14

CHAPTER I

INTRODUCTION AND DESIGN OF THE STUDY

1.1 Introduction

1.2 Statement of the Problem

1.3 Objectives of the Study

1.4 Scope of the Study

1.5 Methodology

1.6 Period of the Study

1.7 Plan of Analysis

1.8 Operational Definition of Concepts

1.9 Limitations of the Study

1.10 Scheme of the Report

 1

1.1 INTRODUCTION

India ranks second in the world in the production of sugar. In their order of

importance the three countries are Brazil, India and China. A sugar factory occupies an

important place among the organized factories in India. Sugar factory, one of the major

agro-based factories in India, has been instrumental in resource mobilization,

employment, income generation and social infrastructure creation in rural areas. As a

matter of fact, sugar factory has facilitated and accelerated the pace of rural

industrialization. The annual turnover of this factory is 25,000 crore. The Governments

both central and state receive annually 2500 crore as excise duty, purchase tax, and cess

from this factory. More than 4.50 crore farmers are engaged in sugarcane cultivation

and about 5 lakh rural people in India get direct and indirect employment in the factory.

The sugar factory has brought socio–economic changes in rural India by facilitating

ancillary entrepreneurial activities such as dairies, poultries, fruits and vegetables

processing and providing education, health and credit facilities.

Sugar factory in Tamilnadu plays a vital role in the economic development of the

state, particularly promoting the rural economy by providing large scale direct and

indirect employment to several lakhs of farmers and agricultural labourers engaged in

cultivation, harvesting, transport and other services. Tamilnadu is one of the major sugar

producing states in India and it contributes on an average of nineteen lakhs tonnes of

sugar annually, which is about ten per cent of the total production of sugar in the country.

Tamilnadu comes under low recovery zone with recovery hovering around nine per cent.

Agro processing units including sugar units are equally plagued by the problem of
 2

sickness. The sugar factory is beset with a number of problems like shortage of

sugarcane, obsolete technologies, under utilisation of capacity, payment of high state

advised price, high cost of production and so on. A good financial analysis will help to

identify the strengths and weaknesses of a company and facilitates a more informed

management decision. And also it will be able to identify and correct the performance

problems before they have a major impact in the business. As such, the study is expected

to help the corporate management, the financiers, the investors and the government at

large, to take appropriate decisions. The study has academic relevance too in so far as

new theoretical and practical knowledge would be added to the existing stock of

knowledge undoubtedly. The present study will act as a masterpiece on the subject for

further research and development. Therefore, to cover the gaps in the earlier studies, the

present study is undertaken to give an insight into the performance of selected private

companies of Tamilnadu sugar factory. It would also enable shareholders, investors and

investment analyst to identify the determinants of corporate performance. There are many

studies conducted at macro level to deal with the entire economy. Such studies pertain to

a sector or a factory and very few studies are conducted at micro level. But the financial

performance of selected private sector sugar factories in Tamilnadu has received only

scant attention and therefore in this study the researcher makes an attempt to analyze the

working capital performance of Dharani Sugar Limited in Tamilnadu.

1.2 STATEMENT OF THE PROBLEM

Sugar factory is still waiting to be liberalised. As opposed to other countries

where sugar prices are influenced by economic considerations, in India they are
 3

influenced by political considerations. The factory is still subjected to the monthly release

mechanism for sugar sales that is determined and declared by government of India. Sugar

Cane prices are increased every year by the central government and even more by each of

the state governments in the form of Statutory Minimum Price and State Advised Price

respectively. Sugar price, on the other hand, does not increase in the same proportion

every year. Consequently, margins are squeezed and the limited are not able to make

enough money, not even to recover their conversion costs. When factories are cash

strapped, they take delivery of sugar cane but postpone payments to farmers forcing them

into a debt trap with very little incentive to grow cane. Farmers may sell the cane to

manufacturers of other cane products like Jaggery or Molasses. Frequent switching also

lowers recovery rates and consequently India has the lowest recovery rate amongst major

sugar producers. World recovery rates are thirteen to fourteen per cent while Indian

producers can recover at best ten to twelve per cent. Most of the sugar Factories in India

utilise only fifty per cent of its production capacity. Low capacity utilisation and

inadequacy of raw material led to the closure of sugar factories in India. Indian sugar

production is much lower than the installed capacity because of shortage of raw

materials. These problems left India’s private sector sugar factory in the large.

The Dharani Sugars also incurred heavy losses. But it tends to nourish for itself.

