WORKING CAPITAL ASSESSMENT OF METRO & CEMENT

SIP project report submitted in partial fulfillment of the requirements for the PGDM
Program

By: Akancha Agarwal

Roll no.: 2013012

Supervisors:

Company Guide: Mr. Amit Jain Faculty Guide: Prof. Subodh Tagare

Institute of Management Technology, Nagpur.

2013 - 15
ACKNOWLEDGEMENT

I am sincerely grateful to Reliance Infrastructure Ltd. for providing me an opportunity to do

an internship under its Project Finance Department.

I want to express my gratitude and sincere thanks to Mr. Amit Jain who guided me throughout
the project.

I am very thankful to Mr. Prateek Chaturvedi who helped me face all challenges of the project.
His deep understanding about the policies and norms was helpful throughout. His views enabled
me to gain practical insights about the subject matter of this project and the industry in general.

I hereby also take the opportunity to thank Mr. Rajat Singh for recommending me to Reliance
Infrastructure and guiding throughout the internship.

I am also thankful to my Faculty Guide Prof. Subodh Tagare, IMT Nagpur who acted as
guiding beacon for my project.

Last but not the least I would like to express my heartfelt gratitude to all employees of Reliance
Infrastructure for their support in making this project truly successful.

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Page 2
Table of Contents
ACKNOWLEDGEMENT ............................................................................................................................................. 1
COMPLETION CERTIFICATE ................................................................................................................................... 2
EXECUTIVE SUMMARY ........................................................................................................................................... 4
INTRODUCTION ......................................................................................................................................................... 5
DESCRIPTION OF CONCEPT/MODELS ................................................................................................................... 7
COMPANY ANALYSIS ............................................................................................................................................ 13
CASE STUDIES ......................................................................................................................................................... 15
APPENDICES ............................................................................................................................................................. 34
BIBLIOGRAPHY ....................................................................................................................................................... 43

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 I. EXECUTIVE SUMMARY

Working capital is significant to all types of enterprises, both manufacturing and trading. Without
sufficient working capital, operations related to manufacturing would be difficult. All the
activities in an enterprise are dependent on this. The working capital management refers to the
management of current assets including short term assets like cash and bank balance, marketable
securities, receivables and inventories.

Filbeck and Krueger (2005) defined working capital management as follows: “it is the difference
between resources in cash or readily convertible into cash (Current Assets) and organizational
commitments for which cash soon will be required (Current Liabilities)”.

The first part of the project provides an insight about Project Finance, Working Capital and
methods of Working Capital Assessment. It is purely based on whatever I learned at Reliance
Infrastructure and other resources available from Internet. One can have a brief knowledge about
Project Finance, Working capital and all its basics through the project.

The second part of the project provides a brief about the company, the various sectors it is
involved in and the role of Project Finance department in an organization.

The third part consists of two case studies providing the working capital assessment of projects
Reliance Metro and Cement respectively using Credit Monitoring Arrangement data. It is mainly
used to estimate the Working Capital Gap, Maximum Permissible Bank Finance and Debt
Service Coverage Ratio. The report gives my interpretations of financial statements, analysis on
the sensitivity of the projects and recommendations for both the projects.

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 II. INTRODUCTION

Project financing is an innovative and timely financing technique that has been used on many
high-profile corporate projects. Employing a carefully engineered financing mix, it has long been
used to fund large-scale projects like roads, railways, metros and Real estate.
Project Financing discipline includes understanding the rationale for project financing, how to
prepare the financial plan, assess the risks, design the financing mix, and raise the funds. A
knowledge-base is required regarding the design of contractual arrangements to support project
financing; issues for the host government legislative provisions, public/private infrastructure
partnerships, public/private financing structures; credit requirements of lenders, and how to
determine the project's borrowing capacity; how to prepare cash flow projections and use them to
measure expected rates of return; tax and accounting considerations; and analytical techniques to
validate the project's feasibility.

Project finance is finance for a particular project, which is repaid from the cash-flow of that
project. Project finance is different from traditional forms of finance because the financier
principally looks to the assets and revenue of the project in order to secure and service the loan.
In contrast to an ordinary borrowing situation, in a project financing the financier usually has
little or no recourse to the non-project assets of the borrower or the sponsors of the project. In
this situation, the credit risk associated with the borrower is not as important as in an ordinary
loan transaction; what are most important are the identification, analysis, allocation and
management of every risk associated with the project.

In a no recourse or limited recourse project financing, the risks for a financier are great. Since the
loan can only be repaid when the project is operational, if a major part of the project fails, the
financiers are likely to lose a substantial amount of money. The assets that remain are usually
highly specialized and possibly in a remote location. If saleable, they may have little value
outside the project. Therefore, it is not surprising that financiers, and their advisers, go to
substantial efforts to ensure that the risks associated with the project are reduced or eliminated as
far as possible. It is also not surprising that because of the risks involved, the cost of such finance
is generally higher and it is more time consuming for such finance to be provided.

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OBJECTIVES OF THE STUDY

 to get brief idea about Project Finance and Working Capital

 to understand the different methods of working capital assessment
 to get brief idea about the Infrastructure and Cement Sector
 to determine Maximum Permissible Bank Finance using Credit Monitoring Arrangement
data
 to evaluate Debt Service Coverage Ratio to determine if the company is viable to take
loan
 to do sensitivity analysis to get a better understanding of different scenarios
 to provide suitable recommendations
 the whole study would also provide the knowledge of difference in working capital
requirement in different types of project (here, Metro and Cement)

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 III. DESCRIPTION OF CONCEPTS/ MODELS

1. Working Capital Requirement

“Working Capital refers to firm’s investment in short term assets-cash, short term securities,
accounts receivables and inventories.”

Gross WC
Concept
Net WC
Working capital
Permanent / Regular
WC
Periodicity
Variable WC

Fig. 1: Classification of Working Capital

Gross working capital refers to the total current assets of the firm, which within an accounting
year can be converted in to cash. It primarily focuses on:
 Investment in current assets optimally
 Current assets financing
Net working capital is the net of Current Assets and Current Liabilities. Net working capacity
reflects the liquidity position of the firm. It is generally referred as working capital.

2. Operating Cycle

A manufacturing enterprise needs to maintain a given level of inventory (minimum) at any point
of time as below this level there would be disruption in the production. The minimum level of
current asset is generally called Core Current Asset level. This should constantly remain in the
business even with changes in the sales or other activity level.
Fluctuating component is the level above core current asset level and continuously changes
with change in demand, product seasonality, etc.

