Professional Documents
Culture Documents
Summer Training Repor1
Summer Training Repor1
On
Project Title:-
Working Capital Management
Submitted in partial fulfillment of the requirements of
Graduate Programme
BY
Lakshya Sharma
(MBA)
Acknowledgement
First of all I would like to express my gratitude to Mr. N.C. Jain (Asst. Vice
President, Finance) who despite his tight schedule spared time for
discussions and informed about basic groundwork and direction without
whose support, this report would not have been possible. I appreciate him of
giving me an option of selecting such a wonderful project. The learning has
been immense for me from this project.
I am thankful to all employees at Shree Cement Ltd. for providing me all the
information and help I required for completion of this project. I am highly
grateful to the management at Shree Cement Ltd. for giving me this
opportunity to work on a dream project and in the process harness myself
with the huge learning on all aspects.
I would like to give credit to all sources form where I have drawn material for
this project.
Sr. No. Particulars
Policies
3 Research Methodology
Method of Assessment
7 Approaches to Lending
8 Other Modes of Financing
13 Bibliography
14 Comments
COMPANY PROFILE
Other including
Indian Public
7%
Directors and
Their Relatives
64%
The company continues to be one of the most operationally efficient and energy
conserving cements producers in the world. Its mission statement is;
To sustain its reputation as the most efficient cement manufacturer in the world.
To drive down costs through innovative plant practices.
To increase the awareness of superior product quality through a realistic and
convincing communication process with consumers.
To strengthen realizations through intelligent brand building.
Shree caters to cement demand arising in Rajasthan, Delhi, Haryana, UP and Punjab.
What is strategic for SCL is that it is located in central Rajasthan so it can cater to the
entire Rajasthan market with the most economic logistics cost. Also, Shree Cement is the
closest plant to Delhi and Haryana among all cement manufacturers in its state and
proximity to these profitable cement markets renders the company an edge over other
cement companies of the company in terms of lower freight costs.
SCL has a 99 MW captive thermal power plant, which has achieved over 90 per cent load
factor. In 2000-01, the company has succeeded in substituting conventional coke with
100 per cent pet coke, a waste from refineries, as primary fuel resulting in lower
inventory and input costs.
In the past two years the price of coal has gone up. Earlier dependent on good quality
imported coal, the company's switch to pet coke could not have come at a better time.
The company also replaced indigenous refractory bricks with imported substitutes,
reducing its consumption per tonne of clinker.
The company has one of the most energy efficient plants in the world. The captive plant
generates power at a much lower cost of Rs 2.5 per unit (excluding interest and
depreciation) as compared to over Rs 5 per unit from the grid. In appreciation of its
achievements in Energy sector, the Company has been awarded the prestigious 'National
Energy Conservation Award" for the year 1997. Shree is rated best by Whitehopleman, an
international agency specializing in the rating of cement plants
PRODUCTS
1 Shree Ultra Red Oxide Jung Rodhak Cement (ROC)
2 Bangur Cement
3 Tuff Cemento
Markets classification
Markets States
Primary Rajasthan
Delhi, Punjab, Jammu and Kashmir, Haryana, Western
Secondary
U.P. and Uttaranchal
Tertiary Gujarat, M.P. and Central U.P.
Policies
Quality Policy:
Energy Policy:
Water Policy:
Environment Policy:
To ensure:
Clean, green and healthy environment
Efficient use of natural resources, energy, plant and equipment
Reduction in emissions, noise, waste and greenhouse gases
Continual improvement in environment management
Compliance of relevant environmental legislation
To ensure good health and safe environment for all concerned by:
Promoting awareness on sound health and safe working practices
Continually improving health and safety performance by regularly
setting and reviewing objectives & Targets
Identifying and minimizing injury and health hazards by effective
risk control measures
Complying with all applicable legislations and regulations
30
24
24
22
20
19
18
18
18
18
16
12
12
10
8
8
6
7
5
0
Rajasthan Delhi Haryana Punjab Uttaranchal
a) Non-trade Network
Consumers
Teamwork
Shree leverages effective team working to generate a sustainable
improvement.
