hindalco working capital internship report

8/20/2019 Hindalco Working Capital Internship Report

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Working Capital Analysis of Hindalco Industries 2013-2014

i | P a g eAnkur Sharma

Working Capital and Balance sheet Analysis of Hindalco

Industries Ltd, 2013-14

Submi tted by Ankur Sharma

(Roll No. 17 /Batch 15)

I n partial fu lf il lment f or the award of the degree of

POST GRADUATE DIPLOMA IN MANAGEMENT INSTITUTE FOR FINANCIAL MANAGEMENT AND RESEARCH




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CERTIFICATE

This is to certify that this project report ―Working Capital and Balance SheetAnalysis of Hindalco Industries Ltd ” . is the bona fide work of Ankur Sharma

who carried out the project work under my supervision.

(Signature)Mr. Kumar Rahul.

Senior Officer (Finance and Accounts),

Hindalco Industries Ltd.




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ACKNOWLEDGEMENT

t the outset, I am grateful Hindalco Industries Ltd for giving me theopportunity to do my summer internship with them. A sense of gratitude isnot enough to express my sincere thanks towards my project guide, Mr.

Kumar Rahul (senior officer, Accounts and Finance) who guided me with hisinsights and knowledge. I am also thankful to Mr. Hemraj ( Training Head,TTMDC), Mr. Mayank Srivastava ( Senior General Manager, Fuel Management)for helping me in this project.

I take this opportunity to thank Mr Surender Rao (Faculty at IFMR). He gave mehis valuable time and guided me at each step with his expertise and provided me allthe information required for my project.

My sincere thanks to Mr. Shreyans Kavdia (Head of Finance and AccountsDepartment).

I duly acknowledge with gratitude the help and cooperation received from the entirestaff at Hindalco Industries Ltd., Renusagar.

Ankur Sharma

A




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EXECUTIVE SUMMARY

orking capital management involves managing the different components of thecurrent assets, managing the current liabilities and financing the current assets. Notonly this, it has to be managed around an optimal level in order to keep it low at

maximum profitability possible. There is tradeoff between liquidity and profitability which has to be managed through effective working capital management. A well designed and implementedworking capital management is expected to contrib ute positively to the creation of a firm‘s value..The purpose of this project is to examine the trends in working capital management (WCM), howis it being managed and its impact on the performance of Hindalco Industries Ltd. during the

period of 2011-2014, followed by comparative study Nalco during 2013-14.

The in depth analysis include study of various financial ratios like liquidity ratios, solvency ratios,Turnover ratios etc. helps in understanding the current financial situation. Apart from these ratiosoperating cycle and cash conversion cycle analysis provide insights of current working capitalscenario.

The project throws light on how Hindalco has performed during this four financial years and whatis its position today. In the end the project helps giving some findings and recommendations to thereaders of the report.

W




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TABLE OF CONTENTS

Chapter 1Part A

1 Introduction 1

1.1) Major Division of Operations for Hindalco 2

1.2) Subsidiaries and associate companies of Hindalco Industries 5

1.3) Operations 6

1.3.1) Operations in India 61.3.2) Global Operations 7

1.4) Hindalco's strategy 11

1.5) Vision of Hindalco 13

1.6) Mission of Hindalco 14

1.7) Management team 14

1.8) Current Scenario and Recent Developments 15

1.9) Global Aluminum Industry Analysis 18

1.10) Opportunities and challenges 20

1.11) Aluminium Analysis in Q1 2015 21

Part BWorking Capital 24

1.12) Classification of Working Capital 25

1.13) Balanced Working Capital Position 26

1.14) Determinants of Working Capital 28

1.15) Tradeoff between Liquidity and Profitability. 29

1.16) Management of working capital: 30

1.16.1 Inventory management 301.16.2 Cash management 31

1.16.3 Management of receivables 33

1.17) Financing Of Working Capital 34

1.17.1) Matching Approach 351.17.2) Conservative Approach 361.17.3) Aggressive Approach 36




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Chapter 22.1) The Objectives of the project study 372.2) The Research method followed 37

2.3) Scope of the study 37

2.4) Collection of data 382.5) Tools for Analysis of the data 382.6) Period covered under study 38

2.7) Limitations of the study 38

Chapter 33 Analysis of Data and Interpretation 39

3.1) Liquidity Ratios 39

3.1.1) Current ratio 39

3.1.2) Quick Ratio 403.1.3) Cash ratio 42

3.2) Solvency ratios 43

3.2.1) Debt Equity Ratio 433.2.2) Interest Coverage Ratio 443.2.3) Proprietary Fund Ratio 45

3.3) Profitability ratios 46

3.3.1) Gross profit ratio 463.3.2) Operating Profit 473.3.3) Net profit ratio: 47

3.4) Return Ratios 48

3.4.1) Return on capital employed 483.4.2) Return On Equity 493.4.3) Return On Assets ( ROA) 50

3.5) Turnover ratios 51

3.5.1) Asset Turnover Ratio 513.5.2) Working capital ratio 523.5.3) Inventory Turnover 53

3.5.4) Debtors Turnover 54

3.5.5) Creditors turnover ratio: 553.6) Operating Cycle and Cash Conversion Cycle 57

3.6.1) Days of Inventory Outstanding (DIO) 59

3.6.2) Days of Sales Outstanding (DPO) 593.6.3) Days Payable Outstanding – DPO 593.6.4) Observation and Conclusion for Operating Cycle and CCC. 60

Chapter 4




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4 Conclusion and Suggestions 63

4.1) To increase inventory in order to reduce DIO 65

4.2) To increase debtors turnover by increasing collections efficiency 66

4.3) To increase DPO and hence decrease Creditors turnover66

Annexure 67References 71




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Table of Figures F ig 1.1 Classif ication of H in dalco busin ess divisions 2F ig 1.2 Classif ication of Al umi niu m division brands 3F ig 1.3: H indalco global operati ons 8F ig 1.4 H in dalco-Noveli s downstream strategy 12F ig 1.5 By-product value 13F ig 1.6 Global pri mary alu mini um pr oduction vs. consumption trend, 2012-2018 18F ig 1.7 Share of major alum ini um produces in th e world 19F ig 1.8 Share of major alum ini um consumers in t he in the worl d 19F ig 1.9 LM E Al umini um price in past 10 year 22F ig 1.10 Classif ication of Work ing Capital 25F ig 1.11 Temporary and permanent worki ng capital 26F ig 1.12 Balanced Worki ng capital position 27F ig 1.13 Optimum l evel of wor kin g capital 30F ig 1.14 Matching approach f or f inancing working capital 35F ig 1.15conservative approach f or f inanci ng worki ng capital 36F ig 1.16 Aggressive approach f or f inanci ng worki ng capital 36F ig 3.1 Curr ent Ratios for H in dalco 2011-2014 40F ig 3.2 H in dalco-Nalco Curr ent rati os compari son 40F ig 3.3 Quick Ratios for H indalco 2011-2014 41F ig 3.4 H in dalco-Nalco Quick r atios compari son 41F ig 3.5 Stru cture of cur rent assets for H indalco in 2014 41F ig 3.6 Cash Ratios for H indalco 2011-2014 42F ig 3.7 H in dalco-Nalco Cash r atios comparison 42F ig 3.8 Debt to Equity Ratio for H indalco 2011-2014 43F ig 3.9 I nterest coverage Ratio f or H indalco 2011-14 44F ig 3.10 In terest expense for H in dalco 2011-14 44F ig 3.11 Propri etor fu nd ratio for H in dalco 2011-14 45F ig 3.12 Hi ndalco-Nalco Propri etor fu nd ratio comparison 45F ig 3.14 Nalco Hi ndalco Gross Prof it comparison 2013-14 46F ig 3.15 Operati ng Profi t Ratio for H indalco 2011-2014 47F ig 3.16 Hindalco – Nalco Operati ng Prof it comparison 47F ig 3.17Net Prof it Ratio for H indalco 2011-14 48

F ig 3.18 H indalco-Nalco Net Prof it comparison 48F ig 3.19 ROCE f or H indalco 2011-2014 49F ig 3.20 H indalco-Nalco ROCE compari son 49F ig 3.21 ROE f or H indalco 2011-14 50F ig 3.22 H indalco-Nalco ROE compari son 50F ig 3.23 ROA f or H indalco 2011-14 51F ig 3.24 H indalco-Nalco ROA compari son 51




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F ig 3.25 Asset Tu rn over Ratio for H indalco 2011-14 52F ig 3.26 Hi ndalco-Nalco Asset Tu rn over Ratio compari son 52F ig 3.27Work ing capital for H indalco 2011-14 53F ig 3.28 Sale to WC compari son f or H indalco 2011-14 53

F ig 3.29 I nventory Tu rn over f or H indalco 2011-14 54F ig 3.30 H indalco-Nalco I nventory Tur nover comparison 54F ig 3.31 Debtors Turnover for H in dalco 2011-14 55F ig 3.32 Hi ndalco-Nalco Debtors Tur nover comparison 55F ig 3.33 Creditors Tur nover f or H indalco 2011-14 56F ig 3.34 H indalco-Nalco Creditors Tur nover comparison 56F ig 3.35 Cash conversion cycle mechanism 57F ig 3.36 Cash F low tim eli ne 58F ig 3.37 Hindalco- Nalco cash conversion cycle factors’ comparison 60F ig 3.38 DI O, DPO and DSO for H indalco 2011-14 60

F ig 3.39 Hi ndalco-N alco cash conversion and operating cycle compari son 2013-2014 61F ig 3.40 Prof itabil ity ratios for H indalco 2011-14 64

List of Tables

Table 1.1 Hi ndalco M anagement Team 14Tabl e 1.2 Curr ent assets and l iabi li ti es 24Tabl e 3.1 Observation table of operating and cash conversion cycle 60Table 4.1 Common size current assets’ components 63Tabl e 4.2 I ncrease/ Decrease in f actors affecting the financi al positi on of a company2013-14 65




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CHAPTER 1Part A

Introduction Hindalco Industries Limited

indalco Industries Limited, the metals Flagship Company of the Aditya Birla Group isthe world's largest aluminium rolling company, an industry leader in aluminium andcopper and one of the biggest producers of primary aluminium in Asia. Its copper

smelter is amongst the largest single location custom smelter globally.

Hindalco story dates back to the young Indian democracy of the 1950s. Ready to take a giantleap, India was geared to make it big, especially in terms of innovation and industrialization.

Hindalco embarked on its journey in 1958. Its first real contribution to the vision of an industrialIndia occurred four years later, when the visionary late Mr. GD Birla set up India's firstintegrated aluminium facility at Renukoot, in the eastern fringe of Uttar Pradesh, India. It was

backed by a captive thermal power plant at Renusagar in 1967. Hindalco attained its leadership position in the aluminium industry under the dynamic leadership of the late Mr.AdityaVikramBirla — a formidable force in the Indian industry.

And it was through the vision and guidance of Mr. Kumar Mangalam Birla, the Group Chairman

that the business segments of aluminium and copper are consolidated to make Hindalco the non-ferrous metals powerhouse it is today. This was achieved in part by expansion through mergersand acquisitions with companies such as Indal and Birla Copper. Hindalco also secured copperreserves and amplified its operating base by acquiring the Australian Nifty and Mt. Gordoncopper mines.

H




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Over the years, Hindalco has grown into the largest vertically integrated aluminium company inthe country and among the largest primary producers of aluminium in Asia. Its copper smelter istoday the world's largest custom smelter at a single location.

In 2007, the landmark acquisition of Novelis Inc., the world's largest aluminium rollingcompany, placed Hindalco's footprint across the globe, securing it a rank amongst the top fiveglobal aluminium majors and also placing it in the Fortune 500 league.

Today, it is a metals powerhouse present in two of the fastest growing metal segments; aluminium andcopper, with global footprints in 13 countries and with a consolidated turnover of USD 14.8 billion (Rs.

80,193 Crore).

1.1) Major Division of Operations for Hindalco

Fig 1.1 Classif ication of H in dalco busin ess divi sions

1) Aluminium portion:-The largest integrated primary producer of aluminium in Asia, Hindalco also ranks as oneof the most cost-efficient producers globally. With a pan-India presence that encompassesthe entire gamut of operations, from bauxite mining, alumina refining, aluminiumsmelting to downstream rolling, extrusions and recycling, Hindalco enjoys a leadership

position in aluminium and downstream value-added products in India.

HindalcoBusinesses

AluminimumDivision

CopperDivision Fertilizers Dry Cargo

Handling Acid Division




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Hindalco‘s India aluminium operations in India are integrated and consist of bauxitemining, alumina refining, smelting and converting primary metal into value-added

products.

