the same proportion. This is because the raw material consumption has increased. better the position of the business.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.
Return on Total Asset The profitability of the firm is measured by establishing relation of net profit with the total assets of the organization.76 183.957.52 95.129.713.51 113.293. Year 2004 2005 2006 2007 2008 Operating Profit 15.765 26.399.964. 22% and 18% respectively.88 192.27 Ratio(OPx100/NS) 24% 24% 23% 22% 18% Operating Profit Ratio for the Year 2004-2008 30% 20% 10% Ratio(OP*100/NS) 1 2 3 4 5 g a t n c r e P 0% Year Interpretation In the FY 2003-04 to 2007-08 the operating profit ratios are 24%. 24% 23%.59 308.051 40.43 151.61 Ratio(NPx100/TA) 7% 9% 9% 10% 9% 72 . Net Profit Return on Total Assets = x100 Total Assets Year 2004 2005 2006 2007 2008 Net Profit 8.389.150 34.888.144.39 Total Assets 114.66 188.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.011 Net Sales 62.232.083.57 16.25 28.555.643.010.609. This shows the operational efficiency of the enterprise as it keeps on going downward.77 249.50 25.29 13.003 22. This ratio indicates the efficiency of utilization of asset in generating revenue.
29 13.73 157.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.643. 9%.176. The strategic aim of business enterprise is to earn a return on capital.57 16. the return in the long-run is not satisfactory. This seems good for the enterprise as the capital is employed very efficiently. then the deficiency should be corrected or the activity be abandoned for a more favorable one.39 Capital Employed 104.370. Net Profit Return on Investment = Capital employed Year 2004 2005 2006 2007 2008 Net Profit 8.030.389. 9%. Return on Total Assets for the Year 2004-2008 12% 10% 8% 6% 4% 2% 0% 1 2 3 4 5 g a t n c r e P ratio(NP/TA) Year Interpretation In the FY 2003-04 to 2007-08 Return on Total assets are7%.74 270. Return on Investment This ratio is also called as Return on capital Employed (ROI).50 25.25 125.25 28.880.609.555.962.293. If in any particular case. 10% & 9% respectively.73 Ratio(NPx100/CE) 8% 11% 11% 12% 11% 73 .49 209.
57 16.78 96.643.609. 11%.579 76. 11%.358.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. the measure is based on historical net worth and will be high for old plants and low for new plants. Net Profit Return on Equity = x100 Net Worth Year 2004 2005 2006 2007 2008 Net Profit 8.062. However.180.555. The ratio shows that the sources are being utilized efficiently. 12% & 11% respectively.29 13. they want to assess the rate of return in order to decide whether to continue with their investment. The factor which motivates shareholders to invest in a company is the expectation of an adequate rate of return on their funds and periodically.52 124.389.293.50 25.25 28. Return on Equity This ratio is an important yardstick of performance for equity shareholders since it indicates the return on the funds employed by them.39 Net Worth 68.37 174.665.15 Ratio(NPx100/NW) 12% 17% 17% 21% 16% 74 . Return on Investment for the Year 2004-2008 14% 12% 10% 8% 6% 4% 2% 0% 1 2 3 4 5 g a t n c r e P Ratio(NP/CE) Year Interpretation In the FY 2004 to 2008 the ratios are 8%.
643. EPS is one of the major factors affecting the dividend policy of the firm and the market price of the company. A higher EPS means better capital productivity. Earnings per Share (EPS) The objective of financial management is wealth or value maximization of a corporate entity.130.628.486 1.192 Ratio(NP/No.839.293.57 16.of equity share) 90.227.31 75 . Of Equity Shares Net Profit after Tax and Preference Dividend 8.39 Year 2004 2005 2006 2007 2008 No.43 143.50 25. Return on Equity for the Year 2004-2008 25% 20% 15% 10% 5% 0% 1 2 3 4 5 g a t n c r e P Ratio(NP/NW) Year Interpretation From the FY 2003-04 to 2007-08 the ratio reveals that the shareholder’s funds are being utilized very efficiently year by year.25 28.80 24.043.29 16. Growth in EPS is more relevant for pricing of shares from absolute EPS.774. The value is maximized when market price of equity share is maximized.508. A steady growth in EPS year after year indicates a good track of profitability. Net Profit after Tax Earnings per Share = No.57 23.555.609.29 13.228 1.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. of Equity Shares 92.797 985.774.797 92.
57 and 23.80. 143. 24.31 respectively. of Equity Shares) s e m i T Year Interpretation From the FY 2003-04 to 2007-08. 16.00 100.43. ratios are 90. It seems to be strengthening the shareholders faith to the enterprise.29.00 1 2 3 4 5 Ratio(NP/No. EPS for the Year 2004-2008 200.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.00 150.00 50. 76 . It is due to increase in net profit.
77 . The terms and conditions on which the company has given guarantees for loans taken by its Subsidiaries and joint ventures from banks and financial institutions are not prima facie prejudicial to the interest of the company. 2.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. SUGGESTIONS Following suggestions can be drawn from the study made: 1.
Its net consolidated revenue registered a quantum leap.. It also has good leverage ratios as it has debt equity of 0. acquired by the Company on 16. Of the revenues.12. The growth in 2007-08 looks particularly impressive because of the acquisition of Novelis Inc. company recorded a commendable performance in a very difficult year fraught with several challenges such as. Hindalco has also become the world’s largest rolling company. touching US$ 15 billion (Rs.340 crores). reduced duty protection. was able to maintain high realization largely because it focuses on specialty business as well as prudent makes of forward contract and spot sales. CONCLUSION Hindalco has shown robust top line growth over the past 5 years.7. Despite falling alumina prices in the international market. although there are some fluctuations in last 5 years. up by 211% and EBITDA at US$ 1. With the acquisition of Novelis. the underlying strength of business operations and project management capabilities.000 crores) came from aluminium business while copper accounted for US$ 3 billion (Rs. which means Hindalco industries ltd. Reducing the raw material conversion period can better control Inventories. It has good liquidity position to meet it current dues. acute cost push and increasing competition. 78 . has shown a continuous increment in the profit from the FY 2005-06 to FY 2007-08.05. Hindalco industries ltd.adverse currency movement.013 crores). To sum up. has a very good borrowing capacity to meet its long term financing problems. and successful implementation of a well thought out strategic plan for quantum growth supported by a strong balance sheet and robust cash flow from existing operations. This performance is testimony to the sound business models of our Aluminium and Copper business.8 billion (Rs.47.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD.60. Hindalco Industries Ltd.2007 through its wholly-owned overseas subsidiaries. stable and capable processes.291 crores) rose by 50%. Turnover ratios are also good which shows that the resources are being utilized properly. Going forward. the Novelis acquisition as well as the thrust on increasing value added domestic sales is expected to de-risk the overall business model and improve predictability and sustainability of profit and cash flow. Hindalco Industries Limited has shown a sterling performance.36 in the FY 2007-08. over US$ 12 billion (Rs. The profitability ratios are also good. a foreign subsidiary.
com Google. REFERENCE WEBSITES: Moneycontrol.com Hindalco.WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. S N Maheshwari ANNUAL REPORTS: 2008-09 of Hindalco 79 . Prasanna Chandra Introduction to Financial Accounting. I. M Pandey Financial Management.com Adityabirla.com BOOKS: Financial Management.
WORKING CAPITAL MANAGEMENT OF HINDALCO INDUSTRIES LTD. 80 .
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