Culture of Innovation
Shree believes that what is good can be made better -across the organization.
Customer Focus
Shree is committed to deliver a superior quality of cement at attractively
affordable prices.
Shareholder Value
Shree is focused on the enhancement of value through a number of strategic
and business initiatives that generate larger and a better quality of earnings.
Community and Environment Shrees community concern extends from direct
assistance to safe and dependable operations for its members and the
environment.
PRIMARY
The following are the primary datas collected for the study
SECONDARY
The following are the secondary datas collected for the study
Internal data: These are all the companies own data which they
provided like organization structures , balance sheet , annual report
etc.
External data: These are all the datas relating to the company or
organization derived from external sources such as internet and other
types of media services that give a wide picture of the organization
with respect to the external work.
Thus, the first, and most critical, use of working capital is providing the
ongoing investment in short-term assets that a company needs to operate.
Working capital financing is a key financing need and challenge for small
firms. Small businesses have less access to long-term sources of capital than
large businesses, including limited access to equity capital markets and
fewer sources of long-term debt. Thus, many small firms are heavily
dependent on short-term debt, much of which is tied to working capital.
However, limited equity and reliance on short-term debt increases the
demand on a firms cash flow, reduces liquidity, and increases financial
leverageall of which heighten the financial risks of extending credit.
Consequently, small firms may have trouble raising short-term debt while at
the same time facing obstacles to securing the longer-term debt necessary to
improve their financial position and liquidity, and lessen their credit risk.
Development finance has an important role in addressing this problem,
either by offering working capital loans when private loans are not available
or by providing debt terms that reduce a firms financial risk and help it
access private working capital financing.
Forms of Working Capital Financing
Line of Credit
A line of credit is an open-ended loan with a borrowing limit that the
business can draw against or repay at any time during the loan period. This
arrangement allows a company flexibility to borrow funds when the need
arises for the exact amount required. Interest is paid only on the amount
borrowed, typically on a monthly basis.
A line of credit can be either unsecured, if no specific collateral is
pledged for repayment, or secured by specific assets such as accounts
receivable or inventory. The standard term for a line of credit is 1 year with
renewal subject to the lenders annual review and approval. Since a line of
credit is designed to address cyclical working capital needs and not to
finance long-term assets, lenders usually require full repayment of the line of
credit during the annual loan period and prior to its renewal. This repayment
is sometimes referred to as the annual cleanup.
Two other costs, beyond interest payments, are associated with
borrowing through a line of credit. Lenders require a fee for providing the
line of credit, based on the lines credit limit, which is paid whether or not
the firm uses the line. This fee, usually in the range of 25 to 100 basis points,
covers the banks costs for underwriting and setting up the loan account in
the event that a firm does not use the line and the bank earns no interest
income.
A second cost is the requirement for a borrower to maintain a
compensating balance account with the bank. Under this arrangement, a
borrower must have a deposit account with a minimum balance equal to a
percentage of the line of credit, perhaps 10% to 20%.
Consider a line of credit for Rs.10 lakhs at a 10% interest rate with a
20% compensating balance requirement. When the company fully draws on
the line of credit, it will have borrowed Rs.10 lakhs but must leave Rs.200,
000 on deposit with the lender, resulting in net loan proceeds of Rs.800, 000.
However, it pays interest on the full Rs.10 lakhs drawn. Thus, the effective
annual interest rate is 12.5% rather than 10% (one years interest is Rs.100,
000 or 12.5% of the Rs.800, 000 in net proceeds).