Hindalco‘s finished products include alumina, primary aluminium in the form of ingots, billets and wire rods, value-added products such as rolled products, extrusions, foils andalloy wheels and specialty alumina products. Hindalco manufactures intermediate

products required for its own production such as power and carbon anode. Its Indianaluminium operations are located in 10 states and one union territory in India, with threerefineries and two smelters that are capable of producing over 600 KTPA of aluminium.

F ig 1.2 Classif ication of Al umi niu m division brands

1) Copper division

Hindalco‘s copper division operates one of the largest single location customs coppersmelter in the world with a capacity of 500,000 TPA Copper Cathode through world class

technologies. The Custom Smelter complex at Dahej in state of Gujarat at west coast ofIndia houses copper smelters, refineries, rod plants, captive power plants, a jetty andother utilities.

Hindalco produces copper cathodes, continuous cast copper rods in various sizes and also precious metals like Gold and Silver. The co-product Sulfuric acid is also utilized to

AluminiumDivision

Aluminiumextrusions

brands

Hindalcoextrusions Maxloader Eternia

AluminiumFRP

Everlastaluminium

roofing sheets

Aluminiumfoil brands

Superwrap Freshwrapp




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produce Phosphoric acid and further value-added to fertilizers like di-ammonium phosphate (DAP). Hindalco is the only manufacturer in India for 19.6mm diametercopper rod used for railway electrification.

2) Dry cargo handlingHindalco‘s Dahej Harbour and Infrastruc ture Limited operates an all-weather jetty in theGulf of Khambhat on the west coast of India. DHIL is strategically located at latitude: 21degrees 42 North and longitude: 72 degrees 31.5 East to cater to the logistics andtransportation needs of its customers. Equipped with skilled and professional workforce,and customer friendly port DHIL values time, money and cargo of its customers. Reputedfor reliability and high performance, the company enjoys strong relationships in themarketplace.

3) FertilizersHindalco produces the fertilizers di-ammonium phosphate (DAP) and nitrogen

phosphorus potassium (NPK) complexes as value-added downstream products.Hindalco‘s DAP plant went on stream in 2000 and has a capacity of 400,000 tpa. Itmanufactures DAP and NPK complexes such as 10:26:26, 12:32:16 and 20:20:0.

The products are marketed under the well-known brand Birla Balwan, a brand name thatcommands preference among the farmers of Gujarat, Maharashtra, Rajasthan, MadhyaPradesh, Karnataka, Haryana and Punjab through the established vast network of dealers,retailers and C&F agents.

Birla Phospho Gypsum marketed in the Agricultural field as a soil conditionerThe popular brand Birla Vishwas also caters to the market of diversified agriculturalinputs.

4) Acids DivisionDuring Hindalco‘s copper production processes, by -products such as sulphuric acid,copper slag, phospho-gypsum and hydrofluosilicic acid are formed. Hindalco is in the

process of setting up an aluminium fluoride manufacturing facility using its by-producthydrofluosilicic acid.




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Sulphuric acid Phosphoric acid Phospho gypsum

Phospho Copper slag (iron silicate)

1.2) Subsidiaries and associate companies of Hindalco Industries

Novelis Inc.

Acquired by Hindalco in 2007, Novelis is the world leader in rolled aluminum products,delivering unique solutions for the most demanding global applications, such as beverage cans,automobiles, architecture and consumer electronics. Our unique material advantage, customer-focused innovation and unparalleled commitment to sustainability define the Novelis brand.

Aditya Birla Minerals

Aditya Birla Minerals is an Australian mining company with a focus on copper production andexploration. Based in Perth, West Australia, the company conducts its activities at the Birla NiftyCopper Operation in the Great Sandy Desert, WA and the Mt Gordon Copper Operation locatedin the Mt Isa Block in Queensland. Aditya Birla Minerals is part of the Aditya Birla Group and is

part owned by Hindalco.

Hindalco-Almex Aerospace

Hindalco-Almex Aerospace Limited manufactures high-strength aluminium alloys forapplications in the aerospace, sporting goods and surface transport industries. A joint venture

between Hindalco and Almex Aerospace, Hindalco-Almex operates a first-of-its-kind facility inIndia, which is exclusively devoted to high-performance aluminium alloys.




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1.3) Operations

Hindalco operates 51 units in 13 countries and includes a workforce of 34,000 representing 15 different

nationalities.

1.3.1) Operations in India

In India, Hindalco commissioned the Renukoot plant in Uttar Pradesh in 1962. The facilityoperates across the aluminium value chain from bauxite mining, alumina refining, aluminiumsmelting to downstream rolling and extrusions. The integrated facility houses a 700,000 tpaalumina refinery and a 345,000 TPA aluminium smelter along with facilities for production ofsemi-fabricated products namely conductor redraw rods, sheet and extrusions.Hindalco's other units in India are located at Muri in Jharkhand, Belur in West Bengal, Kollur inAndhra Pradesh, Silvassa in the union territory of Dadra and Nagar Haveli, Hirakud in Orissa,Alupuram in Kerala, Taloja in Maharashtra, Belgaum in Karnataka and Dahej in Gujarat.Hindalco operates captive bauxite mines in Jharkhand, Chhattisgarh, Maharashtra and Orissa,which provide the raw material to alumina refineries at Belgaum, Muri and Renukoot.Hindalco also has two research and development centres in Belgaum and Taloja.

Various manufacturing facilities across India are:

Renukoot: Hindalco's Renukoot plant was commissioned in 1962 with one potline and a smelterof 20,000tpa capacity.

Muri: Muri alumina plant was India's first alumina refinery. It is located on the banks of theSubarnarekha River in Chhotamuri village, 60 km from the town of Ranchi.

Alupuram: Located in Ernakulum district of Kerala, Hindalco Alupuram Works was set up in1938.

Belur: India's aluminium story begins with the Belur plant, it operates at 45, Taloja: The Taloja sheet rolling plant is located in the Raigad district of Maharashtra, Belgaum: The Belgaum unit of Hindalco, located in Karnataka,

Hirakud: The Hirakud smelter and power complex is in Odisha. Dahej: Birla Copper, Hindalco's copper unit, is one of the largest single-location copper smelters

in the world with integrated port facilities. Mouda: The world class foil production facility at Mouda near Nagpur is now operational. Shendra: Operated by Hindalco-Almex Aerospace, this first-of-its-kind facility in Aurangabad

is exclusively devoted to high-performance aluminium alloys.




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1.3.1) Global Operations:

a) Novelis is headquartered in Atlanta, Georgia and operates 25 manufacturing facilities innine countries on four continents, with nearly 11,000 employees. Novelis is the world‘slargest rolled aluminum producer in terms of volume shipped, and the largest purchaserof aluminum as well.

b) Aditya Birla Minerals is based in Perth, West Australia, and conducts its activities at theBirla Nifty Copper Operation in the Great Sandy Desert, WA and the Mt Gordon CopperOperation located in the Mt Isa Block in Queensland.

c) Hindalco-Almex operates a first-of-its-kind facility in India, which is exclusively devotedto high-performance aluminium alloys. HAAL is located at Shendra, Aurangabad inwestern India, around 350 km from Mumbai.

Hindalco's manufacturing locations worldwide include:

Hindalco-Novelis headquartered in Atlanta, Georgia, is the world‘s largest rolled aluminum

producer, operating 25 manufacturing facilities in nine countries on four continents. Thecompany‘s production sites are spread across Asia, Europe, North and South America




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F ig 1.3: H indalco global operati ons




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1. .South Korea Yeongju: This is a modern, low-cost facility that has casting, hot rolling, cold rolling, finishing

and recycling facilities. Ulsan: This plant is equipped with casting, hot rolling, cold rolling, finishing and recyling

facilities.

2. Malaysia Bukit Raja: This mill produces a variety of rolled products, ranging from sheet and coil to

heavy gauge foil products.

3. France Voreppe: This facility provides technologies and services in the fields of casting and in-line

molten metal treatment.

4. Germany Goettingen: This plant is a specialist supplier of flat-rolled aluminum sheet. Luedenscheid: This mill supplies high quality foil for the flexible packaging market. Nachterstedt: This facility supplies customers of industrial, packaging, building and automotive

applications worldwide.

Norf: The mill here is the largest aluminum rolling and casting facility in the world. Ohle: This Continental Foil facility specializes in the rolling of high-performance alloys used for

applications such as containers, converter foil and industrial products.

5. Italy Bresso: This plant produces pre-painted rolled products and supplies to the building,

distribution, industry and transport markets. Pieve: This plant is an integrated recycling, continuous casting, rolling and finishing operation.

6. Switzerland Sierre: The site has hot and cold rolling and heat treatment capability. It supplies to the

automotive, building, industrial and transport markets.

7. United Kingdom Latchford: This area is home to two of Novelis' major recycling plants.




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8. Canada Burnaby, British Columbia: This facility houses aluminum container and aluminum foil

production, and a customer service center to meet the needs of retail and industrial customersaround the region.

Kingston, Ontario: The site produces specialty and industrial products for marine,transportation and other industrial applications with cold rolling, finishing and annealingequipment, uniquely designed to produce automotive sheet and specialty surfaces.

Montreal, Quebec: Novelis sells and distributes aluminum container and aluminum foil products for Eastern Canada's industrial and food service customers.

Toronto, Ontario: This is the primary fabricating facility for aluminum container, aluminumfoil and sheeted foil products distributed in North America and other markets.

9. United States Berea, Kentucky: This is the world's largest dedicated aluminum can recycling plant. Detroit, Michigan: This site provides sales and engineering technical support for automotive

manufacturers. Fairmont, West Virginia: This is an aluminum sheet and heavy gauge foil cold rolling facility

with precision slitting and annealing capability. Greensboro, Georgia: The first stand-alone Used Beverage Can Recycling facility in Novelis,

this facility is now responsible for pioneering the majority of Novelis' recycling technologies. LaGrange, Georgia: US center of sales, marketing and customer service activities for aluminum

container, aluminum foil and foil products requirements. Logan, Kentucky: One of the largest, most technologically advanced aluminum manufacturing

facilities in the world. Oswego, New York: The plant produces premium aluminum products used primarily by the

beverage can, building and construction and automotive markets, and in multiple industrial product applications.

Terre Haute, Indiana: A world-class light gauge foil rolling plant and a recognized leader inthe production of semi-rigid foil container stock, package foil, wide industrial fin stock andconverter foil.

Warren, Ohio: The plant applies coating to rolled aluminum sheet which is then used for production of lids for aluminum beverage cans.




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10. Brazil Pindamonhangaba: . The site focuses on the production of aluminum rolled sheets to supply the

packaging, automotive and civil construction segments. And the largest South American

Recycling Center with an 80,000 ton-per-year recycling capacity. Utinga: This rolling mill supplies to the automotive and consumer goods segments. Ouro Preto: Produces primary aluminum in the form of plates and billets. This location also has

an upcoming specialty alumina facility.

11. Australia

Aditya Birla Minerals is an Australia-based mining company with a focus on copper productionand exploration. It has two operations:

Birla Nifty: Located in the Great Sandy Desert Region of the East Pilbara in West Australia, thisoperation comprises a historical open pit oxide mine and an underground sulphide mine with anassociated concentrator.

Mt Gordon: Located in northwest Queensland, this operation can produce copper in concentrateat an annual production rate of approximately 20kt.

1.4) Hindalco's strategy:

a) An i ntegrated approach for Al umin ium : The objective is to balance between themore volatile high-margin upstream products and the steadier low-margindownstream portfolio. Hindalco's upstream strategies for the aluminium industry

http://www.hindalco.com/about-us/strategy/strategy-aluminium






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focuses on continuing existing low-cost operations and progressing on newGreenfield projects that will further improve cost competitiveness through lowest

production costs; by controlling key resources, such as bauxite mines, refineries, power plants and coal; and reaping benefits of economies of scale.

. One tonne of aluminium requires over 15,000 Kwh of power. Power constitutesalmost 40 per cent of the total cost of production. Low cost, uninterrupted poweris absolutely vital for the successful aluminium operations. The smelters fully

backed by captive power plants located at the pitheads of the owned coal minesmake us one of the lowest cost producers globally.