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The operating cycle is the total length of time required to complete the given cycle of events.

Cash

Raw
Debtors
Material

Work in
Sales
Progres

Finished
Goods

Fig. 2: Operating Cycle

3. Determinants of Working Capital

 Nature and size of business

 Manufacturing cycle
 Sales growth
 Demand conditions
 Nature of raw material used
 Production policy
 Operating efficiency and performance
 Firm’s credit policy
 Degree of synchronization among cash inflows and outflows

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4. Methods of Working Capital Assessment

Nayak Committee
Assesment of Working Capital
CMA

Cash Budget

Fig. 3: Ways of Working Capital Assessment

1. Nayak Committee states that of an acceptable sales turnover, 25% of total sales would be the
required working capital, of which 20% would be financed by the bank and the remaining 5%
would have to be the margin that is to be brought by the owner
2. CMA (Credit Monitoring Arrangement) Data, provided by the company, is always in a
prescribed format. CMA data includes the analysis of balance sheet to find out the working
capital requirements of the company and also MPBF (maximum amount of permissible bank
finance). This method is widely used method and also requires a great understanding to prepare a
CMA data of the given company
3. Cash Budget method, used specially for industries where there is seasonality in availability of
raw materials such as sugar industry. In the method mentioned, a cash budget is prepared for the
next 12 months. The cash requirements for each month are evaluated and the value which is
highest during any month becomes the working capital of the company

5. Credit Monitoring Arrangement

Credit Monitoring Arrangement (CMA) data is a significant analysis of current & projected
financial statements of a loan applicant by the banker. It helps in analyzing working capital
management of a borrower with the objective to ensure that the usage of long term and short
term fund have been made for the given purpose. CMA data generally contains 6 statements
which are as follows:

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1. Operating statement:
 This is the first statement which is provided by the borrower to indicate the
business plan of the borrower that provides the Current Sales, Direct expenses,
Indirect expenses, Profit before & after tax also the projections made for
expenses, profit position & sales for approximately 3 years based on the
borrower’s request
 This statement gives a scientific analysis of current & projected financial as well
as the profit generating capability of the borrower

2. Analysis of Balance sheet:

 This is the second statement in the data providing the detailed analysis of cash &
bank position, current & noncurrent assets, current & noncurrent liabilities, fixed
assets as well as net worth position of the borrower for the projected years
 This analysis provides a complete financial position of the borrower and cash
generating capability for the projected years

3. Comparative statement of Current Asset & liabilities:

 This is the third statement providing the comparative analysis of current assets &
current liabilities movement
 This analysis helps in deciding the actual working capital cycle during the
projected years and the capability of the borrower to meet the required working
capital

4. Calculation of (Maximum Permissible Bank Finance) MPBF: This statement provides

calculation of the working capital GAP and the finance permissible in two lending
methods: -
 First method of lending allows MPBF 75% of the net working capital GAP
(Current assets less current liabilities)
 Second method of lending allows MPBF 75% of the total current assets
The MPBF limit is the only cash credit component known as Drawing power (DP Limit)
of the borrower deciding the borrowing limit of the borrower from the bank

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 5. Fund flow statement:
 This statement analyzes the borrower’s fund position as per the working capital
analysis provided in MPBF calculations and the projected balance sheets
 The main objective is to capture the movement of funds for the given period

6. Ratio analysis: This is the last statement prepared showing key ratios and submitted to the
bank. It helps in assessing the financial position of the borrower

6. Key Ratios

Ratio analysis is used to evaluate various aspects of a company’s operating and financial
performance such as its efficiency, liquidity, profitability and solvency. The trend of these ratios
over time is studied to check whether they are improving or deteriorating. The key ratios are:

 Current Ratio (Current Assets / Current Liabilities) is a liquidity ratio which

measures the company's ability to pay its’ short-term obligations. This ratio under 1
suggests that the company would not be able to pay off its obligations if they came due at
that point
 Quick Ratio ((Current Assets – Inventories) / Current Liabilities) is a strict indicator
which determines whether a firm has sufficient short-term assets to cover its short term
liabilities without selling inventory. Any company’s ratio less than 1 suggests that they
cannot pay their immediate liabilities and should be looked at with extreme caution.
Importantly, if this ratio is much lower to the working capital ratio, then it would mean
that the current assets are highly dependent on inventory
 Proprietary ratio (Total Shareholder Equity / Total Assets) is used to calculate the
portion shareholders would receive if there is company-wide liquidation also called as the
shareholder’s contribution
 Without sufficient gross margin ((Revenue- Cost of Goods Sold) / Revenue), a
company will not be able to pay its operating as well as other expenses and therefore
build for the future

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 Net Profit Margin (Net Income / Revenues) shows profitability of the company
 The Asset Turnover ratio (Revenues/Total Assets) is shows the efficiency with which a
company deploy its assets. The ratios also signifies the company’s earning per dollar of
assets
 The Return on Assets (Net Income / Total Assets) provides the investors an idea of
effective conversion of money that the company has invested into net income
 Return on equity (Net Income/Shareholder's Equity) measures the profitability of a
corporation by reflecting the profit a company generates using the money shareholders
have invested. The returns basically shows the existing profitability of shareholder’s
investment
 Receivables Turnover Ratio (Net Credit Sales / Average Accounts Receivable) is a
measure which is used to quantify the effectiveness of a firm in extending credit and
collecting debts
 Inventory Turnover Ratio (Cost of Goods Sold / Average Inventory) is a ratio
showing the number of times the inventory of a company is sold and again replaced over
a period.

 The fixed-asset turnover ratio (Net Sales / Average Net Fixed Assets) provides the
ability of a company to generate net sales from fixed-asset investments - mainly property,
plant and equipment (PP&E) - net of depreciation.

 A company with low debt/equity ratio (ideally less than 1 or 0.5) will have less debt to
be taken care of. Therefore, its earnings would be sufficient enough to service the debt as
well as certain amount of free funds to take care of other business activities.

