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CHAPTER-1 INTRODUCTION
1.1 Introduction of the study
Working capital management (WCM) is the management of
short term financing requirement of firm. This includes maintaining
optimum balance of working capital components receivable, inventory
and payables and using the cash efficiently for day-to-day operations.
Optimization of working capital balance means minimizing the working
capital requirements and realizing maximum possible revenues. Efficient
WCM increase firms free cash flow, which in turn increases the firms
growth opportunities and return to shareholders. Even though firms
traditionally are focused on long term capital budgeting and capital
structure, the recent trend is that many companies across different
industries focus on WCM efficiency.
Empirical result shows that ineffective management of working capital
management is one of the important factors causing industrial sickness.
Modern financial management aims at reducing the level of current
assets without ignoring the risk of stock outs. Efficient management of
working capital is thus an important indicator of sound health of an
organization which requires reduction of unnecessary blocking capital of
in order to bring down the cost of financing. In the light of the above, an
attempt is made in this study to look into the working capital
management in iron mining industry.
of
working
capital
means
management
of
various
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selected
in
the
studying
THE
IMPACT
OF
WORKING
CAPITAL
Working capital is the life blood and nerve center of business. Working
capital is very essential to maintain smooth running of a business. No
business can run successfully without an adequate amount of working
capital. The main advantages or importance of working capital are as
follows:
1. Strengthen the short term solvency
Working capital helps to operate the business smoothly without any
financial problem for making the payment of short-term liabilities.
Purchase of raw materials and payment of salary, wages and overhead
can be made without any delay. Adequate working capital helps in
maintaining solvency of the business by providing uninterrupted flow
of production.
2. Enhance Goodwill
Sufficient working capital enables a business concern to make prompt
payments and hence helps in creating and maintaining goodwill.
Goodwill is enhanced because all current liabilities and operating
expenses are paid on time.
3. Regular supply of Raw Material
Quick payment of credit purchase of raw material ensures the regular
supply of raw materials from suppliers. Suppliers are satisfied by
payment on time. It ensures regular supply of raw materials and
continuous production.
4. Smooth business operation
Working capital is really a life blood of any business organization which
maintains the firm in well condition. Any day to day financial
requirement can be met without any shortage of fund. All expenses
and current liabilities are paid on time.
5. Ability to face crisis
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Study of Working capital is the most widely used and powerful technique
of financial analysis. The main objective of present study is to know the
financial condition of the company.
To analyze the investment in various current assets of the company.
To compute working capital ratios.
To compute profitability ratios.
To analyze the impact of working capital on profitability.
Secondary Data:
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The Secondary Data are those which have already collected and stored.
Secondary data easily get those secondary from records, annual reports
of the company etc. It will save the time, money and efforts to collect
data. The major source of data for this project was collected through
annual reports, profit and loss account of 4 years period & some more
information collected from internet and text sources.
Data analysis tools: Current ratio, Quick ratio, Return on total assets,
working capital turnover ratio, inventory turnover ratio.
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History
India is one of the earliest manufacturers and users of iron and steel in the
world. This is indicated from a number of references available in the annals
of metallurgical history. A survey of literature reveals many documentary
evidences, such as making of various surgical instruments in the 3 rd/4th
century B.C. by Sushrut, presentation of a gift of 30lb of Indian iron by King
Porus to Alexander the great on the bank of Jhelum (around 326 B.C.) and
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the use of different weapons in various shapes and sizes in the ancient
tomes.
The first signs of use of iron come from the Sumerians and the Egyptians,
where around 4000 B.C., a few items, such as the tips of spears, daggers and
ornaments, were being fashioned from iron recovered from meteorites.
Because meteorites fall from the sky some linguists have conjectured that
the English word iron (OE isem), which has cognates in many northern and
western European languages, derives from the Etruscan aisar which means
the god.
Summary
India is one of the leading producers of iron ore, with estimated total
resources of over 28.5 billion tons (bt) of hematite (Fe203) and magnetite
(Fe304) taken together. Of the 294 iron ore mines in 2012, compared to 336
in 2010, 34 were in public sector while the remaining 260 were owned by
private firms in 2012. In 2013, production was estimated at 142.9 million
tons (Mt), which is expected to increase to 284Mt in 2020 growing at
compound annual growth rate (CAGR) of 7.4%. Simultaneously, iron ore
consumption over the forecast period (2014-2020) is projected to increase to
238.3Mt in 2020.
Indian scenario
India is an important producer of iron ore in the world contributing more than
7% of the production and ranking fourth in term of quantity produced
fallowing China, Brazil and Australia. As per UNFC system (United Nations
Framework Classification) as on 1.4.2005, India possesses total hematite
resources of 14630 Mt of which 7004 Mt are reserves and 7626 Mt are
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Future Scenario
Total reserves of iron ore in India, including magnetite have been estimated
at approximately 17 billion tons. Fortunately, ores are of a fairly good quality.
Current Scenario
Indias iron ore exports have gone down by 28.16% during April-December of
the current fiscal to 11.17 Mt as gloom continues over the sector due to the
regular scenario mineral industries. India, once the third largest exporter of
iron ore, had exported 15.55 Mt of the mineral in the corresponding period of
last fiscal, data released by Federation of Indian Mineral Industries (FIMI)
showed. We expect the situation to continue as long as government policy
does not change.