Factoring
Factoring entails the sale of accounts receivable to another firm,
called the factor, who then collects payment from the customer. Through
factoring, a business can shift the costs of collection and the risk of non-
payment to a third party. In a factoring arrangement, a company and the
factor work out a credit limit and average collection period for each
customer. As the company makes new sales to a customer, it provides an
invoice to the factor. The customer pays the factor directly, and the factor
then pays the company based on the agreed upon average collection period,
less a slight discount that covers the factors collection costs and credit risk.
Factoring has several advantages for a firm over straight accounts receivable
financing.
On the other hand, factoring costs may be higher than a direct loan,
especially when the firms customers have poor credit that lead the factor to
charge a high fee. Furthermore, once the collection function shifts to a third
party, the business loses control over this part of the customer relationship,
which may affect overall customer relations, especially when the factors
collection practices differ from those of the company.
Inventory Financing
Term Loan
While the four prior debt instruments address cyclical working capital needs,
term loans can finance medium-term non-cyclical working capital.
A term loan is a form of medium-term debt in which principal is repaid over
several years, typically in 3 to 7 years. Since lenders prefer not to bear
interest rate risk, term loans usually have a floating interest rate set between
the prime rate and prime plus 300 basis points, depending on the borrowers
credit risk. Sometimes, a bank will agree to an interest rate cap or fixed rate
loan, but it usually charges a fee or higher interest rate for these features.
Term loans have a fixed repayment schedule that can take several forms.
Level principal payments over the loan term are most common. In this case,
the company pays the same principal amount each month plus interest on
the outstanding loan balance.
A second option is a level loan payment in which the total payment amount
is the same every month but the share allocated to interest and principle
varies with each payment.
Finally, some term loans are partially amortizing and have a balloon
payment at maturity.
1.1 Previously working capital finance provided by the banks to trade and
industry was regulated by the Reserve Bank of India through a series of
guidelines/instructions issued. There were various quantitative and
qualitative restrictions on banks lending. The banks were also expected to
ensure conformity with the basic financial disciplines prescribed by the RBI
from time to time under Credit Authorization Scheme (CAS).
1.2 However, consistent with the policy of liberalisation and financial sector
reforms, several indirect measures to regulate bank credit such as exposure
norms for lending to individual/group borrowers, prudential norms for
income recognition, asset classification and provisioning for advances,
capital adequacy ratios, etc. were introduced by RBI and greater operational
freedom has been provided to banks in dispensation of credit.
1.3 Banks are now expected to lie down, through their boards, transparent
policies and guidelines for credit dispensation, in respect of each broad
category of economic activity, keeping in view the credit exposure normsand
various other guidelines issued by the Reserve Bank of India from time
The faster a business expands the more cash it will need for working
capital and investment. The cheapest and best sources of cash exist as
working capital right within business. Good management of working capital
will generate cash will help improve profits and reduce risks. The cost of
providing credit to customers and holding stocks can represent a substantial
proportion of a firm's total profits.
There are two elements in the business cycle that absorb cash
If you can get money to move faster around the cycle (e.g. collect monies
due from debtors more quickly) or reduce the amount of money tied up (e.g.
reduce inventory levels relative to sales), the business will generate more
cash or it will need to borrow less money to fund working capital. As a
consequence, you could reduce the cost of bank interest or you'll have
additional free money available to support additional sales growth or
investment. Similarly, if you can negotiate improved terms with suppliers
e.g. get longer credit or an increased credit limit; you effectively create free
finance to help fund future sales.
3.1.1 The revised guidelines in respect of borrowers other than SSI units,
requiring working capital limits above Rs.1 crore and for SSI units requiring
fund based working capital limits above Rs.5 crore, from the banking system
bestow greater level of flexibility to the primary (urban) co-operative banks
in their day-to-day operations without diluting the prudential norms for
lending as prescribed by Reserve Bank of India.
a). The turnover method, as prevalent for small borrowers may be used as a
tool of assessment for this segment as well,
b). Since major corporates have adopted cash budgeting as a tool of funds
management, banks may follow cash budget system for assessing the
working capital finance in respect of large borrowers.
c) The banks may even retain the concept of the MPBF with necessary
modifications.