F ig 1.4 Hi ndalco-N oveli s downstream str ategy

b) Expanding verti call y for Copper

Hindalco has the world's largest single-location custom smelters at Dahej facilityin Gujarat, India, along with a power plant and nearby jetty. In pursuit of verticalexpansion, it has extended its presence in copper production across national

borders when we acquired the Nifty and the Mt. Gordon mines in Australia. Thesemines secure partial supply of our concentrate

http://www.hindalco.com/about-us/strategy/strategy-copper

http://www.hindalco.com/about-us/strategy/strategy-copper




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F ig 1.5 By-product value

Gold and silver have an affinity to copper ore. Hence its extracts them, as well as traceamounts of platinum and palladium after copper refining. The dispatch of these preciousmetals is conducted using special armored vehicles that Hindalco contracts on a long-term basis through agencies.

Sulfuric acid employed in copper processing by converting it to phosphoric acid and then

using that to produce the fertilizers – di-ammonium phosphate and nitrogen phosphorus potassium compound.

1.5) Vision of HindalcoTo be a premium metals major, global in size and reach, excelling in everything wedo, and creating value for its stakeholders.




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1.6) Mission of HindalcoTo relentlessly pursue the creation of superior shareholder value, by exceeding customerexpectation profitably, unleashing employee potential, while being a responsible corporate

citizen, adhering to our values.

1.7) Management team

Board of Directors Hindalco Industries Limited: Novelis Inc:

Mr. Kumar Mangalam Birla,Chairman

Mr. Debnarayan Bhattacharya,Managing Director

Steve Fisher - InterimPresident & CEO and CFO

Mr. Debnarayan Bhattacharya,Managing Director

Mr. Satish Pai, Deputy ManagingDirector

Utkal AluminaInternational Limited:

Mr. Satish Pai, Deputy ManagingDirector

Mr. J. C. Laddha, Group ExecutivePresident, Copper Mr. Vijay Sapra, President

Mr. AK Agarwala Mr. Praveen Maheshwari, ChiefFinancial Officer

Aditya Birla MineralsLimited:

Mr. Jagdish KhattarMr. DK Kohly, Chief OfficerOperations, Renukoot Unit &

Renusagar Units

Mr. N M Patnaik, CEO andMD

Mr. KN Bhandari Mr. Vineet Kaul, Chief HumanResource Officer

Mr. MM Bhagat Mr. Sachin Satpute, ChiefMarketing Officer, Aluminium

Mr. NJ Jhaveri Mr. BB Jha, Head, CorporateProjects and Procurement Cell

Mrs. Rajashree Birla Mr. Sanjay Sehgal, President,Chemicals

Mr. Ram CharanMr. Anil Malik, Company

Secretary

Table 1.1 Hi ndalco M anagement Team




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1.8) Current Scenario and Recent Developments

An investment of over USD 5 Bn, after facing various unforeseen challenges, got ready fordelivery. The three Greenfield field projects and three brown field projects came on streamduring the course of the year

Profit before interest, depreciation and tax increased by 13% over the previous year(Standalone). On a consolidated basis, The Company registered a turnover of US$ 14.5 billion(87,695 Crore) and an EBITDA of US$ 1.5 billion (9,303 Crore).

Noveli s, Company‘s 100% subsidiary faced several headwinds in the form of extended winter in

the North American markets that led to sharp deterioration in the can market, rising physical premium leading to pricing pressures in the Asian markets, etc. Yet, it managed to deliver arobust adjusted EBITDA of US$ 885 Million.

Bu sin ess H ighli ghts

Three Greenfield projects (Mahan, Utkal and Aditya) have become operational and are currentlyramping up. These projects, in their fullness, would redefine Company‘s cost co mpetitiveness onthe global compass and significantly enhance the sustainability of its operations.

The highlights for the financial year were:a) Highest ever Aluminium Metal volumes produced and sold Aluminium Metal

production in India is up 13% b) Highest ever Alumina production as Utkal started delivering strong volumes

Alumina production up 23%.c) Three Greenfield projects, with an investment of over Rs. 30,000 crore are now

ramping up and are on course to achieve desired results.d) In addition, the brownfield projects, viz, Hirakud smelter expansion, Hirakud FRP

Plant and Mouda Foils are also on stream and would strengthen the aluminiumVAP portfolio further.




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e) Novelis too, achieved significant progress on all its strategic expansions. Theseinclude the ramp up of rolling production at the Pinda plant in Brazil, coupledwith the mill expansions in Korea and the start of commercial production at its US

automotive finishing lines.f) Consolidated revenue stood at Rs. 87, 695 crore as compared with Rs. 80,192

crore in FY13.g) Profit before depreciation, interest and taxes stood at Rs 9,303 crore as against

Rs 8,849 crore in FY13.h) Net profit was lower at 2,175 crore as compared with 3,027 crore in FY13 on

account of higher interest, depreciation and certain exceptional items.i) Of the total annual revenue of 87,695 crore, Aluminium Business contributed

69,218 crore, vs. 62,259 crore last year. Aluminium EBIT for FY14 was 3,764crore as compared with 4,388 crore posted in FY13.

j) Copper business delivered a robust performance, generating an EBIT of ` 1,025crore. The copper business‘ performance cushioned the pressure on aluminium

margins, vindicating the virtue of a balanced portfolio of your Company.k) Standalone revenues increased 7% to 27,851 crore from 26,057 crore in FY13.

Profit before interest, depreciation, tax and exceptional items were 13% higher at3,616 crore vs. 3,187 crore in FY13. This increase in profit was mainly onaccount of strong operational performance by copper business.

l) Net profit for the year stood at ` 1,413 crore as compared with 1699 crore inFY13. This was primarily due to higher depreciation and finance costs.

m) Depreciation and Finance cost increased as the projects started commercial production.




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Decreasing Prof its ……………..

During FY14, multiple projects of

large magnitude and investments were

brought on stream Mahan aluminium,

Utkal alumina refinery and Aditya

Aluminium smelter, with an

investment of over ` 30,000 crore, are

on stream and are now ramping up to

slated capacities.

Due to this debt increased and hence

consolidated Interest expenses

increased from 2,079 crore to 2,702

crore. In standalone business, finance

costs went up from 436 crore to 712

Consolidated and standalone

depreciation increased.




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1.9) Global Aluminum Industry Analysis

F ig 1.6 Global pri mary alum ini um pr oduction vs. consumption tr end, 2012-2018

Aluminium is one of the most versatile and essential materials for the global economy. Thecommodity‘s extensive properties, including strength, conductivity, recyclability, and

lightweight make it the world‘s second most used metal after steel. Aluminium finds major usein transportation and construction sectors. China dominates the global aluminium market in both

production and consumption. Boom in the residential and infrastructure markets drive itsaluminium market.

Recent years have seen a continuation of volatility in aluminium market prices, with pricesincreasing from US$ 1843 per MT in August 2012, to a high of US$ 2087 per ton in December2012. Current price of aluminum in international market is US $ 1736 1A few nations haveseen government intervention to absorb losses by aluminium producers, or providing tax breaksor cheaper energy. This government intervention is resulting in a large quantity of over-supply ofaluminium suppressing prices further.Worldwide, rising aluminum stocks have hampered production and cut down prices.Manufacturers have slowed down production to reduce pressure on prices. Industry estimates

1 LME Aluminium Cash-Settlement, 21. May 2015

2012 2013 2014 2015

Production 47.8 50.8 53.8 56.5

Consumption 47.4 50.4 53.6 56.5

4244

46

48

50

52

54

56

58

Global primary aluminium production vs. consumption trend.( million tonnes), 2012-2018




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reveal that while primary aluminium production is growing at a CAGR of around 3%, the primary aluminium consumption is estimated growing at around 4% during 2012-2018.

F ig 1.7 Share of major alumi niu m produces F ig 1.8 Share of major alumi niu m consumers in theI n the world. World.

World primary aluminium markets have witnessed nine consecutive years of surplus since 2008.Amongst key industry verticals, transportation accounts for 25% consumption share, followed byconstruction (24%), packaging (17%), power (12%) and machinery (10%).Regionally, APAC dominates both production and consumption of Aluminium. China aloneaccounts for around 40% of global aluminum production and 45% of consumption. In the last tenyears, China has quadrupled its consumption of aluminum. Already accounting for 42% ofglobal aluminium consumption, China is forecast to boost this share to 52% by 2025. Chinesegrowth in aluminium consumption is largely driven by urbanization, goals and strategies of theChinese Government has resulted in investments in infrastructure and housing which alsoconsume large amounts of aluminum. Besides, the continued strong position of China as a

producer of industrial and consumer goods for export result in large investments in the aluminumindustry.

40%

9%7%6%

38%

Share of major aluminiumproducers

china

russia

canada

EU

others

45%

14%

10%

6%4%

22%

Share of major aluminumconsumers

China

EU

US

Japan

India

Others




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1.10) Opportunities and challenges

1.10.1) Opportunities

a) Middle east emerging as major marketLooking over the supply-side, the market is shifting towards the Middle East dueto the availability of cheap energy in the region. Aluminium growth in MiddleEast further benefits from advantages such as rich bauxite reserves as well aseconomical energy. Also, the close proximity of the GCC region to Europeancountries enables smelter operators to further reduce costs.

b) Enhanced application areasThe new markets for aluminum are found within aviation, solar cells, electronics,cars and new types of material for construction. Aluminum has already succeededin entering part of the copper market since copper is higher priced and is heavierthan aluminum. Therefore manufacturers can save costs and weight in their

production if they are able to exchange copper materials for aluminum materials.

c) Sustainable production technologiesResearchers at the DOE‘s Argonne National La boratory and Noranda

Falconbridge are developing a way to produce aluminum at significantly reducedtemperatures. The ITP, working with Aleris Inc., among others, has supported thedevelopment of a radically new concept for melting aluminum — isothermalmelting — that can dramatically improve energy efficiency in melting and othermolten metal processes. Alcoa has launched a carbon capture technology at itsKwinana alumina refinery in Western Australia.

1.10.2) Challenges

a) Price volatilityIn the past few years, aluminium prices have become very volatile, especially dueto global economic uncertainties. During 2013, aluminium prices slipped to anaverage of US$ 2,053 per MT, down almost 15% compared to 2012.

b) High inventory




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The global aluminium market is set to remain in surplus over the next couple ofyears as demand growth failed to keep pace with rising supply. Global inventorieshave remained at 7 Million MT since the beginning of the year equating to 60

days of consumption and more than double the levels seen before the financialcrisis in 2008.

c) High energy and carbon costAnother challenge is the demand to save energy and reduce energy consumptionin all aspects of the primary aluminium production process. Also, challenge is toreduce the emissions of greenhouse gases from the aluminium production process.Both the electric power generation from fossil fuels and the smelting process aremajor sources of greenhouse gas emissions. Although significant progress has

been made in recent years, this problem is not yet solved, and it will be one of the biggest technological challenges for the aluminium industry in the years to come.

d) Competition from substitutesCarbon fiber-reinforced plastic (CFRP), Titanium, Steel and Composite materialsgive stiff competition to aluminum. The rivalry between substitutes would

become harsher in the following decades as consumers continuously assessed notonly the functional characteristics of competing materials but also their relative

prices.

1.11) Aluminium Analysis in Q1 2015

Aluminium prices have reversed much of the gains of the second and third quarters last year thatwere prompted by the delay to the new LME load-out rates, which in turn saw LME warehousequeues grow again. High ‗all -in‘ prices and, more recently, weak er energy prices haveencouraged producers to step up output – the fact this has coincided with deterioration in theeconomic outlook for the global economy eg US has dampened sentiment, which is leading tothe current price correction. Since oil prices may well remain low for a few quarters and the newLME load-out rates could increase availability prices are expected to remain range bound.




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Production climbs, helped by lower energy prices – Global aluminium output in Novemberaveraged 151,700 tonnes per day (tpd) compared with 146,100 tpd in October and an average of142,100 tpd in November 2013. In the first 11 months of 2014, production averaged 144,920 tpd,

which means output in November on an annualized basis was running some 2.5 million tonnesabove the average in the first 11 months of the year. Looking forward, producers now face somecrosscurrents - some will be able to take advantage of lower energy prices to reactivate idlecapacity but lower LME aluminium prices will start to squeeze operating margins at others. So inthe short term lower oil prices are likely to remain a bearish influence, especially if it encouragesmore exports of Chinese aluminium semis. But if lower benchmark prices start to prompt talk ofmore output cuts, bargain-hunting may well reappear. As always with aluminium, the demand

profile is second to none, so at the first sign of supply restraint consumers and investors arelikely to return as buyers. This in turn could trigger short covering and restocking and anotherupward run in prices.

