Working Capital Management-Comparative Analysis
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
PROJECT TITLE WORKING CAPITAL and INVENTORY ANALYSIS
UNDER THE GUIDANCE OF Mr. INDRAJIT ROY
HEAD, FINANCE AND ACCOUNTS (DECISION SUPPORT) TATA STEEL JAMSHEDPUR & Lecturer. Mrs NANDITA MISHRA FACULTY MENTOR INSTITUTE OF MANAGEMENT STUDIES GHAZIABAD
Submitted By: PRATEEK SANDHU Roll No.: BM-010111
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
D E CLARATION
I , Prateek Sandhu, the undersigned, a student INSTITUTE OF MANAGEMENT STUDIES, Ghaziabad, declare that project report titled “Working capital and Inventory management at TATA STEEL” submitted in partial fulfillment of the requirement for the summer internship project during the Post graduate program in planning and management, a prestigious Post graduate diploma awarded by Institute Of Management Studies . The project duration was from 20th April2011 to 2nd July 2011.
This is my original work and has not been submitted as part of another degree or diploma of other business school or university.
The findings and conclusions of this report are based on my personal study and experience, during the tenure of my summer internship.
Name : Prateek Sandhu
Institute Of Management Studies
Ghaziabad
S ignature:
Date: 20th June 2011
Place: TATA STEEL (Jamshedpur)
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
ACKNOWLEDGEMENT
I would like to extend my gratitude to Mr. Indrajit Roy (Head Financial Account) for giving me opportunity to work in such an important sphere and sharing his vision and experience. Mr. Imtiaz Ahmed for his continuous support and guidance; Mr.Gautam Ghosh (Manager, Tata Management Development Centre (TMDC) for providing me the opportunity to learn and complete my summer internship in this esteemed organization.
I also take the opportunity to thanks Mrs Nandita Mishra ( Institute Of Management Studies ) for her guidance and invaluable inputs in the development of the project , and interims of managing the real time issues that we faced in the corporate world .
Last but not the least I would like to extend my thanks to all the employees at finance department , my family and friends for their cooperation , valuable information and feedback during my project .
Prateek Sandhu
Institute Of Management Studies
Ghaziabad .
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
PREFACE
It has been a fruitful summer project. The summer training has been a greater into the corporate culture and has enriched my knowledge about conducting my business. Having spent some mature individual ,prepared to take on the pressure of the business world.
This report added immensely to my knowledge how a corporate world actually work as a team to achieve its goals ,the spirit and the enthusiasm of the leading ahead from its competitors and the above all true and fair view as the main motto and the most of all various techniques used to maximize efficiency and increase production.
I will be grateful to TATA STEEL for giving me the opportunity to be part of this repudiated organization and help me throughout in understanding some of the important facts concerned with this prestigious institution.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Table of content SL . PARTICULARS PAGE No No . 1. DECLARATION 3 2. ACKNOWLEDGEMENT 4 3. PREFACE 5 4. OBJECTIVE OF PROJECT 9 5. INTRODUCTION 10 – 27
a. Steel Industry Overview
b. SWOT Analysis
c. Michael Porter Analysis
d. History Of TATA STEEL
e. Subsidiaries Of TATA ( Domestic / Global )
6. COMPANY PROFILE 28 - 36
a. Management Of Tata Steel
b. Product Portfolio
c. Vision & Mission of Tata Steel
d. Group Vision
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
e. Tata Steel business objectives
7. RESEARCH METHODOLOGY 37 – 40
a. Scope Of the Project
b. Research Design
c. Collection Of Data
8. DATA ANALYSIS OF TATA STEEL 41 – 59
a. Net Working Capital
b. Percentage Change In Working Capital
c. Financial Ratios
d. Operating Cycle
9. DATA ANALYSIS OF JSW ( Jindal steel works ) 60 - 75
a. Net Working Capital
b. Percentage Change In Working Capital
c. Financial Ratios
d. Operating Cycle
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
10. DATA ANALYSIS OF SAIL (Steel Authority of 76 - 94 India ltd )
a. Net Working Capital
b. Percentage Change In Working Capital
c. Financial Ratios
d. Operating Cycle
11. COMPARATIVE ANALYSIS 95 - 110
a. Operating Cycle
b. Financial Ratios
12. CHAPTER - 2
13. INVENTORY OVERVIEW 111 - 117
a. Inventory Management at Tata Steel
b. Policies Maintained By Tata Steel for Inventory
14. FINANCIAL ANALYSIS 118 - 137
a. Ratios
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
b. Operating Cycle
c. COST SHEET
15. COMPARITIVE ANALYSIS 138 - 151
a. JSW
1. Balance Sheet
2. Profit & Loss a/c
b. ESSAR STEEL
1. Balance Sheet 2. Profit & Loss a/c
c. SAIL
1. Balance Sheet 2. Profit & Loss a/c
16. PRESENTATION of INVENTORY at TATA STEEL 152 - 156
a. Inventory of Tata Steel Product and Location Wise
17. CONCLUSION 158
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
18. RECOMMENDATIONS 159
19. LIMITATIONS 160
20. BIBLIOGRAPHY 161
21. ANNEXTURE 162
OBJECTIVE OF THE PROJECT :
1) To understand the concept of WORKING CAPITAL and INVENTORY MANAGEMENT.
2) To understand the techniques and processes of WORKING CAPITAL and INVENTORY MANAGEMENT at TATA STEEL. TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
3) To analyze the effectiveness and efficiency of the existing working capital and inventory Control system.
4) To compare the working capital and inventory position of TATA STEEL with other players in the market.
5) To find out areas of weakness, if any.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
STEEL INDUSTRY OVERVIEW
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
World steel production graph
World steel association, anshuman, previous report, 2010 steel production & news
Global Steel Industry
The crude steel production for 66 countries reporting to the World Steel Association was 1220 million metric tonnes for calendar year 2009, lower by 8% against that of 2008. Hit by the economic downturn, the drop in production was nearly in all steel producing countries barring positive growth recorded in China, India and the Middle East. In most countries including the developed steel markets of the EU, the U.S.A., Japan, Brazil, CIS deterioration in the economy resulted in a sharp decline of demand in key steel using sectors. The following table shows the growth in terms of crude steel production for the top ten steel producing nations:
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Rank Country 2010 2009 Change
1 China 626,654 573,567 9.26%
2 Japan 109,600 87,534 25.21%
3 U.S. 80,594 58,196 38.49%
4 Russia 67,021 60,011 11.68%
5 India 66,848 62,838 6.38%
6 South Korea 58,453 48,572 20.34%
7 Germany 43,815 32,670 34.11%
8 Ukraine 33,559 29,855 12.41%
9 Brazil 32,820 26,507 23.82%
10 Turkey 29,002 25,304 14.61%
(Figures in Thousand Metric Tons)
As a result of the strong growth in China in sharp contrast to the decline in major parts of the globe, the list of the top ten steel producing companies during 2009 was dominated by Chinese companies.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Rank Company Country 2010
Crude steel output per year in MT .
1 Arcelor Mittal Luxemburg 1,03,300,000
2 Nippon Steel Japan 37,500,000
3 Bao Steel China 35,400,000
4 POSCO South Korea 34,700,000
5 Hebei Iron & Steel China 33,300,000 Group
6 JFE Holdings Japan 33,000,000
7 Wuhan Steel China 27,700,000
(WISCO)
8 Tata Steel India 24,400,000
(TISCO)
9 Jaingsu Shagong China 23,300,000 Group
10 US Steel USA 23,200,000
(Figures in million metric tonnes)
Steel Industry in India
The efforts to develop the steel industry in India started during the first five year plan but the real developments started happening from 1980s onwards. Although the Indian steel industry increased its production, in the nineties India imported huge quantity of steel to meet the growing demand of steel in the country. This scenario was totally changed in 2004 when India stood at the ninth position in terms of crude steel production in the whole world and in 2006, India was at the seventh place among the crude steel producing companies.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
There are different factors that are responsible for this development. Firstly, the Indian government has taken some reformatory steps that have helped the Indian steel industry to grow at a good pace. The Indian government has set a target to increase the crude steel production and till 2019-20, the Indian steel industry is expected to produce nearly 110 million tones of crude steel.
The production of flat products and long products of major Indian companies is estimated to have grown by around 12% and 8% respectively during the financial year 2009-10 when compared with the previous financial year. While the long products exports were almost at the same level as that in the last year, fl at products exports dipped by around 30% on account of the global slowdown. The imports on the other hand were higher for both fl at products as well as long products by around 17% and 35% respectively as the fl at products and long products segments experienced around 23% and 9% increase in steel consumption. In line with the fiscal stimulus package announced in the country, the Government of India removed export duty on all steel items, reintroduced import duty of 5% on steel, restored DEPB benefits, reduced excise duty to 8% for major part of the year, placed import of hot rolled coils on the ‘restricted list’ thus making them available to direct users only and withdrew countervailing duty on import of Thermo-Mechanically Treated (TMT) bars and structural. In order to ensure adequacy of availability of iron ore in domestic market, export duty on iron ore lumps has been increased from 5% to 10% and a 5% export duty has been imposed on iron ore fines to regulate the exports. The steel prices during the financial year 2009-10 have increased from the level prevailing in the quarter ended March 2009 driven primarily by the increase in the prices of input raw materials during the same period.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
SWOT ANALYSIS :
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
STRENGTH:
• Strong brand name like Tata Steel & Corus • Indian operation capable of meeting it’s own requirement • Strong supply chain for raw material leading sales & distribution • Low cost, high skilled labour.
WEAKNESS:
• Low R & D Investment
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
• Unscientific mining method • Technologically backward • Low productivity
OPPURTUNITY:
• Unexplored rural markets • Growing domestic market • Growing global market • Carbon trade • High investment in infrastructure sector
THREATS:
• Major player entering Indian market • China set to become a net exporter • High duties and taxes from the government • Environmental concerns & laws • Global slowdown
MICHAEL PORTER ANAYLYSIS :
Michael Porter had identified five competitive forces that shape every single industry and the market. These forces help in analyzing the industry from the intensity of competition to the probability and attractiveness of an industry.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Threat of new Entrants :
The easier it is for new companies to enter the industry, the more cut-throat competition there will be. Steel industry is highly capital intensive and is estimated that to set up 1 MTPA capacity of integrated steel plant, it requires around Rs. 30 billion of investment depending upon the location of the plant and technology used. The government follows a favorable policy for steel manufacturers but certain discrepancies involved in allocation of iron ore mines and land acquisition in India.
Bargaining power of suppliers : If one supplier has large impact on the company’s margin and volume then it holds substantial power. In the steel industry the bargaining power of supplier is very low because the big players in the industry have their own mines for major raw materials. However, still a few companies have to depend up on suppliers for the raw materials.
Bargaining power of Buyer : In the steel industry unlike the household goods market the buyers have a very low bargaining power. The only effort which can be done towards ensuring that the buyers are saved in the curb or ceiling laid by the government on the prices which can be charged by the companies on its product. However, most of the sale of steel is to the other industries or to through the distribution network and very less to the common man. TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Competitive Rivalry : In India the steel industry is dominated by a major few players only and the degree of competitive rivalry is very low as the demand is always more than the supply or the production of the companies.
Threat of substitutes : The presence of substitute products increases the propensity of customers to switch to alternatives. The usage of aluminum has been constantly growing in the automobile sector which used to be the major customer of the steel industry. However, because of the durability and other features of the steel, aluminum does not stand as a threat in the market
TATA STEEL ( Jamshedpur )
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
We aspire to be the global steel industry benchmark for Value creation and corporate citizenship
“The world’s10th largest steel company and the world’s 2nd most geographically diversified steel producer.”
“A balanced global presence in over 50 markets and manufacturing operations in 26 countries.”
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
HISTORY OF TATA STEEL
Formerly known as Tata Iron and Steel Ltd. (TISCO), TATA STEEL was registered in Bombay( now Mumbai) on August 26, 1907.It had an initial capacity of 1,60,000 tones of ingot steel,70,000 tones of rails, beams and shapes and 20,000 tones of bars, hoops and rods. It also had a power house, auxiliary facilities and a laboratory. In 1917, the company increased its steel Capacity to 5,00,000 tonnes and introduced the Modern Duplex process of making steel. Since the company has continued to add new units and increase capacity.
In the 1980’s the company undertook in various phases an ambitious “Modernization Programme.”The first phase, between 1981and1985, involved a total project cost of Rs 223 chores. This phase, among others saw the installation of two 130 tone LD converters, two 250 tone a day Oxygen Plants, a bar forging machine, two vertical twin shaft lime kilns and a tar-dolo brick plant. Significantly, a six-strand billet caster and a 130-tonne vacuum arc-refining unit were installed that too in the integrated steel plant.
The second phase (1985-1992) involved a project cost ofRs780crores. It saw for the first time in India coal injection in blast furnace and coke oven battery with 54 ovens using stamp-charging technology. A 0.3 MTPA 9million tone per annum) wire rod mill, a 2.5mtpa sinter plant, a bedding and blending plant and a waste recycling plant of 1 MTPA were installed.
The company recently commissioned its 1.2MT (million tone) capacity Cold rolling Mill Complex .At a project cost of Rs 1600 chores. This Four-Phase Modernization Programmed has enabled Tata steel to be equipped with the most
modern steel- making facilities in the world. As of today The Tata steel facility has a Hot Metal Capacity of 3.8MTPA, corresponding to a saleable steel Capacity of 3.4 MTPA.
In the fifth phase stress s laid on the utilization of the intellectual capabilities of the employees to generate sustainable value for the shareholders.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Rather than create new personal assets, the focus has now shifted to how best to use those assets to get optimum value. The human resource
management division of TATA STEEL has developed what is called the “mindset programme”. Which is designed to bring about an attitudinal change among the employees. The programme Seeks to inculcate in the employees self-awareness and a positive outlook.
In order to improve its performance further the company engaged the internationally reputed Consultants Mckinsey & Co, who suggested the Total Operational Performance(TOP) Enhancement Programme structured time bound, team-based programme, it uses the creativity and energy of the employees to increase output with the minimum investment and in the shortest possible time.
In 2005 Tata Steel acquired Singapore based steel company Nat Steel by subscribing to 100per cent equity of its subsidiary, NatSteel Asia. Tata Steel is rapidly expanding capacity and plans to produce 15MT of steel annually by 2010.It acquired Singapore’s NatSteel in August 2004. This has added 2 MT to its capacity. It is close to completing a 1 MT capacity expansion in its Jamshedpur plant. The expansion is scheduled to be completed by September 2005. In addition a 6 MT green field plant is to be developed in Kalinganagar, Orissa, India (to be commissioned in 2010) and another 2.4 MT capacity expansion will be taken up in Jamshedpur. After partnership with Corus Group, the combined entity will be the 6th largest steel producer and the 2nd most geographically diversified steel company in the World.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
FOUNDERS OF TATA STEEL
Jamsedji Nusserwanji Tata (1839 – 1904)
He was a visionary behind Tata Steel .He realized that India’s real freedom depended upon its self- sufficiency in scientific knowledge, power and steel, thus devoted the major part of his life, and his fortune to three great enterprises-The Indian institute of Science at Bangalore, the Hydro-electric schemes and the Iron & Steel Works at Jamshedpur .He envisaged and conceived a steel town to the very last detail, later to be named as Jamshedpur.
J.N. Tata had exhorted to his sons to pursue and develop his life’s work ; his elder son, Sir Dorabji Tata(1859-1933) carried out the bequest with scrupulous zeal and distinction .Thus , even though it was Jamshedji Tata who had envisioned the mammoth projects, it was in fact Dorabji Tata who actually brought the ventures to existence and fruition. He was the first chairman of the gigantic Tata enterprises.
It was in 1907 that the village of Sakchi was discovered at the confluence of two rivers, Subarnarekha and Kharkhai and the railways station of kalimati .The Tata Iron and Steel Company was floated.
Sir Dorabji Tata (1859 – 1933)
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Sir Dorabji Tata(1859-1933) carried out the bequest with scrupulous zeal and distinction.
Thus , even though it was Jamshedji Tata who had envisioned the mammoth projects, it was in fact Dorabji Tata who actually brought the ventures to existence and fruition. He was the first chairman of the gigantic Tata enterprises.
Bharat Ratna Jehangir Ratanji Dadabhai Tata (1904 – 1993)
J.R.D.Tata has been one of the greatest builders and personalities of modern India in the twentieth century.
He assumed Chairmanship of Tata Steel at the young age of 34, but his charismatic, disciplined and forward looking leadership over the next 50 years led the Tata Group to new height of achievement, expansion and modernization.
His style of management was to pick the best person for the job at
hand and let him have the latitude to carry out the job. He was never interested for Micro- Management. It was he who zeroed in on Sumant Moolgaokar, the engineering genius who successfully steered our company for many years. He was a visionary whose thinking was far ahead of his time, which helped Tata Group launching it’s own Airlines ,now known as as Air India. He was awarded the country’s highest civilian honour, The Bharat Ratna in 1992.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
RATAN NAVAL TATA
Ratan Navel Tata was born on December 28, 1937, in Surat. He is the present Chairman of Tata Group, India’s largest conglomerate founded by jamshedji Tata and consolidated and expanded by later generation of his family. He is one of the most well known and respected industrialists in India.
Tata was born into wealthy and famous family of Mumbai. His childhood was troubled as his parents separated in the mid 1940s, when he was about seven and his younger brother was five. His mother moved out and both he and his brother were raised by his grandmother Lady Navarjbai.
Ratan Tata completed his degree in architecture with structural engineering from Cornell University in 1962, and the Advance management Program from Harvard Business School in 1975. He joined the Tata Group in December 1962 on the advice of JRD Tata. He was first sent to Jamshedpur to work at Tata steel. He worked on the floor with the other blue collar employees, shoveling limestone and handling the blast furnaces. He was appointed the Director In Charge of The National Radio & Electronics Company Limited (Nelco) in 1971 and was successful in turning Nelco around.
IN 1981, he became the chairmen of Tata industries and was instrumental in ushering in a wide array of reforms. It was under his stewardship that Tata consultancy services went public and Tata Motors was listed in the New York stock Exchange.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
On the occasion of India’s 58th Republic day on 26 January, 2000, Ratan Tata was honoured with the padma Bhushan, the third highest decoration that might be awarded to a civilian.
