project report on working capital management at jindal saw ltd
DESCRIPTION
A project report on working capital management at jindal saw ltd.TRANSCRIPT
OBJECTIVE OF THE STUDY
To have the brief knowledge about the Jindal Saw Ltd. Company. To know the Financial Position of the company. To analyse the past five years performance of the Company To know the market position of the Company. To do the comparison with other competitors. To know the turnover of the company. To know the product details and export of the Company. To have the Jindal Industries overview. To know the Growth Plans of the Company. To have the practical knowledge about working capital management. To calculate the working capital cycle of the company.
RESEARCH METHODOLOGY
The research report is done through the Secondary data only which includes, Annual Reports of the Company, Company’s websites, journals and other research papers.
Research type is a Descriptive type of Research.
LIMITATIONS OF THE STUDY
Time constraints.
Lack of knowledge.
Lack of availability of accurate Data.
JINDAL SAW LTD.
1
Literature Review
SAW Pipes (SPL), a member of the Jindal Group, is the only company in India that manufactures UOE pipes in technical collaboration with UEC Pittsburgh of USA. It manufactures UOE submerged arc welded steel tubes and cold rolled strips of various grades. The products manufactured by the company find use in critical high pressure applications like oil and gas distribution.
Jindal SAW Ltd. is a part of the USD 18 billion O.P. Jindal Group, one of the country's top most industry houses and the foremost indigenous steel producers and exporters. It started operation in the year 1984, when it became the first company in India to manufacture Submerged Arc Welded (SAW) Pipes using the internationally acclaimed U-O-E technology.Jindal SAW Ltd. is in a commanding position in India’s tubular market, being the undisputed leader.With integrated facilities at multiple locations and an ever expanding market opportunity, Jindal SAW Ltd. has diversified from a single product company to a multi-product company, manufacturing large diameter submerged arc pipes and spiral pipes for the energy transportation sector; carbon, alloy and stainless steel seamless pipes and tubes manufactured by conical piercing process used for industrial applications; and Ductile iron (DI) pipes for water and wastewater transportation. Besides these, the company also provides various value added products like pipe coatings, bends and connector castings to its clients.Over the years Jindal SAW has continued to gain the confidence and trust of its stakeholders - from employees, associates, shareholders and people whose lives have benefitted by the company's endeavours. With its vision of sustainable development firmly in place, Jindal SAW has played a leading role in developing livable cities across the world - that in turn has helped transform the lives of people staying in them.
Ensuring timely transportation of oil, gas and water, Jindal SAW helps residents and organizations in numerous cities function efficiently. The pipes produced by the company are energy efficient; reduce dependence on fossil fuels, and help conserve natural resources like water.
At the very core of Jindal SAW is imprinted the conviction of never being content with the success attained and it is constantly striving for newer horizons. New boundaries, new challenges and new opportunities keep the company driven to surge ahead. Venturing forward into different areas of businesses with Jindal ITF, a subsidiary of Jindal SAW, the company is making rapid progress in urban services sectors with:
Water, Wastewater and Solid Waste Management Domestic Transport and Logistics Transportation Equipment Fabrication
Having identified the immense potential offered by these sectors for the future, JITF has diversified into five business verticals in these areas: JITF Ecopolis, JITF Aquasource, JITF Vector, JITF Shipyards, and Jindal Rail Infrastructure.
2
MILESTONES
1984 Founded in 1984
1986 Commissioning of first and only UOE Pipe Mill manufacturing LSAW Pipes in Kosi Kalan, India with a capacity of 250,000 M.T P.A, located about 1200 Kms from nearest west coast port of India
1988 API Line Pipe production commences
1989 First order for ONGC casing Pipe completed
1992/93 Three major offshore projects awarded by ONGC under international competitive bidding - Italian and Japanese being L2 and L3 bidders
1994 Seamless Pipes and Tubes Division commissioned at Nashik. First Coating plant commissioned at Kosi Kalan
1995 Received first export order
1998 First Induction bending plant commissioned at Kosi Kalan
2000 Commissioning of second LSAW pipe manufacturing facility as 100% export oriented unit using JCO forming process at Nanakapaya, Mundra to meet the export market with a capacity of 300,000 MT per annum close to Port Mundra – The first major private port on west coast of India. Internal coating plant commissioned at Kosi Kalan Commissioning of second Coating plant at Nanakapaya – Port Mundra
2002 Concrete weight coating plant commissioned at Nanakapaya – Port Mundra
2003 Commissioning of third Coating plant at Samaghogha, Mundra
2004 Commissioning of third Pipe mill manufacturing LSAW Pipe using JCO forming process in Samaghogha, Mundra with a capacity of 250,000 MT per annum.
2005 Commissioning of fourth Pipe mill manufacturing HSAW (Spiral) Pipe at Samaghogha, Mundra with capacity of 150,000 MT per annum
2005 Start up of Integrated Pipe Unit Ductile Iron Pipe manufacturing plant of
3
200,000 capacity along with Blast Furnace of 250,000 MT per annum capacity and a Coke Oven plant
2008 Commissioning of fifth & sixth Pipe mill manufacturing HSAW (Spiral) pipe at Bellary - Karnataka and Samaghogha-Mundra with a combined capacity of 390,000 MT per annum. Second Induction bending plant commissioned at Samaghogha, Mundra
2009 Commissioning of seventh Pipe mill manufacturing LSAW using JCO forming in Nanakapaya - Port Mundra with capacity of 300,000 MT per annum
2011 Commissioning of 8th Pipe mill manufacturing HSAW (Spiral) pipe at Kosi Kalan, Mathura, U.P. with capacity of 150,000 MT per annum This mill is commissioned to cater to the water sector
PRODUCTS
4
Product Outside Diameter (D) (mm)
Wall Thickness(t) (mm)
Annual Capacity
Hot Finished Carbon/ Alloy Steel Seamless Tubes and Pipes.
33.40 to 177.80 3.38 to 25.00 80000 MT
Seamless Casing and Tubing conforming to API 5CT.
60.30 to 177.80 4.00 to 19.05
120000 MTSeamless Drill Pipes & Greens conforming to API 5D.
60.30 to 168.30 6.45 to 12.70
Cold Finished Carbon/ Alloy Steel Seamless Tubes and Pipes.
19.05 to 140.00 1.50 to 19.05 20000 MT
Anti Corrosion 3 LPE / FBE Coating.
2 to 14 as per DIN 306701million SQM
LOCATIONSMundra I & II Country : India
State : GujaratBy Rail Nearest railway station at Ghandhidham, Gujarat - 50 Kms.By Road 15 Kms from the Gujarat State Highway.By Sea 6 Kms from Mumdra Port (Gujarat)Products LSAW Pipes (J-C-O Process)
Kosi-Kalan Country : India
State : Uttar PradeshBy Rail Through Mathura – 40 KmsBy Road On the National Highway No.2Products LSAW Pipes (J-C-O Process) Large Radius Bends & related Anti-corrosion
coatings
Nashik Country : IndiaState : MaharashtraBy Rail 50Kms. From Rail Head.By Road 25 Kms. From the National Highway (NH 8)
5
By Sea 200 Kms. From Mumbai Port (Maharashtra)Products SEAMLESS Pipes and Tubes
LOCATIONAL ADVANTAGE
The plants are spread over strategic geographical locations in India. Being close to the ports gives them an additional locational advantage.
CLIENTS
DOMESTIC
Aban Constructions Limited Assam Gas Co. Limited
6
Bharat Petroleum Corporation Limited Bridge & Roof Co. (India) Ltd.
Cairn Energy Engineers India Limited
Essar Constructions Limited GAIL (India) Limited
Gujarat Gas Co. Limited Hindustan Petroleum Corp.Ltd.
IBP Limited Indian Oil Tanking Limited
Indian Oil Corporation IVRCL Infratr. & Projects Ltd.
Oil and Natural Gas Corporation Limited Petronet India Limited
Petronet MHB Limited Petronet VK Limited
Raunaq International Limited Reliance Industries Limited
Raunaq International Limited Ramky Infrastructure Ltd.
SHELL Hazira LNG Pvt. Ltd. Subhash Projct & Marketing Ltd.
Gannon Dunkerley & Co.Ltd. Delhi Jal Board
Gujarat Water Supply And Sewerage Board Maharashtra Jeevan Pradhikaran
Public Health Engineering Department, Rajasthan Kirloskar Brothers Ltd.