3.2.2. Reserve Bank of India no longer prescribes detailed norms for each
item of inventory as also of receivables.
3.3.2 Banks may also consider evolving suitable internal guidelines for
accepting the projections made by their borrowers relating to the item
"Sundry Creditors (Goods)" appearing as an item under "Other Current
Liabilities" in the balance sheet.
To meet the contingencies, banks may decide on the quantum and period for
granting ad hoc limits to the borrowers based on their commercial judgments
and merits of individual cases. While granting the ad hoc limits the banks
must ensure that the aggregate credit limits (inclusive of ad hoc limits) do
not exceed the prescribed exposure ceiling.
3.9.1 Background
i. The ground rules for sharing of cash credit and loan components may
be laid down by the consortium, wherever formed, subject to the
stipulations contained in paragraph 3.9.2 above.
ii. The level of individual bank's share shall be governed by the norm for
single / group borrowers credit exposure.
Banks are allowed to fix separate lending rates for 'loan component' and
'cash credit component'.
The minimum period of the loan for working capital purposes may be fixed
by banks in consultation with borrowers. Banks may decide to split the loan
component according to the need of the borrower with different maturity
bases for each segment and allow roll over.
3.9.6 Security
In regard to security, sharing of charge, documentation, etc., banks may
themselves decide on the requirements, if necessary, in consultation with the
other participant banks.
Export credit limit would be allowed in the form hitherto granted. The
bifurcation of the working capital limit into loan and cash credit
components, as stated in paragraph 3.9.2 (i) above, would be effected after
excluding the export credit limits (pre-shipment and post-shipment).
Bills limit for inland sales may be fully carved out of the 'loan component'.
Bills limit also includes limits for purchase of third party (outstation)
cheques/bank drafts. Banks must satisfy themselves that the bills limit is not
mis-utilised.
The banks, at their discretion, may permit the borrowers to invest their short
term/temporary surpluses in short-term money market instruments like
Commercial Paper (CP), Certificates of Deposit (CDs) and in Term Deposit
with banks, etc.
3.9.11 Applicability
Approach to lending
Approach to Lending
The committee suggested three methods of lending out of which RBI
accepted two methods for implementation. According to First Method, the
borrower can be allowed maximum bank finance upto 75% of the working
capital gap (working capital gap denotes difference between total current
assets required and amount of finance available in the shape of current
liabilities other than short term bank borrowings). The balance 25% to be
brought by the borrower as surplus of long term funds over the long term
outlay.
Methods of lending
Like many other activities of the banks, method and quantum of short-term
finance that can be granted to a corporate was mandated by the Reserve
Bank of India till 1994. This control was exercised on the lines suggested by
the recommendations of a study group headed by Shri Prakash Tandon.
The study group headed by Shri Prakash Tandon, the then Chairman of
Punjab National Bank, was constituted by the RBI in July 1974 with eminent
personalities drawn from leading banks, financial institutions and a wide
cross-section of the Industry with a view to study the entire gamut of Bank's
finance for working capital and suggest ways for optimum utilisation of
Bank credit. This was the first elaborate attempt by the central bank to
organise the Bank credit. The report of this group is widely known as
Tandon Committee report. Most banks in India even today continue to look
at the needs of the corporates in the light of methodology recommended by
the Group.
Banks can work out the working capital gap, i.e. total current assets less current
liabilities other than bank borrowings (called Maximum Permissible Bank
Finance or MPBF) and finance a maximum of 75 per cent of the gap; the
balance to come out of long-term funds, i.e., owned funds and term borrowings.