F ig 1.9 LM E Al umini um price in past 10 year

New LME rules may have little impact on availability – If the new LME warehousing rules areimplemented this year, leading to a faster outflow of metal, it does not necessarily meanavailability will increase - the metal leaving warehouse could simply just go into off-marketfinancing deals. We do not think there will be much pick-up in availability in the market untilinterest rates rise to a level that makes financing metal economically unviable. Given concernsover slower global growth, the US Federal Reserve may indeed delay any rate rises or the raterises may have a negligible impact on the financing model. The aluminium industry may




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therefore have more time to reduce the stock overhang but to do so it will need to limit production increases - this will require keeping ‗all -in‘ aluminium prices sufficiently low.




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1.12) Classification of Working Capital

F ig 1.10 Classif ication of Work ing Capital

Working capital can be classified on the basis of concept and on the basis of time.

1) Types of working capital On the basis of concept

a) Gross Working Capital : In broad sense: working capital refers to gross working capital.It is also defined as financial concept or going concern concept. It means the capitalinvested in the current assets of the firm. Current assets mean the assets which can beconverted into cash easily or within one accounting period. It helps in determining thereturn on investment in working capital and providing correct amount of working capitalat right time.

b) Net Working Capital : In narrow sense: working capital refers to net working capital. Itis also defined as accounting concept. It means excess of current assets over currentliabilities. It helps in finding out firm‘s capability to meet short term liabilities as well asindicates the financial soundness of the enterprise. Net working capital = current assets – current liabilities

WorkingCapital

On ConceptBasis

Gross WorkingCapital

Net workingCapital

On Time basis

PermanentWorkingCapital

RegularWorkingCapital

ReserveWorkingCapital

TemporaryWorkingCapital

SeasonalWorkingCapital

SpecialWorkingCapital




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F ig 1.11 Temporary and permanent worki ng capital

2) Types of working capital on the basis of time

a) Permanent working capital : it is also called fixed working capital. It means to carry onthe day to day expenses the firm is required to maintain the minimum amount of workingcapital. For example the firm is required to maintain the minimum level of raw material,finished goods or cash balance etc.

i) Regular working capital- it means the minimum amount which the firm has to keepwith itself to carry on the day to day operation.

ii) Reserve working capital- it means the excess amount over the regular working capitalfor uncertain circumstances like strike, lock out, depression etc.

b) Temporary working capital: it is also called variable working capital, which isrequired to meet the seasonal demands as well as for special purposes.

i) Seasonal working capital: it is required to meet the seasonal needs of the enterprise.ii) Special working capital: it is required for some special purposes of the enterprise. For

example advertising the product of the firm requires special working capital.

1.13) Balanced Working Capital Position

The firm should maintain good working capital, both inadequate and excessive working capitalare dangerous for the firm‘s well - being as they could impair the firm‘s profitability due to

production interruptions and inefficiencies and sales disruptions.




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F ig 1.12 Balanced Worki ng capital positi on

Excessive working capital leads to :

• It results in unnecessary accumulation of inventories thereby increases the chances of inventorymishandling, waste, theft and losses• It is an indication of defective credit policy and slack in collection period. Consequently, higherincidence of bad debts results, which adversely affects profits• Negligent excessive working capital makes management negligent which degenerates intomanagerial inefficiency• Tendencies of accumulating inventories tend to make speculative prof its grow. This may tendto make dividend policy liberal and difficult to cope with in future, when the firm is unable tomake speculative profits

Inadequate working capital leads to :

• It slows down the growth of the company. It becomes difficult for th e firm to undertake profitable projects for the firm to undertake profitable projects for non-availability of workingcapital funds• It becomes difficult to implement operating plans and achieve the firm‘s profit target• Operating inefficiencies creep in when it becomes difficult even to meet day-to-daycommitments• Fixed assets are not efficiently utilized for the lack of working capital funds. Thus, the firm‘s

profitability would deteriorate




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• Paucity of working capital funds render the firm unable to avail attractive credit opportunitiesetc.• The firm loses its reputation when it is not in a position to honor its short -term obligations. As aresult, the firm faces tight credit terms for growth. It becomes difficult for the firm to undertake

profitable projects for the firm to undertake profitable projects for non-availability of workingcapital funds

1.14) Determinants of Working Capital

A firm‘s working capital can be determined by the following

1. Nature of Business

Working capital requirements of a firm are basically influenced by the nature of its business.Retail stores have a need for large sum of money to be invested in working capital. Constructionfirms need to invest substantially in working capital and a nominal amount in fixed assets.

2. Market and Demand Conditions

Sales forecasts determine the level of production, which in turn determines the level of currentassets. Sales forecasts are based on swings in market conditions. An upward swing in theeconomy will create demand thereby an increase in sales, which calls for an increaseddeployment of funds in current assets. In such a situation, firms resort to substantial borrowingwhereas the scenario for a downward swing in the market is opposite. The demand for short-term

borrowings during the downward swing, to fuel the working capital requirements goes down.

3. Technology and Manufacturing Policy

The manufacturing cycle comprises the purchase and use of raw materials and the production offinished goods. Longer the manufactu ring cycle, larger will be the firm‘s working capitalrequirements.

4. Credit Policy

The credit policy of a firm affects the working capital by influencing the level of debtors. Thecredit terms granted to the customers depend upon the norms of the industry to which the firm

belongs.

5. Availability of Credit from Suppliers

The working capital requirements of a firm are also affected by credit terms granted by itssuppliers. A firm will need less working capital, if liberal credit terms are available to it from thesuppliers. Supplier‘s credit finances the firm‘s inventories and reduces the cash conversion cycle




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6. Operating Efficiency

The operating efficiency of the firm relates to the optimum utilization of all its resources at

minimum costs. Operating efficiency can be achieved by controlling operating costs utilizationof current and fixed assets thereby improving the use of working capital and accelerating the pace of cash conversion cycle.

7. Price Level Changes

Generally, rising price levels will require a firm to maintain higher amount of working capital.Same level of current assets will need increased investment when price levels are increasing.Companies, which can revise their product prices immediately in line with increased input costs,will not face a severe working capital problem.

1.15) Tradeoff between Liquidity and Profitability.

As it is not possible to estimate working capital needs accurately, the firm must decide aboutlevels of current assets to be carried. Given a firm‘s t echnology and production policy, sales anddemand conditions, operating efficiency etc., its capital assets holding will depend upon itsworking capital policy. These policies involve risk-return trade-offs. A conservative policymeans lower return and risk, while an aggressive policy produces higher return and risk.

. The two important aims of the working capital management are: profitability and Liquidity.

Lenders and creditors expect prompt settlements of their claims as and when due. To ensure this,the firm should be very liquid, which means larger current assets holdings. If the firm maintainsa relatively large investment in current assets, it will have no difficulty in paying claims ofcreditors. However, considerable amount of firm‘s funds will be tied up in current assets, and tothe extent, this investment is idle, the firm‘s profitability will suffer.

To have higher profitability, the firm may sacrifice Liquidity and maintain a relatively low levelof current assets. When the firm does so, its profitability will improve as fewer funds are tied upin idle current assets, but its solvency would be threatened and would be exposed to greater riskof cash shortage and stock outs.

In determining the optimum level of current assets, the firm should balance the profitability-solvency tangle by minimizing total costs- cost of liquidity and cost of illiquidity.




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F ig 1.13 Optimum l evel of wor kin g capital

It is indicated in the figure that with the level of current assets the cost of liquidity increaseswhile the cost of illiquidity decreases and vice versa. The firm should maintain the current assetsat the level where the sum of these two costs is minimized. The minimum cost point indicates theoptimum level of current assets.

1.16) MANAGEMENT OF WORKING CAPITAL:

Working Capital Management involves management of different components of working capitalsuch as cash, inventories, accounts receivable, creditors etc. A brief description followsregarding the various issues involved in the management of each of the above components ofworking capital.

A) INVENTORY MANAGEMENT: Inventory management refers to an optimuminvestment in inventories. It should neither be too low to effect the production adverselynor too high to block the funds unnecessarily. Excess investment in inventories isunprofitable for the business. Both excess and inadequate investment in inventories is notdesirable.

The following are the various measures of selective control of inventory:

1 Economic Ordering Quantity (EOQ) It is important to note that only the correctquantity of materials is to be purchased. For this purpose, the factors such asmaximum level, minimum level, danger level, re-ordering level, and quantity alreadyon order, quantity reserved, availability of funds, quantity discount, and interest oncapital, average consumption and availability of storage accommodation are to bekept in view. Economic Ordering Quantity (EOQ) is the quantity fixed at the point




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where the total cost of ordering and the cost of carrying the inventory will be theminimum.

2 Fixing levels (Quantity Control) - For fixing the various levels such as maximum,

minimum, etc., average consumption and lead time i.e. the average time taken between the initiation of purchase order and the receipt of materials from suppliersare to be estimated for each item of materials.

3 ABC Analysis for value of items consumed- ABC analysis is a method of materialcontrol according to value. The basic principle is that high value items are moreclosely controlled than the low value items. The materials are grouped according tothe value and frequency of replenishment during a Period. ‗A‘ Class items: Small percentage of the total items but having higher values. ‗B‘ Class items: More percentage of the total items but having medium v alues.‗C‘ Class items: High percentage of the total items but having low values.

4 Just in Time (JIT): The material reaches the points of production process directlyfrom the suppliers as per the time schedule and the manufacturer does not have tohold any inventory. Zero inventory helps in lesser working capital and more

profitability. It is possible in the case of companies with respective process. Since, itrequires close coordination between suppliers and the ordering firms, and therefore,only units with systematic approach will be able to implement it.

B) CASH MANAGEMENT: Cash management is one of the key areas of working capitalmanagement. Cash is the most liquid current assets. Cash is the common denominator towhich all current assets can be reduced because the other major liquid assets, i.e.

receivable and inventory get eventually converted into cash. This underlines theimportance of cash management.

Strategies for cash management are:-

1 Projection of cash flows and planning - The cash planning and the projection ofcash flows is determined with the help of cash budget. The cash budget is the mostimportant tool in cash management. It is a device to help a firm to plan and controlthe use of cash. It is a statement showing the estimated cash inflows and cashoutflows over the firm‘s planning horizon. In other words the net cash position i.e.,surplus or deficiency of a firm is highlighted by the cash budget from one budgeting

period to another period.2 Determining optimal level of cash holding in the company -Determining to

optimum level of cash balance influenced by a tradeoff between risk and profitability.Every business enterprise holding cash balances for transaction purposes and to meet

precautionary, speculative and compensative motives. It is also observed that cashinflows and cash outflows and cash outflows. With the help of cash budget thefinance manager predicts the inflows and outflows of cash during a particular period




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of time and there by determines the cash requirements of the company. Whiledetermining the optimum level of cash balance (neither excess nor inadequate cash

balances) the finance manager has to bring a tradeoff between the liquidity and profitability of the firm. The optimum level of cash balances of a company can be

determined in various ways: They are:-a. Inventory model (Economic Order Quantity) to cash management: Economic

Order Quantity (EOQ) model is used in determination of optimal level of cash ofa company. According to this model optimal level of cash balance is one at whichcost of carrying the inventory of cash and cost of going to the market forsatisfying cash requirements is minimum. The carrying cost of holding cash refersto the interest foregone on marketable securities whereas cost of giving to themarket means cost of liquidating marketable securities in cash. Optimum level ofcash balance can be determined as follows:

Q=√

Where Q = Optimum level of cash inventoryA= Total amount of transaction demandO = Average fixed cost of securing cash from the market (ordering cost ofcash securities)

b. Stochastic model: The basic assumption of this model is that cash balances, areirregular, i.e., changes randomly over a period of time both in size and directionand form a normal distribution as the number of periods observed increases. Themodel prescribes two control limits Upper control Limit (UCL) and LowerControl Limit (LCL) when the cash balances reaches the upper limit a transfer ofcash to investment account should be made and when cash balances reach thelower point a portion of securities constituting investment account of the companyshould be liquidated to return the cash balances to its return point. The controllimits are converting securities into cash and the vice – versa, and the costcarrying stock of cash.

c. Probability model : According to this model, a finance manager has to estimate probabilistic out comes for net cash flows on the basis of his prior knowledge andexperience. He has to determine what is the operating cash balance for a given

period, what is the expected net cash flow at the end of the period and what is the probability of occurrence of this expected closing net cash flows. The optimumcash balance at the beginning of the planning period is determined with the helpof the probability distribution of net cash flows. Cost of cash shortages,opportunity cost of holding cash balances and the transaction cost.