Larsen & Toubro U.P. Jal Nigam, Lucknow
Directorate Of Supplies & Disposal, Haryana UttaranchalPey Jal Nigam
Madhya Pradesh Laghu Udyog Nigam Ltd. Public Health Engnr. Deptt. Bihar
Drinking Water Supply& Sewerage Board, Ranchi. Punjab Water Supply & Sewerage Board
Karnataka Urban Water Supply & Sewerage Board, Bangalore.
INTERNANTIONAL CLIENTS
7
AGIP, Nigeria Abu Dhabi Gas Industries Limited (GASCO), UAE
Anglo American, Chile Burullus Gas Co., Egypt
China National Petroleum Company, China Center Point Energy Gas Transmission, USA
DODSAL, UAE East Gas Co. Ltd., Egypt
Egyptian natural Gas Company(GASCO), Egypt Hyundai Heavy Industries, Korea
International Petroleum Investment Comp. Abu Dhabi Joannou& Paraskevaides Ltd. Greece
Kuwait Oil Company, Kuwait Man GHH Oil And Gas, Germany
National Iranian Oil Co., Iran Oil Tools PTE Ltd, Singapore
Oman Gas Company – Oman PEDEC, Iran
PEDCO Iran PETRONAS - Malaysia
PETROJET, Egypt petroleum Development Oman LLC, Oman
Petroleum Development Oman LLC, Oman PETROCHINA, China
Petroleum Development Oman LLC, Oman Qatar Petroleum, Qatar
Questar Gas Management Co., USA Rashid Petroleum Co.(RASHPETCO), Egypt
Saipem, Italy Samsung Heavy Industries, South Korea-Cheveron Project
Saudi Aramco, Saudi Arabia Saudi Arabian Texaco, Kuwait
Shell, The Netherlands Sichuan Petroleum Administration, China
Allied Trading International (Pvt) Ltd, Sri Lanka Boom Construction, QatarDerwent Sand, Algeria Boru Spain, SpainQatar Arab Contractor,Qatar SNI, FranceHydropro SARL, Lebanon
FIVE YEARS ANALYSIS
Results Consolidated No. of 12 15 12 12 12
8
MonthsYear
EndingDec-08* Mar-10* Mar-11* Mar-12* Mar-13*
EQUITY SHARE DATA
High Rs 1,225 225 234 211 174
Low Rs 217 36 170 109 78
Sales per share (Unadj.) Rs 1,027.6 259.9 166.0 218.5 244.9
Earnings per share (Unadj.)
Rs 64.0 24.6 16.1 6.8 -0.7
Diluted earnings per share
Rs 12.1 24.3 16.1 6.8 -0.7
Cash flow per share (Unadj.)
Rs 80.1 30.4 22.0 13.4 7.2
Dividends per share (Unadj.)
Rs 5.00 1.25 1.00 1.00 1.00
Adj. dividends per share Rs 0.94 1.24 1.00 1.00 1.00
Dividend yield (eoy) % 0.7 1.0 0.5 0.6 0.8
Book value per share (Unadj.)
Rs 523.6 131.1 147.3 133.8 132.8
Adj. book value per share
Rs 98.8 129.9 147.3 133.8 132.8
Shares outstanding (eoy)
m 52.12 273.61 276.23 276.23 276.23
Bonus/Rights/Conversions
BC FV2BC BC - -
Price / Sales ratio x 0.7 0.5 1.2 0.7 0.5
Avg P/E ratio x 11.3 5.3 12.5 23.4 -184.7
P/CF ratio (eoy) x 9.0 4.3 9.2 11.9 17.4
Price / Book Value ratio x 1.4 1.0 1.4 1.2 0.9
Dividend payout % 7.8 5.1 6.2 14.6 -146.5
Avg Mkt Cap Rs m 37,579 35,706 55,798 44,197 34,833
No. of employees `000 NA NA NA NA NA
Total wages/salary Rs m 1,599 2,803 2,867 3,524 4,327
Avg. sales/employee Rs Th NM NM NM NM NM
Avg. wages/employee Rs Th NM NM NM NM NM
Avg. net profit/employee
Rs Th NM NM NM NM NM
9
INCOME DATA
Net Sales Rs m 53,558 71,103 45,863 60,364 67,647
Other income Rs m 298 574 608 1,014 828
Total revenues Rs m 53,856 71,676 46,471 61,378 68,475
Gross profit Rs m 7,070 12,534 8,619 6,684 6,037
Depreciation Rs m 840 1,586 1,638 1,818 2,190
Interest Rs m 2,154 2,579 1,820 1,655 2,356
Profit before tax Rs m 4,374 8,943 5,769 4,226 2,319
Minority Interest Rs m -28 -7 2 7 11
Prior Period Items Rs m 102 -60 0 0 0
Extraordinary Inc (Exp)
Rs m 0 0 0 -1,408 -2,005
Tax Rs m 1,113 2,154 1,324 933 513
Profit after tax Rs m 3,334 6,723 4,447 1,891 -189
Gross profit margin % 13.2 17.6 18.8 11.1 8.9
Effective tax rate % 25.5 24.1 23.0 22.1 22.1
Net profit margin % 6.2 9.5 9.7 3.1 -0.3
BALANCE SHEET DATA
Current assets Rs m 38,514 28,188 39,300 47,990 48,321
Current liabilities Rs m 23,372 10,104 26,294 35,074 38,025
Net working cap to sales
% 28.3 25.4 28.4 21.4 15.2
Current ratio x 1.6 2.8 1.5 1.4 1.3
Inventory Days Days 113 41 136 130 96
Debtors Days Days 86 43 103 94 91
Net fixed assets Rs m 22,733 27,433 31,154 41,489 55,031
Share capital Rs m 521 547 553 553 553
"Free" reserves Rs m 21,550 34,665 39,325 35,181 34,320
Net worth Rs m 27,288 35,871 40,694 36,960 36,675
Long term debt Rs m 9,442 10,807 7,266 18,935 28,438
Total assets Rs m 62,039 59,120 76,466 93,255 107,129
Interest coverage x 3.0 4.5 4.2 3.6 2.0
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Debt to equity ratio x 0.3 0.3 0.2 0.5 0.8
Sales to assets ratio x 0.9 1.2 0.6 0.6 0.6
Return on assets % 8.8 15.7 8.2 3.8 2.0
Return on equity % 12.2 18.7 10.9 5.1 -0.5
Return on capital % 18.0 24.5 15.8 8.0 4.1
Exports to sales % 43.8 36.4 34.4 44.5 47.3
Imports to sales % 51.2 35.2 48.6 38.2 35.6
Exports (fob) Rs m 23,456 25,916 15,793 26,887 31,987
Imports (cif) Rs m 27,422 25,013 22,284 23,061 24,092
Fx inflow Rs m 26,320 25,989 15,878 26,978 32,101
Fx outflow Rs m 31,874 27,190 23,766 25,145 27,188
Net fx Rs m -5,554 -1,201 -7,887 1,833 4,913
CASH FLOW
From Operations Rs m 3,178 16,948 -7,988 -2,958 2,220
From Investments Rs m -5,463 -10,489 -5,932 -6,012 -14,821
From Financial Activity
Rs m 1,531 -6,045 10,045 9,793 12,548
Net Cashflow Rs m -753 414 -3,875 822 -53
8 QUATERS ANALYSIS
Interim Results
No. of MonthsQtr. Ending
3 Jun-
12
3 Sep-
12
3 Dec-
12
3 Mar-
13
3 Jun-
13
3 Sep-
13
3 Dec-
13
3 Mar-
14
Net SalesRs m
12,904 16,369 17,227 9,801 12,070 12,294 17,096 13,636
Other incomeRs m
184 225 225 190 188 208 145 306
TurnoverRs m
13,088 16,594 17,452 9,991 12,258 12,502 17,241 13,942
ExpensesRs m
11,302 14,390 15,642 8,771 10,646 10,812 15,439 12,009
11
Gross profitRs m
1,602 1,980 1,586 1,030 1,424 1,482 1,657 1,627
DepreciationRs m
387 416 386 361 454 513 539 622
InterestRs m
323 377 418 383 430 547 692 594
Profit before tax
Rs m
1,076 1,412 1,007 476 728 630 572 717
TaxRs m
157 223 248 97 54 80 100 231
Profit after taxRs m
919 1,189 759 379 674 550 472 486
Gross profit margin
% 12.4 12.1 9.2 10.5 11.8 12.1 9.7 11.9
Effective tax rate
% 14.6 15.8 24.6 20.4 7.4 12.7 17.5 32.3
Net profit margin
% 7.1 7.3 4.4 3.9 5.6 4.5 2.8 3.6
Diluted EPS Rs 3.3 4.3 2.7 1.4 2.4 2.0 1.7 1.8
Diluted EPS (TTM)
Rs 13.5 14.2 14.4 11.8 10.9 8.6 7.5 7.9
* Results ConsolidatedInterim results
Source: Company Annual Reports, Regulatory Filings, Equitymaster
Key Ratios
Annual Ratios (%)
1-Year 3-Years 5-Years
Growth
Revenue 12.07 -1.53 -
Net Profit -110.58 -130.85 -
EPS -109.93 -130.29 -
Book Value -0.77 0.43 -
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Average
Operating Margin 10.15 14.34 15.07
Net Margin -0.29 4.11 5.57
Return on Networth -0.54 5.32 10.15
Return on Investment 3.31 7.84 12.77
Interim Growth Ratios (%)
QoQ YoY YTD
Quarterly
Revenue -20.24 39.13 39.13
Operating Profit 5.62 58.57 58.57
Net Profit 14.03 53.88 53.88
13
EPS 14.03 - -
TTM
Revenue 7.48 -2.14 -2.14
Operating Profit 11.24 0.63 0.63
Net Profit 16.08 -25.41 -25.41
EPS 65.43 -7.71 -7.71
Peer Comparison
Market Cap
(R Cr)
Revenue (R Cr)
Net Profit (R Cr)
Net Margin
(%)
RoE (%)
Price to Book
Price to Earnings
Jindal Saw 2,309.23 5,509.59 144.27 2.58 5.32 0.65 -
Maharashtra Seamless 1,914.51 1,205.17 97.12 7.66 7.13 0.86 18.86
Welspun Corp 2,210.08 4,867.61 -1.08 -0.02 1.33 0.78 30.11
COMPETITORS (Macro View)
Name Last Price Market Cap.(Rs. cr.)