 Debt Service Coverage Ratio (Net Operating Income / Total Debt Service) is the ratio
of availability of cash for debt servicing to interest, principal and lease payments. DSCR
for any company above 1.0 suggests that there is enough cash flow to cover loan
payments

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IV. Company Analysis

 The role of a finance department in any type of organization is to ensure that adequate
funds are for the resources that are required to help achieve the organizational objectives.
The department also ensures that the costs are controlled, that there is an adequate cash
flow, and also that it establishes and further controls all profitable levels. All of which are
extremely important to the running of any organization.
 It is required for the project finance department to integrate the findings of all other
department and finally decide on the source and application of funds. For example, for
purchase department determines the expenses, sales department provides the sales budget
so it is the responsibility of this department to collate all the data.
 The company’s vision is “To set new benchmarks in standards of corporate performance
and governance through the pursuit of operational and financial excellence, responsible
citizenship, and profitable growth.”
Therefore, these projects are helping company achieve its’ objectives.

1. Infrastructure Sector in India

Infrastructure refers to all those services and facilities that integrate the basic support system of
an economy. The functioning of all the economic activities of a country depends on it. It implies
transportation network in the form of railways, ports, civil aviation and roadways; the
telecommunication system as well as the power sector. All these utilities, through their backward
and forward linkages, provide an enabling environment which facilitates the growth of a nation.
Having recognized the critical importance of the infrastructure sector, the Government of India
has given it a priority. Accordingly, both the Central and the State Governments have been
working to upgrade the Indian infrastructural set up in order to meet the international norms and
standards. But, investment in infrastructure projects inculpates high risks, low returns, huge
capital, high incremental capital/ output ratio, long payback periods and also superior
technology.

Government has entered into the 'Public Private Partnership (PPP)' program in order to bring in
adequate resources (physical, financial and technical) for setting up of a sound and efficient
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infrastructural base. The above program involves long-term detailed contracts between the
Government and the private players, providing the rights and obligations of both the contracting
parties. Such partnership encourages better risk sharing, accountability, cost recovery as well as
management of infrastructure. Using such initiatives, the Government is moving to the role of a
'facilitator and regulator' from its traditional role of 'provider of services.’

As a facilitator and regulator, the Government has pledged to create an appropriate policy
framework to instill confidence in the private sector. These policies confront several incentives
and schemes so that massive capital can be attracted towards the infrastructure industry.
Eventually, the Government continues to fulfill its social obligations through proper checks and
balances as a transparent regulatory system. Regulation is required to protect the interests of
consumers and foster an institutional set up, which would help in delivering infrastructure
services of high quality at low prices.

2. About Reliance Infrastructure

Reliance Infrastructure and all its subsidiary companies along with subsidiaries of the subsidiary
company have been registered under the Companies Act of 1956 and it is subjected to all the
clauses under the Act. Its MOA cannot include clauses or activities outside the Companies Act of
1956. Reliance Infrastructure Limited is India’s leading utility company having presence in
across the value chain of power business i.e. Generation, Transmission, Distribution, EPC and
Trading and the largest infrastructure company by developing projects in all high growth areas in
infrastructure sector i.e. Roads, Highways, Metro Rails, Airports, Cement and Specialty Real
Estate.

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V. 1. CASE STUDY 1
Mumbai Metro Project
A. Objective

To assess working capital using CMA data to determine working capital requirement, MPBF,
whether the company can cover its’ debts, financial position and performance of the company.
The objective is also to do the sensitivity analysis and finally provide recommendations.

B. Introduction

The urgency to meet the ever-increasing transportation demands of urban population is of

paramount importance. People today demand transport that is fast, safe and easily accessible.
That is why RInfra has taken up the responsibility for three metro rail projects on BOT basis in
Mumbai and Delhi with project cost over Rs.160 billion.

Mumbai Metro Line I- Versova-Andheri-Ghatkopar Corridor

Awarded by Mumbai Metropolitan Region Development Authority (MMRDA), Versova-
Andheri-Ghatkopar Corridor Mass Rapid Transit System (MRTS) project (Mumbai Metro Line
I) forms the first project. It was awarded to RInfra led consortium through a global competitive
bidding process on Public-Private-Partnership (PPP) framework.
A special purpose vehicle, namely, Mumbai Metro One Private Limited (MMOPL) has been
incorporated for implementation of the project. RInfra holds 69% of the equity share capital of
MMOPL, while MMRDA holds 26% and remaining 5% is held by Veolia Transport, France.
The project costs 23.5Bn and includes a concession period of 35 years. This metro line
encompasses a length of 12 kms and it features 12 stations along the corridor, five stations are
underground and only the Dhaula Kuan station is elevated.

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C. Assumptions Underlying Profitability Estimates

1. Project Milestone

Event Date
Signing of Concession Agreement March 7, 2007
Commencement of Construction Work March 8, 2008
Commercial Operation Date April 1, 2014
Total Project Life (including construction period) 35 years
Project Life (Operation Period) 30 years
Last Year of Operation 2043
Table 1

2. Capital Structure

Project Cost Rs. 4321 crore

MMRDA Grant Rs. 650 crore
Existing Loan (RTL & FCL) Rs. 1257 crore
Additional Loan Rs. 936 crore
Bridge Loan (15% of MMRDA grant) Rs. 98 crore
Table 2

3. Traffic Assumptions

Operating Capacity: The operating capacity of the train has been assumed to be 14.7 lakh
passengers per day.

Year Traffic assumed in financial YoY Growth Rate

model (per day) (in lakh)
FY 14 6.67 9.4 %
FY 15 7.20 8.0 %
FY 16 7.78 8.0 %
FY 17 8.17 5.0 %
FY 18 8.58 5.0 %

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 FY 19 9.01 5.0 %
Table 3

4. Revenue Assumptions
 Base Year fares 03-04 viz. Rs.6 (up to 3 km), Rs. 8 (3 to 8 kms), Rs. 10 (>8 kms)
with escalation @ 11% every 4th year has been assumed as per Concession
Agreement.
 Advertising revenue is estimated at Rs. 30 crore p.a. in FY 14 with escalation @
5% p.a. and revision in advertising rates by 15% every 2 years.
 Retail revenue is estimated at Rs. 3.73 crore p.a. in FY 14 with escalation @ 5%
p.a.
 CDM revenue is estimated to be nil as it is assumed that there will be negligible
saving in CO2 emission.