This approach was considered suitable only for very small borrowers i.e. where
the requirements of credit were less than Rs.10 lacs
Under this method, it was thought that the borrower should provide for a
minimum of 25% of total current assets out of long-term funds i.e., owned
funds plus term borrowings. A certain level of credit for purchases and other
current liabilities will be available to fund the build up of current assets and the
bank will provide the balance (MPBF). Consequently, total current liabilities
inclusive of bank borrowings could not exceed 75% of current assets. RBI
stipulated that the working capital needs of all borrowers enjoying fund based
credit facilities of more than Rs. 10 lacs should be appraised (calculated) under
this method.
Under this method, the borrower's contribution from long term funds will be
to the extent of the entire CORE CURRENT ASSETS, which has been
defined by the Study Group as representing the absolute minimum level of
raw materials, process stock, finished goods and stores which are in the
pipeline to ensure continuity of production and a minimum of 25% of the
balance current assets should be financed out of the long term funds plus
term borrowings.(This method was not accepted for implementation and
hence is of only academic interest).As can be seen above, the basic
foundation of all banks' appraisal of the needs of creditors is the level of
current assets. The classification of assets and balance sheet analysis,
therefore, assumes a lot of importance. RBI has mandated a certain way of
analyzing the balance sheets. The requirements of this break-up of assets and
liabilities differs slightly from that mandated by the Company Law Board
(CLB).
1. Commercial Papers
2. FCNR(B) Loans
3. MIBOR based loans
4. Channel Financing
Computation of Working Capital of Shree Cement
The Requirement of current assets for Shree Cement Ltd. may be calculated
as follows:
(All figures used for calculation of working capital gap are in Rs. lacs)
I. Inventory
A company's merchandise, raw materials, and finished and unfinished
products which have not yet been sold. These are considered liquid
assets, since they can be converted into cash quite easily. There are
various means of valuing these assets, but to be conservative the lowest
value is usually used in financial statements.
b. Consumable Spares :
The yearly consumption of consumable spares for the year 2008-09 was Rs.
5533 lacs .
c. Stock- in Progress :
The cost of production for 2008-09 was Rs.134492 lacs and for
the year 2009-10 it was Rs.183488lacs.
2. Receivables :
The domestic sales for the year 2008-09 were Rs.246844 lacs and the
average debt collection period in 2008-09 was 0.24 months. Now with
increased production in 2009-10, sales have risen at Rs.287529 lacs. In view
of the requirement of extending more credit to customer due to increased
quantity of sales and opening of more sales outlets, the debt collection
period has been taken as 0.25 months. Working capital requirement for this
specific item will be:
2008-09 2009-10
Domestic Sales 246844 287529
Export Sales 0 0
Total 246844 287529
2008-09 2009-10
Monthly
domestic
sale
5832 8242
2008-09 2009-10
Cash and cash
equivalents 47226 41637.4
4. Other current assets
2008-09 2009-10
Other current assets 755.2 1127.8
The requirement for Current Liabilities (other than bank borrowings) may be calculated
as follows:
was Rs.1520lacs. The average consumption for the year 2009-10 was
Rs.1680 lacs .
2008-09 2009-10
Sundry Creditors 1520 1680
Total 1520 1680
2. Statutory Liability:
This mainly contains the due sales tax. This has been estimated to be
Rs.13264 lacs and last year the same was Rs.12238 lacs.
3.Other current liabilities:
This Category includes provision for doubtful debts, dividend payable
(including corporate tax), unclaimed dividend, interest accrued but not
due etc. the value other current liabilities is generally decided on a
judgemental basis.In year 2008-09 it was Rs15242.4lacs and in year
2009-10 it was Rs 31740.5 lacs.
The amount of borrowings of Shree Cement Ltd. for the year 2008-09 is calculated
as follows: (Rs. In lacs)
Sr.No. Particulars 2008-09 2009-10
The above mentioned options for working capital financing of Shree Cement
are discussed below.