SalesTurnover
Net Profit Total Assets
Jindal Saw 84.85 2,343.76 5,509.59 144.27 6,971.88
Welspun Corp 87.35 2,296.85 4,867.61 -17.54 6,960.31
Mah Seamless 291.50 1,953.04 1,205.17 97.12 2,827.34
Ratnamani Metal 382.05 1,783.54 1,326.10 142.81 765.99
APL Apollo 283.20 663.78 2,057.32 26.18 598.91
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Man Industries 76.70 437.98 1,005.29 8.90 1,248.56
Surya Roshni 98.35 431.08 3,030.97 53.36 1,501.69
Oil Country 65.25 288.99 358.64 10.42 434.48
Gandhi Spl Tube 163.25 239.95 83.53 17.31 150.63
Prakash Steelag 122.50 214.38 944.22 16.55 366.54
PSL 28.10 149.76 208.66 -142.14 4,146.88
Innoventive Ind 23.80 141.95 389.79 -434.66 844.68
Zenith Birla 1.70 22.32 280.22 -44.62 464.85
Comparison with other Competitors (Micro View)
Balance Sheet ------------------- in Rs. Cr. -------------------
Jindal Saw
Welspun Corp
Mah Seamless
Ratnamani Metal
APL Apollo
Mar '13 Mar '12 Mar '13 Mar '13 Mar '13
Sources Of Funds
Total Share Capital 55.25 113.89 35.27 9.28 22.32
Equity Share Capital 55.25 113.89 35.27 9.28 22.32
Share Application Money 0.00 0.00 0.00 0.00 4.04
Preference Share Capital 0.00 0.00 0.00 0.00 0.00
15
Reserves 3,673.38 3,481.33 2,787.46 637.43 274.46
Revaluation Reserves 0.00 0.00 0.00 0.00 0.00
Networth 3,728.63 3,595.22 2,822.73 646.71 300.82
Secured Loans 2,295.25 2,598.61 3.06 57.45 47.39
Unsecured Loans 948.00 766.46 1.56 61.83 250.68
Total Debt 3,243.25 3,365.07 4.62 119.28 298.07
Total Liabilities 6,971.88 6,960.29 2,827.35 765.99 598.89
Jindal Saw
Welspun Corp
Mah Seamless
Ratnamani Metal
APL Apollo
Mar '13 Mar '12 Mar '13 Mar '13 Mar '13
Application Of Funds
Gross Block 3,502.19 3,885.88 849.84 651.85 209.93
Less: Accum. Depreciation 945.95 832.48 215.17 261.36 24.46
Net Block 2,556.24 3,053.40 634.67 390.49 185.47
Capital Work in Progress 1,011.20 197.95 672.04 22.86 2.68
Investments 826.53 3,403.94 697.16 29.11 77.97
Inventories 1,471.11 1,649.85 513.29 232.73 177.55
Sundry Debtors 1,238.57 1,092.76 321.55 251.19 165.44
Cash and Bank Balance 62.93 640.94 7.83 60.04 9.86
Total Current Assets 2,772.61 3,383.55 842.67 543.96 352.85
Loans and Advances 1,003.63 1,018.64 258.66 42.27 114.27
Fixed Deposits 0.00 0.00 0.00 0.00 0.00
Total CA, Loans & Advances 3,776.24 4,402.19 1,101.33 586.23 467.12
Deffered Credit 0.00 0.00 0.00 0.00 0.00
Current Liabilities 1,128.56 3,933.23 268.35 229.63 115.38
Provisions 69.77 163.94 9.51 33.07 18.95
Total CL & Provisions 1,198.33 4,097.17 277.86 262.70 134.33
Net Current Assets 2,577.91 305.02 823.47 323.53 332.79
Miscellaneous Expenses 0.00 0.00 0.00 0.00 0.00
Total Assets 6,971.88 6,960.31 2,827.34 765.99 598.91
Contingent Liabilities 2,419.19 4,635.08 755.26 164.97 13.36
Book Value (Rs) 134.98 157.84 400.20 139.33 132.95
Source : Dion Global Solutions Limited
OPERATIONAL & FINANCIAL HIGHLIGHTS
16
The sales break up for 2nd Quarter ended 30th Sep 2013 is given hereunder:
PRODUCT Quantity Sold (MT)- app.
PIPES
- Large Dia Pipes
- L Saw 36,500
- H Saw 35,000
- Ductile Iron 55,900
Pipes
- Pig Iron 34,500
- Seamless Tubes 33,600
TOTAL PIPES SOLD 195,500
IRON ORE Etc
- Pellets 134,000
Geographical Break up
- Sale in India - 76 % - Sale outside India (exports) - 24 %
The Production for Q1 and Q2 in FY 13-14 are given here:
Product Production- Q2 MT
Production- Q1 MT
Pipes 207,000 204,000 Pellets 137,000 37,000 Iron Ore Concentrate 102,000 90,000
Operational Performance:During 2nd Quarter ended 30th September 2013:
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Saw Pipe Strategic Business Unit: The segment witnessed lower production and sales due to customer’ delivery schedules, lower order book and heavy rains. The Company executed more of domestic orders and export constitutes 25% of LSaw Pipes sales. Company expects additional orders and improvement in business and operations in subsequent quarters.
DI and Pig Iron Strategic Business Unit: Company produced app. 61,000 MT of DI pipes and 26000 MT of Pig Iron. The production and sales of DI pipes is ramping up with stabilization of second DI plant. DI exports in this quarter were app. 15%.
Seamless Strategic Business Unit: The activities in seamless pipes & tubes segment improved in second quarter. During this quarter, the company also catered to some drill pipe orders and as a result the EBITDA in this segment has improved. Company expect the situation to improve gradually. The production of seamless pipes in 2nd quarter was app.34,000 MT and exports sale was app. 57%.
Iron Ore Mines and Pellet Strategic Business Unit: Production and sales of Pellet have increased in 2nd quarter. The same could have been higher but got impacted to some extent due to extended monsoons. Company expect the operations to improve quarter by quarter.
18
19
Order Book Position The current order book is app. 475 million (app. Rs 3,000 Crores), the break up is as
under: Large Diameter Pipes – US$ 230 Mio Ductile Iron Pipes – US$ 215 Mio Seamless Pipes – US$ 30 Mio
The orders for Large Diameter Pipes are slated to be executed by March 2014 and in case of Ductile Iron Pipes the same are slated to be executed over next 12-18 months or more. Company has participated in various bids and likely to get orders in phases. The current order book includes export of app 25%. The major exports orders are from Middle East, Gulf region and South East Asia and Far East.
Financing and Liquidity
a) As at 30th Sep 2013, net debt in the Company (standalone) was app. Rs 36,400 mio (app. USD 588 mio.) including ECB/ long term loans and fund based working capital and other unsecured loans. The loan includes buyer’s credit of app. Rs 9,100 mio (app. USD 146 Mio). The loans have increased marginally in this quarter as compared to 1st Quarter ended 30th June 2013 due to
(i) Rupee depreciation and
(ii) Capital expenditures and some increase in working capital.
b) To meet the long term funds requirements, the Company intends to raise additional long term funds.