Hence, it is impracticable for the Dharani Sugars units to shrink their cost of production

through expansion or modernisation. Dharani Sugars units are, therefore, incapable of

fighting in the Sugar markets. This results in the sugar factory being the drainer of

economic growth and India is keen to use it as a level of accelerated growth in the
 4

country. Therefore, the present study is undertaken to analyse the growth, production,

sales trend, profitability, financial structure, working capital performance and assessment

of financial health of the Factory and to suggest remedial measures to solve the problems

of the Dharani Sugar limited in Vasudevanallur.

1.3 OBJECTIVES OF THE STUDY

The objectives of the study are:

1. To study the growth of sugar factory in Tamilnadu and India.

2. To identify the significant financial ratios which influence the working capital

management of the study unit.

3. To analyze the management of different components of working capital

4. To analyze the pattern of investment aspects of working capital in Dharani Sugar

Limited.

5. To study the financial aspect of working capital of the study unit

6. To analyze the relationship between profit and working capital of the Factory.

1.4 SCOPE OF THE STUDY

The present study is confined to and highlights the working capital performance

of the Dharani Sugar Limited in Tirunelveli District through facts and figures of

published financial statements. The financial performance of sugar factory is evaluated

on parameters, such as profitability utilization of assets, growth of performance, financial

strength and opinion of the members staff of the finance department of sugar factory. The
 5

present study has also identified the nature of relationship between the various aspects of

working capital performance of sugar factory.

1.5 METHODOLOGY

The present study is mainly based on secondary data. The data required for the

purpose of the study were collected from Dharani Sugar Limited. The data have also been

taken from annual reports, journals, and newspapers, magazines and general discussion

with the company. For the Dharani Sugar Limited, the information required is available

through review, monthly progress reports, books and websites.

1.6 PERIOD OF STUDY

The period for this study is covered by ten years from 2005-06 to 2014-15. The

data for this period have been collected from Dharani Sugar Limited Vasudevanallur. The

financial year runs from 1st April to 31st March every year.

1.7 PLAN OF ANALYSIS

To analyse the working capital performance of Dharani Sugar Limited, the ratio

analysis has been used. The following ratios have been applied for the purpose this study:

Calculated Financial Ratios are as under:

1. Working Capital (WC) / Total Assets (TA)

2. Sales (S) / Working Capital (WC)

3. Debtors (Drs) / Inventory (I)

4. Earning before interest and tax (EBIT)/ Total Assets (TA)

 6

5. Current Liabilities (CL)/Inventory (I)

6. Sales (S)/ Inventory(I)

7. Long term debt (LTD)/ Net Worth (NW)

8. Total Debt (TD)/ Net Worth (NW)

9. Current Liabilities (CL) / Net Worth (NW)

10. Quick Assets (QA) / Total Assets (TA)

11. Total Debt (TD)/ Working Capital (WC)

12. Quick Assets (QA) / Net Worth (NW)

13. Current Assets (CA)/ Current Liabilities (CL)

14. Inventory (I) / Working Capital (WC)

15. Inventory (I) / Current Assets (CA)

16. Long term debt (LTD)/ Total Debt (TD)

17. Cash (C) / Total Assets (TA)

18. Cash (C ) / Sales (S)

19. Long Term debt (LTD) / Net Capital Employed (NCE)

20. Pre tax profit (PTP) / Net Capital employed (NCE)

21. Long term debt (LTD) / Total Assets (TA).

 7

For the purpose of analyzing the working capital of Dharani Sugar Limited,

Working capital cycle has been computed. The working capital cycle can be assessed as

under:

WCC = R + W + F + D -C

Where,

WCC – Working capital Cycle

R – Raw materials

W– Work in progress

F– Finished stock

D– Debtors and receivable collection period

C– Credit period available

The ratio analysis has been used to analyze the behavioural pattern of investment

aspect of working capital and its impact on profitability. A linear trend equation is fitted

to estimate the net working capital.

In order to analyze the behavior pattern of investment aspect of working capital in

Dharani Sugar Limited, the researcher has used the trend analysis.

To identify the significant financial ratios, factor analysis has been used for the

study.
 8

1.8 OPERATIONAL DEFINITION OF CONCEPTS

1.8.1 Agro-based Factory

It is a factory using agricultural produce, as its main raw material.

1.8.2 Capacity Utilized

It is the ratio of production to install capacity in a specified period.

1.8.3 Capital Employed

It is the long-term funds supplied by the creditors and owners of the firm.

1.8.4 Co-generation

Simultaneous generation of electricity produced during the process of sugar

production is known as Co-generation. In this context, it refers to the generation of power

over and above the sugar plant’s requirement which is fed to the electricity grid.

1.8.5 Current Assets

Assets are convertible into cash within a year known as current assets.