5. Operating Cost
 Employee cost is estimated at Rs. 25 crore p.a. in FY 14 with escalation @ 5%
p.a. Further, 10% pay revision is assumed in every 5 years starting from FY 16.
 Energy cost comprises of Auxiliary Power and Traction Power. Base Year charge
FY 11 viz. Rs. 4.50 per unit with escalation @ 4% p.a.
o Demand charge is estimated at Rs. 150 per kVA per month.
o The auxiliary requirement is estimated at 8500 kVA per month with gross
of 5% energy losses and 85% PF.
o The load requirement is estimated at 7.1 kVA per month.
o Number of hours of operation is assumed to be 18.5.
 Insurance cost is assumed to be Rs.4 crore p.a.
 Spares and Maintenance cost is assumed to escalate at 4% p.a.
 Administrative & General Expenses:
o Administrative charges are estimated at Rs.7 crore p.a. with an annual
escalation of 4%.
o Independent engineer cost is estimated at Rs.1 crore p.a.
o Auditor’s fee is estimated at Rs.1 crore p.a.

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 o Management fees are estimated at Rs.3 crore p.a.
o Bank Guarantee charges are estimated at Rs.7 crore p.a.
 O & M fees comprises of fixed charge of 2 lacs p.a. plus operator margin of 5%
on the Operating Budget for the respective year.
 Income Tax is assumed at 32.45%.
 Dividend Tax is assumed at 16.22%.

D. Interpretations

 Working Capital Gap for FY 15 is Rs. -35.18 crore which implies that the Current Assets
are not sufficient to meet the short term obligations (refer Appn. 20)
 Working Capital Gap remains negative for subsequent years also (refer Appn. 20)
 The Company will not receive short term financing support from bank because there are
no short term assets to be provided as security (refer Appn. 8)
 Since the operations would be at initial stage, it is not providing much returns
 DSCR remains greater than 1 which implies that the cash flows are enough to cover the
debts

E. Ratio Analysis

Ratios Appendices FY 15 FY 16 FY 17
Refer

Current Ratio 8/11 0.70 0.99 0.93

Quick Ratio 8-9/11 0.70 0.99 0.93

Proprietary Ratio 15+17/12 0.06 0.02 (0.01)

Gross Margin 3/i (0.11) 0.21 0.26

Net Profit Margin 5/i

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 (0.84) (0.44) (0.35)

Asset Turnover Ratio 1/ 7+8 0.09 0.10 0.11

Return on Assets 5/12 (0.07) (0.04) (0.04)

Return on Equity 5/14+17 (0.15) (0.09) (0.08)

Receivables Turnover Ratio i/10 - - -

Inventory Turnover Ratio 2/9 - - -

Fixed Asset Turnover Ratio 1/7 0.09 0.11 0.12

Debt Equity Ratio 18/14+17 1.11 1.10 1.17

DSCR 5+ ii+ iii/iii 0.68 1.17 1.29

Table 4

 As per the projections, Current Ratio is below 1 showing that the financial health of the
company is not good
 Here, the Quick Ratio is similar to the current ratio as there is no inventory
 In FY 15 the Proprietary Ratio is 6%, then at that time shareholders would receive 6%
of total assets as they have contributed that much. The decreasing ratios imply poor
solvency position
 FY 15 shows negative Gross Margin but is approximately 20% in the following years
showing the ability to pay the additional expenses increases over the operating years
 Net Profit Margin though negative is increasing over time showing the improvement in
the profitability
 The lower Asset Turnover Ratios signify that the company is earning less per dollar of
assets
 As per the projections the Return on Assets is negative for the company indicating that
the company is not earning much money on investment
 The negative Return on Equity show poor profitability on shareholder’s investment

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  It is assumed there are no receivables so Receivable Turnover Ratio remains nil.
 It is assumed there is no inventory so Inventory Turnover Ratio remains nil.
 The Fixed Asset Turnover Ratios are approximately 11% in the following years
showing that the company has been satisfactory in using the investment in fixed assets to
generate revenues

 The lower trend in Debt/ Equity Ratio signifies low dependence on debt

 DSCR for the company is above 1.0 indicating that there is enough cash flow to cover
loan payments

F. Sensitivity Analysis

A sensitivity analysis was carried out to ascertain how certain project parameters affect the debt
servicing capacity of the company. The average DSCR (Debt Service Coverage Ratio) had been
computed considering the period up to servicing of entire debt.

PBIT PAT DSCR CR DER ROA RONW

Actual Predictions
FY 15 (35.29) (265.29) 0.68 0.70
1.11 (0.07) (0.15)
FY 16 75.43 (153.57) 1.17 0.99 1.10
(0.04) (0.09)
FY 17 94.58 (130.42) 1.29 0.93 1.17
(0.04) (0.08)

Increase in Revenue by
5%
FY 15 (17.81) (247.81) 0.76 0.85 1.10
(0.06) (0.14)
FY 16 94.86 (134.14) 1.26 1.23 1.08
(0.04) (0.08)
FY 17 115.34 (109.66) 1.38 1.28 1.13
(0.03) (0.07)

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Decrease in revenue by
5%
FY 15 (282.77) 0.61 0.55 1.12
(52.77) (0.07) (0.16)
FY 16 55.99 (173.01) 1.09 0.74 1.13
(0.05) (0.10)
FY 17 73.83 (151.17) 1.19 0.57 1.21
(0.04) (0.10)

Increase in traffic by 5%
FY 15 (249.58) 0.75 0.89 1.10
(19.58) (0.06) (0.14)
FY 16 111.46 (117.54) 1.33 1.41 1.07
(0.03) (0.07)
FY 17 152.77 (72.23) 1.55 1.72 1.09
(0.02) (0.04)

Decrease in traffic by 5%
FY 15 (281.00) 0.61 0.50 1.12
(51.00) (0.07) (0.16)
FY 16 41.15 (187.85) 1.02 0.53 1.14
(0.05) (0.11)
FY 17 41.94 (183.06) 1.05 0.07 1.24
(0.05) (0.12)

Increase in cost by 5%
FY 15 (284.53) 0.60 0.62 1.11
(54.53) (0.07) (0.16)
FY 16 59.76 (169.24) 1.10 0.88 1.11
(0.05) (0.10)
FY 17 78.56 (146.44) 1.22 0.79 1.18
(0.04) (0.09)

Decrease in cost by 5%
FY 15 (246.04) 0.77 0.78 1.10
(16.04) (0.06) (0.14)

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FY 16 91.09 (137.91) 1.24 1.09 1.09
(0.04) (0.08)
FY 17 110.61 (114.39) 1.36 1.06 1.15
(0.03) (0.07)