20
STATUS OF NEW PROJECTS/ CAPITAL EXPENDITURES
a) Small Dia DI Pipe Plant: Ductile Iron Plant (small dia DI pipe plant) with blast furnace capacity of app. 200,000 MTPA was put to commercial operation in the quarter ended 31st March 2013. Production has started and the capacity is being gradually ramped up as the production process gets stabilized. The Coke Oven facility and the incremental captive power generation facility related to the Ductile Iron Plant has now been commissioned. These facilities are expected to stabilize fully in the coming months.
b) Greenfield Ductile Iron pipe facility in United Arab Emirates: The Greenfield Ductile Iron Pipe facility in UAE is now commercially operational. The facility has received necessary product and quality approvals. With the concerted efforts its product has been approved in four countries in the region and the efforts to get pre approval in other countries are on way. The current book stands at app. 60,000 MT and company expects the same to improve gradually. The facility has reached to breakeven level.
c) Iron Ore Concentrate and Pellets: The Pellet plant in Bhilwara has stabilized and its products are being well accepted in the market. The production of concentrate and Pellet will ramp up gradually in the coming months.
d) Additional Projects/ new Capital Expenditures: To meet the requirements of the Lease agreement as well as for maximum utilization of iron ore concentrate, Company is adding a Sponge iron and Steel Ingot plant with capacity of app. 250,000 in Rajasthan. These plants should be in place in FY 14-15.
21
PROJECT TOPIC INTRODUCTION
What is Working Capital?
Working capital (abbreviated WC) is a financial metric which represents operating
liquidity available to a business, organization or other entity, including governmental entity.
Along with fixed assets such as plant and equipment, working capital is considered a part of
operating capital. Gross working capital equals to current assets. Net working capital (NWC)
is calculated as current assets minus current liabilities It is a derivation of working capital,
that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If
current assets are less than current liabilities, an entity has a working capital deficiency, also
called a working capital deficit.
A company can be endowed with assets and profitability but short of liquidity if its assets
cannot readily be converted into cash. Positive working capital is required to ensure that a
firm is able to continue its operations and that it has sufficient funds to satisfy both
maturing short-term debt and upcoming operational expenses. The management of working
capital involves managing inventories, accounts receivable and payable, and cash.
Calculation
The basic calculation of the working capital is done on the basis of the gross current assets of
the firm.
Inputs
Current assets and current liabilities include three accounts which are of special importance.
These accounts represent the areas of the business where managers have the most direct
impact:
accounts receivable (current asset)
inventory (current assets), and
accounts payable (current liability)
The current portion of debt (payable within 12 months) is critical, because it represents a
short-term claim to current assets and is often secured by long term assets. Common types of
short-term debt are bank loans and lines of credit.
An increase in net working capital indicates that the business has either increased current
assets (that it has increased its receivables, or other current assets) or has decreased current
liabilities—for example has paid off some short-term creditors, or a combination of both.
22
Working Capital Cycle
Definition
The working capital cycle (WCC) is the amount of time it takes to turn the net current assets
and current liabilities into cash. The longer the cycle is, the longer a business is tying up
capital in its working capital without earning a return on it. Therefore, companies strive to
reduce its working capital cycle by collecting receivables quicker or sometimes stretching
accounts payable.
Meaning
A positive working capital cycle balances incoming and outgoing payments to minimize net
working capital and maximize free cash flow. For example, a company that pays its suppliers
in 30 days but takes 60 days to collect its receivables has a working capital cycle of 30 days.
This 30 day cycle usually needs to be funded through a bank operating line, and the interest
on this financing is a carrying cost that reduces the company's profitability. Growing
businesses require cash, and being able to free up cash by shortening the working capital
cycle is the most inexpensive way to grow. Sophisticated buyers review closely a target's
working capital cycle because it provides them with an idea of the management's
effectiveness at managing their balance sheet and generating free cash flow.
Working Capital Management
Decisions relating to working capital and short term financing are referred to as working
capital management. These involve managing the relationship between a firm's short-term
assets and its short-term liabilities. The goal of working capital management is to ensure that
the firm is able to continue its operations and that it has sufficient cash flow to satisfy both
maturing short-term debt and upcoming operational expenses.
A managerial accounting strategy focusing on maintaining efficient levels of both
components of working capital, current assets and current liabilities, in respect to each other.
Working capital management ensures a company has sufficient cash flow in order to meet its
short-term debt obligations and operating expenses.
Decision Criteria
By definition, working capital management entails short-term decisions—generally, relating
to the next one-year period—which is "reversible". These decisions are therefore not taken on
the same basis as capital-investment decisions (NPV or related, as above); rather, they will be
based on cash flows, or profitability, or both.
One measure of cash flow is provided by the cash conversion cycle—the net number of
days from the outlay of cash for raw material to receiving payment from the customer. As
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a management tool, this metric makes explicit the inter-relatedness of decisions relating
to inventories, accounts receivable and payable, and cash. Because this number
effectively corresponds to the time that the firm's cash is tied up in operations and
unavailable for other activities, management generally aims at a low net count.
In this context, the most useful measure of profitability is return on capital (ROC). The
result is shown as a percentage, determined by dividing relevant income for the 12
months by capital employed; return on equity (ROE) shows this result for the firm's
shareholders. Firm value is enhanced when, and if, the return on capital, which results
from working-capital management, exceeds the cost of capital, which results from capital
investment decisions as above. ROC measures are therefore useful as a management tool,
in that they link short-term policy with long-term decision making. See economic value
added (EVA).
Credit policy of the firm: Another factor affecting working capital management is credit
policy of the firm. It includes buying of raw material and selling of finished goods either
in cash or on credit. This affects the cash conversion cycle.
Management of Working Capital
Guided by the above criteria, management will use a combination of policies and techniques
for the management of working capital. The policies aim at managing the current
assets (generally cash and cash equivalents, inventories and debtors) and the short term
financing, such that cash flows and returns are acceptable.
Cash management. Identify the cash balance which allows for the business to meet
day to day expenses, but reduces cash holding costs.
Inventory management. Identify the level of inventory which allows for
uninterrupted production but reduces the investment in raw materials—and minimizes
reordering costs—and hence increases cash flow. Besides this, the lead times in
production should be lowered to reduce Work in Process (WIP) and similarly,
the Finished Goods should be kept on as low level as possible to avoid over production—
see Supply chain management; Just In Time (JIT); Economic order
quantity (EOQ); Economic quantity
Debtors management. Identify the appropriate credit policy, i.e. credit terms which
will attract customers, such that any impact on cash flows and the cash conversion cycle
will be offset by increased revenue and hence Return on Capital (or vice versa);
see Discounts and allowances.
Short term financing. Identify the appropriate source of financing, given the cash
conversion cycle: the inventory is ideally financed by credit granted by the supplier;
however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors
to cash" through "factoring".
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RELATION BETWEEN CURRENT ASSETS & CURRENT LAIBILITIES
A measure of both company’s efficiency and its short-term financial health. The working capital is calculated as:
The working capital ratio (Current Assets/Current Liabilities) indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient.
If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company's sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller.
Working capital also gives investors an idea of the company's underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations.
Things to Remember If the ratio is less than one then they have negative working capital.
A high working capital ratio isn't always a good thing, it could indicate
that they have too much inventory or they are not investing their excess
cash.
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Main Factors Affecting Working Capital
Main factors affecting the working capital are as follows:
(1) Nature of Business:
The requirement of working capital depends on the nature of business. The nature of business
is usually of two types: Manufacturing Business and Trading Business. In the case of
manufacturing business it takes a lot of time in converting raw material into finished goods.
Therefore, capital remains invested for a long time in raw material, semi-finished goods and
the stocking of the finished goods.
Consequently, more working capital is required. On the contrary, in case of trading business
the goods are sold immediately after purchasing or sometimes the sale is affected even before
the purchase itself. Therefore, very little working capital is required. Moreover, in case of
service businesses, the working capital is almost nil since there is nothing in stock.
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(2) Scale of Operations:
There is a direct link between the working capital and the scale of operations. In other words,
more working capital is required in case of big organisations while less working capital is
needed in case of small organisations.
(3) Business Cycle:
The need for the working capital is affected by various stages of the business cycle. During
the boom period, the demand of a product increases and sales also increase. Therefore, more
working capital is needed. On the contrary, during the period of depression, the demand
declines and it affects both the production and sales of goods. Therefore, in such a situation
less working capital is required.