His recent achievements have been the acquisition of Corus Group, and Anglo-Dutch steel and aluminium producer. This acquisition has made Tata steel the fifth largest producer of steel in the world.
TATA STEEL: AN ORGANISATIONAL PROFILE Established in 1907, Tata Steel is Asia's first and India's largest private sector steel company. Tata Steel is among the lowest cost producers of steel in the world and one of the few select steel companies in the world that is EVA+ (Economic Value Added).
Tata Steel has operations in 10 countries and maintains a strategic presence in select Geographic’s through exports. GROWTH AND GLOBALISATION. Jamshedpur,India- 5 million tones per annum, slated to reach 7 MTPA in 2008&10 MTPA by 2011.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Partnership with Corus On partnership with Corus group, the combined entity will be the 6th largest steel producer and the 2nd most geographically diversified steel company in the world.
Nat steel Asia Singapore 2 million tonnes ;Singapore ,China,Vietnam,Thailand and three other South East Asian countries. Tata Steel , Thailand - 1.7 million tonnes
Limestone mining in Thailand.
Low ash coal in Australia.
Wire manufacturing unit in Sri Lanka known as Lanka special steel captive raw material resources in India give it a competitive advantage.
Other Projects:
India 1.2 MTPA Metcoke project in West Bengal
Deep sea port in Dhamra, Orissa
Titanium Dioxide project in Tamil Nadu
Joint Venture with BlueScope Steel for metallic coating and painting steel unit
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Overseas: Development of a source of low ash coal from Queensland, Australia
Ferro Chrome production in Richards Bay, South Africa
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Some subsidaries of TATA STEEL (Domestic & GLOBAL )
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
compANY PROFILE
An overview of the company
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
TATA Steel has been ranked at the top of the Nielsen’s corporate image monitor study followed by TATA Motors.
The world’s most admirable companies 2011, published by Fortune Magazine, ranks TATA steel on 6th position in metal industry category.
Tata Steel, formerly known as TISCO (Tata Iron and Steel Company limited), is the world’s seventh largest steel company, with an annual crude steel capacity of 30 Million Tones Per Annum (MTPA). It is the second largest private sector steel company in India in terms of domestic production. Ranked 315th on Fortune Global 500, it is based in Jamshedpur, Jharkhand, India.
It is part of Tata Group of companies in private sector with consolidated turnover of Rs.102,393 crores during the year ended March 31st, 2010. Its main plant is located at Jamshedpur in Jharkhand. With its acquisition of the Corus, Nat Steel and Millennium Steel it has become a multinational company with operations in various countries. Tata Steel has a balanced global presence in over 50 developed European and fast growing Asian markets, with manufacturing units in 26 countries. It is the world’s second most geographically diversified steel producer. Also it is the world’s lowest cost producer of steel with shareholder base of 800,000 people and an employee strength over 81,000 across 5 continents.
The registered office of Tata Steel is in Mumbai. The company is listed on Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Tata Steel is backed by 100 glorious years of experience in steel making with its establishment in 1907.
Performance after global economic downturn
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Following two years of the worst global economic downturn, The growth rates in the economies of the
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Through these difficult times, Tata Steel has struggled to adhere to its long-term strategies, both in India and overseas. There has nevertheless been need to re-schedule and re-prioritise investment strategies in consonance with market conditions during this period. In India, the Company has given top priority to the 2.9 million tone expansion programme at its Jamshedpur Works and its major greenfield 6 million tonne integrated steel plant in Orissa. Tata Steel Asia has steelmaking and finishing facilities in various Asian countries (including India) aggregating 10.5 million tonnes. Equal importance has been given to raw material security through the acquisition of iron ore and coal resources overseas to feed its UK and European plants, while rationalising capacities to make them viable in this period of slack demand.
While Tata Steel’s Indian operations have remained profitable, albeit at a lower level than the previous year, Tata Steel’s European operations remained underutilised and hence unprofitable. However, with the rationalisation, the European operations have become EBITDA positive for the last two quarters of 2009-10. The benefits of the rationalization will of course be more evident in 2010-11. In the coming years, Tata Steel expects to emerge as a global steel producer with a total annual output of between 40-50 million tonnes, with major manufacturing plants in India, several countries in Asia, the UK and Continental Europe, supported by integrated mining operations in several geographies.
MANAGEMENT OF TATA STEEL
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Board of Directors
Mr. Ratan N. Tata Chairman
Mr. B. Muthuraman Vice Chairman
Mr. Nusli N. Wadia Company Director
Mr. Iahaat Hussain Board Member
Mr. Subodh Bhargava Board Member
Mr. Jacobus Schraven Non-Executive Independent Director
Dr. Jamshed J. Irani Board Member
Mr. Andrew Robb Non-Executive Independent Director
Mr. S. M. Palia Company Director
Mr. Suresh Krishna Financial Institutions Nominee
Mr. Kirby Adams Managing Director & CEO, Tata Steel Europe
Mr. H.M. Nerurkar Managing Director, Tata Steel Limited
PRODUCT PORTFOLIO : L ong products :
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
• Wire rod mill. • Bar mill. • Merchant mill
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Flat products: • Hot strip mill. • cold rolling mill
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis Vision
We aspire to be the global steel industry benchmark for Value Creation and Corporate Citizenship We make the difference through:
Our people, by fostering team work, nurturing talent, enhancing leadership capability and acting with pace, pride and passion.
Our offer, by becoming the supplier of choice, delivering premium products and services, and creating value for our customers.
Our innovative approach, by developing leading edge solutions in technology, processes and products.
Our conduct, by providing a safe working place, respecting the environment, caring for our communities and demonstrating high ethical standards.
Mission
Consistent with the vision and values of the founder Jamsetji Tata, Tata Steel strives to strengthen India’s industrial base through the effective utilization of staff and materials. The means envisaged to achieve this are high technology and productivity, consistent with modern management practices.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
TATA STEEL - BUSINESS OBJECTIVE
• Be among the lowest cost producers in the world.
• Be the dominant player in the selected market.
• Focus on products having high growth and high returns.
• Produce steel products of the international quality.
• Sustainable growth.
• Divest, merge, acquire.
• Encourage innovation. . • Ensure safety and environment sustainability.
• Enthusiastic and happy employees.
• Improve the quality of life of the communities we serve.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
research methodology
The whole project has been made by collecting data through primary and secondary sources .Primary source stands for that information i.e. collected by direct queries to concern.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
SCOPE OF THE PROJECT:
1) To carry out a critical analysis of the TATA STEEL Ltd. Working capital management.
2) To find out the area of the weakness in the existing working capital control mechanism.
3) To extrapolate the company‟ s position with the steel industry.
RESEARCH DESIGN :
The study will be based on the based on the descriptive and applied research. The efficiency and efficacy of the working capital and inventory management model of the TATA STEEL Ltd. The accounting as well as the planning of the working capital needs a thorough study. By ratio analysis and trend analysis the result of the control mechanism can be summarized which will help in identifying the effectiveness of the system under the preview. Hence the ratio and the trend analysis will be used to arrive at the conclusion.
WORKING CAPITAL CONCEPT Definition :
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
The cash available for day to day operation of an organization .
Sources of Working Capital : 1 . Net Income 2 . Long Term Loan 3 . Sales of Capital Asset 4 . Injection of Fund by Stockholders .
Classification of Working Capital :
Component : 1 . Cash
2 . Marketable Securities
3 . Receivables
4 . Inventory
Time : 1 . Permanent : The amount of current asset required to meet a firms Long term needs .
2 . Temporary : The amount of current assets that varies with seasonal requirements .
FORMULA of WORKING CAPITAL :
Working Capital = Current Asset – Current Liability
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Collection Of Data (Data Information Sources) :
Data will be collected from both the primary and secondary sources:
PRIMARY SOURCE OF DATA:
Observation method Direct Interview Method Indirect Method Department Visit: comprises of discussion with concerned person and interviewing few officers in the account and finance sector.
SECONDARY SOURCE OF DATA :
Annual Report Journal and Books Study of files and office documents Different records by the Accounts and Bills Sections Websites of TATA STEEL Ltd.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
DATA ANALYSIS OF TATA STEEL
NET WORKING CAPITAL CURRENT ASSETS 2005-06 2006-07 2007-08 2008-09 2009-10
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis stores and spares 442.66 505.44 557.67 612.19 623.76 stock in trade 1,732.09 1,827.54 2,047.31 2,868.28 2,453.99 sundry debtors 539.40 631.63 543.48 635.98 434.83 interest accrued on investment 0.20 0.20 0.20 0.00 0.29 cash and bank balances 288.39 455.41 465.04 1,590.60 3,234.14 loans and advances 1,234.86 3,055.73 3,022.62 4340.43 3554.14
TOTAL (A) 4237.60 6475.95 6636.32 10047.5 10301.1 5
CURRENT LIABILITIES sundry creditors 2,534.03 3,145.99 3,243.42 3,842.78 4,086.65 subsidiary companies 62.37 102.61 115.74 1,358.12 1,514.30 interest accrued but not due 24.29 47.11 231.05 506.68 676.66 advances received from the 185.07 198.28 226.03 297.37 334.99 customers liability towards investors 30.23 29.21 39.02 34.91 40.49 education and protection fund provision for retiring gratuities 0.81 49.31 0.00 0.00 0.00 provision for employee 0.00 470.19 848.54 1,143.08 1,127.50 benefits provision for taxation 250.04 448.68 854.74 493.59 507.13 provision for fringe benefits 2.37 18.37 19.12 19.12 2.12 proposed dividend 719.51 943.91 1,191.12 1,278.40 709.77
TOTAL (B) 3,808.72 5,453.66 6,768.7 8,974.0 8,999.6 8 5 1
NET WORKING CAPITAL (A-B) 428.88 1,022.29 (132.46 1073.48 1301.54 )
(Figures are in Rs. Crores)
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
. Net Working Capital = Current Assets-Current Liabilities *Note : Current Assets for 2007-08, exclude the loan amount Rs. 3022.62 Cr. for the acquisition of Corus and cannot be used for day to day expenses, so it is excluded
Graph showing Current Assets, Current Liabilities and Net Working Capital
PERCENTAGE CHANGE IN WORKING CAPITAL CURRENT ASSETS 2005-06 2006-07 2007-08 2008-09 2009-10 stores and spares 26.81 14.18 10.33 9.78 1.89 stock in trade 13.70 5.51 12.03 40.10 (14.44) sundry debtors (7.29) 17.10 (13.96) 17.02 (31.63) cash and bank balances 16.89 57.91 2.11 242.04 103.33 loans and advances (10.68) 147.46 (1.08) 43.59 (18.11)
TOTAL (A) 3.77 242.16 9.43 352.53 41.04
CURRENT LIABILITIES sundry creditors 9.23 24.15 3.10 18.48 6.35 subsidiary companies 7.35 64.52 12.80 10.73 11.50
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis interest accrued but not (71.47) 93.95 390.45 119.29 33.55 due advances received from (7.24) 7.14 14.00 31.56 12.65 the customers liability towards investors 11.51 (3.37) 33.58 (10.53) 15.98 education and protection fund provision for retiring (88.04) 5987.65 0.00 0.00 0.00 gratuities provision for employee 0.00 0.00 63.34 34.71 .014 benefits provision for taxation (11.92) 79.44 90.50 (42.25) 2.74 provision for fringe 0.00 675.11 4.08 0.00 (88.91) benefits proposed dividend 0.00 31.19 26.19 7.33 (44.48)
TOTAL (B) 2.94 6959.78 638.04 169.32 (50.61)
Interpretation
In 2009-10, net working capital increased by 147% compared to previous year. It is because of increase in cash and bank balances and loans and advances in current assets side. But there is no significant increase in current liability side. Also Tata steel reduced the proposed dividend to Rs. 709.77 Cr. from Rs. 1,278.40 Cr. of Previous Year.
During FY 10, inventory decreased by 14% compared to FY 09. Purchase of finished and semi- finished products was much lower compared to previous year as requirements of Agrico and Wires Division were fully met from steel works in the FY 10 as against partial purchases from outside suppliers/imports in the previous year. Non purchase of sponge iron also contributed to lower value of purchase of finished and semi-finished products.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
While the stock of stores and spares as on 31st March, 2010 remained almost at the same level as on 31st March, 2009, the inventories of finished, semi-finished goods, scrap and raw materials was lower by 14% than that of last year. The raw materials inventory was also lower due to lower prices of coal and coke along with lower volume of coke. The raw material Stocks in The Company’s Ferro Alloys & Minerals division was also lower than the last year level.
Debtors as on 31st March, 2010 was lower by 32% as compared to 31st March, 2009 primarily due to stringent credit control measures and lower exports.
The increase of Rs. 939 cr. in loans and advances represents increase in advance against equity (to Centennial Steel) and advances to subsidiary companies (to Tata Steel KZN) partly offset by reduction in the amount receivable against forward covers.
FINANCIAL RATIOS
Working Capital Turnover Ratio:
Ratio that shows the number of times the working capital is converted into revenue in an accounting period, or how efficiently the management is using its working capital to generate sales Revenue.
Working Capital Turnover Ratio = Net Sales / Net Working Capital.
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
NET SALES 15,139.39 17,552.0 19,693.2 24,315. 25,021.98 2 8 77
NET WORKING CAPITAL 428.88 1022.29 (132.46) 1073.48 1301.54
WORKING CAPITAL TURNOVER 35.30 17.169 (148.67) 22.65 19.22 RATIO
Interpretation
Working capital turnover ratio has been decreased to 19.22 times in 2009-10 compared to 22.65 in 2008- 09. Decrease in working capital turnover is because of the increase in net working capital. The reason for increase in net working capital is the increase in cash and bank balances and loans and advances.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Reduction in working capital turnover is not a good sign. Tata Steel has a huge increase in working capital turnover in 2008-09 but could not keep the momentum to FY 10.
Current Ratio:
A liquidity ratio that measures a company ability to pay Short term obligations .
Current Ratio = Current Assets/Current Liabilities
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
CURRENT ASSETS 4,237.60 6475.95 6636.32 10047.50 10301.15
CURRENT LIABILITIES 3,808.72 5453.66 6,768.78 8,974.05 8,999.61
Current Ratio 1.11 1.187 0.98 1.119 1.144
Interpretation :
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
The Financial position is supposed to be very sound if the current ratio is more than 2:1 . In 2006 to 2007 Tata steel has improved its financial soundness as the current ratio is 1.18 which is higher as compared to previous years. It is observed that the company has met the crucial period during 2005 to 2006 when the current asset was almost equal to its current liability which is 1.11 this is because of low market and depression in the economy throughout the Country.
Quick Ratio :
An indicator of a company Short term liquidity . The quick ratio measures a company’s ability to meet its Short term obligations with its most liquid assets. The higher the Quick Ratio, the better the position of the company.
Quick Ratio = (Current Assets - Inventory) / Current Liability
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009- 10
CURRENT ASSETS 4,237.60 6475.95 6636.32 10047.5 10301. 15
STOCK IN TRADE 1,732.09 1,827.54 2,047.31 2,868.28 2,453.9 9
CURRENT LIABILITIES 3,808.72 5,453.66 6,768.78 8,974.05 8,999.6 1
QUICK RATIO 0.66 0.85 0.68 0.80 0.871
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Interpretation :
Higher the ratio the better is the capacity of business to meet its current obligations . In 2009 to 2010 the liquid ratio of tata steel is 0.87 which is aprox to standard 1:1 . In 2006 to 2007 the quick ratio is 0.85 which is also near to standard value 1 and hence during 2006 to 2007 and 2009 to 2010 company can meet with its short term obligations. It is also seen that 2005 to 2006 the liquid position of company was affected due to sufficient financing arrangement for CORUS acquisition .
Stock Turnover Ratio :
A ratio showing how many times a company inventory is sold or replaced over a period .
Stock Turnover Ratio = Cost of Goods Sold / Average Stock
Average Stock = Opening Stock +Closing Stock /2
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
COST OF GOODS SOLD 9922.7 11232.5 12641.1 17000.2 17807.68 7
AVERAGE STOCK 1,627.72 1,779.82 1,937.43 2,457.80 2,661.14
STOCK TURNOVER RATIO 6.09 6.31 6.52 6.91 6.69
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Interpretation :
Stock turnover ratio evaluates the efficiency of the firm in managing its inventory. This ratio indicates the number of times inventory has been converted into sales during the year. Tata Steel shows a constant increase in stock turnover till 2008-09. Stock turnover of 6.91 is good in terms of liquidity. It shows the efficient management of inventory. Turnover of 6.69 times in 2009-10 is also a good value as it is above 6, but it is less than 6.91 . There is an adequate internal control system commensurate with the size of the Company and the nature of its business with regard to purchases of inventory and fixed assets and the sale of goods and services. During the course of our audit, any major weakness has not been observed in such internal control system.
Debtors Turnover Ratio :-
Debtor turnover ratio indicates the velocity of debt collection of firm. In simple words it indicates the number of times average debtors ( Receivable ) are turned over during year .
Debtor Turnover Ratio = Net Sales / Average Debtors
Average Debtor = Opening Debtor +Closing Debtor / 2
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
NET SALES 15,139.39 17,552.0 19,693.28 24,315.77 25,021.98 2
AVERAGE DEBTORS 560.61 585.52 587.56 589.73 535.41
DEBTOR TURNOVER 27.01 29.98 33.52 41.23 46.73 RATIO
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Interpretation:-
Debtor turnover ratio indicates the time lag between credit sales and cash collection period. Debtor turnover ratio of 46.73 times in 2009-10 means Tata Steel collects the cash immediately after giving the delivery i.e., 7.8 days after the sales on an average. It is a marvelous turnover many companies dreaming to achieve. It increases the cash balance of the company and keeps the liquidity. Another fact is, debtor turnover ratio is increasing continuously last 5 years. It is an indication of stringent collection methods followed by Tata Steel. Also, they keep only a small portion that is around 4% as provision for bad debts.