Table 5

Scenario 1: Increase in Revenue by 5%

 Leads to better profitability
 Debt servicing capacity improves
 Better liquidity position of the company as CR gradually becomes greater than 1
 Decreasing dependence on debt
 The company earns more money by investing on assets
 Increasing profitability on shareholder’s investment

Scenario 2: Decrease in Revenue by 5%

 Decreasing profitability of the company

 The company’s cash flow does not remain enough to finance its debts

 The liquidity position gets worse

 The dependence on debt increases

 Money earned through investment on assets decreases

 Profitability on shareholder’s investment decreases

Scenario 3: Increase in Traffic by 5%

 Leads to better profitability

 Debt servicing capacity improves slightly
 Better liquidity position of the company but CR remains less than 1
 Slight decrease in dependence on debt
 The money earned by investing on assets remains almost same

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  Not much affect in profitability on shareholder’s investment

Scenario 4: Decrease in Traffic by 5%

 Decreases the profitability of the company

 Debt servicing capacity reduces
 Liquidity position of the company deteriorates
 Dependence on debt increases
 The money earned by investing on assets reduces

 Decreasing profitability on shareholder’s investment

Scenario 5: Increase in cost by 5%

 The profitability of the company decreases

 The company’s cash flow does not remain enough to finance its debts in the subsequent
years

 The liquidity position gets worse as the liabilities increase

 Increasing dependence on debt

 Decrease in money earned through investment on assets

 Decreasing profitability on shareholder’s investment

Scenario 6: Decrease in cost by 5%

 Increasing profitability of the company with decrease in cost

 The company’s cash flow increases to finance its debts

 The liquidity position improves as CR reaches 1 in the subsequent years

 The dependence on debt gradually decreases

 Higher earnings through investment on assets

 Better profitability on shareholder’s investment

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G. Recommendations

 Rather than capitalizing the entire amount of spares some can be treated as current asset

 Customers can be motivated to use smart cards so that some income might be received in
advance which will increase the cash flow

 Other modes of loan like commercial paper or letter of credit

V. 2. CASE STUDY 2

Reliance Cement Project

A. Objective
To assess working capital using CMA data to determine working capital requirement, MPBF,
whether the company can cover its’ debts, financial position and performance of the company.
The objective is also to do the sensitivity analysis and finally provide recommendations.

B. Introduction

Reliance Cement Company Private Limited (Reliance Cement), Reliance Group Company and
100% subsidiary of Reliance Infrastructure Limited, was incorporated in the year 2007. The
Group’s foray into cement is seen as a natural extension of its interests in power and
infrastructure businesses that would give it a competitive advantage in the cement sector.
Reliance Cement aspires to be amongst the top four cement companies in India in the next 4-5
years with presence across all regions.
Cement production relies heavily on energy resources like coal and power along with raw
materials mainly limestone & fly ash. The synergy of these factors combined with execution
capabilities of Reliance Group will help drive the cement business to become a leader in the
domain and be a part of the Indian Infrastructure development story.
Reliance Cement is currently setting up its first two cement plants, one in Madhya Pradesh and
the other in Maharashtra, with a combined installed capacity of 10 million tons. The Madhya
Pradesh project will have an integrated unit at Maihar, a blending unit at Gondavali and a
grinding unit at Raebareilly in Uttar Pradesh. The Maharashtra Project will have an integrated
unit at Yavatmal and two grinding units, one at Butibori and another located at Nasik. The

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Butibori unit is on a fast track and slated to be commissioned by 2012.
All proposed manufacturing facilities of Reliance Cement will be state of the art in terms of
Technology and Scale, and will leverage best practices in logistics and distribution.
Reliance Cement is committed towards sustainability without any compromise. Principles of
Sustainable development are integral to the company’s business strategy and are reflected in its
Vision Statement.

C. Assumptions Underlying Profitability Estimates

1. Project Milestone

Event Date
Incorporation of the Company August 24, 2007
Commercial Operation April 2014
Table 6

2. Capital Structure

Project Cost- MP Rs. 2783 crore

Debt Rs.1835 crore
Equity Rs.948 crore
Table 7

3. Installed Capacity
 Kunanganj- 20 lac tons
 Gondavili- 8 lac tons
 Maihar- 22.8 lac tons
4. Capacity utilization reaches to approximately 80% by FY 17
5. Raw Material Consumption (% of Cement Production)

 Kundanganj FY 14 FY 15 FY 16 FY 17
Clinker (% of Cement) 68% 66% 65% 64%
Fly Ash (% of Cement) 28% 30% 31% 32%

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 Gypsum (% of Cement) 4% 4% 4% 4%

 Gondavili
Clinker (% of Cement) 72% 72% 72%
Fly Ash (% of Cement) 28% 28% 28%
Gypsum (% of Cement) - - -
‘
 Maihar
Clinker (% of Cement) 68% 66% 65% 64%
Fly Ash (% of Cement) 28% 30% 31% 32%
Gypsum (% of Cement) 4% 4% 4% 4%
Table 8

6. Employee Cost (Rs.)

 Kundanganj- 3.6 cr p.a.
 Gondavili- 1.2 cr p.a.
 Maihar- 15 cr p.a.

7. Power Cost (Rate/ unit)

 Kundanganj- 6.50
 Gondavili- 6.35
 Maihar- 6.35

8. Selling & Distribution (Rs. / MT)

 Kundanganj- 100
 Gondavili- 70
 Maihar- 100

9. Administration Overhead (Rs.)

 Kundanganj- .36 cr p.m.
 Gondavili- .15 cr p.m.

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  Maihar- 1 cr p.m.