(4) Seasonal Factors:
Some goods are demanded throughout the year while others have seasonal demand. Goods
which have uniform demand the whole year their production and sale are continuous.
Consequently, such enterprises need little working capital.
On the other hand, some goods have seasonal demand but the same are produced almost the
whole year so that their supply is available readily when demanded.
Such enterprises have to maintain large stocks of raw material and finished products and so
they need large amount of working capital for this purpose. Woolen mills are a good example
of it.
(5) Production Cycle:
Production cycle means the time involved in converting raw material into finished product.
The longer this period, the more will be the time for which the capital remains blocked in raw
material and semi-manufactured products.
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Thus, more working capital will be needed. On the contrary, where period of production
cycle is little, less working capital will be needed.
(6) Credit Allowed:
Those enterprises which sell goods on cash payment basis need little working capital but
those who provide credit facilities to the customers need more working capital.
(7) Credit Availed:
If raw material and other inputs are easily available on credit, less working capital is needed.
On the contrary, if these things are not available on credit then to make cash payment quickly
large amount of working capital will be needed.
(8) Operating Efficiency:
Operating efficiency means efficiently completing the various business operations. Operating
efficiency of every organisation happens to be different.
Some such examples are:
(i) converting raw material into finished goods at the earliest,
(ii) (ii) selling the finished goods quickly, and
(iii) (iii) quickly getting payments from the debtors. A company which has a
better operating efficiency has to invest less in stock and the debtors.
Therefore, it requires less working capital, while the case is different in respect of companies
with less operating efficiency.
(9) Availability of Raw Material:
Availability of raw material also influences the amount of working capital. If the enterprise
makes use of such raw material which is available easily throughout the year, then less
working capital will be required, because there will be no need to stock it in large quantity.
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On the contrary, if the enterprise makes use of such raw material which is available only in
some particular months of the year whereas for continuous production it is needed all the year
round, then large quantity of it will be stocked. Under the circumstances, more working
capital will be required.
(10) Growth Prospects:
Growth means the development of the scale of business operations (production, sales, etc.).
The organisations which have sufficient possibilities of growth require more working capital,
while the case is different in respect of companies with less growth prospects.
(11) Level of Competition:
High level of competition increases the need for more working capital. In order to face
competition, more stock is required for quick delivery and credit facility for a long period has
to be made available.
(12) Inflation:
Inflation means rise in prices. In such a situation more capital is required than before in order
to maintain the previous scale of production and sales. Therefore, with the increasing rate of
inflation, there is a corresponding increase in the working capital.
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What is the Significance of Working Capital?
Having known the meaning of working capital it is necessary to know its need for business.
Mostly in all businesses two kinds of assets are needed: fixed assets and current assets. Fixed
assets include land, building, machinery, furniture, etc.
Current assets mainly include:
(i) Cash in hand or cash at bank
(ii) Marketable securities
(iii) Bills receivable
(iv) Debtors
(v) Finished goods inventory
(vi) Work-in-progress
(vii) Raw material; and
(viii) Prepaid expenses.
Fixed assets raise the structure of business but to run the show current assets are needed. For
example, a manufacturing enterprise has to purchase raw material, to change it into finished
product labourers are paid wages, to push the sale of finished product publicity expenses are
to be incurred. Sometimes, finished product is sold on credit. To finance all this, working
capital is needed.
Adequate working capital is an index of the liquidity of business or capacity to make
payment immediately. Following are the main causes which underline the need for working
capital:
(i) Payment of daily expenses
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(ii) Payment of current liabilities on time
(iii) Taking advantage of cash discount
(iv) Taking advantage of favourable opportunities of the market
(v) Continuity in production.
Classifications of Working Capital:
1. Permanent 2. Variable
The amount of funds needed for meeting requirements normally varies from time to time in
every business. However, business always needs a certain amount of assets in the form of
working capital if it is to carry out its functions.
This permanent need and the variable requirements are the basis for a convenient
classification of working capital as regular, permanent, or variable as follows:
1. Permanent or fixed working capital:
A part of the investment in current assets is as permanent as the investment in fixed assets. It
covers the minimum amount necessary for maintaining the circulation of the current assets.
Working capital invested in the circulation of the current assets and keeping it moving is
permanently locked up.
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The permanent or fixed working capital is of two kinds:
(a) Regular working capital, and
(b) Reserve margin or cushion working capital.
(a) Regular working capital:
It is the minimum amount of liquid capital required to keep up the circulation of the capital
from cash to inventories to receivables and back again to cash. This would include a
sufficient amount of cash to maintain reasonable quantities of raw materials for processing
into finished goods to ensure quick delivery etc.
(b) Reserve margin or cushion working capital:
It is extra capital required to meet unforeseen contingencies that may arise in future. These
contingencies may crop up on account of rise in prices, business depression, strikes, lock-
outs, fires and unexpected competition. It is needed over and above the regular working
capital requirements.
2. Variable working capital:
The variable working capital fluctuates with the volume of business. It may be sub-divided
into: (i) Seasonal and (ii) Special working capital.
(i) Seasonal working capital:
It refers to liquid capital needed during the particular season. According to Gestenberg,
“Beyond initial and regular working capital, most businesses will require at stated intervals a
large amount of current assets to fill the demands of the seasonal busy periods”.
During the season, the business enterprises have to push up purchase of raw materials
(sugarcane by sugar mills, wool by woollen mills) and employ more people to convert them
into finished goods and thus require large amount of working capital.
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(ii) Special working capital:
It is that part of the variable capital which is needed for financing special operations such as
the organisation of special campaigns for increasing sales through advertisement or other sale
promotion activities for conducting research experiments or execution of special orders of
Government that will have to be financed by additional working capital.
The distinction between permanent and variable working capital is important in arranging the
finance for an enterprise. Permanent working Capital should be raised in the same way as
fixed capital is procured.
It is undesirable to bring regular working capital into business on a short-term basis because a
creditor can seriously handicap the business by refusing to continue lending permanently. Its
only recourse is to curtail operations unless another lender can be found. Variable capital
requirement can, however be financed out of short term loans from the banks or inviting
public deposits.
Main Sources to Meet the Requirements of Short-Term Working Capital
Some of the Major sources to meet requirements of Short-Term Working Capital
(a) Borrowings from Banks
(b) Trade credit
(c) Instalments credit
(d) Consumer Credit or Customer Advances and
(e) Accounts Receivable Financing!
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Other methods are used for short-term financing. Short-term credit is generally used as a
means of financing circulating assets and meeting operating expenses of the business. It is
raised to meet the short-term (i.e. less than one year) working capital requirements of the
business.
Borrowing from short-term sources is often an advantageous way of financing the temporary
expansion of floating assets. It is regarded as a sound financial policy to use short-term credit
to expand circulating assets (variable working capital) because these assets will be converted
into cash in the near future. Short- term finance is also required for paying the continuous
operating business expenses such as salaries, wages, repairs, and rent etc.
Short-term credit is considered to be the most economical means of financing acquisition of
circulating assets. The economical nature of using short-term credit is reflected in terms of (i)
lower interest rates payable on short-term loans, and (ii) avoiding the idleness of the funds.
Short-term financial requirements can be met by the commercial banks. They provide finance
on liberal terms and conditions and bring flexibility in financial planning for short period.
Besides this other sources of short term credit include customers advance, installment credit,
trade credit, accounts receivable financing etc.
Short-term working capital requirements of the business concern can be financed by these
sources and can be paid back within a short period of time.
(a) Borrowings from Banks:
Commercial banks have played an important role as suppliers of short-term working capital
requirement of the business concern.
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They meet the financial requirements of the business undertakings in any
of the following ways:
(i) Cash credit:
The most popular way of providing financial assistance is through cash credit. For obtaining
cash credit, a company has to furnish a security of tangible assets i.e. stock of finished goods
or semi-finished goods or raw material and can borrow up to an agreed amount.
The customer is required to pay interest on the actual amount utilised. It is also called as the
secured credit. If the cash credit is not backed by any security, it is known as clean cash
credit, under which the borrower gives promissory note and is signed by two sureties. The
borrower should bring the account to credit at least once in a year.
(ii) Line of credit:
The bank agrees to allow the company to borrow upto certain amount. A company has to
keep deposit (say 20%) with the bank for securing a line of credit.
(iii) Discounting of bills:
Companies can get financial assistance by discounting their bills of exchange, promissory
notes and hundies from banks. These documents are discounted by the banks at a price lower
than their face value. Genuine trade bills are of much use to the traders, acceptors and also to
the commercial banks. But the Bill market has not developed.