Payables Turnover Ratio :
A short term liquidity measures used toquantify the rate at which a company pays off its suppliers . Accounts payable turnover ratio is calculated by taking total purchase made from suppliers and dividing it by the average account payable amount during the same period .
Payables Turnover Ratio = Net Credit Purchase / Average Creditors
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Average Creditor = Opening creditor +Closing creditor / 2
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
NET CREDIT PURCHASE 3,953.06 2970.55 3074.32 4266.89 3941.88
AVERAGE CREDITORS 1,878.05 2840.01 3194.70 3543.10 3964.71
PAYABLES TURNOVER 2.10 1.04 .96 1.20 .99 RATIO
(Note*- All purchases are assumed as credit purchase. Iron ore is excluded as it is obtained from captive mines)
Interpretation :
Payables turnover ratio of Tata Steel is an exceptional case. It is just slightly greater than one times. This shows that they pay creditors only one times in a year. They manage this turnover for last four years. It helps them to keep the cash with them for a long period and it can be used for other activities.
The study understands the liquidity strength of Tata Steel when the payables turnover is read along with debtor turnover. Debtor turnover is around 40 times in a year and payables turnover is only one times! It clearly shows the competitive advantage Tata Steel has over its suppliers and customers.
OPERATING CYCLE
Gross Operating Cycle (GOC) = RMCP + WIPCP + FGCP + DCP
Net Operating Cycle (NOC) = GOC - CDP
ITEMS 2005-06 2006-07 2007-08 2008-09 2009-10
raw material conversion period raw material consumption 2,639.17 3,419.46 3,841.87 5709.91 5494.74
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis raw material consumption per 7.23 9.37 10.53 16.98 18.09 day raw material inventory 1,627.72 1,779.82 1,937.43 2457.80 2661.14
RMCP ( Raw Material 225.11 189.98 184.07 144.76 147.09 Conversion Period )
work in progress cost of production 8,058.75 9,442.89 10,309.5 13975.99 14663.84 0 cost of process per day 22.08 25.87 28.25 38.29 40.17 work in progress inventory 28.18 26.44 50.21 72.33 115.91
WIPHP ( Work in Progress 1.28 1.02 1.78 1.89 2.89 Conversion Period )
finished goods cost of goods sold 13071.9 14728.0 6 13519.51 8 18759.70 17494.18 cost of goods sold per day 35.81 37.04 40.35 51.40 47.93 finished goods inventory 943.92 1,039.35 1,076.18 1218.06 1251.36
FGCP ( Finished goods 26.36 28.07 26.67 23.70 26.12 Conversion Period )
collection period credit sales at cost 15,139.3 17,551.09 19,691.0 24,315.77 25,021.98 9 3 sales per day 41.48 48.09 53.95 66.62 68.55 debtors 560.61 585.52 587.56 589.73 535.41
DCP ( Debtor Collection Period ) 13.52 12.18 10.89 8.85 7.81
creditors deferral period credit purchase 3,953.06 4,993.95 4,971.88 8,110.97 8,521.25
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis purchase per day 10.83 13.68 13.62 22.22 23.35 creditors 2374.79 2812.71 3194.71 3543.1 3,964.72 1
CDP ( Creditor Defferal Period ) 219.28 205.61 216.15 159.46 169.80
GROSS OPERATING CYCLE 266.27 231.25 223.41 179.21 183.91
NET OPERATING CYCLE 46.99 25.64 7.26 19.75 14.11
Interpretation ➢ From 2008-09, Tata Steel has been reducing the Raw Material Holding Period. It is a clear indication of efficiency of inventory management techniques Tata Steel follows. RMHP was reduced from 185 days in 2007-08 to 145 days in 2008-09. ➢ Work in Progress Holding Period (WIPHP) is maintained below 2 days till 2008-09 which is very good. This shows that there were no stoppages in the production process. Increase in WIPHP in 2009-10 is because of the increase in work in progress.Finished Goods Holding Period (FGHP) has been reducing constantly from FY 2006 to 2010. It is achieved by efficient supply chain management and good relationship with customers and dealers. ➢ Debtors Collection Period is also decreasing and it has come down to 7.81 days in FY 2010. It shows the prompt collection policy of Tata Steel from its customers. ➢ Creditors Deferral Period is at 170 days during FY 2010 which implies that company pays the creditors after 170 days of the purchase. The overall creditor’s value is Rs 8,521.25 crores while the purchase per day has also increased to Rs. 23.35 crores. ➢ Net Operating Cycle (NOC) is coming down to 14 days for the past five years. It is because of the increase in Creditors Deferral Period. It’s a positive signal for the company because it implies that the cash is available for other uses such as investing in new capital, spending on equipments and infrastructure, as well as preparing for possible share buybacks down the road.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Methods Of Calculation :
Raw Material conversion period :
Raw material Consumption The value of raw material consumption is taken from schedule 4 of the profit & loss account. Raw Material Consumption per Day The value of raw material consumption per day is taken by dividing raw material consumption by 360 days. Raw Material Inventory The opening and closing raw material is taken from schedule G contains the breakup of entire inventories. The last year closing is consider as the opining for the current year and average is calculated. Raw Material Holding Days Holding Days are calculated by the dividing raw material inventory by raw material consumption per day.
Work In Progress Conversion Period:
Cost of production The value of cost production is taken from schedule 4 of profit and loss account under manufacturing expenses. The entire manufacturing is given in the cost sheet format. The end value is taken as cost of production. Cost of Process per day The value of cost of process per day is calculated by dividing cost of production by 360 days. Works In Progress Inventory The opening and closing value of work in progress inventory is taken from schedule G of the balance sheet. The schedule G contains the breakup of entire inventory. The last year closing balance is considered as opening of
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
current year and average is calculated. Work in Progress Holding Days Holding days are calculated by dividing work in progress inventory by cost of process per day.
Finished Goods :-
Cost of Goods Sold The value of cost of goods sold is calculated by subtracting profit before taxation from net sales. The net sale is taken from profit and loss account as well as profit before taxation. Then the result is calculated. Cost of Goods Sold Per Day The value is calculated by dividing cost of goods sold by 360 days. Finished Goods Inventory The opening and closing value of finished goods inventory is taken from schedule G of the balance sheet . The schedule G contain the break up of entire inventories . The last year closing balance is consider as opening for current year and average is calculated . Finished Goods Holding Days The value is calculated by dividing finished goods sold per day.
Collection Period :
Credit Sales The value of entire net sales from profit and loss account is taken as credit sales for particular year . The entire net sales is consider as credit sales . Sales Per Day The value is calculated by dividing the entire credit sales by 360 .
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Debtor The value of debtor is taken from balance sheet . Debtor comes under the head of current asset in the balance sheet . Debtor Outstanding Days The value of outstanding days is calculated by dividing debtors by sales per day .
Creditor Deferral Period :
Credit Purchase For the year 2008 – 2009 no purchase is shown . Therefore we have calculated the percentage from raw material consumed and then the entire calculation is done . Purchase Per Day The value is calculated by dividing the entire credit purchase by 360 days . Creditors The value of creditor is taken from the schedule of current liabilities and provision . Creditors Deferral Period The value of deferral period is calculated by dividing by purchase per day .
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
daTA ANALYSIS OF JSW STEEL
NET WORKING CAPITAL
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
CURRENT ASSETS 2005-06 2006-07 2007-08 2008-09 2009-10
Inventories 924.23 1,011.35 1,549.16 2,051.4 2,585.7 2 7
Sundry Debtors 229.19 245.16 337.39 398.14 563.25
Cash and Bank Balances 98.87 337.80 339.22 419.96 287.11
Loans and Advances 979.42 549.28 842.15 1,744.8 2,123.3 8 9
Other Current Assets 513.70 342.04 18.62 17.24 0.00
TOTAL (A) 2,745.41 2,485.63 3,086.54 4,631.6 5,559.5 4 2
CURRENT LIABILITIES
Acceptances 1,027.33 1,478.00 2,060.26 5,293.0 5,047.7 9 5
Sundry Creditors 612.78 510.87 1,295.72 1,652.1 1,655.5 7 8
Rents and Other Deposits 0.00 0.00 20.46 43.43 58.65
Advances from the Customers 38.04 40.48 74.83 164.29 180.38
Interest accrued but not due on 125.59 142.25 142.45 65.14 76.20 loans
Other Liabilities 115.19 28.26 56.70 51.67 53.31
Premium payable on 0.00 0.00 72.30 188.16 268.21 redemption of FCCBs & Preference Shares
Investor Education and 7.93 12.17 15.94 18.33 17.59 Protection Fund
Provision for Income Tax 213.51 31.50 0.00 0.00 0.00
Provision for Wealth Tax 1.50 0.41 0.55 0.40 0.00
Provision for Fringe Benefits 3.24 0.27 0.80 0.95 0.00
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Provision for Employee Benefits 0.00 0.00 21.99 23.77 24.48
Proposed Dividend on 27.90 27.90 29.06 28.99 27.90 Preference Shares
Proposed Dividend on Equity 125.58 0.00 261.87 18.71 177.70 Shares
Corporate Dividend Tax 0.00 4.74 49.44 8.11 34.14
Tax on Equity Preference 21.53 0.00 0.00 0.00 0.00 Dividend
Provision for Leave Encashment 0.00 10.46 0.00 0.00 0.00
TOTAL (B) 2,320.12 2,287.31 4,102.37 7,557.2 7,621.8 1 9
NET WORKING CAPITAL (A-B) 425.29 198.32 (1,015.8 (2,925. (2,062. 3) 57) 37)
(All the figures are in Rs. Cr)
Graph showing Current Assets, Current Liabilities and Net Working Capital
PERCENTAGE CHANGE IN WORKING CAPITAL
CURRENT ASSETS 2005-06 2006-07 2007-08 2008-09 2009-10
Inventories 24.32 9.43 53.18 32.42 26.05
Sundry Debtors (14.03) 6.97 37.62 18.01 41.47
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Cash and Bank Balances (199.28) 241.66 0.42 23.80 (31.63)
Loans and Advances 28.62 (43.92) 53.32 107.19 21.69
Other Current Assets 0.00 (33.42) (94.56) (7.41) (100.00)
TOTAL (A) 44.95 (9.46) 24.18 50.06 20.03
CURRENT LIABILITIES
Acceptances 54.02 43.87 39.40 156.91 (4.64)
Sundry Creditors 24.82 (16.63) 153.63 27.51 0.21
Rents and Other Deposits 0.00 0.00 0.00 112.27 35.04
Advances from the Customers 111.92 6.41 84.86 119.55 9.79
Interest accrued but not due on 22.75 13.27 0.14 (54.27) 16.98 loans
Other Liabilities 26.21 (75.47) 100.64 (8.87) 3.17
Premium payable on 0.00 0.00 0.00 160.25 42.54 redemption of FCCBs & Preference Shares
Investor Education and 22.95 53.47 30.98 14.99 (4.04) Protection Fund
Provision for Income Tax 69.76 (85.25) (100.00) 0.00 0.00
Provision for Wealth Tax 30.43 (72.67) 34.15 (27.27) (100.00)
Provision for Fringe Benefits 0.00 (91.67) 196.30 18.75 (100.00)
Provision for Employee Benefits 0.00 0.00 0.00 8.09 2.99
Proposed Dividend on 0.00 0.00 4.16 (0.24) (3.76) Preference Shares
Proposed Dividend on Equity 94.64 (100.00) 0.00 (92.86) 849.76 Shares
Corporate Dividend Tax 0.00 0.00 943.04 (83.60) 320.96
Tax on Equity Preference 66.00 (100.00) 0.00 0.00 0.00
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Dividend
TOTAL (B) 44.26 (1.41) 79.35 84.22 0.86
Interpretation
For past three years JSW Steel has a negative net working capital as the current liabilities are more than current assets. It is very important for a company to keep a ratio of 2 between current assets and current liabilities to meet its daily liquidity requirements. Increase in current liabilities is because of increase in acceptances from subsidiary companies and customers which occurred due to increase in the value of purchases/services on account of expansion projects.
2009-10
During 2009-10, inventory has been increased by 26% compared to previous year. Higher inventory of raw materials & spares is mainly due to commencement of new facilities. During same year debtors have been increased by 41% in connection with 30% increase in sales. 21% increase in loans and advances was mainly due to increase in entitlement of Minimum Alternative Tax credit of Rs. 259 crores. Current liabilities are almost same as previous year. It is mainly due to payment of project creditorsrelating to new 2.8 mtpa expansion project and other projects.
2008-09
Inventories increased by 32% from Rs. 1,549 crores in 2007-08 to Rs. 2,051 crores in 2008-09. Increase in stores & spares was mainly due to commencement of new facilities. Increase of Finished Goods was mainly due to inventory (Rs. 101 crores) arising out of trial run production of 2.8 MTPA expansion project. Sundry debtors increased by 18% from Rs. 337 crores in 2007-08 to Rs. 398 crores in 2008-09. Loans and Advances increased by from Rs. 842 crores in 2007-08 to Rs. 1,744 crores in 2008-09. The increase was mainly due to a) Loans and advance given to JSW Steel (Netherlands) B.V. amounting to Rs. 664 crores. b) Minimum Alternative Tax credit entitlement of Rs. 95 crores. The current liabilities increased from Rs. 4,102 crores in 2007-08 to Rs. 7,557 crores in 2008-09. The increase was mainly due to increase in the value of purchases/services on account of expansion projects.
2007-08 TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
The inventory increased to Rs. 1,549.16 crores as on 31 March 2008 from Rs. 1,011.35 croresas on 31 March 2007 a growth of about 53.18%. Even as debtors increased from Rs. 245.16 crores in 2006-07 to Rs. 337.39 crores in 2007-08, the debtors’ cycle remained at 9 days (of gross sales) to that of in 2006- 07.
2006-07
Cash and Bank balances increased to Rs. 337 crores in 2006-07 from Rs. 98.87 crores during 2005-06. Net working capital decreased to Rs. 198 crores from Rs. 425 crores of previous year. Decrease in net working capital is because of the decrease in loans and advances and other current assets.
FINANCIAL RATIOS Working Capital Turnover Ratio :
Ratio that shows the number of times the working capital is converted into revenue in an accounting period , or how efficiently the management is using its working capital to generate sales revenue .
Working Capital Turnover Ratio = Net Sales / Net Working Capital
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
NET SALES 6,180.10 8,594.44 11,420.0 14,001.25 18,202.4 0 8
NET WORKING CAPITAL 425.29 198.32 (1,015.8 (2,925.57 (2,062.3 3) ) 7)
WORKING CAPITAL TURNOVER 14.53 43.34 (11.24) (4.79) (8.83) RATIO
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Interpretation
Working capital turnover ratio of JSW Steel is showing negative values for past three years. It is because their net working capital is negative. Also it is not showing any sign of improving as it is fluctuating between -5 and -10. It is really not good for a company to have a negative working capital turnover ratio. It will affect the daily liquidity requirements of the company. Increase in current liabilities is because of increase in acceptances from subsidiary companies and customers.
Current Ratio :
A liquidity ratio that measures a company’s ability to pay Short term obligations .
Current Ratio = Current Assets / Current Liabilities Particulars 2005-06 2006-07 2007-08 2008-09 2009-10
CURRENT ASSETS 2,745.41 2,485.63 3,086.54 4,631.64 5,559.52
CURRENT 2,320.12 2,287.31 4,102.37 7,557.21 7,621.89 LIABILITIES
CURRENT RATIO 1.18 1.09 0.75 0.61 0.73
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Interpretation
The interpretations given for working capital turnover ratio suit current ratio also. Because of the negativity of net working capital, current ratio falls below one. Standard value for current ratio is 2 and JSW has to take the initiatives to increase the current ratio. Increase in current liabilities is because of increase in acceptances from subsidiary companies and customers as part of expansion projects.
Quick Ratio :
An indicator of a companys Short term liquidity . The quick ratio measures a companys ability to meet its Short term obligations with its most liquid assets . The higher the Quick Ratio, the better the position of the company .
Quick Ratio = (Current Assets – Inventories) / Current Liabilities
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
CURRENT ASSETS 2,745.41 2,485.63 3,086.54 4,631.64 5,559.52
INVENTORIES 924.23 1,011.35 1,549.16 2,051.42 2,585.77
CURRENT LIABILITIES 2,320.12 2,287.31 4,102.37 7,557.21 7,621.89
QUICK RATIO 0.78 0.64 0.37 0.34 0.39
Interpretation
The quick ratio has decreased over the last 5 years due to considerable increase in Current Liabilities which increased on account of increase in acceptances. TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Stock Turnover Ratio :
A ratio showing how many times a company inventory is sold or replaced over a period .
Stock Turnover Ratio = Cost of Goods Sold / Average Stock
Average Stock =Opening stock +Closing stock / 2
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
COST OF GOODS SOLD 5,261.92 6,784.41 9,193.02 12,793.05 15,915.67
AVERAGE STOCK 833.82 967.79 1,280.26 1,800.29 2,318.60
STOCK TURNOVER RATIO 6.31 7.01 7.18 7.11 6.86
Interpretation:
Stock turnover ratio of JSW Steel is showing a steady trend at 7. In spite of the increase in inventory from Rs. 833 Cr in FY 2006 to Rs. 2318 Cr in FY 2010, they could manage the inventory turnover.
Inventories were physically verified during the year by the management at reasonable intervals, except for inventories lying with third parties where confirmations have been received. As the Company’s inventory of raw materials mostly comprises bulk materials such as coal, coke, pellets etc. requiring technical expertise for establishing the quality and the quantification thereof, the Company has hired independent agencies for physical verification of such stocks. The procedures of physical verification of inventory followed by the management are reasonable and adequate in relation to the size of the Company and the nature of its business. The Company has maintained proper records of its inventories and no material discrepancies were noticed on physical verification.
Debtors Turnover Ratio:
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Debtor turnover ratio indicates the velocity of debt collection of firm. In simple words it indicates the number of times average debtors (Receivable) are turned over during year.