In this study, current assets include cash and bank balance, inventories, sundry

debtors loans and advances.

1.8.6 Current Liabilities

Liabilities are payable within a period of one year termed as Current liabilities

that include amounts due to the members of the current liabilities staff, workers, farmers
 9

supplying sugarcane, provision for gratuity, bad and doubtful debts, cash credit, and short

term loans.

1.8.7 External Equities

The amount due to outsiders i.e. other than the shareholders will be called as

External equities. Claim of the outsiders, otherwise is known as debt.

1.8.8 Fixed Assets

Assets are acquired only for carrying on business and not for sale, such as

buildings, rest sheds, canteen buildings, wells and water supply arrangements, plant and

machinery fencing tools, engineering and electrical implements, sanitary equipments,

inter-com phone installations and so on.

1.8.9 Gross Profit

Net sales minus the cost of goods sold before considering general expenses,

incidental income and income deductions will be termed as Gross profit.

1.8.10 Internal Equities

The amount due to the preference and equity shareholders like share capital and

reserves.

1.8.11 Inventory

This is an asset consisting of raw materials to be used in the manufacture of a

product and also goods in the process of manufacture and finished goods ready for

delivery to customers.
 10

1.8.12 Liquid Assets

Current assets excluding inventories will be known as liquid assets.

1.8.13 Long-term Funds

The acquired funds that are repayable after one year are known as long-term

funds.

1.8.14 Limited Loss

That quantity of sugar left-over in Bagasse after the extraction of juice.

1.8.15 Net Profit

The financial gain achieved by a firm over a period from a particular activity,

which is measured after allowing all expenses incurred during the period.

1.8.16 Open Market Recovery

The ratio of cumulative quantum of sugar produced to the cumulative quantum of

sugarcane crushed during the months of December, January, February and March during

every crushing season. It is expressed as a percentage.

1.8.17 Productivity

An indicator of efficiency of a production activity measured by comparing the

quantity produced and the resources used to produce it.

1.8.18 Raw Sugar

Sugar crystals before washing, with a sucrose content ranging from 90 to 98

percent.
 11

1.8.19 Recovery Rate of Sugar

The relationship between the quantity of sugar obtained and the quantity of

sugarcane crushed. It is expressed as percentage.

1.8.20 Reserved Cane Area

Allotted area for sugarcane procurement for a sugar factory.

1.8.21 Statutory Minimum Price (SMP)

The minimum price fixed each year by the Central Government for the sugarcane

supplied for manufacturing white sugar.

1.8.22 Sugar Year

It consists of twelve months from October to September. But for the purpose of

this study, the number of working days namely 172 at the rate of 22 hours per day has

been considered as the working time unit.

1.8.23 Tangible Assets

Those assets which can be seen and felt are Tangible assets.

1.8.24 Accounting Year

Accounting year, up to 1987, signifies the year commencing from 1st October and

ending with 30th September and since 1987, it means year starting on 1st April ending

with 31st march next year.

 12

1.8.25 Total Owned Funds

Total owned funds include share capital, reserves and surplus and retained

earnings.

1.8.26 Term Loans

Term loans refer to the long-term loans provided by financial institutions as

secured and unsecured.

1.9 LIMITATIONS OF THE STUDY

The present study is confined to the Dharani Sugar Limited situated at

Vasudevanallur block of Sivagiri Taluk in Tirunelveli District of Tamilnadu. The results

of the study cannot be generalized for all sugar factories in Tamilnadu. Further the

present study is entirely based on the financial statements prepared by the Dharani Sugar

Limited. The research study is based on secondary data for 10 years from 2005-06 to

2014-15.

1.10 SCHEME OF THE REPORT

The present study entitled, “A Study on Working Capital Performance of Sugar

Factory with Special Reference to Dharani Sugar Limited at Vasudevanallur” has been

organized into seven chapters. They are given below:

Chapter I

The First Chapter deals with the introduction, statement of the problem, Need for

the study, objectives, research methodology and limitations of the study.

 13

Chapter II

The second chapter reviews the earlier studies relating to working capital

performance of sugar limited.

Chapter III

The third chapter discusses the growth of sugar factoires in India and Tamilnadu.

Further, it describes the study unit in Dharani Sugar limited at Vasudevanallur.

Chapter IV

The fourth chapter analyses the working capital performance of Dharani Sugar

limited.

Chapter V

The fifth chapter deals with the behavioural pattern of investment aspect of

working capital.

Chapter VI

The sixth chapter throws light on the behavioural pattern of working capital and

its impact on profitability.

Chapter VII

The seventh chapter presents the summary of the findings along with

conclusions and suggestions.