3 Strategy for economizing cash - Once cash flow projections are made andappropriate cash balances are established, the finance manager should take stepstowards effective utilization of available cash resources. A number of strategies haveto be developed for this purpose they are:




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a. Strategy towards accelerating cash inflows - In order to accelerate the cashinflows and maximize the available cash the firm has to employ several methodssuch as reduce the time lag between the movement a payment to the company ismailed and the movement the funds are ready for redeployment by the company.

This includes the quick deposit of custo mer‘s cheques; establishing collectioncenters and lock – box system etc.

i. Quick deposit of customer’s Cheques ii. Establishing collectioniii. Lock-box method

b. Strategy for slowing cash outflows - In order to accelerate cash availability inthe company, finance manager must employ some devices that could slow downthe speed of payments outward in addition to accelerating collections. Themethods of slowing down disbursements are as flows:

i. Delaying outwardii. Making pay roll periods less iii. Solving disbursement by sue of drafts. iv. Centralized payment system

C) MANAGEMENT OF RECEIVABLES: A firm should establish receivables policiesafter carefully considering both benefits and costs of different policies. These policiesrelate to.

1 Credit Standards - The firm‘s credit sta ndards are generally determined by the five

―C‘s‖. Character, Capacity, Capital, Collateral and Conditions. Information about the fiveC‘s can be collected both from internal as well as external sources. Internal sourcesinclude the firm‘s previous experie nce with the customer supplemented by its own welldeveloped information system. External resources include customer‘s references, tradeassociations and credit rating organizations such .

2 Credit terms - It refers to the terms under which a firm sells goods on credit to itscustomers. As stated earlier, the two components of the credit terms are (a) Credit Periodand (b) Cash Discount. The approach to be adopted by the firm in respect of each of thesecomponents is discussed:

a. Credit period - Extending the credit period stimulates sales but increases the cost onaccount of more tying up of funds in receivables. Similarly, shortening the credit

period reduces the profit on account of reduced sales, but also reduces the cost oftyping up of funds in receivables. Determining the optimal credit period, therefore,involves locating the period where the marginal profits on increased sales are exactlyoffset by the cost of carrying the higher amount of accounts receivable.




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b. Cash discount - The effect of allowing cash discount can also be analyzed on thesame pattern as that of the credit period. Attractive cash discount terms reduce theaverage collection period resulting in reduced investment in accounts receivable.Thus, there is a saving in capital costs. On the other hand, cash discount itself is a loss

to the firm. Optimal discount is established at the point where the cost and benefit areexactly offsetting.

3 Collection procedures- A stringent collection procedure is expensive for the firm because of high out-of-pocket costs and loss of goodwill of the firm among its customers.However, it minimizes the loss on account of bad debts as well as increases savings interms of lower capital costs on account of reduction in the size of receivables. A balancehas therefore to be stuck between the costs and benefits of different collection proceduresor policies.

1.17) Financing Of Working Capital

A) Policies for Financing Current AssetsA firm can adopt different financing policies vis-à-vis current assets. Three types offinancing may be distinguished as

i) Long Term Financing: The sources of long-term financing include ordinary sharecapital, preference share capital, debentures, long-term borrowings from financialinstitutions and reserves and surpluses (retained earnings).

ii) Short Term Financing: Short -term financing is obtained for a period less than oneyear. It is arranged in advance from banks and other suppliers of short term finance inthe money market. Short-term finances include working capital funds from banks,

public deposits, commercial paper, factoring of receivables etc.

iii) Spontaneous Financing: Spontaneous financing refers to the automatic sources ofshort-term funds arising in the normal course of a business. Trade (suppliers), credit,and outstanding expenses are examples of spontaneous financing. There is no explicitcost of spontaneous financing. A firm is expected to utilize these sources of financesfully. The real choice of financing current assets, once the spontaneous sources offinancing have been fully utilized, is between the long term and short-term sources of

finances.

B) Approach for Financing Current AssetsDepending on the long term and short term financing, the approach followed by acompany may be referred to as• Matching Approach• Conserva tive Approach• Aggressive Approach




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1.17.1) Matching ApproachThe firm can adopt a financial plan, which matches the expected life of assets with the expectedof the source of funds raised to finance assets. Thus, a ten-year loan may be raised to finance a

plant with an expected life of ten years; stock of goods to be sold in thirty days may be financedwith a thirty-day commercial paper or a bank loan. The justification for the exact matching isthat, since the purpose of financing is to pay for assets, the source of financing and the assetsshould be relinquished simultaneously. Using long term financing for short-term assets isexpensive, as funds will not be utilized for the full period. Similarly, financing long-term assetswith short-term financing is costly as well as inconvenient, as arrangements for the new short-term financing will have to be made on a continuing basis.

F ig 1.14 M atching approach f or fi nancing worki ng capital

When the firm follows a matching approach (hedging approach), long-term financing will beused to finance fixed assets and permanent current assets and short-term financing to financetemporary or variable current assets are financed with short-term funds and as their levelincreases, the level of short-term financing also increases. Under a matching plan, no short-termfinancing will be used if the firm has a fixed current assets need only.

1.17.2) Conservative ApproachA firm in practice may adopt a conservative approach in financing its current and fixed assets.The financing policy of the firm is said to be conservative when it depends more on long-termfunds for financing needs. Under a conservative plan, the firm finances its permanent assets anda part of temporary current assets with long-term financing.In the periods when the firm has no need for temporary current assets, the idle long-term fundscan be invested in the tradable securities to conserve liquidity. The conservative plan reliesheavily on long-term financing and, therefore, the firm has less risk of facing the problem ofshortage of funds.




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F ig 1.15conservative approach for f in ancing worki ng capital

1.17.3) Aggressive ApproachA firm may be aggressive in financing its assets. An aggressive policy is said to be followed bythe firm when it uses more short-term financing than warranted by the matching plan. Under anaggressive policy, the firm finances a part of its permanent current assets with short-termfinancing. The relatively large use of short-term financing makes the firm more risky.

F ig 1.16 Aggressive approach for fi nancing worki ng capital




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CHAPTER 2

Objectives and Methodology

2.1) The Objectives of the project study

A) To analyze various working capital ratios for last four years starting from 2011 to2014.

B) Analysis of Current Asset and Current Liabilities

C) To estimate Working Capital requirement

D) Compare the financial position and performance Hindalco with Nalco on the basis ofvarious financial ratios

2.2) The Research method followed

A) The major sources of data were secondary data sources i.e. annual financial reports,finance journals, Research papers etc. while primary data was obtained throughRenusagar Power Division Finance and Accounts Department.

B) Excel solver used for forecasting working capital. Working capital and pertinent datafor past 10 years was obtained through annual reports of past 10 years (2005 to 2014)

C) Industry standard ratios were obtained through primary as well as secondary sources.

D) Suggestions made based on analysis of the financial ratios, comparing them with thefinancial scenario of the company and researching standard industry practices to improvesuch situation.

2.3) Scope of the study




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The study is confined to the organization, targets the areas of working capital to concentrate onand suggests steps for optimized levels of working capital.

2.4) Collection of dataSecondary Sources

i) Annual Report of Hindalco Industries from 2005 to 2014.ii) Annual report of Nalco from 2013 to 2014iii) International Aluminium Journals 2014iv) Chatterjee, S. (2012). The impact of working capital on the profitability: Evidencefrom the Indian firms.v) International Mining Journal 2014

Primary Sources

Primary Source of data includes personal discussion with the finance and accounts department professionals.

2.5) Tools for Analysis of the data

Microsoft Excel was used all through the project for the financial analysis of data, regressionanalysis and to create graphs and tables.

2.6) Period covered under study

The period of study was limited to two months during 1 April and 30 May 2015. During this period all the required data till 2014 was collected through secondary sources and analyzed withthe help of financial tools of analysis.

2.7) Limitations of the study

i) Data available till the last FY, current data not available.

ii) Insufficient data in order to keep the confidentiality of company‘s important information safe.

iii) This analysis is based on secondary data like a nnual reports and company‘s Balance Sheet.The scope of the study is limited to that extent.

iv) The time available to carry out this study was limited to two month




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CHAPTER 3

Analysis of Data and InterpretationFinancial Ratios

inancial ratios are mathematical comparisons of financial statement accounts orcategories. These relationships between the financial statement accounts help investors,creditors, and internal company management understand how well a business is

performing and areas of needing improvement.

3.1) Liquidity Ratios

3.1.1) Current ratio:

Current ratio is calculated by dividing current assets by current liabilities:

Current assets include cash and those assets that can be converted into cash within a year, such as

marketable securities, debtors, inventories, loans and advances. All the obligations maturingwithin a year are included in current liabilities. Current liabilities include creditors, bills payable,accrued expenses, short term bank loan, income tax liability and long-term debt maturing in thecurrent year.

F




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It indicates the availability of current assets in rupees for every one rupee of current liability. Aratio of greater than one means that the firm has more current assets than current claims againstthem. In India, the conventional rule is to have a ratio of 1.33(internationally it is 2).

F ig 3.1 Curr ent Ratios for H in dalco 2011-2014 Fi g 3.2 H indalco-Nal co Curr ent rati os compari son

For the year 2011, Hindalco Industries had a current ratio of 1.618, which was lower than theindustry standard of 2:1, which increased by 2013, indicating increase in liquidity situation butthat got offset during the subsequent years reaching 1.745 in 2014 i.e. decreased by 15%. Thisdecrease is due to disproportionate rise in current liabilities (29%) as compared to current assets

(9%), which is due to pressures on account of declining bauxite quality and rise in freight, aconsequence of diesel price deregulation.

When we compare the current ratio of Hindalco with Nalco over past two years, Nalco comesout to be in better position, indicating better liquidity.

3.1.2) Quick Ratio:

Quick ratio is given by

Quick assets are those assets which are converted into cash easily. It includes debtors, cash and bank and current investments. While quick liabilities are the liabilities which are immediately payable they include Creditors, Outstanding Expenses, Short term Investment.

1.74

2.07

1.64 1.62

0.0

0.5

1.0

1.5

2.0

2.5

2014 2013 2012 2011

Current Ratio1.74

2.072.29 2.18

0.000

0.500

1.000

1.500

2.000

2.500

2013-14 2012-13HINDALCO NALCO




41 | P a g e

It measures firm‘s capacity to pay off current obligations immediately and it is more rigorous test

of liquidity as compared to current ratio.

F ig 3.3 Quick Ratios for H indalco 2011-2014 F ig 3.4 H indalco-Nal co Quick rati os compari son

Ideally quick ratio should be 1:1 which is remains lower than it constantly in Hindalco, while itincreased to 0.97 in 2013 which again came down to 0.72. Also huge difference between quickratio and current ratio shows high dependency of Hindalco on inventory for liquidity.

F ig 3.5 Structure of curr ent asset for H indalco in 2014

This is supported by the data from Balance sheet. 41% of the total current assets are inventory. Inthis, almost 86% of the inventory is either raw material or WIP inventory, which is a standard

practice in aluminium manufacturing industry.

0.71

0.97

0.67 0.68

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2014 2013 2012 2011

Quick Ratio

0.7190.970

1.7071.548

2013-14 2012-13

HINDALCO NALCO

30%

41%

6%

5%

15%

3%

Current Investment

Inventories

Trade Receivables

Cash and Bank Balance

Short-Term Loans and Advnces

Other Current Assets




42 | P a g e

In comparison to which Nalco seems to be in much better position in terms of liquidity, withsimilarly high inventory.

3.1.3) Cash ratio

The Cash Ratio is a ratio that measures Liquidity and describes how well a company couldhandle their current Liabilities with their cash & cash equivalents if current liabilities were tocome due. The cash ratio measures the amount of cash, cash equivalents and invested funds acompany has to pay its current liabilities. The cash ratio is the most conservative of the short-term solvency measures because it eliminates short-term assets such as Inventory and AccountsReceivables which involve a lot of uncertainty concerning their true value and the time it takes to

be converted into cash. This is why many creditors look at the cash ratio specifically beforegiving credit. They want to see if a company maintains adequate cash balances to pay off all oftheir current debts as they come due.

It is calculated as

F ig 3.6 Cash Ratios for H in dalco 2011-2014 F ig 3.7 H indalco-Nal co Cash rati os compari son

The cash ratio of Hindalco is alarmingly low. Creditors prefer higher cash ratios, which isgenerally 1 or above for aluminium industry. Now with such low cash ratios, it becomes difficultto retain creditors or get new credit due for longer time period and hence it reduces days of

00.020.040.060.08

0.10.120.140.160.18

2014 2013 2012 2011

Cash Ratio

0.09 0.15

1.25

1.09

2013-14 2012-13

HINDALCO NALCO




43 | P a g e

payable outstanding (DPO), which means longer cash conversion cycle which affects workingcapital negatively which in turn, results in lower profitability 2.