Debtor Turnover Ratio = Net Sales / Average Debtors
Average Debtor = Opening Debtor +Closing Debtor /2
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
NET SALES 6,180.10 8,594.44 11,420.0 14,001.25 18,202.48 0
AVERAGE DEBTORS 247.90 243.21 291.28 367.77 480.70
DEBTOR TURNOVER RATIO 24.93 35.34 39.21 38.07 37.87
Interpretation :
Debtor turnover ratio has shown a steady trend over the last 3 years which shows the company’s efficient policy of collection from customers. At the same time, company’s sales and average debtors have increased drastically. It is a good indicator of company’s capacity to increase the sales without compromising on its collection policies.
Payables Turnover Ratio :
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
A short term liquidity measures used toquantify the rate at which a company pays off its suppliers . Accounts payable turnover ratio is calculated by taking total purchase made from suppliers and dividing it by the average account payable amount during the same period .
Payables Turnover Ratio = Net Credit Purchase / Average Creditors
Average Creditor = Opening Creditor +Closing Creditor / 2
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
NET CREDIT PURCHASE 3,527.81 4,377.23 6,495.21 9,381.51 11,386.28
AVERAGE CREDITORS 551.87 604.34 867.89 1,426.58 1,643.39
PAYABLES TURNOVER 6.39 7.24 7.48 6.58 6.93 RATIO
Interpretation :
JSW Steel’s payables turnover ratio is high as compared industry ratio. During 2008-09 it has come down to 6.58 which again increased to 6.93. It is mandatory to keep the payables turnover ratio as lower as possible as it will increase the availability of cash for day to day activities. The fact JSW has a negative working capital for last three years has to be read along with its high payables turnover ratio which will again reduce its liquidity.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
OPERATING CYCLE
Gross Operating Cycle (GOC) = RMCP + WIPCP + FGCP + DCP
Net Operating Cycle (NOC) = GOC – CDP ITEMS 2005-06 2006-07 2007-08 2008-09 2009-10
raw material conversion period raw material consumption 3,112.05 3,964.00 5,883.53 8,735.70 10,460.82 raw material consumption 8.64 11.01 16.34 24.27 29.06 per day raw material inventory 833.82 967.79 1,280.26 1,800.29 2,318.60
RMCP 96.46 87.89 78.34 74.19 79.79
work in progress cost of production 4,433.99 5,777.62 8,065.40 11,168.1 13,929.58 4 cost of process per day 12.32 16.05 22.40 31.02 38.69 work in progress inventory 80.27 51.17 41.51 88.08 123.12
WIPCP 6.52 3.19 1.85 2.84 3.18
finished goods cost of goods sold 5,261.92 6,784.41 9,193.02 12,793.0 15,915.67 5 cost of goods sold per day 14.62 18.85 25.54 35.54 44.21 finished goods inventory 150.80 216.28 315.58 561.49 734.24
FGCP 10.32 11.48 12.36 15.80 16.61
Collection period
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis credit sales at cost 6,180.10 8,594.44 11,420.00 14,001.2 18,202.48 5 sales per day 17.17 23.87 31.72 38.89 50.56 debtors 247.90 243.21 291.28 367.77 480.70
DCP 14.44 10.19 9.18 9.46 9.51
creditors deferral period credit purchase 3,527.81 4,377.23 6,495.21 9,381.51 11,386.28 purchase per day 9.80 12.16 18.04 26.06 31.63 creditors 551.87 604.34 867.89 1,426.58 1,643.39
CDP 56.32 49.70 48.10 54.74 51.96
GROSS OPERATING CYCLE 127.73 112.74 101.73 102.29 109.09
NET OPERATING CYCLE 71.41 63.04 53.63 47.54 57.13
(Note*: Finished goods of 2008-09 excludes Rs. 101.41 Cr which arising out of trial run production.
Interpretation :
➢ Because of increase in raw material consumption per day, Raw Material Holding Period (RMHP) has come down to 79 days during FY 2010 from 96 days in FY 2006. It indicates company applies new inventory management techniques to efficiently utilize its inventory and reduce the stock of inventory.
➢ Work in Progress Holding Period (WIPHP) is only three days during 2009-10 which is a good number. But it has increased in last three consecutive years. At the same time they reduce RMHP, they are not able to reduce WIPHP. The company has to implement some techniques to reduce WIPHP as they do for raw material.
➢ Finished Goods Holding Period (FGHP) is increasing constantly from FY 2006. It is 16 days for FY 2010 which is very less and good. It is shown in the profit and loss accounts that the sales is
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
increasing in every year. Increase in FGHP may be because of increase in sales. If they can increase sales without increasing finished goods, it would be appreciable.
➢ Debtors Collection Period (DCP) stands at 9 days for last three years which is a good number. It means that the company gets the payment within 9 days of the credit sales to customers. This satisfies the liquidity requirements of the company. In spite of the increase in sales, they could maintain DCP. It shows company’s efficient collection policy and its business relationship with customers.
➢ Creditor’s Deferral Period (CDP) stands around 50 days for last five years. Even though the credit purchase has increased in these years, there is no increase in CDP. The company should try to increase CDP as its purchases are increasing. It will increase the availability of cash for working capital.
➢ During FY 2010, Net Operating Cycle (NOC) has increased to 57 days from 47 days during FY 2009. It is because of decrease in CDP. So the company should increase CDP to reduce NOC.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
DATA ANALYSIS OF SAIL
NET WORKING CAPITAL
CURRENT ASSETS 2005-06 2006-07 2007-08 2008-09 2009- 10
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Inventories 6,210.06 6,651.47 6,857.23 10,121.4 9,027.4 5 6
Sundry Debtors 1,881.73 2,314.75 3,048.12 3,024.36 3,493.9 0
Cash & Bank Balances 6,172.64 9,609.83 13,759.4 18,228.5 22,436. 4 3 37
Interest Received / Accrued 85.48 152.56 273.08 1,014.47 780.34
Loans 254.14 306.83 372.67 434.34 472.19
Claims Recoverable 455.62 623.50 779.26 860.70 1,450.8 4
Contractors & Suppliers 115.18 116.56 158.99 102.87 104.67
Income Tax Paid in Advance / 1,763.13 10.50 11.62 67.07 140.84 Recoverable
Export Incentive Receivable 22.49 107.07 58.56 16.27 41.00
Others 306.32 350.95 464.16 394.60 433.52
Deposits 116.94 134.60 534.49 246.21 700.03
TOTAL (A) 17,383. 20,378. 26,317. 34,510. 39,081 73 62 62 87 .16
CURRENT LIABILITIES
Sundry Creditors 2,427.36 2,545.07 2,985.24 4,156.77 6,232.3 6
Advances 536.26 631.68 643.49 565.64 699.28
Security Deposits 232.30 257.76 243.09 431.20 517.08
Interest Accrued but not due 375.82 198.79 115.64 95.58 401.12
Liability Towards Investor 11.60 7.43 8.89 10.03 11.00 Education and Protection Fund
Other Liabilities 1,608.36 1,757.47 2,404.57 2,454.17 3,076.0 2
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
PROVISIONS
Gratuity 2,289.75 1,718.20 718.16 573.17 89.26
Accrued Leave 1,223.82 1,371.43 1,346.70 1,602.08 1,979.7 1
Taxation 1,939.75 44.32 38.18 364.01 2.71
Pollution and Peripheral 86.44 83.11 89.05 99.73 112.92 Development
Exchange Fluctuation 13.95 0.00 0.00 0.00 16.43
Proposed Dividend 309.78 619.56 743.47 536.95 702.17
Tax on Dividend 43.45 105.29 125.54 91.26 116.62
Employee Benefits 776.30 795.18 872.21 1,070.18 1,276.7 2
Wage Revision 342.52 512.58 2,459.66 4,552.94 1,243.2 2
Mines Closure / Afforestation 142.12 223.96 351.05 467.29 607.01
Others 68.56 77.15 53.81 50.60 64.90
TOTAL (B) 12,428. 10,948. 13,198. 17,121. 17,148 14 98 75 60 .53
NET WORKING CAPITAL (A-B) 4,955.5 9,429.6 13,118. 17,389. 21,932 9 4 87 27 .63
(All Figures are in Rs. Cr)
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Graph showing Current Assets, Current Liabilities and Net Working Capital
Interpretation
The graph clearly indicates that the Current Assets of SAIL has increased over the last five years following a linear trend. The Current Liabilities has also increased but the rate of increase of Current Liabilities is less than the increase in Current Assets. Net Working Capital also has increased consistently over the last five years.
2009-10
During this year inventory has been decreased by 10% compared to previous year. The inventories decreased mainly on account of reduction in semi/finished inventory by Rs.1157 chore and stores & spares inventory by Rs.22 chore. However, there was increase in raw material inventory by Rs.46 crore.The decrease in finished/semi-finished inventories by 20% was dueto decrease in quantity and valuation rate on account of reduction in both cost of production or Net Sales Realisation .The stores & spares inventory was reduced by 1% and raw material inventory had increased marginally by 2%.
Increase in current liabilities by Rs.3248 chore was mainly on account of increase in sundry creditors for capital works, advances from customers, security deposits etc. The provisions were decreased by Rs.3239 crore mainly on account of decrease in provision for gratuity, taxation and wage revision.
2008-09
The inventory has increased by 47%. Inventories increased mainly on account of increase in semi/finished inventory by Rs.1,873 crore, raw material inventory by Rs.1,183 crore and stores & spares inventory by Rs.209 crore. Increase in finished/semi-finished inventories was due to increase in quantity and valuation rate on account of increase in cost of production and Net Sales Realisation. Also, the sudden meltdown of world economy during the middle of the year resulted in lower sales and
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis accumulation of stocks. Increase in stores & spares inventory was partly due to price escalations and partly due to procurement for major repairs to be carried out in various plants.
Despite increase in sales turnover, there was marginal reduction in net debtors.
Loans and Advances reduced by Rs.258 crore. The reduction was mainly on account of decrease in advances recoverable from contractors and suppliers, employees, deposits with port trust, excise authorities, railways, etc.
Increase in current liabilities by Rs.1,312 crore was mainly on account of increase in sundry creditors for capital works, security deposits etc. The provisions were increased by Rs.2,610 crore mainly on accountof increase in provision for accrued leave, taxation, wage revision.
2007-08
The inventory has increased by 3% this year. The increase in inventory of finished/semi-finished products by 12% was on account of valuation at increased cost of production. However, in terms of number of days of turnover, the inventory of finished/semi-finished products reduced to 32 days as on 31.03.2008 against 33 days as on 31.03.2007. Increase in stores & spares inventory by 10% was due to price escalations and procurement for major repairs to be carried out in various plants. In terms of number of days, stores and spares inventory was almost at the same level of 31.03.2007. Raw materials inventory was at 37 days consumption as on 31.03.2008 as against 49 days consumption as on 31.03.2007. The increase of Rs. 733 crore in net debtors was mainly on account of increase in turnover.
In terms of number of days of turnover, the debtors increased from 22 days as on 31.03.2007 to 24 days as on 31.03.2008.
Loans and Advances increased by Rs 730 crore. The increase was mainly on account of loans to employees and advances for operational supplies.
Increase in current liabilities by Rs 1003 crore were mainly on account of increased level of operations and employees related year-end dues. While there were increase in provisions on account of mines afforestation / restoration / closure costs, wage revision, dividend and tax on dividend; overall increase was marginal due to reduction in provision for gratuity on account of transfer of Rs. 1250 chore to a separate Gratuity Fund constituted during the previous year. TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
2006-07
The increase of Rs. 433.02 chore in net debtors was mainly on account of increase in turnover. Loans and Advances increased by Rs 369.09 chore. The increase was mainly on account of loans to employees, export incentives recoverable, advances for operational supplies etc.
2005-06
Working capital has increased mainly due to increase in inventory by Rs. 1,989 chore. Inventory of Iron and Steel (including by-products) has increased by Rs. 1,276 chore, Raw Materials by Rs. 400 chore and Stores and Spares by Rs. 314 chore.
PERCENTAGE CHANGE IN WORKING CAPITAL
CURRENT ASSETS 2005-06 2006-07 2007-08 2008-09 2009-10
Inventories 47.13 7.11 3.09 47.60 (10.81)
Sundry Debtors (1.40) 23.01 31.68 (0.78) 15.53
Cash & Bank Balances 0.66 55.68 43.18 32.48 23.08
Interest Received / Accrued (39.88) 78.47 79.00 271.49 (23.08)
Loans 45.31 20.73 21.46 16.55 8.71
Claims Recoverable 4.59 36.85 24.98 10.45 68.57
Contractors & Suppliers 6.09 1.20 36.40 (35.30) 1.75
Income Tax Paid in Advance / 136.76 (99.40) 10.67 477.19 109.99 Recoverable
Export Incentive Receivable (61.73) 376.08 (45.31) (72.22) 152.00
Others 44.97 14.57 32.26 (14.99) 9.86
Deposits 133.23 15.10 297.10 (53.94) 184.32
TOTAL (A) 22.53 17.23 29.14 31.13 13.24
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
CURRENT LIABILITIES
Sundry Creditors 9.96 4.85 17.30 39.24 49.93
Advances 2.20 17.79 1.87 (12.10) 23.63
Security Deposits 16.05 10.96 (5.69) 77.38 19.92
Interest Accrued but not due (28.79) (47.10) (41.83) (17.35) 319.67
Liability Towards Investor (29.35) (35.95) 19.65 12.82 9.67 Education and Protection Fund
Other Liabilities 23.30 9.27 36.82 2.06 25.34
PROVISIONS
Gratuity 23.69 (24.96) (58.20) (20.19) (84.43)
Accrued Leave 20.77 12.06 (1.80) 18.96 23.57
Taxation 159.30 (97.72) (13.85) 853.40 (99.26)
Pollution and Peripheral 2.62 (3.85) 7.15 11.99 13.23 Development
Proposed Dividend (58.33) 100.00 20.00 (27.78) 30.77
Tax on Dividend (58.33) 142.32 19.23 (27.31) 27.79
Employee Benefits 1.57 2.43 9.69 22.70 19.30
Wage Revision 0.00 49.65 379.86 85.10 (72.69)
Mines Closure / Afforestation 1,719.72 57.59 56.75 33.11 29.90
Others (0.17) 12.53 (30.25) (5.97) 28.26
TOTAL (B) 22.25 (11.90) 20.55 29.72 0.16
NET WORKING CAPITAL (A-B) 23.24 90.28 39.12 32.55 26.13
FINANCIAL RATIOS
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Working Capital Turnover Ratio :
Ratio that shows the number of times the working capital is converted into revenue in an accounting period , or how efficiently the management is using its working capital to generate sales revenue .
Working Capital Turnover Ratio = Net Sales / Net Working Capital
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
NET SALES 27,837.57 33,923.1 39,508.4 43,150.0 40,551.3 2 5 8 8
NET WORKING CAPITAL 4,955.59 9,429.64 13,118.8 17,389.2 21,932.6 7 7 3
WORKING CAPITAL TURNOVER 5.62 3.60 3.01 2.48 1.85 RATIO
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Interpretation :
The graph clearly indicates that the working capital turnover ratio has decreased over the last five years. This means that the firm is not being efficient in employing its working capital. This is due to the drastic increase in net working capital which is a result of increase in current assets. It is an indication that the company is not utilizing its current assets in an efficient manner. There is also a piling up of cash and bank balanced which again shows company is not using its cash.
Current Ratio : A liquidity ratio that measures a companys ability to pay Short term obligations .
Current Ratio = Current Assets / Current Liabilities
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
CURRENT ASSETS 17,383.7 20,378.6 26,317.6 34,510.8 39,081.16 3 2 2 7
CURRENT LIABILITIES 12,428.1 10,948.9 13,198.7 17,121.6 17,148.53 4 8 5 0
CURRENT RATIO 1.40 1.86 1.99 2.02 2.28
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Interpretation :
The interpretations given for working capital turnover ratio suit current ratio also. Because of the negativity of net working capital, current ratio falls below one. Standard value for current ratio is 2 and in 2008 to 2009 SAIL is meeting with standard level of 2 , so it is favourable for company but in 2009 to 2010 the ratio is increasing more than standard level to 2.28 so company may face problem to meet its obligations .
Quick Ratio :
An indicator of a companys Short term liquidity . The quick ratio measures a companys ability to meet its Short term obligations with its most liquid assets . The higher the Quick Ratio, the better the position of the company .
Quick Ratio = (Current Assets – Inventories) / Current Liabilities
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
CURRENT ASSETS 17,383.7 20,378.62 26,317.62 34,510.8 39,081.16 3 7
INVENTORIES 6,210.06 6,651.47 6,857.23 10,121.4 9,027.46 5
CURRENT LIABILITIES 12,428.1 10,948.98 13,198.75 17,121.6 17,148.53 4 0
QUICK RATIO 0.90 1.25 1.47 1.42 1.75
Interpretation :
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Quick ratio is also higher as net working capital is high. Interpretations for current ratio apply for quick ratio also. Quick ratio has increased to 1.75 during 2009-10 from 1.42 during 2008-09. It is observed that company is in position to meet its obligation . Higher the ratio the better is the capacity of business to meet its current obligations
Stock Turnover Ratio :
A ratio showing how many times a company inventory is sold or replacedover a period .
Stock Turnover Ratio = Cost of Goods Sold / Average Stock
Average Stock = Opening Stock +Closing Stock / 2
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
COST OF GOODS SOLD 25,027.8 27,907.48 32,255.69 38,779.34 35,764.07 3
AVERAGE STOCK 5,215.38 6,430.77 6,754.35 8,489.34 9,594.33
STOCK TURNOVER RATIO 4.80 4.34 4.78 4.57 3.73
Interpretation
Stock turnover ratio of SAIL is very less. It was around 4.5 times during the period of 2005-06 to 2008- 09. During 2009-10, it has decreased to 3.73 times. It is a serious matter of concern. The company has to TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis take some stringent actions to increase turnover. The sole reason for less stock turnover is high stock of inventory. It seems like the company is very conservative in its approach to stock of inventories. It is strongly recommended that the company has to decrease stock of inventory thereby increase its stock turnover. Company may improve the efficiency of its supply chain in this aspect.
Debtors Turnover Ratio :
Debtor turnover ratio indicates the velocity of debt collection of firm . In simple words it indicates the number of times average debtors ( Receivable ) are turned over during year .