Indian iron ore exports have been hurt badly in last few years due to mining
bans in Goa and Karnataka, which led to drastic fall in domestic production
as well. Increase in export duty to 30 percent on both types of iron ore,
lumps and fines, in December 2012, had also impacted the sector.
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Presently, low grade iron ore (or fine) are being exported from Odisha,
Jharkhand, Rajasthan and Madhya Pradesh as mining is still banned in Goa.
Export of mineral is not permitted from Karnataka at present.
The Goa government had issued a notification to sell about 15 Mt iron ore
through exports, as per a Supreme Court order. However, none of it is
expected to be exported.
Industry is estimating that Indias total iron ore production in the present
fiscal will be around 140 Mt, almost the same last year.
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ISO 9001: 2008 - QMS Certification for all its iron ore mines and R&D
Centre
Strong back up of an ISO 9001 certified R&D Centre, which has been
declared as the "Centre of Excellence" in the field of mineral processing by
the Expert Group of UNIDO.
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NMDC has made valuable and substantial contribution to the National efforts
in the mineral sector during the last five decades and has been accorded the
status of schedule-A Public Sector Company. In recognition to the Company's
growing status and consistent excellent performance, the Company has
been categorized by the Department of Public Enterprises as "NAVRATNA"
Public Sector Enterprise in 2008.
Results
2011-12
2012-13
2013-14
Ore
27.26 MT
27.18 MT
30.02 MT
Sales
27.30 MT
26.27 MT
30.50 MT
Income
Rs 13,301 crore
Rs 13,127 crore
No.
5924 (31.03.12)
5777 (31.03.13)
5664 (31.03.14)
Iron
Production
(L+F)
Iron
Ore
(L+F)
of
Employees
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The story of NMDC is woven around the dreamy hills and the deep jungle
land of Bastar in Chhattisgarh, known as Dandakaranya from the epic
periods. The Bailadila iron ore range - "The hump of an ox" - in the local
dialect, was remote, inaccessible and replete with wild life. The range
contains 1200 million tonnes of high grade iron ore distributed in 14
deposits. The entire area was brought to the mainstream of civilization by
the spectacular effort of NMDC by opening-up of mines. Today, Bailadila is a
name to reckon with in the world iron ore market because of its super high
grade iron ore. Bailadila complex possesses the world's best grade of hard
lumpy ore having +66% iron content, with negligible deleterious material
and the best physical and metallurgical properties needed for steel making.
NMDC is presently producing about 20 million tonnes of iron ore from its
Bailadila sector mines and 10 million tonnes from Donimalai sector mines.
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The demand for steel will continue to grow in the years to come and this in
turn would call for increased demand for iron ore. NMDC is gearing itself to
meet
the
expected
increase
in
demand
by
enhancing
production
Foreign Venture: M/s NMDC has also prestigious foregin venture also
such as:
Exploration of gold in Madagascer.
Exploration of gold in Tanzania.
Exploration of diamond in Namibia.
India is in 4th place among twenty top crude steel producing countries in
world in previous years. Still India keeps its place in global market.
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Turnover
operation)
Cash profit
Net profit
Total assets
Net worth
Rs. 75.62
Rs. 16.19
27%
21%
Dividend
Interim
300%
l
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550%
ll
..
Final
30.47 Tonnes
(Iron Ore)
The saga of NMDC includes the pioneering exploration activity carried out for
developing iron ore mines in Karnataka in various regions like Kudremukh,
Donimalai, Bababudan, Kumaraswamy and Ramandurg. NMDC developed the
Donimalai mine in this area to export ore to Japan and South Korea . ISO
9002 Certification awarded in February, 1999.
Commissio
ned:
Average
October, 1977
+ 65% Fe
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grade:
Balance
reserves:
Product:
Capacity:
Port of
Export:
No. Of.
Employees
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scientific
quality
management
systems
through
active
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3.
4.
5.
6.
7.
1. Personnel department
Establishment section:
This section deals with
attendances
particulars
of
employees,
2. Mining department
This is very big department consisting of 202 staff consisting workmen,
junior officer, executive headed by DGM. Mining, heavy earth moving
machineries are run in the field, records, conducting weekly meetings deals
by this department. The main aim is to achieve quality production with
available resources in fixed time. Maintenance and services are also taken
care by this department.
Plant divisions:
Plants in NMDC, DIOM divided into 3 i.e. crushing plant where ore is
crushed, screening plant where ore is screened and loading plant
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where ore is loaded into wagons. The plant mechanical aspects headed
by charges of respective plants.
Service division:
This department mainly deals with the electrical work of the township
i.e. wiring, attending to the complaints, taking care of sub stations etc.
3. Material department
This department is divided into 3 department i.e. purchase section, stores
section and inventory control section.
Purchase section:
This section deals with purchase of required items for the project. The
purchase are made on the basis of issue of limited tender enquires and
receiving quotations, scrutiny of offers by committee, placing order
etc.