3.2) Solvency ratios

Solvency refers to long-term solvency. It indicates whether the entity will be able to continue inthe long run.

Debt to Equity ratio:

F ig 3.8 Debt to Equity Ratio for H indalco 2011-2014

The D/E ratio is well under industry standards, it increased by 247% since 2011 to 2013Company raised 3,000 Crore through secured non-convertible debentures, the single largestissuance by a private corporate in India to fund the upcoming projects worth 30,000.

As debt is usually cheaper hence while debts increased at a rate of 61.75% annually on average,

more shares were not issued nor equity increased comparable to debt. On the other hand in 2013to 2014, both debt and equity grew by 8% in 2014 making D/E same as the previous year.

On other hand, Nalco surprisingly is a debt free company and much less riskier.

2 Chatterjee, S. (2012). The impact of working capital on the profitability: Evidence from the Indian firms

0.602 0.602

0.347

0.173

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

2014 2013 2012 2011

Debt to Equity RatioDebt usually has lower cost and hence it isused to improve ROE. Raising financethrough debt increases fixed liability interms of payment of interest. It adds tofinancial risk. Such liability has to be metwith even if business is not performing well.Entity may suffer loss if ROI is lower thancost of debt (interest); therefore D/E ratioshould be reasonable. The ratio is importantas it indicates about risk level of company.




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3.2.1) Interest Coverage Ratio

F ig 3.9 I nterest coverage Ratio for H indalco 2011-14 F ig 3.10 I nterest expense for H in dalco 2011-14

It is calculated as

Interest coverage is a financial ratio that provides a quick picture of a company's ability to paythe interest charges on its debt. The "coverage" aspect of the ratio indicates how many times theinterest could be paid from available earnings, thereby providing a sense of the safety margin acompany has for paying its interest for any period, may easily fall into bankruptcy if its earningssuffer for even a single month. For Aluminium manufacturing industry generally the minimumlevel for interest coverage ratio is 3.

Though ICR for Hindalco is slightly above the minimum required level but its continuousdecline from past several years indicates poor margin of safety, as large amount of debt takenduring these years and hence interest expense also increased, but since most of the projects arenot operational in full swing, revenues from them and in turn EBIT did not increaseProportionally. On the other hand Nalco did not pay any interest due to zero borrowings.

3.92

5.69

10.32

12.80

0

2

4

6

8

10

12

14

2014 2013 2012 2011

Interest Coverage Ratio

2014 2013 2012 2011

Series1 711.65 435.98 293.63 219.96

0100

200

300

400

500

600

700

800

Interest Expense




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3.2.4) Proprietary Fund Ratio .

The proprietary ratio (also known as the equity ratio) is the proportion of shareholders' equity to

total assets, and as such provides a rough estimate of the amount of capitalization currently usedto support a business. If the ratio is high, this indicates that a company has a sufficient amount ofequity to support the functions of the business, and probably has room in its financial structure totake on additional debt, if necessary. Conversely, a low ratio indicates that a business may bemaking use of too much debt or trade payables, rather than equity, to support operations (whichmay place the company at risk of bankruptcy).

It‘s calculated as

F ig 3.11 Proprietor f und ratio f or H indalco 2011- 14 Fi g 3.12 H indalco-Nalco Propri etor f und r atiocomparison

Observations: proprietor fund ratio which was 63.82% in 2011 came down to 49.8% in 2014(industry average being 40%) . The continuous decline is due to increase in leverage andinvesting heavily in projects which still have to generate cash flows in future e.g. Mahansmelter.Though the proprietor ratio is better in NALCO and also has increased from past year, but forHindalco it is expected to improve in the upcoming years.

49.79% 51.00%

57.56%63.82%

0%10%

20%

30%

40%

50%

60%

70%

2014 2013 2012 2011

proprieter fund ratio

49.79% 51.00%

73.25%65.17%

2013-14 2012-13

HINDALCO NALCO




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3.3) Profitability ratios

Profitability ratios are used to assess a business's ability to generate earnings as compared to its

expenses and other relevant costs incurred during a specific period of time.

3.3.1) Gross profit ratio

Gross profit ratio reflects the margin earned by the firm through manufacturing or trading as a proportion of sales. The gross profit earned should be sufficient to recover all operating expensesand to build up reserves after paying all fixed interest charges and dividends.

It is calculated as

F ig 3.13 Gross Prof it Ratio for H indalco 2011-14 F ig 3.14 Nalco H indalco Gross Profi t compari son2013-14

The gross profit ratio has been continuously declining, from 25% in 2011 to 22.14% in 2014which is slightly more than pre vious year‘s 21.95%. The decline can be attributed to various

factors like increased cost of raw freight and poor quality bauxite. Nalco on the other handmaintained a good gross profit ratio much higher that Hindalco, because the cost of raw materialconsumed for Nalco is 14.49% of the revenue while for Hindalco it is 64.9%. This is due to

purchase of copper ore by Hindalco, which Nalco does not procure.

22.14% 21.95%

22.88%

25.06%

20%

21%22%

23%

24%

25%

26%

2014 2013 2012 2011

Gross profit ratio

22.14% 21.95%

53.70%48.88%

2013-14 2012-13

HINDALCO NALCO




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3.3.2) Operating Profit

Operating profit is the excess of sales overs COGS and operating expenses. Operating profit is

earned from normal business operations of the concern.

It is calculated as *100.

F ig 3.15 Operati ng Prof it Ratio for H in dalco 2011-14 F ig 3.16 H indalco – Nalco Operati ng Prof it comparison

The operating profit declined from 11.8% in 2011 to 9.52% in 2013, which increased slightly to10.03%. Interestingly the decline in gross profit is more steep than decline in operating profit forthe entire duration which indicates reduction in the proportion of non-production overheads dueto better efficiency of operations. Operating profit margin for Nalco is more than Hindalco; it isexpected to catch up in near future.

3.3.3) Net profit ratio:

Net profit after tax is obtained after deducting all expenses, interest and tax from sales. It is

Calculated as:

*100.

10.03% 9.53%11.39% 11.80%

0%

2%

4%

6%

8%

10%

12%

14%

2014 2013 2012 2011

Operating Profit Ratio

10.03% 9.53%

14.26%13.19%

2013-14 2012-13

HINDALCO NALCO




48 | P a g e

F ig 3.17Net Prof it Ratio for H in dalco 2011-14 F ig 3.18 H indalco-Nalco Net Prof it compari son

The profit margin ratio directly measures what percentage of sales is made up of net income. Inother words, it measures how much profits are produced at a certain level of sales. This ratio alsoindirectly measures how well a company manages its expenses relative to its net sales.The NPR is like other ratios for Hindalco are constantly declining as compared to Nalco, whichhas better NPR and that too improving year after year. This clearly shows Nalco performing

better than Hindalco in profitability.

3.4) Return Ratios:

Return ratios indicate the rate at which the company has generated return over its capitalemployed in the business.

3.4.1) Return on capital employed:

Return on capital employed (ROCE) is the ratio of net operating profit of a company to itscapital employed. It measures the profitability of a company by expressing its operating profit asa percentage of its capital employed. Capital employed is the sum of stockholders' equity andlong-term finance. It is calculated as

5.07%

6.52%

8.41%8.96%

0%

2%

4%

6%8%

10%

2013-14 2012-13 2011-12 2010-11

Net Profit Ratio

5.07%6.52%

9.47%8.57%

2013-14 2012-13

HINDALCO NALCO




49 | P a g e

It indicates how efficiently a company uses its capital employed as well as its long-termfinancing strategies. For a company to remain in business over the long term its return on capitalemployed should be higher than its cost of capital; otherwise, continuing operations graduallyreduce the earnings available to shareholders. It is commonly used to compare the efficiency ofcapital usage of businesses within the same industry.

F ig 3.19 ROCE for H indalco 2011-14 F ig 3.20 H indalco-Nalco ROCE compari son

The Return on capital invested for Hindalco declines from 7.032% in 2011 to 4.16% in 2013 andincreased marginally in 2014 to 4.302 which is quite less than that of Nalco‘s 8.546%. AlsoWACC for Hindalco is 10.1% 3. Now as WACC is more than ROCE, Hindalco proves to destroythe wealth of in investors.WACC for Nalco being 15% 4, Nalco also destroys wealth for its investors.

3.4.2) Return On Equity:

This ratio indicates how profitable a company is by comparing its net income to its averageshareholders' equity. The return on equity ratio (ROE) measures how much the shareholders

3 Zhumadil, Mariyam. March 11, 2014, Spin-off could unlock value, but devil is in the details, Halyk FinanceReport. 4 http://www.sakalmoney.com/reports/AmbitNationalAluminium.pdf

4.30% 4.16%

6.34%7.03%

0%1%2%3%4%5%6%7%8%

2014 2013 2012 2011

ROCE

4.30% 4.16%

8.55% 8.83%

2013-14 2012-13

HINDALCO NALCO




50 | P a g e

earned for their investment in the company. The higher the ratio percentage, the more efficientmanagement is in utilizing its equity base and the better return is to investors.

It is calculated as

F ig 3.21 ROE for H indalco 2011-14 F ig 3.22 H indalco-Nal co ROE compari son

Observation: ROE like other financial ratios, too decline continuously since 2011, from 7.195%to 3.848%, and hence decline in efficiency of investors‘ money being employed. Nalco on the

other hand continues to show higher and improving ROE from past few years. When we seeROE a nd ROI together, Nalco seems to be a better option from investors‘ perspective.

3.4.3) Return On Assets ( ROA)

It indicates the profit earned on assets used. Assets include fixed asset, capital work in progress,investments and total current assets, loans and advances.

It is calculated as follows:

3.848%

5.002%

6.984% 7.195%

0%

2%

4%

6%

8%

2014 2013 2012 2011

ROE

3.848%

5.002%5.299%4.968%

2013-14 2012-13

HINDALCO NALCO




51 | P a g e

F ig 3.23 ROA for H indalco 2011-14 F ig 3.24 H indalco-Nalco ROA compari son

While investment in total assets increased by 11% from 2013 to 14, revenues increased by only6% in the same period. This resulted in decline in return on total assets declined from 2.55% in2013 to 1.916% in 2014. There is a continuous decline in ROA since 2011. The reason beinghuge investment in projects which yet to start generating cash flows, which has resulted in lowAsset turnover and hence lower ROA. A low ROA indicates inefficient usage of assets, but thisnot the cause behind declining ROA here. Nalco on the other hand has slightly increasing ROAfrom 3.63% in 2013 to 3.88% in 2014.

3.5) Turnover ratios:

Turnover ratios indicate efficiency in asset use.

3.4.1) Asset Turnover Ratio

Amount of sales or revenues generated per rupee of assets. The Asset Turnover ratio is anindicator of the efficiency with which a company is deploying its assets. For a specific company,the trend in the asset turnover ratio over a period of time should also be reviewed to checkwhether asset usage is improving or deteriorating. It is calculated as:

1.916%2.551%

4.020%

4.592%

0%

1%

2%

3%4%

5%

2014 2013 2012 2011

ROA

1.916%

2.551%

3.882%3.630%

2013-14 2012-13

HINDALCO NALCO




52 | P a g e

F ig 3.25 Asset Tur nover Ratio for H indalco 2011-14 F ig 3.14 H indalco-Nal co Asset Tu rn over Ratiocomparison

Asset turnover ratio declined from 0.513 in 2011 to 0.378 in 2014. The reason for decline issame as decline in ROA. Nalco though, has higher asset turnover ratio, but it is declining too.Steeper decline in ROA as compared to asset turnover ratio is due to the fact that ROA is productof Asset turnover and profit margin ratio, both declined in the studied period.

3.4.2) Working capital ratio:

The working capital turnover ratio measures how well a company is utilizing its working capitalto support a given level of sales. It shows how quickly working capital rotates. A high turnoverratio indicates that management is being extremely efficient in using a firm's short-term assetsand liabilities to support sales. Conversely, a low ratio indicates that a business is investing in toomany accounts receivable and inventory assets to support its sales, which could eventually leadto an excessive amount of bad debts and obsolete inventory. If it is extremely high, On the

surface, appears that the company is operating at a very high efficiency, but in reality, workingcapital level might be dangerously low. Very low working capital can possibly cause thecompany to run out of money to fund business.