(iv) Overdrafts:
Banks also provide facilities of overdraft under which the customers can draw more money
than they have actually deposited. Under this arrangement, the customer is charged interest
on the amount actually overdrawn and not on the limit ‘sanctioned’. The overdraft is allowed
from one week to one month to overcome the occasional shortage of funds sufficiently in our
country.
In fact there is no bill market in our country in its true sense. Therefore, the RBI introduced a
Bill Market Scheme in 1952, but the scheme failed to develop a market for genuine bills in
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our country. Again the RBI introduced another new scheme in 1970, on the basis of the
recommendations of the study group.
(v) Term loans:
Term loan means advance granted for a period of more than a year or so. Under this, the
borrower receives the loan in lumpsum and is required to pay interest on fixed rate till the
repayment of the loan. Borrower can return the loan in installments or in lump-sum. Interest
is paid on the reduced balance.
The commercial banks have also started granting credit to small scale industries. Prior to
1969 small scale units were looked upon as risky and the banks were reluctant in advancing
money to them. But now preference is given to small scale industries in granting bank credit.
(b) Trade credit:
When a company sells goods, it allows credit to its customers. Similarly, it gets credit from
its suppliers known as trade credit. According to Howard and others, “trade credit may be
defined as the credit extended by the sellers to buyers at all levels of production and
distribution processes down to the retailer.
It does include consumer credit on installment. It arises due to difficult transfer of goods and
is unsecured”. The usual duration of such credit is 30 to 90 days. It is granted to the buyer on
‘open account’, without any security i.e., on the goodwill and credit-worthiness of the buyer.
Trade credit facilitates the purchase of goods without immediate payment. No interest is
charged on trade credits; only the price is a little higher than the cash price. The period of
trade credit depends upon the financial resources of the supplier, nature of product, location
of the customer, traditions of trade, degree of competition in the market, and the eagerness of
the supplier to sell his stocks.
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(c) Instalment credit:
This is known as consumer credit, it is usually allowed by retailers for selling consumer
durables like television sets, fans, radios, refrigerators, washing machines, scooters,
motorcycles, cars etc. Some portion of the cost price of the asset is paid at the time of
delivery and the balance is paid in number of installments along with interest.
Sometimes, installment credit is granted by financial companies or commercial banks which
have special arrangements with the suppliers. Machinery or equipment may also be supplied
on hire purchase basis. Under this system the purchaser becomes the owner only when all the
installments are paid.
(d) Consumer Credit or Customer Advances:
Many a times the suppliers or manufactures of goods insist on advance by customers along
with orders. Such advances represent part of the price and carry no interest. A manufacturer
can meet his short-term needs at least partly, through customer advances. The period of such
credit depends upon the time taken to deliver the goods.
The availability of this credit depends on degree of competition in the market, customs of the
trade and usage and reputation of the supplier.
(e) Accounts Receivable Financing:
Under this arrangement, the accounts receivable of a business concern are bought by a
financing company or money may be advanced on security of accounts receivable, normally
60 percent of the value of accounts receivable pledged is advanced by the finance companies.
If there are any bad debts, it is to be borne by the business concern itself. This account
receivable is a right to property and a right to collect the amount from the client. This method
of financing is very popular in the United States of America.
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Buyer’s credit
Buyer's credit is short term credit availed to an importer (buyer) from overseas lenders such
as banks and other financial institution for goods they are importing. The overseas banks
usually lend the importer (buyer) based on the letter of comfort (a bank guarantee) issued by
the importer's bank. For this service the importer's bank or buyer's credit consultant charges a
fee called an arrangement fee.
Buyer's credit helps local importers gain access to cheaper foreign funds that may be closer
to LIBOR rates as against local sources of funding which are more costly.
The duration of buyer's credit may vary from country to country, as per the local regulations.
For example in India, buyer's credit can be availed for one year in case the import is for
tradable goods and for three years if the import is for capital goods. Every six months, the
interest on buyer's credit may get reset.
Benefits to importer
1. The exporter gets paid on due date; whereas importer gets extended date for making
an import payment as per the cash flows
2. The importer can deal with exporter on sight basis, negotiate a better discount and use
the buyers credit route to avail financing.
3. The funding currency can be USD, GBP, EURO, JPY etc., depending on the choice of
the customer and availability of libor rates in the exchange market.
4. The importer can use this financing for any form of trade; open account, collections,
or LCs.
5. The currency of imports can be different from the funding currency, which enables
importers to take a favorable view of a particular currency.
Steps involved
1. The customer will import the goods either under LC, collections or open account
2. The customer requests the Buyer's Credit Arranger to arrange the credit before the due
date of the bill
3. Arrange to request overseas bank branches to provide a buyer's credit offer letter in
the name of the importer. Best rate of interest is quoted to the importer
4. Overseas bank to fund Importer's bank Nostro account for the required amount
5. Importer's bank to make import bill payment by utilizing the amount credited (if the
borrowing currency is different from the currency of Imports then a cross currency
contract is utilized to effect the import payment)
6. Importer's bank will recover the required amount from the importer and remit the
same to overseas bank on due date.
7. It helps importer in working capital management.
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Cost involved
1. Interest cost: is charged by overseas bank as a financing cost
2. Letter of Comfort / Undertaking: Your existing bank would charge this cost for
issuing letter of comfort / Undertaking
3. Forward Booking Cost / Hedging cost
4. Arrangement fee: Charged by person who is arranging buyer's credit for buyer.
5. Risk premium: Depending on the risk perceived on the transaction.
6. Other charges: A2 payment on maturity, For 15CA and 15CB on maturity,
Intermediary bank charges.
7. WHT (Withholding tax): The customer may have to pay WHT on the interest amount
remitted overseas to the local tax authorities depending on local tax regulations. In
case of India, the WHT is not applicable where Indian banks arrange for buyer's
credit through their offshore offices.
Indian Regulatory Framework
Banks can provide buyer’s credit up to USD 20 million per import transactions for a
maximum maturity period of one year from date of shipment. In case of import of capital
goods, banks can approve buyer’s credits up to USD 20 million per transaction with a
maturity period of up to three years. No rollover beyond that period is permitted.
As per RBI directives dated 11.07.13, at the time of availment of trade credit, the period of
trade credit should be linked to the operating cycle and trade transaction. AD banks need to
ensure that these instructions are strictly complied with.
RBI has issued directions under Sec 10(4) and Sec 11(1) of the Foreign Exchange
Management Act, 1999, stating that authorized dealers may approve proposals received (in
Form ECB) for short-term credit for financing—by way of either suppliers' credit or buyers'
credit—of import of goods into India, based on uniform criteria. Credit is to be extended for a
period of less than three years; amount of credit should not exceed $20 million, per import
transaction; the `all-in-cost' per annum, payable for the credit is not to exceed LIBOR + 50
basis points for credit up to one year, and LIBOR + 125 basis points for credits for periods
beyond one year but less than three years, for the currency of credit.
All applications for short-term credit exceeding $20 million for any import transaction are to
be forwarded to the Chief General Manager, Exchange Control Department, Reserve Bank of
India, Central Office, External commercial Borrowing (ECB) Division, Mumbai. Each credit
has to be given `a unique identification number' by authorised dealers and the number so
allotted should be quoted in all references. The International Banking Division of the
authorised dealer is required to furnish the details of approvals granted by all its branches,
during the month, in Form ECB-ST to the RBI, so as to reach not later than 5th of the
following month. (Circular AP (DIR Series) No 24 dated September 27, 2002.
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As per RBI Master circular on External Commercial Borrowing and Trade Finance 1 July
2011, the all-in cost ceiling for interest is now six month L + 200 bps(bps is Basis Points . A
unit that is equal to 1/100th of 1%) for buyer's credit arrange for tenure up to three years. All
cost ceiling includes arranger fee, upfront fee, management fee, handling and processing
charges, out-of-pocket and legal expenses, if any.
The above ceiling go revised on 15/11/2011 to 6 Month Libor + 350 bps and got further
extended on 30/03/2012 till 30/09/2012. From 01-10-2012 Maximum cap of 6 Month Libor +
350 bps has been extended till further review.
About vendor bills
A vendor bill is an invoice received for products and services that your company purchases. You can create a new vendor bill, or you can create a vendor bill from a purchase order or an item receipt. There are several ways to handle vendor bills.
Manage vendor bills
Work with vendor bills to make processing your financial transactions easier and more efficient. To learn more about different ways you can manage vendor bills, click the following links.
INVOICE DISCOUNTING
Invoice discounting is a form of short-term borrowing often used to improve a
company's working capital and cash flow position.