Debtor Turnover Ratio = Net Sales / Average Debtors
Average Debtor = Opening Debtor +Closing Debtor /2
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
NET SALES 27,837.57 33,923.12 39,508.45 43,150.08 40,551.38
AVERAGE DEBTORS 1,895.09 2,098.24 2,681.44 3,036.24 3,260.84
DEBTOR TURNOVER RATIO 14.69 16.17 14.73 14.21 12.44
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Interpretation :
Debtor turnover ratio has been coming down since 2006-07. It was at 12.44 times during 2009-10. Debtor turnover of 12 times means that on an average company takes 30 days to collect payment from debtors. It is a good number, but in today’s highly competitive industrial environment, companies are trying to collect its receivables fast. But in the case of SAIL debtor turnover is reducing year by year. Delay in collection shows a large number for sundry debtors in balance sheet, which in fact increase the current assets. It is also a reason for the high current ratio. So it is recommended that the company should tighten its collection policies and bring up the debtor turnover.
Payables Turnover Ratio :
A short term liquidity measures used toquantify the rate at which a company pays off its suppliers . Accounts payable turnover ratio is calculated by taking total purchase made from suppliers and dividing it by the average account payable amount during the same period .
Payables Turnover Ratio = Net Credit Purchase / Average Creditors
Average Creditor =Opening Creditor +Closing Creditor / 2
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
NET CREDIT PURCHASE 13,698.8 14,763.97 15,532.29 21,828.64 18,662.04 6
AVERAGE CREDITORS 2,317.43 2,486.22 2,765.16 3,572.01 5,168.62
PAYABLES TURNOVER RATIO 5.91 5.94 5.62 6.11 3.61
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
(Note*- All the purchases are assumed to be credit purchases.)
(Note*-SAIL has captive mines for iron ore and coal. It procures iron ore from these mines. But it is not completely dependent on its mines for coal and its imported. So iron ore purchased is excluded from net credit purchase.)
Interpretation
Payables turnover ratio has decreased to 3.61 times during 2009-10 from 6.11 times during 2008-09. It is very interesting that although the credit purchase has decreased, company could delay its payments to creditors thereby decreasing payables turnover. This may be due to the decrease in sales. If the company can keep this lower payables turnover, it would be appreciated.
OPERATING CYCLE
Gross Operating Cycle (GOC) = RMCP + WIPCP + FGCP + DCP
Net Operating Cycle (NOC) = GOC – CDP
ITEMS 2005-06 2006-07 2007-08 2008-09 2009-10
Raw Material Holding Period raw material consumption 12,325.6 13,274.91 13,960.14 20,076.92 17,340.18 3 raw material consumption 34.24 36.87 38.78 55.77 48.17
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis per day raw material inventory 5,215.38 6,430.77 6,754.35 8,489.34 9,594.33
RMHP 152.33 174.39 174.18 152.22 199.19
Work in Progress Holding Period cost of production 21,210.3 24,275.46 28,476.38 34,119.23 31,337.09 9 cost of process per day 58.92 67.43 79.10 94.78 87.05 work in progress inventory 405.79 633.83 1,062.42 3,130.31 1,366.30
WIPHP 6.89 9.40 13.43 33.03 15.70
Finished Goods Holding Period cost of goods sold 25,027.8 27,907.48 32,255.69 38,779.34 35,764.07 3 cost of goods sold per day 69.52 77.52 89.60 107.72 99.34 finished goods inventory 2,586.91 3,369.40 3,726.83 4,881.41 5,239.12
FGCP 37.21 43.46 41.59 45.32 52.74
Debtors Collection Period credit sales at cost 27,837.5 33,923.12 39,508.45 43,150.08 40,551.38 7 sales per day 77.33 94.23 109.75 119.86 112.64 debtors 1,895.09 2,098.24 2,681.44 3,036.24 3,260.84
DCP 24.51 22.27 24.43 25.33 28.95
Creditors Deferral Period credit purchase 13,698.8 14,763.97 15,532.29 21,828.64 18,662.04 6 purchase per day 38.05 41.01 43.15 60.64 51.84 creditors 2,317.43 2,486.22 2,765.16 3,572.01 5,168.62
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
CDP 60.90 60.62 64.09 58.91 99.71
GROSS OPERATING CYCLE 220.93 249.53 253.64 255.90 296.57
NET OPERATING CYCLE 160.03 188.90 189.55 196.99 196.86
Interpretation
➢ Because of its large stock of inventory, Raw Material Holding Period (RMHP) of SAIL was at 199 days during 2009-10. It is the highest in last five years. It is again recommended to reduce the stock.
➢ Since FY 2006, Work in Progress Holding Period (WIPHP) has increased to 33 days in during FY 2009. But it has decreased to half during FY 2010. The company has to reduce its further and make it a single digit number.
➢ Finished Goods Holding Period (FGHP) is increasing year by year and stood at 52 days during 2009-10. It seems a very high number which means the company keeps its finished goods idle for 52 days after the production.
➢ Debtors Collection Period (DCP) shows a steady trend for last five years. Despite of the decrease in credit sales during 2009-10, DCP has increased to 29 days. It shows that the company’s collection policies are not strong.
➢ During FY 2010, Creditors Deferral Period has increased to 99 days from 59 days in FY 2009. It would be appreciated if the company can keep this momentum in future.
➢ Net Operating Cycle (NOC) was 197 days during 2009-10. Despite the increase in CDP, NOC did not come down. It was because of the drastic increase in RMHP during this period.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Comparing to other companies in steel industry, SAIL’s NOC is very high. A solution for all of these is to reduce the stock of inventory.
Comparative analysis
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
COMPARISON OF OPERATING CYCLE FOR THE YEAR 2009-10
PARTICULARS RMHP WIPHP FGCP DCP CDP GOC NOC
TATA STEEL 147.09 2.89 26.12 7.81 169.80 183.91 14.11
JSW 79.79 3.18 16.61 9.51 51.96 109.09 57.13
SAIL 199.19 15.70 52.74 28.95 99.71 296.57 196.86
Interpretation :
➢ Among Raw Material Holding Period (RMHP) of the three companies, JSW Steel has the lowest RMHP. Their RMHP is only 80 days compared to 147 days of Tata Steel and 199 days of SAIL. Lesser the holing period higher the turnover of inventory. RMHP of JSW indicates that the company has efficient inventory policies.
They are successful in reducing RMHP to 80 days which was at 96 days during 2005-06. To a certain extent, Tata Steel also could achieve by the reduction of RMHP from 222 days to 147 days TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
during the same period. SAIL is not showing a good RMHP. It had a RMHP of 152 days during FY 2006 and increased to 199 days.
➢ Among the three companies, Tata steel keeps the lowest Work in Progress Holding Period (WIPHP). Tata steel’s WIPHP was slightly less than 3 days while JSW Steel’s value was 3.18. SAIL is far away from its competitors with a WIPHP of 16 days. Tata Steel has the lowest work in progress inventory during FY 2010. Although its work in progress inventory has increased drastically during last five years, it keeps WIHP around 2. It is an indication of company’s efficiency to convert its raw material into finished goods in a short period of time. JSW Steel had reduced WIPHP to 2 days during FY 2008 from 6.5 days during FY 2006. But it’s increasing last two years and reached 3 days during FY 2010. But Tata Steel does not face such a fluctuation in WIPHP.It is strongly recommended SAIL has to reduce its work in progress inventory stock thereby reduce WIPHP.
➢ JSW Steel has the lowest Finished Goods Holding Period (FGHP) of 16 days followed by Tata steel at 26 days and SAIL at 52 days. The lowest FGHP indicates the efficiency of JSW’s supply chain. FGHP of JSW Steel has increased from 10 days during FY 2006 to 16 days during FY 2010. But in the case of Tata Steel, it has decreased to 26 days from 28 days during the same period. It is a good indication to the implementation of efficient distribution activities. It helps them to decrease idle time of finished goods. So it may be concluded that Tata Steel is little better than JSW steel in FGHP. During FY 2010, SAIL held its finished goods in its warehouses for 52 days which is increasing continually since FY 2006. They should reduce the idle time of its finished goods.
➢ To ensure the availability of cash for the day to day activities, company should collect receivables as soon as possible. Companies should follow moderately strict collection policies so that it gets the payments in short period of time and reduce the bad debts.
Among the three companies analysed, Tata Steel and JSW Steel have comparatively less Debtors Collection Period(DCP). Tata Steel’s DCP is 7.81 days and that of JSW Steel’s is 9.5 days. SAIL’s DCP is very high at 28.9 days during 2009-10. The only reason for short DCP is the strict collection policies. It is evident that from the ratio of sales to debtors. For SAIL, this gap is 12 at the same time it is 47 and 38 for Tata Steel and JSW Steel respectively.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
➢ Creditors Deferral Period (CDP) is the time taken by the company to settle its payments to the creditors. The capacity of the company to make the payment late increases the cash availability of the company.
Among the three companies studied in this project, Tata Steel stands far beyond the other two companies. It has a CDP of 170 days which indicates the capacity of the company to use the creditors’ money for another purposes for 170 days. JSW Steel and SAIL pay its suppliers after 52 and 100 days respectively. A comparison between Tata Steel and JSW Steel shows that credit purchase of JSW Steel is higher than Tata Steel. But average creditors of JSW is less than Tata. It indicates Tata Steel pays its suppliers after longer period than JSW Steel after the purchase.
Another noticeable factor is that the three companies are maintaining CDP around a particular time period. No high deviation from this period has been observed in the last five years performance of these companies.
➢ Coming to Gross Operating Cycle (GOC), JSW Steel is the best with 109 days. But when comes to Net Operating Cycle (NOC), Tata Steel is the best with NOC of just 14 days.
It’s very difficult to keep a NOC near to a one digit. Tata achieve this by its higher CDP. Tata Steel could reduce NOC to 14 days from 47 days during 2005-06. So among the companies analysed, Tata Steel has the best NOC
COMPARISON OF FINANCIAL RATIOS FOR THE YEAR 2009-10
PARTICULA WORKING CURRENT QUICK STOCK DEBTOR PAYABLE RS CAPITAL RATIO RATIO TURNOVER TURNOVE S TURNOVER RATIO R RATIO TURNOV RATIO ER RATIO
TATA 19.22 1.144 .871 6.69 46.73 2.15 STEEL
JSW (8.83) 0.73 0.39 6.86 37.87 6.93
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
SAIL 1.85 2.28 1.75 3.73 12.44 3.61
Interpretation
Comparing the Working Capital Ratio of three companies, it was found that this ratio was maximum for Tata Steel at 19.22 times for last year followed by SAIL and JSW Steel.
Tata Steel
Working capital turnover ratio has been decreased to 19.22 times in 2009-10 compared to 22.65 in 2008-09. Decrease in working capital turnover is because of the increase in net working capital. The reason for increase in net working capital is the increase in cash and bank balances and loans and advances. Reduction in working capital turnover is not a good sign. Tata Steel has a huge increase in working capital turnover in 2008-09 but could not keep the momentum to FY 10.
JSW Steel
Working capital turnover ratio of JSW Steel is showing negative values for past three years. It is because their net working capital is negative. Also it is not showing any sign of improving as it is fluctuating between -5 and -10. It is really not good for a company to have a negative working capital turnover ratio. It will affect the daily liquidity requirements of the company. Increase in current liabilities is because of increase in acceptances from subsidiary companies and customers.
SAIL
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
The working capital turnover ratio has decreased over the last five years. This means that the firm is not being efficient in employing its working capital. This is due to the drastic increase in net working capital which is a result of increase in current assets. It is an indication that the company is not utilizing its current assets in an efficient manner. There is also a piling up of cash and bank balanced which again shows company is not using its cash.
Current Ratio :
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
Tata Steel 1.11 1.18 0.98 1.119 1.144
JSW Steel 1.18 1.09 0.75 0.61 0.73
SAIL 1.40 1.86 1.99 2.02 2.28
Interpretation
Among the three companies analysed, Tata Steel has a current ratio of more than 1. JSW Steel’s current ratio is less than 1 for last three years. SAIL’s current ratio is matched with standard value of 2.
Tata Steel
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Current ratio of Tata Steel is moving good as it is increasing from the year 2008-09 after its decrease in 2007-08. Current ratio in FY 2009 and 2010 are above 1. Decrease in current ratio to 0.98 was because of the decrease in current assets which resulted in a negative net working capital. The decrease in current assets is accounted to the decrease in cash and bank balances which was caused by the acquisition of Corus.
JSW Steel
Because of the negativity of net working capital, current ratio falls below one. JSW has to take the initiatives to increase the current ratio. Increase in current liabilities is because of increase in acceptances from subsidiary companies and customers as part of expansion projects.
SAIL
The current ratio has decreased to 2.28 during FY 2010. But during FY 2006 to 2009, it was increasing . As the company has a current ratio of more than 1.40 to 2.28 in last five years, it may be concluded that the company is not managing its working capital properly. It can deploy its current assets for investments, to increase production or for new developments. Or it may avail more current liabilities to reduce current ratio.
Quick Ratio :
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
Tata Steel 0.66 0.85 0.68 0.80 .871
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
JSW Steel 0.78 0.64 0.37 0.34 0.39
SAIL .90 1.25 1.47 1.42 1.75
Interpretation
Tata Steel shows the best quick ratio among the companies analysed. For JSW Steel, quick ratio is too low and it’s too high for SAIL.
Tata Steel
Quick ratio follows the same path of current ratio with an increase in FYs 2009 and 2010 after a decrease in FY 2008. The reasons given above for the decrease in current ratio are applicable for quick ratio also. The only factor which can make a change in quick ratio from current ratio – inventory – does not show any drastic change in the past five years. In FY 2008, there is a 40% increase in inventory due to the increase in volume and prices.
JSW Steel
The quick ratio has decreased over the last 5 years due to considerable increase in Current Liabilities which increased on account of increase in acceptances.
SAIL
Quick ratio is also higher as net working capital is high. Interpretations for current ratio apply for quick ratio also. Quick ratio has increased to 1.75 during 2009-10 from 1.42 during 2008-09. It is observed that company is in position to meet its obligation. Higher the ratio the better is the capacity of business to meet its current obligations TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Stock Turnover Ratio :
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
Tata Steel 6.09 6.31 6.52 6.91 6.69
JSW Steel 6.31 7.01 7.18 7.11 6.86
SAIL 4.80 4.34 4.78 4.57 3.73
Interpretation :
Stock turnover ratio evaluates the efficiency of the firm in managing its inventory. This ratio indicates the number of times inventory has been converted into sales during the year. Both Tata Steel and JSW
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Steel have good stock turnover ratio around 7 times for last three years. It means they are able to convert their stock into sales 7 times in an year. SAIL has very low stock turnover around 4.
Tata Steel
Tata Steel shows a constant increase in stock turnover till 2008-09. Stock turnover of 6.52 is good in terms of liquidity. It shows the efficient management of inventory. Turnover of 6.69 times in 2009-10 is also a good value as it is near to 7. There is an adequate internal control system commensurate with the size of the Company and the nature of its business with regard to purchases of inventory and fixed assets and the sale of goods and services. During the course of our audit, any major weakness has not been observed in such internal control system.
JSW Steel
Stock turnover ratio of JSW Steel is showing a steady trend at 7. In spite of the increase in inventory from Rs. 833 Cr in FY 2006 to Rs. 2318 Cr in FY 2010, they could manage the inventory turnover.
JSW Steel physically verifies inventories during the year by the management at reasonable intervals, exceptfor inventories lying with third parties where confirmations have been received. As the Company’s inventory of raw materials mostly comprises bulk materials such as coal, coke, pellets etc. requiring technical expertise for establishing the quality and the quantification thereof, the Company has hired independent agencies for physical verification of such stocks
SAIL
Stock turnover ratio of SAIL is very less. It was around 4.5 times during the period of 2005-06 to 2008- 09. During 2009-10, it has decreased to 3.73 times. The company has to take some stringent actions to increase turnover. The sole reason for less stock turnover is high stock of inventory. It is strongly recommended that the company has to decrease stock of inventory thereby increase its stock turnover. Company may improve the efficiency of its supply chain in this aspect.
Debtor Turnover Ratio :
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
Tata Steel 27.01 29.98 33.52 41.23 46.73
JSW Steel 24.93 35.34 39.21 38.07 37.87
SAIL 14.69 16.17 14.73 14.21 12.44
Interpretation :
Tata Steel has the best debtor turnover ratio among the three companies. This ratio tells us the number times the firm receives payments from its debtors.
Tata Steel
Debtor turnover ratio of 46.73 times in 2009-10 means Tata Steel collects the cash immediately after giving the delivery i.e., 7.8 days after the sales on an average. It is a marvelous turnover many companies dreaming to achieve. It increases the cash balance of the company and keeps the liquidity. Another fact is that debtor turnover ratio is increasing continuously last 5 years. It is an indication of stringent collection methods followed by Tata Steel. Also, they keep only a small portion that is around 4% as provision for bad debts.
JSW Steel
Debtor turnover ratio has shown a steady trend over the last 3 years which shows the company’s efficient policy of collection from customers. At the same time, company’s sales and average debtors have increased drastically. It is a good indicator of company’s capacity to increase the sales without compromising on its collection policies.
SAIL TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Debtor turnover ratio has been coming down since 2006-07. It was at 12.44 times during 2009-10. Debtor turnover of 12 times means that on an average company takes 30 days to collect payment from debtors. It is a good number, but in today’s highly competitive industrial environment, companies are trying to collect its receivables fast. But in the case of SAIL debtor turnover is reducing year by year. Delay in collection shows a large number for sundry debtors in balance sheet, which in fact increase the current assets. It is also a reason for the high current ratio. So it is recommended that the company should tighten its collection policies and bring up the debtor turnover.
Payables Turnover Ratio :
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
Tata Steel 2.10 2.36 1.96 2.72 2.15
JSW Steel 6.39 7.24 7.48 6.58 6.93
SAIL 5.91 5.94 5.62 6.11 3.61
Interpretation :
In payables turnover ratio also, Tata Steel is the bestwith a turnover just above 2 times for last five years. JSW Steel has a turnover around 6 times and SAIL has around 5 times, but it shows a sudden decrease to 3.61 times in FY 2010.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Tata Steel
Payables turnover ratio of Tata Steel is an exceptional case. It is just slightly greater than two times. This shows that they pay creditors only two times in a year. They manage this turnover for last five years. It helps them to keep the cash with them for a long period and it can be used for other activities.