It is calculates as

0.378 0.391

0.4780.513

0.0

0.1

0.2

0.3

0.4

0.5

0.6

2014 2013 2012 2011

Asset turnover ratio

0.378

0.391

0.410

0.423

2013-14 2012-13

HINDALCO NALCO




53 | P a g e

F ig 3.27 Work ing Capital for H indalco 2011-14 F ig 3.28 Sale to WC comparison for H indalco 2011-14

Working capital though dropped from 3.92 in 2011 to 2.5 in 2013, but it increased marginally in2014 and expected to increase in future, during 2012-13, sales decreased and working capitalincreased, resulting in steep decline in working capital turnover.Increase in sales while marginally decreased working capital resulted in increased workingcapital turnover.

3.4.3) Inventory Turnover

Inventory turnover ratio explains movement of inventories in relation to sales. Lower ratioindicates slow movement of inventories. Inventory turnover is a measure of how efficiently acompany can control its merchandise, so it is important to have a high turnover. This shows thecompany does not overspend by buying too much inventory and wastes resources by storing non-salable inventory. It also shows that the company can effectively sell the inventory it buys.

This measurement also shows investors how liquid a company's inventory is. Inventory is one of

the biggest assets a retailer reports on its balance sheet. If this inventory can't be sold, it isworthless to the company. This measurement shows how easily a company can turn its inventoryinto cash.

2.972.50

4.13 3.92

0

1

2

3

4

5

2014 2013 2012 2011

working capital turnover

9,370 10,413

6,444 6,087

27,85126,057 26,597

23,859

2014 2013 2012 2011

Working Capital Sales




54 | P a g e

This ratio is given as follows:

F ig 3.29 I nventory Tur nover for H in dalco 2011-14 F ig 3.30 H indalco-Nalco I nventory Tur novercomparison

Inventory turnover did not show any significant changes in this period, showed 0.89% decline in2014 from the previous year. Hindalco has maintained almost same inventory turnout ratio,which is a good sign. This performance is better than Nalco, both in stability and absolute value.It shows better inventory management in Hindalco.

3.4.4) Debtors Turnover

Debtors Turnover indicates the number of times receivables are collected, on average, during thefiscal year. Generally, higher is the value of debtors turnover, more efficient the debtorsmanagement of the company is.A high receivables turnover ratio implies either that the company operates on a cash basis or thatits extension of credit and collection of accounts receivable are efficient. Also, a high ratioreflects a short lapse of time between sales and the collection of cash, while a low number means

collection takes longer.

The ratio is given as

Almost all sales Hindalco made were in credit; hence sales can be takes as credit sales.

2.61

2.63

2.66

2.63

2.58

2.60

2.62

2.64

2.66

2.68

2014 2013 2012 2011

Inventory Turnover

2.61 2.63

2.46

2.73

2013-14 2012-13

HINDALCO NALCO




55 | P a g e

F ig 3.31 Debtors Tur nover f or H indalco 2011-14 F ig 3.32 H indalco-Nalco Debtors Tur nover compari son

The debtors turnover ratio show a small fluctuating pattern form 2011 to 2014, which indicates astable debtors policy. It increased by 12% from 2013 to 2014, indicating shorter lapse of time

between sales and the collection of cash.

Though Nalco has significantly higher debtors turnover ratio than Hindalco, but it saw a declineof 37.25%. Though Nalco is yet much above industry standard yet such steep decline rings awarning bell for debtors management for Nalco.

3.4.5) Creditors turnover ratio:

The accounts payable turnover ratio is shows a company's ability to pay off its accounts payable by comparing net credit purchases to the average accounts payable during a period. In otherwords, the accounts payable turnover ratio is how many times a company can pay off its averageaccounts payable balance during the course of a year. If the turnover ratio declines from one

period to the next, this indicates that the company is paying its suppliers more slowly, and may be an indicator of worsening financial condition

19.90

17.71

19.83

18.49

16.5017.0017.5018.0018.5019.0019.5020.0020.50

2014 2013 2012 2011

Debtors Turnover

19.90 17.71

34.58

55.38

2013-14 2012-13

HINDALCO NALCO




56 | P a g e

It is calculated by dividing the net credit purchases by average creditors.

Where, Total purchase = Ending Inventory -

Beginning Inventory + COGS

A higher ratio shows suppliers and creditors that the company pays its bills frequently andregularly. It also implies that new vendors will get paid back quickly. A high turnover ratio can

be used to negotiate favorable credit terms in the future.

F ig 3.33 Creditors Tur nover f or H in dalco 2011-14 F ig 3.34 H indalco-Nal co Creditors Tur nover compari son

Since 2012 there is a continuous improvement in Creditors turnover, due to increase in purchaseand decrease in payables which suggests vendors are being paid more frequently. This shows

better financial position of the company in terms of liquidity. This situation enhances the creditworthiness of the company. However a very favorable ratio to this effect also shows that the

business is not taking the full advantage of the credit facilities allowed by the creditors.

6.17

5.26 4.71 5.11

0.00

1.00

2.00

3.00

4.005.00

6.00

7.00

2014 2013 2012 2011

Creditors Turnover Ratio6.17

5.26

5.64

6.16

2013-14 2012-13

HINDALCO NALCO

Hindalco industry maintains a good

policy regarding creditors and debtors.

While the days of purchase outstandingremain high, it has come down fromlast year while days of sales

outstanding a quite lower yet stable

during past four years.




57 | P a g e

3.4) Operating Cycle and Cash Conversion Cycle.

Operating cycle is the number of days a company takes in realizing its inventories in cash. It

equals the time taken in selling inventories plus the time taken in recovering cash from tradereceivables. It is called operating cycle because this process of producing/purchasing inventories,selling them, recovering cash from customers, using that cash to purchase/produce inventoriesand so on is repeated as long as the company is in operations.The duration of time required to complete the following sequence of events, in case ofmanufacturing firm, is called the operating cycle:

Conversion of cash into raw materials. Conversion of raw materials into work-in-progress. Conversion of work in process into finished goods. Conversion of finished goods into debtors and bills receivables through sales Conversion of debtors and bills receivables into cash.

F ig 3.35 Cash conversion cycle mechanism




58 | P a g e

The cash conversion cycle is a cash flow calculation that attempts to measure the time it takes acompany to convert its investment in inventory and other resource inputs into cash. In otherwords, the cash conversion cycle calculation measures how long cash is tied up in inventory

before the inventory is sold and cash is collected from customers

The cash cycle has three distinct parts. The first part of the cycle represents the current inventorylevel and how long it will take the company to sell this inventory. This stage is calculated byusing the days inventory outstanding calculation.The second stage of the cash cycle represents the current sales and the amount of time it takes tocollect the cash from these sales. This is calculated by using the days sales outstandingcalculation.

The third stage represents the current outstanding payables. In other words, this represents howmuch a company owes its current vendors for inventory and goods purchases and when thecompany will have to pay off its vendors. This is calculated by using the days payablesoutstanding calculation.

F ig 3.26 Cash F low tim eli ne




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3.4.1) Days of Inventory Outstanding (DIO):

Days Inventory Outstanding (DIO), also known as Days Sales of Inventory (DSI), is anefficiency metric used to measure the average number of days a company holds inventory beforeselling it. A declining ratio over time can indicate that a company is able to sell inventory at aquicker pace. An increasing ratio, generally a bad sign, can indicate a company held on to itsoutstanding inventory for a longer rate than usual.DIO plays a crucial component in the Cash Conversion Cycle (CCC), which is used to determinehow long cash is tied up in working capital It is calculated as 365/ Inventory turnover.

3.4.2) Days of Sales Outstanding (DPO):

The average numbers of days it takes for a company to collect outstanding receivables. A dayssales outstanding (DSO) of 15 means it takes 15 days to collect on sales. Low DSOs arefavorable; a company is able to quickly collect on sales. Payments can be used for other

purposes.

Companies with a low DSO, for example those have substantial sales and minor receivables

means that the company has sold a lot and only a small amount of customers owe them paymentson those sales. The company is quickly collecting on its sales. Companies with a low amount ofsales and a high amount of customers owing payments on those sales represent a high DSO. Thisis a situation where the company is unable to quickly collect on its sales.

DSO is a component of the Cash Conversion Cycle (CCC), which is used to determine how Dayssales outstanding is calculated as: 365/Debtors turnover

3.4.3) Days Payable Outstanding – DPO

Days Payable Outstanding (DPO) is a turnover ratio which represents the average number ofdays it takes for a company to pay its suppliers. A high (low) DPO indicates that a company is

paying its suppliers slower (faster In general, high DPOs are looked at favorably; it indicates thatthe firm is able to use cash (that would have gone to immediately paying suppliers) to other uses




60 | P a g e

for an extended period of time. Extremely high DPOs potentially highlight liquidity issues orextensive credit terms that favor the company.

Days Payable Outstanding is a crucial component of the Cash Conversion Cycle (CCC), which isused to determine how long cash is tied up in working capital. Companies with an extremelyhigh DPO can lead to a negative CCC. (For the CCC, a ratio where lower is better, that is a goodsign

3.4.4) Observation and Conclusion for Operating Cycle and CCC .

2013-14 2012-13 2011-12 2010-11

Days of inventory Outstanding(DIO) 140 139 137 139

Days of payable outstanding (DPO) 59 69 77 71

Days of sales outstanding (DSO) 18 21 18 20

Operating cycle (OC) 158 159 155 158

Cash Conversion Cycle(CCC) 99 90 78 87

Tabl e 3.1: Observation table of operating and cash conversion cycle

F ig 3.37 H indalco-Nalco cash conversion cycle F ig 3.38: D I O, DPO and DSO for H indalco 2011-14 factors’ comparison

The above data shows various factors of operating and cash cycles.

140

59

18

148

65

11

Inventoryperiod

DPO DSO

HINDALCO NALCO

18 21 18 20

5969

77 71

140 139 137 139

2014 2013 2012 2011

DSO DPO DIO




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a) The days of inventory outstanding for Hindalco remains lower than that of Nalco and ithas maintained the same level in past four years. The constant levels for DIO along with

stable DSO provide a stable operating cycle.

b) From table the operating cycle shows a standard deviation of 1.45 days. For Nalco, onthe other hand it shows more variation, which increased by 19 days from previo us year‘s

(2013) 140 days to 159 in 2014. Apart from much stable operating cycle, DIO and DPOfor Hindalco are lesser and hence more efficient than that of Nalco. This suggests thatInventory and payable management in Hindalco is better than that of Nalco.

F ig 3.39 Hi ndalco-N alco cash conversion and operat in g cycle compari son 2013-2014

c) While the operating cycle of Hindalco is slightly shorter and better than that of Nalco for2014, the cash conversion cycle for Nalco is shorter and hence better than that ofHindalco‘s. This is due to shorter DPO for Nalco. In 2014, DSO for Hindalco was 18

days while for Nalco it was 11 days. Nalco collects payments from its debtors 39% fasterthan Hindalco.

d) Cash conversion cycle for both the companies has got worse from past year. Percentagewise Nalco saw more increase in Hindalco.

158 159

9990

159140

9481

Operating Cycle (2014) Operating Cycle (2013) Cash Conversion Cycle(2014)

Cash ConversionCycle(2013)

Hindalco Nalco




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e) Hindalco has a quite stable DSO and DIO while it has a decreasing DPO. It has toconcentrate more on getting more credit period in order to have better liquidity andshorter Cash Conversion Cycle.

f) Steps for better Creditors management are discussed further in this report.




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CHAPTER 4

Conclusion and Suggestions

Hindalco Nalco

2014 2013 2014 2013Current Assets 21951.89 20150.03 7426.2 7030.23

Current Investments 30% 32% 17% 19%

Trade Receivables 6% 8% 3% 2%

Cash and Bank Balances 5% 7% 55% 50%

Inventory 41% 38% 16% 20%

Table 4.1: Common size current assets’ components

A) All current assets declined from last years except inventories which increased by 3% ofthe total current assets. Hindalco already has very high levels of inventory, mostly WIPand raw material inventory. Hence it should try toa) Reduce inventory level, specifically raw material and WIP Inventory.

b) Improve cash and bank balance which are highly undermined in Hindalco.

On the other hand Nalco holds more than appropriate level of cash and bank balance.Holding cash has opportunity cost associated with it, though it increases liquidity of thefirm.

B) While debt increased by mere 8% finance expense increased by 63% in 2014 from lastyear. The finance cost is will increase further due to loans taken in 2014. Since increasein equity is also 8%, there is no effect over D/E ratio but interest coverage ratio decreaseddrastically. From the point of view of investors, Hindalco has become riskier to invest




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due to higher leverage and hence they expect higher rate of return for their investment ascompared to Nalco which has zero debt and high proprietary ratio.