Invoice discounting allows a business to draw money against its sales invoices before the
customer has actually paid. To do this, the business borrows a percentage of the value of
its sales ledger from a finance company, effectively using the unpaid sales invoices
as collateral for the borrowing.
Although the end result is the same as for debt factoring (the business gets cash from its sales
invoices earlier than it otherwise would) the financial arrangement is somewhat different.
Features
When a business enters into an invoice discounting arrangement, the finance company will
allow the business to draw down a percentage of the outstanding sales invoices - usually in
the region of 80%. It is possible to achieve a full 100% advance rate but this is typically only
seen within the recruitment industry. As customers pay their invoices, and new sales invoices
are raised, the amount available to be advanced will change so that the maximum drawdown
remains at the agreed percentage of the sales ledger.
The finance company will charge a monthly fee for the service, and interest on the amount
borrowed against sales invoices. In addition, the finance company may refuse to lend against
some invoices, for example if it believes the customer is a credit risk, sales to overseas
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companies, sales with very long credit terms, or very small value invoices. The lender will
require a fixed charge over the book debts (trade debtors) of the business as security for the
funds it lends to the business under the invoice discounting arrangement.
Responsibility for raising sales invoices and for credit control stays with the business, and the
finance company will often require regular reports on the sales ledger and the credit control
process.
Benefits
By receiving cash as soon as a sales invoice is raised, the business will find that its cash
flow and working capital position is improved.
The business will only pay interest on the funds that it borrows, in a similar way to
an overdraft, which makes it more flexible than debt factoring.
Invoice discounting arrangements often have a simplified due diligence process
Invoice financing can be arranged confidentially, so that customers and suppliers are
unaware that the business is borrowing against sales invoices before payment is received.
PRESHIPMENT FINANCE
Pre Shipment Finance is issued by a financial institution when the seller want the payment of the goods before shipment. The main objectives behind preshipment finance or pre export finance is to enable exporter to:
Procure raw materials. Carry out manufacturing process. Provide a secure warehouse for goods and raw materials. Process and pack the goods. Ship the goods to the buyers. Meet other financial cost of the business.
Types of Pre Shipment Finance
Packing Credit Advance against Cheques/Draft etc. representing Advance Payments.
Preshipment finance is extended in the following forms :
Packing Credit in Indian Rupee Packing Credit in Foreign Currency (PCFC)
Requirment for Getting Packing Credit
This facility is provided to an exporter who satisfies the following criteria
A ten digit importerexporter code number allotted by DGFT. Exporter should not be in the caution list of RBI.
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If the goods to be exported are not under OGL (Open General Licence), the exporter should have the required license /quota permit to export the goods.
Packing credit facility can be provided to an exporter on production of the following evidences to the bank:
1. Formal application for release the packing credit with undertaking to the effect that the exporter would be ship the goods within stipulated due date and submit the relevant shipping documents to the banks within prescribed time limit.
2. Firm order or irrevocable L/C or original cable / fax / telex message exchange between the exporter and the buyer.
3. Licence issued by DGFT if the goods to be exported fall under the restricted or canalized category. If the item falls under quota system, proper quota allotment proof needs to be submitted.
The confirmed order received from the overseas buyer should reveal the information about the full name and address of the overseas buyer, description quantity and value of goods (FOB or CIF), destination port and the last date of payment.
Eligibility
Pre shipment credit is only issued to that exporter who has the export order in his own name. However, as an exception, financial institution can also grant credit to a third party manufacturer or supplier of goods who does not have export orders in their own name.
In this case some of the responsibilities of meeting the export requirements have been out sourced to them by the main exporter. In other cases where the export order is divided between two more than two exporters, pre shipment credit can be shared between them
Quantum of Finance
The Quantum of Finance is granted to an exporter against the LC or an expected order. The only guideline principle is the concept of Need Based Finance. Banks determine the percentage of margin, depending on factors such as:
The nature of Order. The nature of the commodity. The capability of exporter to bring in the requisite contribution.
Different Stages of Pre Shipment FinanceAppraisal and Sanction of Limits
1. Before making any an allowance for Credit facilities banks need to check the different aspects like product profile, political and economic details about country. Apart from these things, the bank also looks in to the status report of the prospective buyer, with whom the exporter proposes to do the business. To check all these information, banks can seek the help of institution like ECGC or International consulting agencies like Dun and Brad street etc.
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The Bank extended the packing credit facilities after ensuring the following"
a. The exporter is a regular customer, a bona fide exporter and has a goods standing in the market.
a. Whether the exporter has the necessary license and quota permit (as mentioned earlier) or not.
b. Whether the country with which the exporter wants to deal is under the list of Restricted Cover Countries(RCC) or not.
Disbursement of Packing Credit Advance
2. Once the proper sanctioning of the documents is done, bank ensures whether exporter has executed the list of documents mentioned earlier or not. Disbursement is normally allowed when all the documents are properly executed.
Sometimes an exporter is not able to produce the export order at time of availing packing credit. So, in these cases, the bank provide a special packing credit facility and is known as Running Account Packing.
Before disbursing the bank specifically check for the following particulars in the submitted documents"
a. Name of buyerb. Commodity to be exportedc. Quantityd. Value (either CIF or FOB)e. Last date of shipment / negotiation.f. Any other terms to be complied with
The quantum of finance is fixed depending on the FOB value of contract /LC or the domestic values of goods, whichever is found to be lower. Normally insurance and freight charged are considered at a later stage, when the goods are ready to be shipped.
In this case disbursals are made only in stages and if possible not in cash. The payments are made directly to the supplier by drafts/bankers/cheques.
The bank decides the duration of packing credit depending upon the time required by the exporter for processing of goods.
The maximum duration of packing credit period is 180 days, however bank may provide a further 90 days extension on its own discretion, without referring to RBI.
Follow up of Packing Credit Advance
3. Exporter needs to submit stock statement giving all the necessary information about the stocks. It is then used by the banks as a guarantee for securing the packing credit in advance. Bank also decides the rate of submission of this stocks.
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Apart from this, authorized dealers (banks) also physically inspect the stock at regular intervals.
Liquidation of Packing Credit Advance
4. Packing Credit Advance needs be liquidated out of as the export proceeds of the relevant shipment, thereby converting preshipment credit into postshipment credit.
This liquidation can also be done by the payment receivable from the Government of India and includes the duty drawback, payment from the Market Development Fund (MDF) of the Central Government or from any other relevant source.
In case if the export does not take place then the entire advance can also be recovered at a certain interest rate. RBI has allowed some flexibility in to this regulation under which substitution of commodity or buyer can be allowed by a bank without any reference to RBI. Hence in effect the packing credit advance may be repaid by proceeds from export of the same or another commodity to the same or another buyer. However, bank need to ensure that the substitution is commercially necessary and unavoidable.
Overdue Packing
5. Bank considers a packing credit as an overdue, if the borrower fails to liquidate the packing credit on the due date. And, if the condition persists then the bank takes the necessary step to recover its dues as per normal recovery procedure.
Preshipment Credit in Foreign Currency (PCFC)
3. Authorised dealers are permitted to extend Preshipment Credit in Foreign Currency (PCFC) with an objective of making the credit available to the exporters at internationally competitive price. This is considered as an added advantage under which credit is provided in foreign currency in order to facilitate the purchase of raw material after fulfilling the basic export orders.
The rate of interest on PCFC is linked to London Interbank Offered Rate (LIBOR). According to guidelines, the final cost of exporter must not exceed 0.75% over 6 month LIBOR, excluding the tax.
The exporter has freedom to avail PCFC in convertible currencies like USD, Pound, Sterling, Euro, Yen etc. However, the risk associated with the cross currency truncation is that of the exporter.
The sources of funds for the banks for extending PCFC facility include the Foreign Currency balances available with the Bank in Exchange, Earner Foreign Currency Account (EEFC), Resident Foreign Currency Accounts RFC(D) and Foreign Currency(NonResident) Accounts.
Banks are also permitted to utilize the foreign currency balances available under Escrow account and Exporters Foreign Currency accounts. It ensures that the requirement of funds by the account holders for permissible transactions is met. But the limit prescribed for maintaining maximum balance in the account is not exceeded. In addition, Banks may
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arrange for borrowings from abroad. Banks may negotiate terms of credit with overseas bank for the purpose of grant of PCFC to exporters, without the prior approval of RBI, provided the rate of interest on borrowing does not exceed 0.75% over 6 month LIBOR.