The study understands the liquidity strength of Tata Steel when the payables turnover is read along with debtor turnover. Debtor turnover is around 40 times in a year and payables turnover is only two times! It clearly shows the competitive advantage Tata Steel has over its suppliers and customers.
JSW Steel
JSW Steel’s payables turnover ratio is high as compared industry ratio. During 2008-09 it has come down to 6.58 which again increased to 6.93. It is mandatory to keep the payables turnover ratio as lower as possible as it will increase the availability of cash for day to day activities. The fact JSW has a negative working capital for last three years has to be read along with its high payables turnover ratio which will again reduce its liquidity.
SAIL
Payables turnover ratio has decreased to 3.61 times during 2009-10 from 6.11 times during 2008-09. It is very interesting that although the credit purchase has decreased, company could delay its payments to creditors thereby decreasing payables turnover. This may be due to the decrease in sales. If the company can keep this lower payables turnover, it would be appreciated.
CHAPTER:2 TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
INVENTORY MANAGEMENT
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
WHAT IS INVENTORY
Inventory refers to stock pile of product a firm is offering for sale and components that make up the product .in other words inventory is composed of assets that will be sold in future in normal course of business operation. Inventory is a quantity or store of goods that is held for some purpose or use .inventory play a crucial role in the companies purchasing –production –marketing. TYPES OF INVENTORY: RAW MATERIAL
Raw materials are inventory items that are used in the manufacturer's conversion process to produce components, subassemblies, or finished products. These inventory items may be commodities or extracted materials that the firm or its subsidiary has produced or extracted. They also may be objects or elements that the firm has purchased from outside the organization. Even if the item is partially assembled or is considered a finished good to the supplier, the purchaser may classify it as a raw material if his or her firm had no input into its production. Typically, raw materials are commodities such as ore, grain, minerals, petroleum, chemicals, paper, wood, paint, steel, and food items. However, items such as nuts and bolts, ball bearings, key stock, casters, seats, wheels, and even engines may be regarded as raw materials if they are purchased from outside the firm. WORK-IN-PROCESS
Work-in-process (WIP) is made up of all the materials, parts (components), assemblies, and subassemblies that are being processed or are waiting to be processed within the system. This generally includes all material—from raw material that has been released for initial processing up to material that has been completely processed and is awaiting final inspection and acceptance before inclusion in finished goods.
Any item that has a parent but is not a raw material is considered to be work-in-process. A glance at the rolling cart product structure tree example reveals that work-in-process in this situation consists of tops, leg assemblies, frames, legs, and casters. Actually, the leg assembly and casters are labeled as subassemblies because the leg assembly consists of legs and casters and the casters are assembled from wheels, ball bearings, axles, and caster frames.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
FINISHED GOODS
A finished good is a completed part that is ready for a customer order. Therefore, finished goods inventory is the stock of completed products. These goods have been inspected and have passed final inspection requirements so that they can be transferred out of work-in-process and into finished goods inventory. From this point, finished goods can be sold directly to their final user, sold to retailers, sold to wholesalers, sent to distribution centers, or held in anticipation of a customer order.
SPARES PARTS
This category includes those products, which are accessories to main products produced for the purpose of sale. Example of spare items is blots .nuts, clamps, screws etc.
INVENTORY MANAGEMENT:
Inventory management system provides information to efficiently manage flow of materials, effectively utilize peoples and equipment ,co-ordinate internal activities and communicate with customers .inventory management does not make decisions or manage operations, they provide the information to managers who make more accurate and timely decisions to manage their operations.
A firm neglecting the management of inventories will be jeopardizing its long run profitability and may fail ultimately .it is possible for a company to reduce its level of inventories to a considerable degree without any adverse effect on production and sales by using simple inventory planning and control techniques .the reduction in excessive inventories carries a favorable impact on companies profitability.
The purpose of inventory management is to keep the stock in such a way that neither there is over stocking nor under stocking.
A proper planning of purchasing, handling, storing and accounting should form a part of inventory management an efficient system of management will determine.
WHY SHOULD INVENTORY BE HELD?
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Holding inventory involves blocking of firm’s fund and the cost of storage and handling. Every business enterprise has to maintain a certain level of inventories to facilitate uninterrupted production and smooth running of business. In absence of inventories, a firm will have to make purchase as soon as it receives orders. It means loss of time and delays in the execution of orders which May sometimes result in loss of business and customer. INVENTORY MANAGEMENT TECHNIQUE:
The objective of inventory control is to reduce the investment in inventory without affecting the efficiency in the areas of production and sales .There are various techniques for inventory control:
1. ECONOMIC ORDER QUANTITY (EOQ):- Refers to the optimum order size that will result in the lowest total of order and carrying cost for an item of inventory given its expected uses, carrying cost and ordering cost. By calculating an economic order quantity the firm attempts to determine the order size that will minimize the total inventory cost. We assume the order cost, is constant regardless of the size of order. In the purchase of raw material or other item, these cost represents the clerical costs involve in placing an order as well as certain cost receiving and checking the goods once they arrive . for finished goods inventories ordering cost involve scheduling a production run .when set up cost are large as they are in producing a material piece of metal, for eg- ordering cost are likely to involve nothing more than record keeping. The total ordering cost are nothing but cost per order times the number of orders for that period.
To find out EOQ; the formula is= √2AO/C
Where; A= Annual consumption; O= ordering cost, C= carrying cost
2. ABC ANALYSIS:- in the case of manufacturing company of reasonable size the number of items of inventory runs into hundreds if not more. From the point of view of monitoring information for control it becomes extremely difficult to consider each one of these items. The ABC analysis comes in quiet handy and enables management to concentrate attention and keep a close watch on relatively less number of items which accounts for a large percentage of the value of annual usage of all items of inventory management. The ABC classification process is an analysis of range of items, such as finished products or customer into 3 categories:
A- Outstanding importance,
B- Average importance
C- Relatively unimportant
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
As a basis for control scheme. Each category can and sometime should be handled in a different way. With more attention being devoted to category A, less to B, and still less to C.ABC analysis is applied to inventory management as a rule of thumb.
3. FNS CLASSIFICATION:- this type of analysis is more concerned from the point of view of movement of items or issue of the items .items are classified s fast moving,slow moving and non moving based on consumption pattern ot the item.
‘F’ items are those items, which are fast moving i.e. in a given period of time ,say a month or a year they have been issued up till number of items.
‘S’ items are those items which are slow moving in the sense that in a given period of time they have been issued in a very limited number of time .
‘N’ non moving items are those, which are not at all issued for a considerable period of time.
4. XYZ CLASSIFICATION:-
XYZ classification has the value of inventory stored as basis for differentiation .it is calculated by dividing an item’s current stock value of the stores
‘X’ items are those whose value of balance stocks lying in the stock are very high, and are 60% of total stock value
‘Y’ items are those items whose value of balance stock is moderate and is 30% of total stock value.
‘z’ items are those whose value of balance stock lying in the stock is very low, and are 30% of total stock value
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
INVENTORY MANAGEMENT AT TATA STEEL:
Inventory management is one of the most important managerial activities. TATA steel has its own mines and quarries in India and also in some other countries. The raw material inventory includes materials from its own source as well as purchased from others. Raw material inventory therefore lies both at works and its place of extraction. These are transported to works both by road and rail.
To maintain the minimum required inventory is not an easy task. There are many reasons for each different organization as to what the quantity should be maintained. TATA STEEL’s raw material inventory consists of mainly coal and iron ore, but there are many other things included in it in small quantities. TATA STEEL has its transportation system which helps in carrying the materials from different locations to Jamshedpur works.
Each types of production department maintain separate inventory level. TATA steel maintains different types of inventory i.e. raw material, WIP, finished goods, transit inventory, buffer inventory, anticipation inventory and cycle inventory.
For valuation of inventory TATA Steel generally uses FIFO method and for ordering, they use EOQ method.
First in first out (FIFO): A method of valuation of inventory, by which the cost are allocated on the assumption that goods are consumed or sold in the order in which they are received and taken in to stock.
Economic Ordering Quantity (EOQ): It is the optimum quantity of goods for which if orders are placed, the aggregate order placing cost and the aggregate inventory carrying cost will be equal and economical. There will not be any loss by either way. For any item of goods, annual requirement in units, cost of placing one order, cost of carrying one unit in inventory for one year are the influencing factors. Any change in one or more of them will change the EOQ of that item.
To find out EOQ; the formula is= √2AO/C
Where; A= Annual consumption; O= ordering cost, C= carrying cost
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
CHANNELS OF ORDERING RAW MATERIAL:
POLICIES MAINTAINED BY TATA STEEL FOR INVENTORIES:
• Finished and semi-finished products produced and purchased by the Company are carried at lower of cost and net realizable Value. • Work-in-progress is carried at lower of cost and net realizable value. • Coal, iron ore and other raw materials produced and purchased by the Company are carried at lower of cost and net realizable value. • Stores and spare parts are carried at cost. Necessary provision is made and charged to revenue in case of identified obsolete and non-moving items. • Cost of inventories is generally ascertained on the ‘weighted average’ basis. Work-in-progress and finished and semi-finished products are valued on full absorption cost basis.
TATA STEEL has own electric plant, water preserver and gas preserver for regular production. Dimna Lake is one of the advance point for Jamshedpur plant.
FINANCIAL ANALYSIS
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
RATIO ANALYSIS:
In financial analysis, a ratio is used as benchmark for evaluating the financial position and performance of the firm. The relationship between two accounting figures, expressed mechanically, is known as financial ratio. Ratio analysis is powerful tool of finance analysis for measuring performance of the firm and to make future projection.
Ratio is an important device to judge the growth, development and present condition of a concern. It plays an important role in measuring the comparative significance of the income and position statements. Accounting ratios are expressed in the form of time, percentage or per one rupee.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
James C.Van Horne “to evaluate the financial condition and the performance of the firm, the financial analyst needs certain yardstick. One of the yardsticks frequently used is ratio”
The main purpose of ratio analysis is:
• To measure the past performance and project future trends • It is also used for inter firm and intra firm comparison as a measure of comparative productivity
While interpreting the ratios the analyst however has to be careful about the limitations imposed by the accounting concepts and the methods of valuation. Information of the non financial nature should also be taken into consideration before a meaningful analysis is made.
Ratio analysis is the major and efficient tool for management to analyze the data. So here some ratios are given which are related to inventories and with analysis.
1. RAW MATERIAL CONVERSION PERIOD
This ratio shows how many days are used for manufacturing raw materials.
Formula:
Average stock of raw material x 365 Total raw material consumed
Where average stock of raw material = (Op. stock of raw mat + Cl. Stock of raw mat)/2
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Particulars 2009-10 2008- 2007- 2006- 2005- 09 08 07 06
Opening stock of raw 1433.26 901.56 720.52 707.54 603.7 material
Closing stock of raw 1153.94 1433.2 901.56 720.52 707.54 material 6
Average stock of raw 1293.6 1167.4 811.04 714.03 655.62 material 1
Total raw material 5494.74 5709.9 3429.5 3121.46 2368.3 consumed 1 2
RAW MATERIAL 85.93 74.63 86.31 83.49 101.04 CONVERSION
PERIOD(IN DAYS)
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TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
WORK IN PROGRESS CONVERSION PERIOD
This ratio shows in how many days the WIP is converted into finished products.
To find out this ratio, the formula is;
Average stock of work-in-process x 365 Cost of production
Where average stock of WIP = (Op. stock of WIP+ Cl. Stock of WIP)/ 2
Particulars 2009-10 2008-09 2007-08 2006-07 2005-06
Opening stock of WIP 73.17 71.48 28.94 23.93 32.42
Closing stock of WIP 158.65 73.17 71.48 28.94 23.93
Average stock of WIP 115.91 72.325 50.21 26.44 28.18
Cost of production 17124.8 18917.7 14423.4 13300.1 11469.7 2 1 7 7 1
WIP CONVERSION 2.47 1.39 1.27 0.72 0.89
PERIOD(IN DAYS)
Analysis: Analysis: As we can se can we As e in the chart the in e that WIP co WIP that nverted into into nverted finished prod finished uct within a a within uct day in the ye the in day ar 2004-05 t 2004-05 ar o 2006-07. B 2006-07. o ut in recent y recent in ut ear it is takin is it ear g more than more g one day. If w If day. one e measure t measure e his chart, we chart, his can say that that say can the efficienc the y level of TA of level y TA steel is re is steel TA ducing year ducing by year to co to year by nvert WIP to WIP nvert finished go finished ods.
1 FINISHED GOODS CONVERSIO PERIOD
It refers to the time in which the finished goods are converted into sales or in other way we can say that the time period between production and sales when the finished goods kept in the ware house before the actual sale is made.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
So formula for FGCP is;
Average stock of finished goods x 365 Cost of goods sold Where average stock of finished goods = (Op. stock of finished goods +Cl. Stock of finished goods)/2
Particulars 2009-10 2008- 2007-08 2006-07 2005-06 09
Opening stock of finished 1361.85 1074.2 1078.08 1000.62 887.82 goods 7
Closing stock of finished 1141.40 1361.8 1074.27 1078.08 1000.62 goods 5
Average stock of finished 1251.62 1218.0 1076.18 1039.35 944.22 goods 6
Cost of goods sold 17140.0 18989 14874.2 13673.3 12012.3 9 3 1 9
FINISHED GOODS
Analysis: Analysis: From the tabl the From e and the cha the and e rt we can ea can we rt sily observed sily that, though that, in the year 2 year the in 005-06 the c the 005-06 onversion p onversion eriod increas eriod ed than the y the than ed ear 2004-05. ear But fortunat But ely the reces the ely sion period c period sion ouldn’t hit th hit ouldn’t e sales for th for sales e e year 2006- year e 07 to 2010-0 to 07 9. The finish The 9. ed goods we goods ed re converted re into sales ev sales into en less than than less en only 25 days 25 only in the year 2 year the in 010-09. It sh It 010-09. ows the effic the ows iency of not of iency only quality only of the steel b steel the of ut also the e the also ut fficiency of m of fficiency arketing dep arketing artment of T of artment ATA steel. ATA CONVERSION PERIOD(IN DAYS) 26.65 23.41 26.40 27.7 28.69
2 RAW MATERIAL TO CURRENT ASSETS
It indicates the percentage of raw materials in the current asset of the company.
To find out this;
Raw material(closing) x 100 Current asset
Particulars 2009-10 2008-09 2007-08 2006-07 2005-
TATA STEEL Ltd . INSTITUTE OF
Analysis: Analysis: This chart an chart This
d table can sh can table d ow the one one the ow unexpected d unexpected ownfall in th in ownfall e year 2006- year e 07, which is which 07, less than 6% than less . If we obser we If . ve carefully carefully ve then we can can we then see that, in th in that, see e year 2006- year e
07, the raw m raw the 07, aterial trend aterial is nearly sam nearly is e to other y other to e ears, but due but ears, to huge cash huge to in hand inc hand in rease the curr the rease ent asset. W asset. ent hich reduce t reduce hich he percentag he e of raw mat raw of e erial to curre to erial nt asset? nt MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
06
Raw material(Closing) 1153.94 1433.26 901.56 720.52 707.54
Current asset 6747.01 10047.48 6636.28 13701.89 4237.6
RAW MATERIAL TO 17.10 14.26 13.58 5.25 16.69 CURRENT ASSETS
3 FINISHED GOODS TO CURRENT ASSET
It indicates the percentage of finished goods in the current assets of the company. Finished goods are such a component of the current assets which can be easily converted into cash.
So the formula is;
Finished goods(closing) x 100 Current asset
Particulars 2009-10 2008-09 2007- 2006-07 2005-06 08
Finished goods(Closing) 1141.40 1361.85 1074.2 1078.08 1000.62 7
Current asset 6747.01 10047.4 6636.2 13701.8 4237.6
Analysis: Analysis: As we saw in saw we As the raw mat raw the erial to curre to erial nt assets, whi assets, nt ch is same a same is ch
s finished go finished s ods to curren to ods t assets. Due assets. t to huge amo huge to unt of cash h cash of unt eld in the ye the in eld ar 2006-07, 2006-07, ar the percentag the e of finished of e goods is les is goods
ser than the o the than ser ther years. B years. ther ut in the yea the in ut r 2005-06 it it 2005-06 r is near to 25% to near is . But the pe the But . rcentage is g is rcentage oing downw oing ards in the ye the in ards ar 2010-09, 2010-09, ar which is less is which than 15%. than 8 8 9
FINISHED GOODS TO 16.91 13.55 16.81 7.86 23.61 CURRENT ASSETS
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
4 AVERAGE INVENTORY TURNOVER RATIO
It indicates the percentages of inventory with gross sales.
The formula is;
Average inventory x 100 Gross sales Where average inventory = (Op. inventory+ Cl. Inventory)/2
Particulars 2009-10 2008- 2007- 2006-07 2005-06 09 08
Opening inventory 2868.28 2047.3 1827.54 1732.09 1532.34 1
Closing inventory 2453.99 2868.2 2047.31 1827.54 1732.09 8
Average inventory 2661.13 2457.8 1937.43 1779.82 1632.22
0
As we can we As observed that, the that, Analysis: Analysis: trend is is trend showing n showing early con early stant, ex stant, cept the y the cept ear 2004 ear -05. The i The -05. nventory nventory level is in is level creasing creasing as well as well as the gros the Gross sales It 24315.77sales. s 26843 22191.8 19762.5 17144.2 shows th shows e constan e t growth growth t of sales a sales of nd invent nd
ory. 7 2
AVERAGE INVENTORY 10.94 9.15 8.73 9 9.5 TURNOVER RATIO
5 STOCK TURNOVER RATIO
Every firm has to maintain a certain level of inventory of finished goods so as to be able to meet the requirements of the business. But the level of inventory should neither be too high nor too low.