10. Freight & Forwarding (Rs. / MT)

 Kundanganj- 620
 Gondavili- 600
 Maihar- 850

11. Advertising Expenses (Rs. / MT)

 Kundanganj- 80
 Gondavili- 30
 Maihar- 50
12. Interest - Rupee term loan taken at 12% and ECB loan at 6%
13. MAT- Minimum Alternate Tax Rate is taken as 20%

D. Interpretations

 Working Capital Gap for FY 15 is Rs. 92.63 which implies that the Current Assets are
sufficient to meet the short term obligations (refer Appn 46)
 Working Capital remains positive for subsequent years also (refer Appn 46)
 The Company will receive short term financing support from bank because there are
short term assets to be provided as security
 Even when the operations would be at initial stage, the company is earning profits
 DSCR remains greater than 1 which implies that the cash flows are enough to cover the
debts

E. Ratio Analysis

Ratios Appendices FY 15 FY 16 FY 17
Refer
Current Ratio 40+41+42+43+44/34+35+36+37

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 0.71 0.81 0.89

Quick Ratio 41+42+43+44/34+35+36+37 0.49 0.60 0.65

Proprietary Ratio 31+32/45 0.19 0.24 0.32

Gross Margin 24/22 31.85 34.79 35.68

Net Profit Margin 30/22 0.01 0.09 0.10

Asset Turnover Ratio 22/45 0.47 0.59 0.67

Return on Assets 30/45 0.01 0.05 0.07

Return on Equity 30/31+32 3.11 22.70 21.55

Receivables Turnover
Ratio 22/41 13.08 14.36 13.98
Inventory Turnover
Ratio 23/40 9.45 9.32 8.70
Fixed Asset Turnover
Ratio 22/39 0.55 0.73 0.86

Debt Equity Ratio 33/31+32 3.48 2.32 1.53

DSCR 30+28+26/28 1.46 1.17 1.10

Table 9

 As per the projections, Current Ratio though improving gradually is still below 1
indicating the unsatisfactory financial health of the company

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 Here, the Quick Ratio is less than 1 as well as lower than the working capital ratio
indicating that the firm is dependent on its inventory and can’t cover its immediate
liabilities
 In FY 15 the Proprietary Ratio is 19%, then at that time shareholders would receive
19% of total assets as they have contributed that much. Higher ratio implies better
solvency position
 FY 15 shows approximately 30% Gross Margin and increases in the following years
showing the ability to pay the additional expenses increases over the operating years
 Net Profit Margin is increasing over time showing the improvement in the profitability
 The higher Asset Turnover ratios signify that the company is earning more per dollar of
assets
 As per the projections the Return on Assets is very low for the company indicating that
the company is earning less money on investment
 Initially the Return on Equity is low i.e., 4% but increases to approximately 20% over
the years implying the increase in profitability on shareholder’s investment
 The lower Receivables Turnover Ratios imply that the company should re-assess its
credit policies in order to ensure the timely collection of imparted credit that is not
earning interest for the firm
 The low Inventory Turnover Ratios of the company implies poor sales and, therefore,
excess inventory
 The Fixed-Asset Turnover Ratios are 50% and above in the following years showing
that the company has been more effective in using the investment in fixed assets to
generate revenues

 The decreasing trend in the Debt/Equity Ratios shows decreasing dependence on debt
but still remains greater than 1.5

 DSCR for the company is above 1.0 indicating that there is enough cash flow to cover
loan payments

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F. Sensitivity Analysis

A sensitivity analysis was carried out to ascertain how certain project parameters affect the debt
servicing capacity of the company. The average DSCR (Debt Service Coverage Ratio) had been
computed considering the period up to servicing of entire debt.

PBIT PAT DSCR CR DER ROA RONW

Actual Predictions
FY 15
254.15 17.81 1.46 0.71 3.48 0.01 3.11
FY 16
404.79 168.44 1.17 0.81 2.32 0.05 22.70
FY 17
455.09 203.77 1.10 0.89 1.53 0.07 21.55

Increase in SP by 5%
FY 15
327.68 76.62 1.69 0.88 3.06 0.02 11.74
FY 16
497.64 242.72 1.35 1.06 1.92 0.08 27.10
FY 17
558.99 286.89 1.28 1.28 1.22 0.09 24.26

Decrease in SP by 5%
FY 15
180.63 (51.26) 1.18 0.51 4.15 (0.02) (10.67)
FY 16
311.94 94.17 0.99 0.53 3.00 0.03 16.39
FY 17
351.18 120.66 0.93 0.48 2.08 0.04 17.36

Increase in sales by 5%
(Prod also inc by 5%)
FY 15
274.08 33.75 1.52 0.76 3.35 0.01 5.67
FY 16

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 424.87 184.50 1.21 0.87 2.21 0.06 23.66
FY 17
467.22 213.48 1.12 0.97 1.45 0.07 21.49

Decrease in sales by 5%
FY 15
257.53 20.51 1.47 0.67 3.60 0.01 3.71
FY 16
552.72 286.78 1.46 0.97 2.05 0.09 34.14
FY 17
538.77 270.71 1.24 1.16 1.30 0.09 24.37

Increase in cost by 5%
FY 15
189.68 (42.21) 1.24 0.57 4.05 (0.01) (8.58)
FY 16
328.92 106.65 1.04 0.61 2.88 0.04 17.82
FY 17
371.06 135.28 0.97 0.61 1.97 0.05 18.43

Decrease in cost by 5%
FY 15
318.04 70.09 1.64 0.83 3.10 0.02 10.88
FY 16
480.05 229.62 1.31 0.98 1.97 0.07 26.28
FY 17
538.51 271.66 1.23 1.16 1.26 0.09 23.72
Table 10

Scenario 1: Increase in SP by 5%

 Leads to better profitability.

 Debt servicing capacity improves.
 Better liquidity position of the company as CR gradually becomes greater than 1.
 Decreasing dependence on debt.
 The company earns more money by investing on assets.

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  Increasing profitability on shareholder’s investment.

Scenario 2: Decrease in SP by 5%

 Decreasing profitability of the company.

 The company’s cash flow does not remain enough to finance its debts.

 The liquidity position gets worse.

 The dependence on debt increases.

 Money earned through investment on assets decreases.

 Profitability on shareholder’s investment decreases.

Scenario 3: Increase in Sales by 5%

 Leads to better profitability.

 Debt servicing capacity improves slightly.
 Better liquidity position of the company but CR remains less than 1.
 Slight decrease in dependence on debt.
 The money earned by investing on assets remains almost same.
 Not much affect in profitability on shareholder’s investment.

Scenario 4: Decrease in Sales by 5%

 Increasing profitability of the company because the expenses also reduce.

 Debt servicing capacity comparatively improves.
 Liquidity position of the company gets better as CR gradually reaches 1.
 Dependence on debt decreases slightly.
 The money earned by investing on assets increases.

 Increasing profitability on shareholder’s investment.

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Scenario 5: Increase in cost by 5%

 The profitability of the company decreases.

 The company’s cash flow does not remain enough to finance its debts in the subsequent
years.