Packing Credit Facilities to Deemed Exports
4. Deemed exports made to multilateral funds aided projects and programmes, under orders secured through global tenders for which payments will be made in free foreign exchange, are eligible for concessional rate of interest facility both at pre and post supply stages.
Packing Credit facilities for Consulting Services
5. In case of consultancy services, exports do not involve physical movement of goods out of Indian Customs Territory. In such cases, Preshipment finance can be provided by the bank to allow the exporter to mobilize resources like technical personnel and training them.
Advance against Cheque/Drafts received as advance payment
6. Where exporters receive direct payments from abroad by means of cheques/drafts etc. the bank may grant export credit at concessional rate to the exporters of goods track record, till the time of realization of the proceeds of the cheques or draft etc. The Banks however, must satisfy themselves that the proceeds are against an export order.
Drawing Power
Drawing Power is the amount of Working Capital funds the borrower is allowed to draw from the Working Capital limit allotted to him. Because the working capital limit is usually allotted to a borrower against security of Stock and Book Debts, the amount of funds a borrower is allowed to draw is calculated by considering the total value of Stock plus total value of Book Debts for the month after deducting the margin. Margin is the component of funds raised from long term sources such as Share Capital and Term Finance (Long Term Loans). It is for this purpose that the borrower must regularly submit Stock and Book Debts Statement and Statement of Trade Creditors.
Drawing Power is calculated on the stock and book debt by reducing the margins as per banks norm. Drawing Power calculation sounds to be simple by definition. but it requires number of adjustment to be made before arriving at real Drawing Power of borrowers.
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Three Important Sources of Short-Term Financing
Important sources of short term financial planning are as follows:
First of all short-term financial planning must make a forecast of future cash flows. It has two
objectives – first, to decide whether the company will have surplus cash or cash deficit; and
second, whether it is of temporary or permanent nature. Firms normally examine cash flow at
quarterly intervals.
In nutshell, a company may require short-term financing on account of seasonality, negative
cash flows, and positive cash flow shocks.
Short-Term FinancingBank Loans Commercial Paper Secured financing
Following are the sources of short-term financing:
1. Bank Loans:
For short-term financing need of a small business, commercial banks are a good choice.
Banks provide three kinds of loans – Single, End-of-period Payment Loan (firms pay fixed or
variable interest on the loan and payback the principal sum in lump sum at the end of the
loan); lines of credit (a bank agrees to lend a company any amount up to a stated maximum –
it may be committed or uncommitted line of credit.
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In India the line of credit is usually in the form of cash credit and banks charge interest only
on the actual balance utilized; and floating charge is created in favor of the bank); and bridge
loans (to bridge the gap until a firm can arrange for long-term financing – the lender deducts
interest in the beginning from the loan proceeds). If the loan amount is too large for a single
bank, the loans may be arranged by one or more lead banks from a syndicate of banks, known
as syndicated loans.
2. Commercial Paper:
It is a short-term, unsecured debt used by large companies, and is cheaper than a short-term
bank loan. The average maturity of commercial paper is 30 days and the maximum maturity
is 270 days. Commercial paper may be direct paper (firm selling security directly to
investors) or dealer paper (dealers selling for a fee for their services).
In the US the minimum face value is $ 25,000 and most commercial paper has a face value of
minimum $ 1, 00,000. The Reserve Bank of India has introduced commercial papers in India
in 1989. Highly rated companies (with a minimum rating of P2 from rating agencies) can
issue commercial paper in India. Maturity period ranges between 15 days and 1 year.
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3. Secured Financing:
Firms obtain secured loans by providing accounts receivables or inventory as collateral
security. Accounts receivables may be used as a security by pledging (the lender decides
which invoices to select, some 75% money is given and in case of default by customers, the
firm shall be responsible) and factoring (firm sells receivables to lender and lender firm
agrees to pay to the firm the amount due minus factoring fee at the end of firm’s payment
period). A factoring arrangement may be with recourse (lender to take money from the
borrower if the customers default) and without recourse (lender to bear the bad
debts).Citibank Factors and SBI Factors are two leading players
Inventory can be used as a collateral for a loan in three ways — Floating Lien (a higher
interest rate is charged as the value of inventory may dwindle); Trust Receipt (Selected
inventory items are held in a trust as security for the loan – As items are sold, the borrower
remits the proceeds to the lender in repayment); and Warehousing Arrangement (least risky
collateral arrangement).
The warehousing arrangement may be to use public warehouse (goods stored in a warehouse
owned by a firm meant only for this purpose, goods can be taken out only on the permission
from the lender); and a field warehouse (operated and controlled by a third party but is set up
on the borrower’s premise in a separate area).
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WORKING CAPITAL CYCLE OF JINDAL SAW LTD
Through the Annual Report 2012-13
WCC = Inventory conversion period + Receivables conversion period – Payables conversion
Period
= Avg. Inventory × 365 + Avg. Receivables × 365 _ Avg. Payables × 365
COGS Sales Inc. in inventory + COGS
1. Inventory Conversion Period
Average Inventory = Opening Inventory + Closing Inventory / 2
= 147110.52 + 180350.25 / 2
= 163730.385
COGS = All Manufacturing Expanses = 469002.99
= 163730.385 × 365 = 127 days
46002.99
2. Receivables Conversion Period
Average Receivables = Opening Receivables + Closing Receivables / 2
= 123857.01 + 128962.17 / 2
= 12649.59
Sales = 561669.84
= 12649.59 × 365 = 82 days
561669.84
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3. Accounts payable Conversion period
Average Ac. Payables = Opening Payables + Closing Payables / 2
= 43688.85 + 46876.30 / 2
= 45282.575
Increase in Inventory = 23080.49
COGS = 469002.99
= 45282.575 × 365
23080.49 + 469002.99
= 33 days
Working Capital Cycle = 127 days + 82 days – 33 days
= 176 days
= 5 months 26 days.
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LAST FOUR YEARS OF WORKING CAPITAL CYCLE OF JINDAL SAW LTD.
Year Inventory Conversion
Period
(A)
Receivables Conversion
Period
(B)
Payables Conversion
Period
(C)
Working Capital Cycle
(A + B - C )
2009-10 93 Days 53 Days 20 Days 126 Days
2010-11 137 Days 88 Days 30 Days 195 Days
2011-12 148 Days 89 Days 29 Days 208 Days
2012-13 127 Days 82 Days 33 Days 176 Days
Jindal Saw Ltd.
Years
Working Capital Cycle
in Months2009-10 126 Days
(4 Months 6 Days)
2010-11 195 Days
(6 Months 15 Days)
2011-12 208 Days
(6 Months 28 days)
2012-13 176 Days
(5 Months 26 Days)
Four Years Analysis
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2009-10 2010-11 2011-12 2012-130
50
100
150
200
250
126
195208
176
Chart Title
Series1
ANALYSIS
It can be analysed from the above graph that the working capital cycle was of minimum days in the year 2009-10 and it was of maximum days in the year 2010-11.
In the year 2012-13 the working capital cycle was of 176 days which is of fewer days than its previous year and it is a good sign of working capital management system in the company.
FINDINGS
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The Company is India’s most diversified manufacturer and supplier of pipe products for the energy, water industry and other industrial applications.
Their customers include most of the world’s leading oil and gas companies, municipal corporations as well as engineering companies engaged in constructing oil and gas gathering, water transportation system, power and automobiles facilities.
Their principal products include (a) large diameter SAW pipes (Longitudinal Submerged Arc Welded (LSAW) and Helically Submerged Arc Welded (Spiral/ HSAW), (b) Seamless Tubes, and (c) Ductile Iron (DI) pipes.
Company’s manufacturing facilities are located in various parts in western, northern and southern part of India.
They are one of the largest global producers of Ductile Iron pipes with manufacturing facilities in India, UAE and Europe.
As at 30th Sep 2013, Net debt of the Company (standalone) was app. Rs 36,400 mio (app. USD 588 mio.) including ECB/ long term loans and fund based working capital and other unsecured loans.
The current order book includes export of app 25%. The major exports orders are from Middle East, Gulf region and South East Asia and Far East.
They have got major share in the Market. Company have location advantage as their competitive advantage. Company’s major competitors are Welspun Corp, Mahrashtra Seamless, Ratnamani
Metal & APL Apollo. The working capital cycle was of minimum days in the year 2009-10 and it was of
maximum days in the year 2010-11. In the year 2012-13 the working capital cycle was of 176 days which is of fewer days
than its previous year and it is a good sign of working capital management system in the company.
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BIBLIOGRAPHY
www.jindalsaw.com
www.iifl.com
Annual Reports of the company.
http://www.jsw.in/organisation
Data Given by Management.
.
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