The stock turnover ratio measures the number of times a company sells its inventory during the year.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
The formula for stock turnover ratio is;
Cost of goods sold Average stock Where average stock = (Op. inventory+ Cl. Inventory)/2
Particulars 2009-10 2008- 2007-08 2006-07 2005-06 09
Cost of goods sold 17140.09 18989 14874.2 13673.3 12012.3
As we can we As find out out find that in th in that Analysis: Analysis: e year 20 year e 04-05 the 04-05 ratio was ratio very hig very h as comp as h are to oth to are er years. er In the ye the In ar 2005-0 ar 6 it is eve is it 6 n less th less n an 7.5, bu 7.5, an t after th after t at TATA s TATA at teel main teel tained th tained e consiste e ncy on its on ncy growth. 3 1 9
Average stock 2661.13 2457. 1937.43 1779.82 1632.22 8
STOCK TURNOVER 6.44 7.72 7.67 7.68 7.37 RATIO
6 AVERAGE OF STOCK
This ratio shows how many days stock are kept as inventory in the company before sales.
To find out the average age of stock is;
365 Stock turnover ratio
Particulars 2009-10 2008- 2007- 2006- 2005- 09 08 07 06
Stock turnover ratio 6.44 7.72 7.67 7.68 7.37
TATA STEEL Ltd . INSTITUTE OF
MANAGEMENT STUDIES
From the c the From Analysis: hart as giv as hart en below, en we can se can we e that ave that e rage age o age rage f stock is n is stock f ot more th more ot an 50 day 50 an in any of t of any in he year. B year. he ut in year year in ut 2004-05 it 2004-05 is near to to near is 40 days w days 40 here, in the in here, year 200 year 5-06 it is n is it 5-06 ear to 50 d 50 to ear ays. But i But ays. n the recen the n t year it is it year t near to 48 to near day. TAT day. A steel nee steel A ds to redu to ds ce the day the ce , through i through , ts sale wit sale ts h the help help the h of marketi of ng departm ng ent. Working Capital Management-Comparative Analysis
AVERAGE OF STOCK 56.67 47.27 47.58 47.52 49.52
7 SPARE PARTS INDEX
It shows the index of spare parts, which are used to fixed asset.
To find out spare parts index, the formula is;
Stores and spares parts(closing) x 100 Net block of fixed asset
Particulars 2009-10 2008-09 2007- 2006-07 2005- 08 06
Stores and spares 623.76 612.19 442.66 505.44 442.66 parts(closing)
Net block of fixed assets 16006.03 14482.2 9865.05 11040.5 9865.05
This index index This Analysis: is showing is
downward s in recen in s t years. Bu years. t t in the ye the in t ar 2004-05 ar it is less t less is it han 4. And 4. han in the ye the in ar 2006-07 ar it is more is it than 4.5. 4.5. than
So TATA st TATA So eel should eel try to red to try uce this in this uce dex. But th But dex. e chart is is chart e showing ve showing ry impress ry ive that in that ive dex is red is dex ucing year ucing by year. by 2 6
SPARE PART INDEX 3.89 4.22 4.48 4.57 4.48
8 INVENTORY CONVERSION PERIOD
This ratio shows in how many days inventories are converted into sales. It is major ratio analysis for cash conversion period. Because it is the first component of the cash conversion period.
The formula is; TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Inventories(closing) Sales/365
Particulars 2009-10 2008-09 2007-08 2006-07 2005-06
Inventories(Closing) 2453.99 2868.28 2047.31 1827.54 1732.09
Sales 25021.9 24315.7 19693.2 17551.0 15139.3
8 7 8 9 9
From this c this From Analysis: hart we ca we hart n observe n d that in th in that d e year 200 year e 7-08 and and 7-08 2006-07, t 2006-07, he invento he ry was mo was ry st efficient st ly converte ly d into sale into d s. But unf But s. ortunately it is very h very is it igh in the the in igh year 2010 year -09. So it s it So -09. hows the the hows inefficiency for the co the for mpany. INVENTORY 35.79 43.05 37.94 38.00 41.75 CONVERSION PERIOD
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
9 CURRENT RAIO
This ratio is used to judge the short term solvency of a company and is worked out by dividing the aggregate Current Assets by its aggregate Current Liabilities.
To find out the current ratio, the formula is;
Current asset Current liabilities
Particulars 2009-10 2008- 2007- 2006-07 2005- 09 08 06
Current asset 6747.01 5707.0 6636.28 13701.8 4237.6 5 9
Current liability 6653.09 6039.8 6768.78 5453.66 3808.72 6
CURRENT RATIO 1.01 0.94 0.98 2.51 1.12
10 ACID TEST RATIO
It measures the company’s most liquidity against the current liability. Here we exclude the inventory
In the yea the In Analysis:
r 2006-07 2006-07 r
this ratio is ratio this
too high high too
due to hug to due
e amount amount e
cash held held cash
in the com the in
pany. From pany.
here we we here
can say th say can
at compan at
from the current asset. Because inventory is less liquidity than other current assets. So it indicates the huge has y liquidity b liquidity
ut in othe in ut
r sense we sense r
can say th say can
at compa at
ny blocked ny
this huge this
amount of amount
cash with cash out investi out ng. Again Again ng. it is very g very is it ood sign fo sign ood r the comp the r any, beca any, use the re the use cession hit cession the world world the in the yea the in r 2007-08 2007-08 r and compa and ny has hu has ny ge amoun ge t of liquidit of t y to face t face to y he crisis m crisis he oment. Ag oment. ain we can we ain see that t that see he in the y the in he ear 2007-0 ear 8 the ratio the 8 is even le even is ss than 1. than ss So 2006-0 So 7 heavy c heavy 7 ash amoun ash t saved in saved t the year 2 year the 007-08. R 007-08. est of the y the of est ear maint ear ained the c the ained onsistency
, which is is which , just above just 1. coverage of current liabilities with quick realizable assets.
The formula to find acid test ratio;
Current assets- Inventories Current liabilities
TATA STEEL Ltd . INSTITUTE OF
MANAGEMENT STUDIES
As we hav we As Analysis:
e seen in t in seen e
he current he
ratio, in th in ratio,
e year 200 year e
6-07 is hi is 6-07
ghest than ghest
the others the
. Here also Here .
this ratio this
is highest highest is
than the o the than
ther due t due ther
o heavy am heavy o
ount of ca of ount
sh, which which sh,
shows the shows
most liqui most
dity. Here Here dity. we can see can we that the c the that urrent rati urrent o of the ye the of o ar 2005-06 ar and 2010 and -09 was s was -09 ame. But d But ame. ue to less less to ue inventory inventory percentage in curren in t assets th assets t e acid test acid e ratio is hig is ratio her than t than her he year 20 year he 05-06. 20 05-06. 05-06 ratio 05-06 is even le even is ss than the than ss year 200 year 7-08. So fo So 7-08. r the year the r 2007-08 li 2007-08 quidity is l is quidity ittle bit be bit ittle tter than 2 than tter 005-06, af 005-06, ter facing facing ter the crisis p crisis the eriod. And eriod. it is slowly is it moving u moving pwards in in pwards the year 2 year the 010-09.
Working Capital Management-Comparative Analysis
As we hav we As Analysis:
e seen in t in seen e
he current he
ratio, in th in ratio,
e year 200 year e
6-07 is hi is 6-07
ghest than ghest
the others the
. Here also Here .
this ratio this
is highest highest is
than the o the than
ther due t due ther
o heavy am heavy o
ount of ca of ount
sh, which which sh,
shows the shows
most liqui most
dity. Here Here dity. we can see can we that the c the that urrent rati urrent o of the ye the of o ar 2005-06 ar and 2010 and -09 was s was -09 ame. But d But ame. ue to less less to ue inventory inventory percentage in curren in t assets th assets t e acid test acid e ratio is hig is ratio her than t than her he year 20 year he 05-06. 20 05-06. 05-06 ratio 05-06 is even le even is ss than the than ss year 200 year 7-08. So fo So 7-08. r the year the r 2007-08 li 2007-08 quidity is l is quidity ittle bit be bit ittle tter than 2 than tter 005-06, af 005-06, ter facing facing ter the crisis p crisis the eriod. And eriod. it is slowly is it moving u moving pwards in in pwards the year 2 year the 010-09.
Particulars 2009- 2008- 2007- 2006-07 2005-06 10 09 08
Current assets 6747.01 5707.0 6636.28 13701.8 4237.6 5 9
Inventories 2453.99 2868.2 2047.31 1827.54 1732.09 8
Current liability 6653.09 6039.8 6768.78 5453.66 3808.72 6
ACID TEST 0.64 0.79 0.67 2.17 0.65 RATIO
11 TOTAL INVENTORIES TO TOTAL ASSETS
This ratio shows the percentage level of inventories in compare to total asset.
The formula is;
Total Inventories(closing) x 100 Total assets
Particulars 2009-10 2008-09 2007-08 2006- 2005-06 07
Total inventory 2453.99 2868.28 2047.31 1827.54 1732.09
The percen The Analysis: tage level level tage is decreas is ing year by year ing year to in to year crease the crease liquidity l liquidity evel. But in But evel.
TATA STEEL Ltd . INSTITUTE2 year the OF 007-08, it 007-08, is very low very is because because of recessio of n period to period n increase increase the liquidit the y percenta y
ge. MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Total Assets 64232.7 58741.7 47075.5 25597.5 14617.1 8 7 2 6
TOTAL INVENTORY TO 3.82 4.88 4.34 7.13 11.84 TOTAL ASSETS
OPERATING CYCLE
Gross Operating Cycle (GOC) = RMCP + WIPCP + FGCP + DCP Net Operating Cycle (NOC) = GOC - CDP
ITEMS 2008-09 2009-10 TOTAL RAW MATERIAL CONSUMPTION 5709.91 5494.74 OPENINIG RAW MATERIAL 901.56 1433.26 CLOSING RAW MATERIAL 1433.26 1153.94 AVERAGE RAW MATERIAL 1167.41 1293.6 RMHP (RAW MATERIAL HOLDING 74.63 85.93 PERIOD) COST OF PRODUCTION 18917.71 17124.82 OPENING WIP 71.48 73.17 CLOSING WIP 73.17 158.65 AVERAGE WIP 72.32 115.91 WIPHP (WORK IN PROGRESS HOLDING 1.39 2.47 PERIOD) COST OF GOODS SOLD 18989 17140.09 OPENING FINISHED GOODS 1074.27 1361.85 CLOSING FINISHED GOODS 1361.85 1141.4 AVERAGE FINISHED GOODS INVENTORY 1218.06 1251.62 FGHP (FINISHED GOODS HOLDING 23.41 26.65 PERIOD) CREDIT SALES AT COST 24,315.77 25,021.98 AVERAGE SALES PER DAY 66.61 68.55 OPENING DEBTOR 543.48 635.98 CLOSING DEBTOR 635.98 434.83 AVERAGE DEBTOR 589.73 535.4 DCP (DEBTORS COLLECTION PERIOD ) 8.85 7.81 TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
CREDIT PURCHASE 8,110.97 8,521.25 PURCHASE PER DAY 22.22 23.34 OPENING CREDITOR 3243.42 2218.02 CLOSING DREDITOR 2218.02 2572.94 AVERAGE CREDITORS 2730.72 2395.48 CDP (CREDITORS DEFFERAL PERIOD) 122.89 102.63 GROSS OPERATING CYCLE 108.28 122.86 NET WORKING CYCLE -14.61 20.23
Interpretation
➢ Tata Steel has reduced the Raw Material Holding Period. It is a clear indication of efficiency of inventory management techniques Tata Steel follows. RMHP was reduced from 180 days in 2008-09 to 160.81 days in 2009-10. ➢ Work in Progress Holding Period (WIPHP) is maintained below 2 days till 2008-09 which is very good. This shows that there were no stoppages in the production process. Increase in WIPHP in 2009-10 is because of the increase in work in progress. ➢ Finished Goods Holding Period (FGHP) has increased slightly in 2010. It is achieved by efficient supply chain management and good relationship with customers and dealers. ➢ Debtors Collection Period is also decreasing and it has come down to 7.70 days in FY 2010. It shows the prompt collection policy of Tata Steel from its customers. ➢ Creditors Deferral Period is at 167 days during FY 2010 which implies that company pays the creditors after 167 days of the purchase. The overall creditor’s value is Rs 8,521.25 crores while the purchase per day has also increased to Rs. 23.67 crores. Net Operating Cycle (NOC) is come down in 2010. It is because of the increase in Creditors Deferral Period. It’s a positive signal for the company because it implies that the cash is available for other uses such as investing in new capital, spending on equipments and infrastructure, as well as preparing for possible share buybacks down the road. COST SHEET PARTICULARS 2010-09 2009-08 2008-07 2007-06 2006-05 Raw material consumed 5494.74 5709.91 3429.52 3121.46 2368.3 Payment and provision for employee 2361.48 2305.81 1589.77 1454.83 1351.51 Operation and other expenses 6813.33 6213.58 5068.88 4647.28 4038.71 (-)Commission -82.17 -61.49 -52.53 -64.71 -80.75 (-)Provision for wealth tax -1 -1 -0.95 -0.97 -0.8
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Freight and handling charges 1357.27 1251.23 1098.19 1117.45 1004.32 Excise duty 81.13 -32.75 38.5 93.63 76.11 Depreciation 1083.18 973.4 834.61 819.29 775.1 17107.9 PRIME COST 6 16358.7 12006 11188.3 9532.5 Adjustment of WIP (+) Opening stock of WIP 73.17 71.48 28.94 23.93 32.42 (-) Closing stock of WIP -158.65 -73.17 -71.48 -28.94 -23.93 17022.4 FACTORY COST 8 16357 11963.5 11183.3 9540.99 Adjustment of finished goods (+)Opening stock of finished goods 1361.85 1074.27 1078.08 1000.62 887.22 (+) Purchase of finished goods 169.08 358.87 446.95 450.6 656.08 (-)Closing stock of finished goods -1141.4 -1361.9 -1074.3 -1078.08 -1000.6 17412.0 COST OF PRODUCTION 1 16428.3 12414.2 11556.4 10083.7 Other income -853.79 -308.27 -335 -433.67 -254.76 Provision of debt and advances -16 8.61 12.16 11.99 6.49 Expenditure (Other than interest) -326.11 -343.65 -175.5 -236.02 -112.62 Provision for wealth tax 1 1 0.95 0.97 0.8 Net finance charges 1508.4 1152.69 671.73 268.16 118.44 commission to selling agents 82.17 61.49 52.53 64.71 80.75 17807.6 COST OF GOODS SOLD 8 17000.2 12641.1 11232.5 9922.77 PROFIT BEFORE TAX 7214.3 7315.61 7052.2 6319.49 5292.73 25021.9 NET SALES 8 24315.8 19693.3 17552.02 15215.5 *878.7-206.97=671.73 becouse it includes the perivious investment of 2006-07 173.9+94.26=268.16
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
COMPARISON WITH OTHER COMPANIES
JINDAL STEEL AND WORKS
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
In the world of business, the Jindal Organization is a celebrity. Ranked sixth amongst the top Indian Business Houses in terms of assets, the Group today is a US $10 Billion conglomerate.
Jindal Organization, set up in 1970 by the steel visionary Mr. O.P. Jindal, has grown from an indigenous single-unit steel plant in Hisar, Haryana to the present multi-billion, multi-location and multiproduct steel conglomerate. The organization is still expanding, integrating, amalgamating and growing. New directions, new objectives... but the Jindal motto remains the same- "We are the Future of Steel ".
The group has been technology-driven and has a broad product portfolio. Yet, the focus at Jindal has always been steel. From mining of iron-ore to the manufacturing of value added steel products, Jindal has a pre-eminent position in the flat steel segment in India and is on its way to be a major global player, with its overseas manufacturing facilities and strategic manufacturing and marketing alliances with other world leaders.
Jindal Organization aims to be a global player. In pursuance of its objectives, it is committed to maintain world- class quality standards, efficient delivery schedules, competitive price and excellent after sales service.
Financial data of Jindal steel: BALANCE SHEET
Rs. In crore Particulars 31/03/09 31/03/08 31/03/07 31/03/06 31/03/0 5
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Sources of funds Owner's fund Equity share capital 15.47 15.4 15.4 15.4 15.4
Preference share capital - - - - 1 Reserves & surplus 5,399.85 3,740.98 2,481.33 1,829.31 1,302.98 Loan funds Secured loans 2,105.49 1,783.39 2,115.61 1,780.77 1,159.51 Unsecured loans 2,857.16 2,079.96 1,392.11 964.6 336.35 Total 10,377.97 7,619.73 6,004.45 4,590.08 2,815.24 Uses of funds Fixed assets Gross block 7,362.90 5,918.94 4,929.03 3,243.05 2,530.28 Less : accumulated depreciation 1,617.00 1,183.11 781.75 542.33 361.76 Net block 5,745.90 4,735.83 4,147.28 2,700.72 2,168.53 Capital work-in-progress 2,318.01 660.48 937.84 1,146.27 345.7 Investments 1,233.40 1,036.19 709.82 430.3 33.38 Total 15,043.21 11,168.33 9,942.22 6,978.01 4,716.13 Net current assets Current assets, loans & advances 5,189.28 3,299.57 1,801.66 1,490.50 1,036.30 Less : current liabilities & provisions 4,111.64 2,115.48 1,595.39 1,178.45 769.67 Total net current assets 1,077.64 1,184.09 206.27 312.05 266.62 Miscellaneous expenses not written 3.02 3.14 3.24 0.74 1.01 Total 10,377.97 7,619.73 6,004.45 4,590.08 2,815.24 PROFIT AND LOSS ACCOUNT
Particulars 2008-09 2007-08 2006-07 2005-06 2004-05 Income
Operating income 7677.83 5368.14 3523.08 2565.04 2253.6 Expenses TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Material consumed 3,419.42 1,727.40 1,068.50 536.71 528.2 Manufacturing expenses 773.84 670.87 510.96 545.44 514.13 Personnel expenses 181.46 132.2 90.14 79.74 50.85 Selling expenses 327.76 264.73 276.47 222.18 171.87 Adminstrative expenses 337.49 277.03 167.2 148.16 72.42 Cost of sales 5,039.97 3,072.23 2,113.27 1,532.23 1,337.4 6 Operating profit 2,637.86 2,295.91 1,409.81 1,032.81 916.15 Other recurring income 199.46 57.31 36.08 26.02 19.34 Adjusted PBDIT 2,837.32 2,353.22 1,445.89 1,058.83 935.49 Financial expenses 267.89 243.02 173.19 108.02 92.51 Depreciation 433.03 451.51 336.47 219.17 152.48 Other write offs 0.2 0.27 0.27 0.27 0.31 Adjusted PBT 2,136.20 1,658.42 935.96 731.37 690.18 Tax charges 465.4 265.55 241.85 154.91 158.11 Adjusted PAT 1,670.80 1,392.87 694.11 576.46 532.08 Non recurring items -144.78 -144.57 7.78 -12 -12.48 Other non cash adjustments 10.46 -11.34 1.1 8.48 -3.9 Reported net profit 1,536.48 1,236.96 702.99 572.94 515.7 Earnigs before appropriation 4,584.28 3,239.54 2,136.05 1,528.77 1,057.6 0 Equity dividend 85.33 62.02 55.43 46.19 46.19 Dividend tax - 10.55 8.87 6.48 6.33 Profit carried to balance sheet 4,498.95 3,166.97 2,071.75 1,476.10 1,005.0 8
ESSAR STEEL
Essar Steel is one of India's largest exporters of flat products, exporting to the highly demanding US and European markets, and to the growing markets of South East Asia and the Middle East.