 The liquidity position gets worse as the liabilities increase.

 Increasing dependence on debt.

 Decrease in money earned through investment on assets.

 Decreasing profitability on shareholder’s investment.

Scenario 6: Decrease in cost by 5%

 Increasing profitability of the company with decrease in cost.

 The company’s cash flow increases to finance its debts.

 The liquidity position improves as CR reaches 1 in the subsequent years.

 The dependence on debt gradually decreases.

 Higher earnings through investment on assets.

 Better profitability on shareholder’s investment.

G. Recommendations

 Re-assess its credit policies as receivable turnover remains low showing payments
are received late thereby blocking cash for a longer period of time
 Inventory turnover ratio remains low showing inventory is not sold and replaced
that fast so the inventory can be reduced as per the demand forecast which would
thereby reduce the additional expense

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VI. APPENDICES

1. Financial Analysis of Mumbai Metro

Figs in Rs. Crore FY 15 FY 16 FY 17 FY 18
Profit & Loss A/c
Revenue
i. Passenger revenue 314.18 351.55 369.13 387.58
Advertising revenue 31.50 33.08 41.73 43.82
Retail revenue 3.92 4.11 4.32 4.53
CDM Revenue - - - -
Interest on Cash Balance - - - -
1. Total Revenue 349.59 388.74 415.17 435.93
Expenditure
Employee Cost 26.25 30.32 31.83 33.43
Energy Charges 35.85 37.29 38.78 40.33
Insurance 4.00 4.00 4.00 4.00
Spare parts & Maintenance 6.09 20.69 22.40 24.13
Administrative & General Expenses 12.61 12.91 13.23 13.56
Operator's Fees (O&M Operator) 3.90 4.80 4.95 5.15
Taxes & duties - - - -
Bank Guarantee Charges 7.00 7.00 7.00 7.00
Exchange Rate Variation 94.08 - - -
Security Costs 3.10 3.30 3.40 3.60
2. Total Expense 192.88 120.31 125.59 131.20
3. EBIDTA 156.71 268.43 289.58 304.74
ii. Depreciation for the year 192.00 193.00 195.00 208.00
4. EBIT (35.29) 75.43 94.58 96.74
iii. Interest & Finance Cost 230.00 229.00 225.00 221.00
Interest on sub-debt - - - -
EBT (265.29) (153.57) (130.42) (124.26)
Corporate Tax - - - -
5. Profit After Tax (PAT)/ (Loss) (265.29) (153.57) (130.42) (124.26)
Less: Transfer to Reserves - - - -
Less: Dividend (Gross) - - - -
Less: Dividend Tax - - - -

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Less: Dividend (Gross) -preference shares - - - -
Less: Dividend Tax - - - -

Balance transferred to B/S (265.29) (153.57) (130.42) (124.26)

Balance sheet FY 15 FY 16 FY 17 FY 18
ASSETS
6. Gross Block 3,956.50 4,011.14 4,109.79 4,482.96
Less: Depreciation 192.00 385.00 580.00 788.00
7. Net Block 3,764.50 3,626.14 3,529.79 3,694.96
CWIP - - - -
Investment - - - -
8. Current Assets 82.71 148.77 151.88 204.73
9. Inventories - - - -
10. Sundry Debtors - - - -
Cash & Bank Balances 82.71 148.77 151.88 204.73
Other Current Assets - - - -
Loans & Advances - - - -
Less:
11. Current Liabilities 117.88 150.56 164.06 208.86
Provisions - - - -
Net Current Assets (35.18) (1.80) (12.19) (4.13)
Misc Expenditure - - - -
12. Total Assets 3,729.32 3,624.34 3,517.60 3,690.83
LIABILITIES
13. Share Holders' Fund 1,769.49 1,723.14 1,624.39 1,694.59
14. Equity Share Capital (Including Sub-debts) 1,384.77 1,492.00 1,523.67 1,710.13
15. Equity Share Capital 512.00 512.00 512.00 512.00
16. Sub Debt 872.77 980.00 1,011.67 1,198.13
17. Reserves & Surplus (265.29) (418.86) (549.28) (665.54)
Grants (MMRDA) 650.00 650.00 650.00 650.00
18. Loans 1,959.84 1,901.20 1,893.21 1,996.24
Long-term Loan 1,959.84 1,901.20 1,893.21 1,996.24
Additional Borrowings - - - -
Bridge Loan - - - -

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DSRA Account - - - -
Misc Exp Not written-off - - - -
19. Total Liabilities 3,729.33 3,624.34 3,517.60 3,690.83

Figs in Rs. Crore FY 15 FY 16 FY 17 FY 18

Cash Flow Statement

Cash Flow from Operating Activities

EBIDTA 156.71 268.43 289.58 304.74
Change in Net Working Capital 117.88 32.68 13.50 44.80
Income Tax - - - -
Net Cash Flow from Operating Activities 274.59 301.11 303.09 349.53

Cash Flow from Investing Activities

Addition to Fixed Assets (16.52) (54.64) (98.65) (373.17)
Net Cash Flow from Investing Activities (16.52) (54.64) (98.65) (373.17)

Cash Flow from Financing Activities

Interest (230.00) (229.00) (225.00) (221.00)
Dividends Declared (Gross) - - - -
Borrowings - LT Debt - - - -
LT Debt Repayment (8.96) (38.00) (61.00) (71.00)
Additional Debt Drawal - 21.62 21.62 172.97
Additional Debt Repayment - (14.00) (19.00) (19.00)
Post COD Capex loan - - - -
Post COD Capex Loan Repayment - - - -
Borrowings - Bridge Finance - - - -
Repayment of - Bridge Finance (97.50) - - -
Change in Equity Capital - - - -
Addition in Rinfra Sub Debt - 17.45 17.45 139.57
Repayment - Rinfra Sub Debt - - - -
DSRA Support - - - -
Change in Grants 97.50 - - -
Preference shares dividend - - - -
Advances from Customers 58.59 61.52 64.60 74.95

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Net Cash Flow from Financing Activities (180.37) (180.41) (201.33) 76.49

Cash Balance (o/b) 5.00 82.71 148.77 151.88

Cash Surplus / (Deficit) During the Year 77.71 66.06 3.11 52.86
Cash Bal (c/b) 82.71 148.77 151.88 204.73