Fig 3.40 Profitability ratios for Hindalco 2011-14

C) Gross profit ratio for Hindalco is quite less as compared to Nalco‘s GPR, due to high cost

of copper raw material, which Nalco does not deal in. But Operation Expenses forHindalco (% of sales) is quite lesser than that of Nalco showing more efficientoperations. Though GPR and Operating profits increased in 2014 from last year, NPRstill decreased, reason being Liability of Rs. 324.36 crore under UP Tax on Entry of

Goods into Local Areas Act, 2007 (UP Entry Tax) and (b) Liability of Rs. 71.62 croreunder Madhya Pradesh Gramin Avsanrachna Tatha Sarak Vikas Adhiniyam(MPGATSVA) as exceptional expenses.

D) Return ratios have been declining from past four years due to more borrowings, hencemore Capital Employed ( Equity + Loans), for setting up new projects (Assets), but sincethose projects (assets) have not started working in full swing and hence generatingexpected cash outflow, the profitability is still less. This trend is expected to improve,hence generating higher ROE for WACC.

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

2014 2013 2012 2011

Gross Profit

Operating Profit

Net Profit




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E)

Sales 6% ↑

Working Capital 10%↓ Assets 11%↑ CA 8%↑ inventory 16%↑ COGS 7%↑ Average Receivables 4%↓

Table 4.2 In crease/ Decrease in factors affecting the fi nanci al position of a company2013-14

Hindalco has performed poorly on many fronts due to high debt and partially operational projects, but it seems to do well at working capital management. With increase in Assetsand sales, the working capital has gone down, indicating better and efficient managementof working capital. It can be further improved by reducing dependency on inventorywhich is 12% of the total assets and has increased by 16% from last year while sales hasincreased by 6% only. It also seems to do well at debtors and creditors management.Creditors turnover ratio has improved which can be used to negotiate longer DPO andhence improving CCC further.

F)

Cash conversion period can be shorten in three ways i.e.

i) Reduce DIO (Increase Inventory Turnover)ii) Reduce DSO (Increase Debtors Turnover)iii) Increase DPO ( Decrease Creditors turnover)

In order to increase inventory turnover following steps should be taken

Pareto inventory techniquesReduce replenishment lead timesRevise order cycles/quantitiesImprove forecastingEliminate obsolete stockLower service level




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To increase debtors turnover by increasing collections efficiency

Make it easy for customers to pay on time by using a lockbox service, pre-authorized checks or an automatic clearinghouse. Customers drop payments into alockbox or post office box in a central location to be collected by the bank.Preauthorized checks allow the business to draw payments from the customer'saccount at regular intervals. Automatic clearinghouses transfer fundselectronically from customers' accounts into the business account.

To increase DPO and hence decrease Creditors turnover

To increase DPO Hindalco has to reduce creditor turnover. The cash ratio ofHindalco is alarmingly low. Creditors prefer higher cash ratios, which is generally1 or above for aluminium industry. Now with such low cash ratios, it becomesdifficult to retain creditors or get new credit due for longer time period and henceit reduces days of payable outstanding (DPO), which means longer cashconversion cycle which affects working capital negatively which in turn, results inlower profitability.

Though this Cash ratio and DPO do not show any quantitative evidences forHindalco, the correlation coefficient between cash ratio and creditors turnover is.23, high cash ratios can be used to negotiate longer credit periods.

Higher cash ratio would not only improve the chances of higher DPO but alsoimprove the liquidity of Hindalco and would make it convenient for a leaninventory in future.




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Annexure

Financial Statements

HINDALCO NALCO2013-14 2012-13 2011-12 2010-11 2013-14 2012-13

Revenue From Operation 30101.34 28069.78 28296.96 25348.12 6780.85 6916.48

Excise Duty 2250.41 2012.85 1700.18 1488.91

Net Revenue 27850.93 26056.93 26596.78 23859.21 6780.85 6916.48Other Income 1124.42 983.09 615.79 347.49 557.71 511.05Total Income 28975.35 27040.02 27212.57 24206.7 7338.56 7427.53Purchase Of Stock In Trade 0.03 0.38 205.98 522.22Cost Of Material Consumed 18804.28 17136.51 17843.08 15530.94 1063.16 1167.83Changes I Inventory Of Finished Goods -676.21 127.94 -407.31 -394.67 58.55 -64.25Employee Benefit Expenses 1346.1 1200.8 1113.35 1040.39 1245.33 1153.93Power And Fuel 3557.61 3073.04 2870.67 2221.48 2017.67 2432.27Finance Cost 711.65 435.98 293.63 219.96 7.45Depreciation And Amortization 823.29 686.95 689.97 687.48 524.73 505.43Impairment Loss 17.25Other Expense 2327.24 2314.54 1866.25 1784.16 1461.94 1319.83Total Expense 26893.99 24993.39 24475.62 21611.96 6371.38 6522.49Gross Profit 6165.22 5719.06 6084.36 5979.24 3641.47 3380.63Profit Before Exceptional Items And Tax 2081.36 2046.63 2736.95 2594.74 967.18 905.04Pbit 2793.01 2482.61 3030.58 2814.7 967.18 912.49Exceptional Items 395.98 49.37Profit Before Tax 1685.38 2046.63 2736.95 2594.74 917.81 905.04Tax Expenses

Current Tax 288.88 381.41 562.68 555.68 264.65 263.3Differed Tax -16.83 -33.98 -62.93 -97.86 10.81 48.91Net Profit 1413.33 1699.2 2237.2 2136.92 642.35 592.83




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2) Balance Sheet

HINDALCO NALCO2013-14 2012-13 2011-12 2010-11 2013-14 2012-13

Share Capital 206.48 191.48 191.48 191.46 1288.62 1288.62

Reserves And Surplus 36525.97 33239.6 31299.68 29508.64 10833.83 10643.83Money Received Against Share Warrants 541.31 541.31Equity 36732.45 33972.39 32032.47 29700.1 12122.45 11932.45Long Term Borrowings 22108.58 20443.05 11115.13 5147.54Deferred Tax Liabilities ( Net) 1174.31 1191.14 1224.56 1287.49 910.13 903.13Other Long Term Liabilities 830.86 974.28 953.1 290.5 54.96 70.82Long Term Provisions 341.96 300.94 287.32 268.07 218.22 208.62Non-Current Liabilities 24,455.71 22,909.41 13,580.11 6,993.60 1,183.31 1,182.57Short Term Borrowings 4,258.37 3,701.72 3,456.78 3,890.35Trade Payables 4,383.75 3,044.05 4,659.77 4,082.95 531.12 509.17Other Current Liabilities 2,901.91 1,924.09 998.61 1,053.91 2564.38 2545.75Short Term Provisions 1,037.76 1,066.90 919.88 815.43 147.25 162.67Current Liabilities 12,581.79 9,736.76 10,035.04 9,842.64 3,242.75 3,217.59Total Liabilities 73,769.95 66,618.56 55,647.62 46,536.34 16,548.51 16,332.61AssetsTangible Assets 18024.98 7071 7125.95 7560.69 6688.8 6523.8Intangible Assets 29.73 26.65 24.25 23.69 103.14 105.09

Capital Work In Progress 17277.13 23605.11 16256.7 6030.32 768.74 1001.92Intangible Assets Under Development 0.1 0.01 0.24 0.09Fixed Assets 35,331.94 30,702.77 23,407.14 13,614.79 7,560.68 7,630.81Non-Current Investment 15312.45 14,050.17 13,503.70 13,049.66 1.04 161.04Long Term Loans And Advances 1,161.15 1,681.08 2249.53 3942.59 1517.27 1474.04Other Non Current Assets 12.52 34.51 7.81 0.10 43.32 36.49Non Current Assets 51,818.06 46,468.53 39,168.18 30,607.14 9,122.31 9,302.38Current Investments 6,595.01 6,431.96 4,583.40 5,197.09 1244 1329.02Inventories 8,914.58 7,702.62 7,742.86 7,651.40 1173.66 1380.64Trade Receivables 1,283.65 1,515.04 1,427.45 1,255.49 243.57 148.65

Cash And Bank Balance 1,163.17 1,497.82 722.30 233.39 4048.29 3504.38Short Term Loan And Advances 3,226.40 2,261.73 1,647.65 1,344.75 481.38 473.76Current Assets 21,182.81 19,409.17 16,123.66 15,682.12 7190.9 6836.45Other Current Assets 769.08 740.87 355.78 247.08 235.3 193.78Current Assets Inc. Other Current Assets 21,951.89 20,150.04 16,479.44 15,929.20 7,426.20 7,030.23Total Assets 73,769.95 66,618.57 55,647.62 46,536.34 16,548.51 16,332.61




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3) Common Size

HINDALCO NALCO2013-14 2012-13 2011-12 2010-11 2013-14 2012-13

Net Revenue 96.12% 96.36% 97.74% 98.56% 92.40% 93.12%Other Income 3.88% 3.64% 2.26% 1.44% 7.60% 6.88%Total Income 100% 100% 100% 100% 100% 100%ExpensesPurchase Of Stock In Trade 0.00% 0.001% 0.75% 2.15%Cost Of Material Consumed 64.90% 63.37% 65.56% 64.16% 14.49% 15.72%Employee Benefit Expenses 4.65% 4.44% 4.09% 4.29% 16.97% 15.54%

Power And Fuel 12.28% 11.36% 10.54% 9.17% 27.49% 32.75%Finance Cost 2.46% 1.61% 1.07% 0.90% 0.10%Depreciation And Amortization 2.84% 2.54% 2.53% 2.84% 7.15% 6.80%Other Expense 8.03% 8.56% 6.85% 7.37% 19.92% 17.77%Total Expense 92.82% 92.43% 89.94% 89.28% 86.82% 87.82%Gross Profit 21.28% 21.15% 22.35% 24.70% 49.62% 45.51%PBIT 9.64% 9.18% 11.13% 11.62% 13.18% 12.29%Profit Before Tax 5.82% 7.56% 10.05% 10.71% 12.51% 12.18%Net Profit 4.88% 6.28% 8.22% 8.82% 8.75% 7.98%




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4) Financial Ratios

HINDALCO NALCO31/03/2014 31/03/2013 31/03/2012 31/03/2011 31/03/2014 31/03/2013

Working Capital 9370.10 10413.27 6444.40 6086.56 4183.45 3812.64Current Ratio 1.74 2.07 1.64 1.62 2.29 2.18Cash Ratio 0.09 0.15 0.07 0.02 1.25 1.09Quick Ratio 0.72 0.97 0.67 0.68 1.71 1.55CA/FA 0.42 0.43 0.42 0.52 0.81 0.76D/E 0.60 0.60 0.35 0.17 0.00 0.00PBIT 2793.01 2482.61 3030.58 2814.70 917.81 905.04Interest Coverage 3.92 5.69 10.32 12.80 NA 121.48

Net Worth 36732.45 33972.39 32032.47 29700.10 12122.45 11932.45Proprietary Fund Ratio 49.79% 51.00% 57.56% 63.82% 73.25% 73.06%GPR 22.14% 21.95% 22.88% 25.06% 53.70% 48.88%Operating Profit Ratio 10.03% 9.53% 11.39% 11.80% 14.26% 13.19%NPR 5.07% 6.52% 8.41% 8.96% 9.47% 8.57%EPS 7.09 8.88 11.68 11.16 2.49 2.30ROCE 4.30% 4.16% 6.34% 7.03% 8.55% 8.83%Shareholders' Equity 36732.45 33972.39 32032.47 29700.10 12122.45 11932.45ROE 3.85% 5.00% 6.98% 7.19% 5.30% 4.97%ROA 1.92% 2.55% 4.02% 4.59% 3.88% 3.63%

Asset Turnover Ratio 0.38 0.39 0.48 0.51 0.41 0.42Working Capital Turnover 2.97 2.50 4.13 3.92 1.62 1.81Creditors Turnover 6.17 5.26 4.71 5.11 5.64 6.16Inventory Turnover 2.61 2.63 2.66 2.63 2.46 2.73Days Of Inventory 140 139 137 139 148 134Debtors Turnover 19.90 17.71 19.83 18.49 34.58 55.38Collection Period (DSO) 18 21 18 20 11 7DPO 59 69 77 71 65 59Operating Cycle 158 159 155 158 159 140CCC 99 90 78 87 94 81




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hindalco working capital internship report

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