A number of major client companies have approved our steel TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis for their use, including Caterpillar, Hyundai, Swaraj Mazda, the Konkan Railway, and Maruti Suzuki. Essar Steel has acquired extensive quality accreditations. Our lean team gives us one of the highest productivities and lowest manpower costs among steel plants internationally. Seamless integration: A major strategic advantage is our high level of forward and backward integration. We are totally integrated - from raw material to finished products, adding value at every stage of the manufacturing process. Bailadilla facility: Iron ore beneficiation At Bailadilla, where some of the world's richest and finest ore is available, we have set up a beneficiation plant of 8 MTPA capacities, which ensures the highest quality iron ore. The iron ore slurry is pumped through a 267 km pipeline (the second longest in the world) to the pellet plant, yielding advantages in quality, cost and real time inventory management. Visakhapatnam facility: Pelletization The slurry is received at our pellet plant at Visakhapatnam, which has a capacity of 8 MTPA, providing vital raw material for the steel plant at Hazira. Hazira-facility our steel complex at Hazira, Gujarat, houses a 5.0 MTPA sponge iron plant, the world's largest gas-based sponge iron plant in single location. The plant provides raw materials for our state- of- the-art 4.6 MTPA hot rolled coil (HRC) plant, the first and largest of India's new
generation steel mills. This plant is fed with inputs from four electric arc furnaces and three
casters. The complex's sophisticated infrastructure includes independent water supply and power, oxygen and lime plants, a township and a captive port capable of handling up to 8 MTPA of cargo with modern handling equipment like barges and floating cranes.
BALANCE SHEET
Rs. In crore Particulars 31/03/09 31/03/08 31/03/07 31/03/06 31/03/05 Sources of funds
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Owner's fund Equity share capital 1,140.48 1,140.48 1,140.48 581.17 507.98 Preference share capital 43.6 43.6 246.52 2,204.12 530.27 Reserves & surplus 3,554.28 3,447.25 3,080.95 1,246.18 686.54 Loan funds Secured loans 6,317.62 5,383.11 6,533.32 7,355.20 4,126.32 Unsecured loans 993.77 733.47 409.92 650.46 684.27 Total 12,049.75 10,747.91 11,411.19 12,037.13 6,535.38 Uses of funds Fixed assets Gross block 15,367.85 14,688.87 13,554.19 10,447.54 6,940.24 Less : revaluation reserve - - - - 0.07 Less : accumulated depreciation 6,239.03 5,414.98 4,664.60 4,049.09 3,691.34
Net block 9,128.82 9,273.89 8,889.59 6,398.45 3,248.83 Capital work-in-progress 549.61 575.12 1,107.78 2,887.36 589.64 Investments 791.31 515.22 433.43 182.97 768.38 Net current assets Current assets, loans & advances 5,465.23 4,829.42 5,592.66 5,229.78 3,689.80
Less : current liabilities & provisions 3,885.22 4,445.74 4,612.27 2,661.43 1,761.27
Total net current assets 1,580.01 383.68 980.39 2,568.35 1,928.53 Total 12,049.75 10,747.91 11,411.19 12,037.13 6,535.38
PROFIT AND LOSS ACCOUNT
Particulars 2008-2009 2007-08 2006-07 2005-06 2004-05 Income
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Operating income 11,717.40 10,763.35 8,087.48 6,168.66 6,098.3 9 Expenses
Material consumed 3,983.17 4,108.57 2,722.02 2,249.70 2,005.6 7 Manufacturing expenses 4,426.80 3,587.56 2,721.65 1,918.04 1,505.7 2 Personnel expenses 233.07 225.8 152.8 99.75 76.09 Selling expenses 291.73 215.12 337.13 234.9 244.64 Administrative expenses 269.98 265.5 151.69 171.24 317.13 Cost of sales 9,204.75 8,402.55 6,085.29 4,673.63 4,149.2 5 Operating profit 2,512.65 2,360.80 2,002.19 1,495.03 1,949.1 4 Other recurring income 124.48 41.15 59.83 38.56 1.36 Adjusted PBDIT 2,637.13 2,401.95 2,062.02 1,533.59 1,950.5 0 Financial expenses 861.63 890.01 772.04 440.01 570.48 Depreciation 828.11 766.52 631.04 482.1 394.29 Adjusted PBT 947.39 745.42 658.94 611.48 985.73 Tax charges 110.32 383.07 248.19 165.94 204.09 Adjusted PAT 837.07 362.35 410.75 445.54 781.64 Nonrecurring items -707.01 84.16 39.77 172.95 2.98 Other non cash adjustments 55.14 -16.02 -14.03 -88.31 -184.72 Reported net profit 185.2 430.49 436.49 530.18 599.9 Earnings before appropriation 1,859.10 1,874.78 436.49 530.18 -874.78
Preference dividend - 11.5 - - - Dividend tax - 1.96 - - - Profit carried to balance sheet 1,859.10 1,861.32 436.49 530.18 -874.78
STEEL AUTHORITY OF INDIA:
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Steel Authority of India Limited (SAIL) is the leading steel-making company in India. It is a fully integrated iron and steel maker, producing both basic and special steels for domestic construction, engineering, power, railway, automotive and defense industries and for sale in export markets.
Ranked amongst the top ten public sector companies in India in terms of turnover, SAIL manufactures and sells a broad range of steel products, including hot and cold rolled sheets and coils, galvanised sheets, electrical sheets, structural, railway products, plates, bars and rods, stainless steel and other alloy steels. SAIL produces iron and steel at five integrated plants and three special steel plants, located principally in the eastern and central regions of India and situated close to domestic sources of raw materials, including the Company's iron ore, limestone and dolomite mines. The company has the distinction of being India’s second largest producer of iron ore and of having the country’s second largest mines network. This gives SAIL a competitive edge in terms of captive availability of iron ore, limestone, and dolomite which are inputs for steel making.
SAIL's wide range of long and flat steel products are much in demand in the domestic as well as the international market. This vital responsibility is carried out by SAIL's own Central Marketing Organisation (CMO) that transacts business through its network of 37 Branch Sales Offices spread across the four regions, 25 Departmental Warehouses, 42 Consignment Agents and 27 Customer Contact Offices. CMO’s domestic marketing effort is supplemented by its ever widening network of rural dealers who meet the demands of the smallest customers in
the remotest corners of the country. With the total number of dealers over 2000, SAIL's wide marketing spread ensures availability of quality steel in virtually all the districts of the country.
SAIL's International Trade Division ( ITD), in New Delhi- an ISO 9001:2000 accredited unit of CMO, undertakes exports of Mild Steel products and Pig Iron from SAIL’s five integrated steel plants. With technical and managerial expertise and know-how in steel making gained over four decades, SAIL's Consultancy Division (SAILCON) at New Delhi offers services and consultancy to clients world-wide. SAIL has a well-equipped Research and Development Centre for Iron and Steel (RDCIS) at Ranchi which helps to produce quality steel and develop new technologies for the steel industry. Besides, SAIL has its own in-house Centre for Engineering and Technology (CET), Management Training Institute (MTI) and Safety Organization at Ranchi. Our captive mines are under the control of the Raw Materials Division in Kolkata. The Environment Management Division and Growth Division of SAIL.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
BALANCE SHEEET
Rs. In crore Particulars 31/03/09 31/03/08 31/03/07 31/03/06 31/03/05 Sources of funds
Owner's fund
Equity share capital 4,130.40 4,130.40 4,130.40 4,130.40 4,130.40
Reserves & surplus 23,853.70 18,933.17 13,182.75 8,471.01 6,176.25 Loan funds
Secured loans 1,473.60 925.31 1,556.39 1,122.16 1,603.98
Unsecured loans 6,065.19 2,119.93 2,624.13 3,175.46 4,165.81
Total 35,522.89 26,108.81 21,493.67 16,899.03 16,076.44 Uses of funds
Fixed assets
Gross block 32,728.69 30,922.73 29,912.71 29,360.46 28,043.48
Less : accumulated depreciation 20,459.86 19,351.42 18,315.00 17,198.32 15,558.41
Net block 12,268.83 11,571.31 11,597.71 12,162.14 12,485.07
Capital work-in-progress 6,544.24 2,389.55 1,236.04 757.94 366.48
Investments 652.7 538.2 513.79 292 606.71 Net current assets
Current assets, loans & advances 35,666.84 27,309.01 21,673.75 18,788.80 15,521.37
Less : current liabilities & provisions 19,609.72 15,758.74 13,656.77 15,317.67 13,198.12
Total net current assets 16,057.12 11,550.27 8,016.98 3,471.13 2,323.25
Miscellaneous expenses not written - 59.48 129.15 215.82 294.93
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Total 35,522.89 26,108.81 21,493.67 16,899.03 16,076.44
Ratio Tata Jindal Essar Sail
9,554.95 11,244.92 9,327.27 5,590.57 9,249.03
3,284.28 3,934.65 3,253.80 1,694.36 2,592.37
6,270.67 7,310.27 6,073.47 3,896.21 6,656.66
-277.12 161.9 53.75 45.64 -14.35
181.26 64.61 60.57 71.12 174.66
6,174.81 7,536.78 6,187.79 4,012.97 6,816.97
22,052.47 18,348.43 12,886.63 7,861.47 6,839.66
1,073.90 1,528.25 1,280.42 826.08 1,363.03
181.26 258.91 197.98 115.86 185.24
20,797.30 16,561.30 11,408.20 6,919.50 5,291.40
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TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
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TATA STEEL Ltd . INSTITUTE OF
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MANAGEMENT STUDIES
Working Capital Management-Comparative Analysis
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TATA STEEL Ltd . INSTITUTE OF
MANAGEMENT STUDIES
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Working Capital Management-Comparative Analysis
TATA STEEL Ltd . INSTITUTE OF
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PRESENTATION OF INVENTORY OF TATA STEEL
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
PRESENTATION OF INVENTORY IN A MANNER WHICH IS USEFUL TO THE MANAGEMENT AND MIS REPORT RELATING TO INVENTORY MANAGEMENT: As we know there are different types of inventory in a company. They are: -RAW MATERIALS -WORK IN PROGRESS -SEMI FINISHED AND FINISHED PRODUCTS -STORES AND SPARES INVENTORY These are the inventory heads which are maintained by TATA STEEL. Over here I have represented of all inventories segregated each of them in Product and Location wise
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
SEMI FINISHED /FINISHED PRODUCTS
LOCATION
WORKS 484.9 COLD ROLLING COMPLEX- EAST 266.17 MARKETING 213.54 INTERNATIONAL TRADE 12.47 WRM(WEST) 24.01 SECONDARY PRODUCTS 144 TUBES 90.43 AGRICO 11.33 BEARINGS 38.38 WIRE DIVISION 52.9 COLD ROLLING COMPLEX- WEST 23.71
TOTAL 1361.84
PRODUCT
348.5 FLAT 6 211.2 LONG 6 256.3 CR 9 SOS 99.91 148.9 SCRAP AT WORK 9 295.8 OTHERS 9
1361. TOTAL 84 TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
LOCATION
WORKS 964.27 MINES 69.79 RAW MATERIALS COLLIERIES 13.02 TAILINGS AT WBC PRODUCT AND JHARIA 25.87 FAMD DIVISION 336.97 COAL 494.71 CRM(ZINC) 8.85 COKE 212.52 TUBES DIVISION 5.04 IRON ORE 162.09 WIRE DIVISION LIMESTONE 35.79 2.02 DOLOMITE 2.24 TCIL(TIN) 7.44 ANTHRACITE 0.1 ALUMINIUM 1.6 TOTAL 1433.2 NICKLE,COPPER AND SULPHUR 0.86 7 FERRO MANAGANESE 9.6 SILICO MANGANESE 5.77 FERRO SILICON 0.8 FERRO MOLYBDENUM 0.46 FERRO CHROME 52.74 STOCK AT HIGH SEAS 161.99 IN TRANSIT 0.85 MIDDLINGS 2.31 CHROME ORE 149.39 TAILINGS 25.87 ZINC 8.85 TUBES 5.04 WIRE 2.02 TIN 7.44 OTHERS 90.25 TOTAL 1433.29
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
STORES AND SPARES INVENTORY OTHER DIVISIONS
WORKS (INCL.CRM) 424.7 UNDER WORKS DEPT 63.81 TOWN,MEDICAL,ENGG 0.55 MINES AND COLLIERIES 50.24 WRM-WEST 2.45 TUBES 24.52 FAMD 8.71 WIRE DIVISION 1059 BEARINGS 6.04 GROWTH SHOP 15.9 COLD ROLLING COMPLEX- WEST 4.58 AGRICO 0.11
TOTAL 611.39
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
CON CLUSION AND RECOMMENDATION
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
CONCLUSION
We have identified and examined the main elements of working capital. We have seen that the management of capital requires an evaluation of both the cost and the benefits associated with each element. Some of these costs and benefits may be hard to quantity in practice. Some assessment must be in order to try and optimize the user of funds within a business. We have examined various techniques for management of working capital. These techniques vary in their sophistication; some really heavily on management judgement, while other adopts a more objective, quantitative approach.
Tata steel maintains sound position interns of working capital. Its efficiency in receivable and deferral management is reflected in the constantly decreasing operating cycle. The company has primarily been operating on cash drawn from the market and reaping full benefits of its brand name. Inventory which constitutes an important component of working capital in a steel manufacturing company has also been managed well. This is evident from the high inventory turnover in comparison to the industry average. However, the conversion period of raw material need to be worked upon. The company has a well built supply chain and all its processes of inventory maintenance are SAP linked. It has a competent control system in place for managing stores, spares and finished goods. Nevertheless there is scope for improvements in raw material management.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
RECOMMENDATIONS WORKING CAPITAL :-
1. There should be a proper co-ordination between working capital group and its related department i.e. debtors, inventory etc.
2. Details of working capital should be available at the department level, so that efficiency can be analyzed at departmental level.
3. Advance payments should be avoided. If at all advance payments are required, it should be against securities like banks guarantee etc.
4. The essence of effective working capital management is proper cash flow forecasting. This should take into account the impact of unforeseen events, market cycles, loss of a prime customer and actions by competitors. So the effect of unforeseen demands of working capital should be factored in.
INVENTORY :-
Adequate planning is required for procurement of store items..
New and advanced concept must be introduced in inventory control management.
The company has strong backward integration and a lead time of 10 – 12 hours as its mines are closely located . Hence attempts could be made to reduce the level of stocks maintained by the company .
Cost of Raw Material should be controlled through effective management .
The problem arising due to the storing and maintainance of rejected materials should be solved by timely replacement of such materials .
LIMITATIONS
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
Data Are Confined to Annual Report: - The analysis of financial ratios is done on the basis of data available in the annual report of” TATA STEEL. Hence, only a limited exposure is available to make the report.
Data Are Confidential :- There are many data which are confidential and cant exposed to the public. These are not accessible for analysis. Hence a major part of important information is not available. This has avoided cent-percent accurate result.
Limited Coverage For the Company:- Mostly data is from steel Producing Companies, and they are not calculating Industrial Average For The Year 2009-10. And only a few companies data are available like SAIL,JINDAL STEEL AND TATA STEEL. Therefore analysis was possible within the domestic industries.
Accounting Principle Are Different:- It has been difficult to calculate and analyze the ratio of foreign companies ,because their accounting policies are different compare to Indian financial accounting principles. The Indian companies follow the Indian “GAAP” where as Foreign Companies follow the US GAAP.
Limited Data Of The Year 2009-10:- Since the annual report of the “TATA STEEL” For the Financial Year 2009-10, has not been made public. So only few ratios were been calculated as per the data available to us from the website.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
BIBLIOGRAPHY
• B P RADHAKRISHAN, 2009. Boom in India’s Iron and steel industry, Current Science Vol 92, NO 9 • I M PANDEY, 2007. Financial Management. New Delhi: Vikas Publishing house Pvt Ltd. • BREALEY MYERS 2003. Principles of corporate finance. New Delhi: Tata McGraw Hill publishing house. • http://www.tatasteel.com/investors/annual-report-2009-10/index.html • http://www.jindalsteel.com/investors/annual-reports.aspx • http://www.sail.co.in/aboutus.php?tag=company-background • http://en.wikipedia.org/wiki/jindalsteelandpowerlimited • http://www.sail.co.in/investor.php?tag=investor • http://www.moneycontrol.com • www.marti-tech.com • http://www.accountancy.com.pk/articles • www.azom.com/details.asp?articleID=3541
Other references
• Annual report of TATA STEEL for the year 2004-05, 2005-06, 2006-07, 2007-08, 2010-09. • Annual report of SAIL, JINDAL, ESSAR steel for the year 2010-09.
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
ANNEXTURE
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES Working Capital Management-Comparative Analysis
TATA STEEL Ltd . INSTITUTE OF MANAGEMENT STUDIES