2. MPBF Calculation of Mumbai Metro

Particulars FY 15 FY 16 FY 17 FY 18

A. Inventory

1.Raw Materials - - - -

2.Work in Process - - - -

3.Finished Goods (Stores/Spares) - - - -

B. Book Debts - - - -

C. Cash & Bank 82.71 148.77 151.88 204.73

D. Other Current Assets - - - -

Total Current Assets 82.71 148.77 151.88 204.73

Less:Cr Liability (Other than Bank Borrowings) 117.88 150.56 164.06 208.86

20. 1. Working Capital Gap (35.18) (1.80) (12.19) (4.13)

2.Bank Finance - - - -
3. Minimum Stipulated Net Working Cap. (25% of Current
Assets) 20.68 37.19 37.97 51.18

4. Net Working Capital (35.17) (1.80) (12.19) (4.13)

5. MPBF (min of 1-3)

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 (55.85) (38.99) (50.16) (55.31)

6. MPBF (min of 1-4) (0.00) 0.00 (0.00) (0.00)

7. Borrowing (55.85) (38.99) (50.16) (55.31)

8. Excess Borrowings
55.85 38.99 50.16 55.31

3. Financial Analysis of Reliance Cement

(Fig. in crore) FY 14 FY 15 FY 16 FY 17
Profit & Loss Account
Income

21. Gross Sales 601.92 1,801.15 2,279.81 2,551.68

Less- Excise - Cement 68.61 205.31 259.87 290.86

Less - VAT - Cement 69.25 207.21 262.28 293.56

22. Net Income (A) 464.06 1,388.63 1,757.66 1,967.27

Expenditure

Raw Material Consumption 44.44 166.21 228.04 241.06

Packing Expenses 24.05 71.17 89.61 100.25

Power & Fuel 132.25 325.11 359.04 407.99

Employee Cost 7.75 18.90 19.80 19.80

Total Factory Overheads 10.70 39.05 65.25 80.26

Administration Overheads 9.00 22.05 23.40 23.40

Selling & Dist Expenses

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 19.03 55.30 65.78 73.19

Discount on Sales 34.59 102.90 131.39 147.18

Freight & Forwarding 78.41 231.25 286.91 320.57

Advertisement Expenses 3.88 11.70 16.32 17.68

23. Total Cost 364.09 1,043.64 1,285.53 1,431.38

Closing Stock (25.05) 6.54 (17.44) -

24. EBITA 125.02 338.45 489.57 535.89

Incentive - 32.40 36.78 40.75

25. EBIDTA (with incentives) 125.02 370.85 526.35 576.64

26. Depreciation 44.25 116.70 121.56 121.56

27. PBIT 80.77 254.15 404.79 455.09

28.Interest and finance cost 87.09 231.89 194.22 200.35

29. PBT (6.32) 22.26 210.57 254.74

CASH PAT 37.93 134.50 290.00 325.33

Tax - 4.45 42.13 50.97

30. PAT (6.32) 17.81 168.44 203.77

FY 14 FY 15 FY 16 FY 17
Balance Sheet
EQUITY AND LIABILITIES
Shareholder's Funds

Page 39
31. (a) Share Capital 562.00 562.00 562.00 562.00

32. (b) P&L Account (6.32) 11.49 186.25 372.21

33. Secured Loan for Fixed Asset 1,835.00 1,835.00 1,638.39 1,376.25
Current Liabilities:

Secured Loan for Fixed Asset Repayment - - - -

34. Sub debt 221.00 221.00 221.00 221.00

35. ECB Loan 165.00 156.75 140.25 123.75

36. Secured Loan for Working Capital 19.70 218.36 275.93 277.73

37. Sundry Creditors 28.96 36.20 45.25 56.56

38. Total 2,825.34 3,040.79 3,069.07 2,989.50

ASSETS
39. (a) Fixed Assets 2,703.75 2,587.05 2,465.49 2,343.94

40. (b) Inventory 85.94 103.12 123.75 148.50

41. (c) Trade Receivables 94.47 108.64 124.94 143.68

42. (d) Cash and Cash Equivalents (58.82) 91.31 163.94 144.18

43. (e) VAT Incentive - 32.40 69.18 109.93

44. (f) DSRA - 118.27 115.44 110.76

45. Total 2,825.34 3,040.79 3,062.75 3,000.99

Cash Flow FY 14 FY 15 FY 16 FY 17

PAT

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 (6.32) 17.81 168.44 203.77

Add: Depreciation 44.25 116.70 121.56 121.56

Less: Incentive - 32.40 36.78 40.75

37.93 102.10 253.22 284.58

Change in Working Capital 151.45 24.12 27.87 32.18

Increase in working Capital Loan 19.70 198.66 57.57 1.80

Increase in Debt 588.58 11.45 5.26 (2.71)

Repayment of Debt - (19.70) (218.36) (275.93)

Increase/decrease in Share Capital 282.74 - - -

Increase/ decrease in Sub Debt 221.00 - - -

Increase/ Decrease in FA 1,146.05 (0.00) 0.00 0.00

DSRA - 118.27 (2.82) (4.69)

(147.55) 150.12 72.64 (19.76)

Add: Opening Cash Balance 88.73 (58.82) 91.31 163.94

Closing Balance (58.82) 91.31 163.94 144.18

4. MPBF Calculation of Mumbai Metro

1. Total Current Assets
121.59 335.48 481.81 546.30
2.Current Liabilities
28.96 36.20 45.25 56.56

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46. 3. Working Capital Gap
92.63 299.28 436.57 489.74
4. Minimum stipulated Net Working Capital (NWC)
(25% of Total Current Assets excluding Export 30.40 83.87 120.45 136.57
Receivables)
5. Actual / Projected NWC
72.94 80.92 160.64 212.01
6. Item 3 Minus Item 4
62.24 215.41 316.11 353.17
7. Item 3 Minus Item 5
19.70 218.36 275.93 277.73
8. MPBF (lower of 6 or 7 )
19.70 215.41 275.93 277.73
9. Excess borrowings representing Shortfall in NWC
- 2.95 - -

Page 42
VII. BIBLIOGRAPHY

 Information memorandum report on Reliance metro

 Information memorandum on Reliance cement
 Reliance Infrastructure website – www.rinfra.com
 Investopedia.com
 Annual Reports of Reliance Infrastructure
 Financial Models of Reliance Metro
 Financial Models of Reliance Cement
 Slideshare
 Wikipedia

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