Generally, for the customers having highest credit rating and loan
requirement of more than Rs.25 Cr., the interest rate on these accounts
ranges from 9% to 12%. As Shree Cement has better credit rating, it is able
to acquire cash credit loans at lower limit of interest rate. To get it approved
to the maximum limit can be understood from financial safety point, but
total reliance on a single mode is not advisable. It may be simple in
procedure and less rigorous, but in an economic situation in which higher
inflation and higher liquidity are causing problems to financial regulators,
there are all the way chances of tightening of liquidity and bank finances.
2. Long Term Loans from banks (For Permanent Working Capital part)
The permanent working capital of Shree Cement can be determined in
a this way.
Permanent Working Capital =
(A/c Receivables) + (Inventory) (A/c Payable) (Accruals)
Term Loans
The interest rates for the long term loans are generally higher than the
short term loans. But, they reduce the future uncertainty in arranging
finances for the firm. Financing all or most of the short term financial
requirements through short term loans reflects flexible approach of the firm.
Shree Cement is a growing company and is in the process of capacity
expansion. The cement industry in India as such is going to see lot of
capacity addition in coming few years. In such circumstances, the long term
loans from banks and financial institutions could be better utilised for the
expansion plans. It will not be a good idea to finance the current
requirements through long term loans at this point of time. The prevailing
interest rates on long term loans are 12 to 15%.
Preferred Stock
One of the modes of long term finance is preferred stock. Preferred
stock represents equity of a corporation, but it is different from common
stock because it has preference over common stock in the payment of
dividends and in the assets of the corporation in the event of bankruptcy.
Preference means only that the holders of the preferred share must receive a
dividend (in the case of an ongoing firm) before holders of common shares
are entitled to anything.
Following benefits can be availed by Preference Capital:
There is no legal obligation to pay preference dividend. A company
does not face bankruptcy or legal action if it skips preference
dividend.
Preference capital is redeemable in nature. Financial distress on
account of redemption obligation is not high because periodic sinking
fund payments are not required and redemption can be delayed
without significant penalties.
FCNR (B) loans will be one of the better options available for the
company. FCNR (B) loans are available at the select branches of major
private and PSU banks.
These loans are available in Dollar, Euro, Japanese Yen and GBP. As
these rates are offered in above mentioned foreign currencies, the
fluctuations in the currency rates are a major worry in these loans.
The base rate for these FCNR loans is generally LIBOR or EURIBOR. The
following figure shows the fluctuations in the LIBOR in recent times and
predicted changes in it.
Banks generally charge a rate differential over the base rate as per the credit
rating of the borrower. As Shree Cement enjoys very good credit rating in
the financial world, it will be possible for it to get these loans at lower
differential charges.
The only concern for Shree Cement will be that it doesnt earn much of its
income in foreign currencies. Hence, it has to go for aggressive foreign
currency hedging. A hypothetical calculation for net interest rate on FCNR
loans is shown below.
= Base Rate (1.5 to 2.5 %)
Differential charges (2 %)
Hedging charges (1.5 to 2%)
Processing & other charges (1 to 1.5%)
= Net Interest will range from 5.5% to 8%.
5. Commercial Papers
The market of commercial papers in India is not developed as such. It is
believed in the industry that cement sector have almost completed its
upward journey in recent times and may follow the downward path of the
business cycle. It is all the way possible that market may not respond
enthusiastically to the commercial papers and the bonds may need to offer at
larger discount. Hence, this is not a good option at this point of time.
RESULTS AND CONCLUSIONS
Over the last few years the company has been in the expansion mode and
constantly increasing the installed capacity. The latest being the addition
of 1 MTPA clinker unit in RAS in the world record time of 367 days.
Industry situation is highly competitive within the next few years due to
major capacity additions within the last period surplus of cement may take
place on the market. This situation may result in margin cuts and price war.
For Shree Cement it should still be very comfortable because its costs are
well controlled and margin at above-the-average level. India as a second
largest cement producer in nominal terms still can count on recovery in
building industry.
Bibliography