Stores section:
The stores section is divided into 2 i.e. Main stores and Valley stores
(sub store). The main stores deals with maintaining stock of heavy
earth moving equipments i.e. spares, parts etc., maintaining of
records etc., the valley stores also deals with keeping stock of spares
and materials etc.
Inventory control:
This section deals with maintaining records of items according to value,
code vendor etc. this section also deals with the items of moving and
non-moving nature.
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Mission:
To emerge as a global environment friendly mining organisation with International
Standards of excellence, rendering optimum satisfaction to all its stake holders.
Quality Policy:
Donimalai iron ore mine, an operating unit of NMDC Ltd, is committed to
achieve sustained consistency in quality of iron ore mined, processed and
produced
by
adopting
and
continually
improving
scientific
quality
Promoters:
Central government of India (90%).
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Production
Iron ore
(lakh tonnes)
Sponge iron
Achievement
2012-13
2013-14
% of change
271.84
300.25
10.45%
36289.00
29734.36
(-)18.06%
(tonnes)
Unit
Statutory Auditors
o
1
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Chartered Accountants
Vizag office
Donimalai
Panna
Infrastructure
Construction of roads and bridges.
Electrification of home lights & public buildings.
Construction of house for slum dwellers.
Provision of drinking water.
2. Health care
Free medical treatment at project hospitals.
Medical camps.
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2.7 Competitors
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Weakness
Geographically remote location of the projects acting as deterrent in
attracting and retaining talent and also for reaching supplies and
services.
The Company has not diversified into other sector. As such, any
adverse impact on the mining sector hits the profitability of the
Company.
Opportunities
Continue diversifying and expanding its mining activities and products.
Expand and establish its presence as an integrated producer of iron
and steel.
Continue to be a low cost, efficient and environmentally friendly mining
Company.
Augment resources, improve infrastructure and enhance technology
through joint ventures and commercial tie-ups - the company seeks to
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Threats
Disturbances due to Maoists activities in Bailadila area.
Intense competition from private sector in securing fresh mining
leases, resulting in denial of leases in many cases and litigation
delaying actions. Inability to secure additional reserves of iron ore that
can be mined at competitive costs or cannot mine existing reserves at
competitive costs, profitability and operating margins may be affected.
Entry of MNCs and other Indian private companies into iron ore mining.
The industry being cyclic in nature, NMDC is exposed to sharp
fluctuations in demand for its products.
The Company faces risks in respect of high inventory of stocks and its
disposal.
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Nature of business.
Production policy.
Market condition.
Seasonal fluctuations.
Growth and expansion activities.
Operation efficiency.
Credit policy.
Sales growth.
Dividend policy.
Working capital
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Changes in sales
The changes in sales and operating may be either in the form of
increase or decrease. An increase in the volume of sales in bound to be
accompanied by higher level of cash, inventory and receivable, the
decline in sales has exactly the opposites effect a decline in the need
for working capital. A change in the operating expenses rises or decline
as similar effect as the level of working capital.
Policy changes
Technology changes
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Bank overdraft.
Cash credit.
Bills discounting.
Working capital loan.
Regulations of bank finance.
Tondon committee.
Chore committee recommendation.
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Page 39
CA
CA
FA
TA
EBIT =
ROI
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4.1.1
showing
investment
in
various
current
assets.
(Amount in crores)
Particulars/years
2011
2012
2013
2014
CURRENT ASSETS
Inventories
Trade receivables
Cash
and
bank
28.02
16.42
10.59
68.67
468.31
1.44
133.23
489.87
3.53
97.97
904.33
5.20
balances
Short-term
loans
20.55
127.47
142.48
43.57
and advances
Other
current
0.012
0.026
0.051
75.58
665.90
769.14
1051.12
assets
Total
current
asset
Amount in crores
1200
1000
800
600
400
200
0
2011
2012
2013
2014
Years
4.2.1
showing
Net
working
capital
(Amount in crores)
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Particulars/years
2011
2012
2013
2014
CURRENT ASSETS
Inventories
Trade receivables
Cash
and
bank
28.02
16.42
10.59
68.67
468.31
1.44
133.23
489.87
3.53
97.97
904.33
5.20
balances
Short-term
loans
20.55
127.47
142.48
43.57
and advances
Other
current
0.012
0.026
0.051
75.58
665.90
769.14
1051.12
94.57
92.54
97.80
204.40
103.04
211.63
124.32
216.35
Total current
187.12
302.21
314.67
340.67
liabilities(B)
NET WORKING
-111.54
363.69
454.47
710.45
assets
Total current
asset(A)
CURRENT
LIABILITIES
Trade payable
Other
current
liabilities
Short
term
provisions
CAPITAL(A-B)
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Amount in crores
800
700
600
500
400
300
200
100
0
-100
-200
2011
2012
2013
2014
Years
Interpretation:
From the above analysis in the year 2011 there is negative working capital.
Negative working capital means that the business currently is unable to
meet its short-term liabilities with its current assets. Therefore, an immediate
increase in sales or additional capital into the company is necessary in order
to continue its operations.
From the year 2012 onwards there positive working capital and it has been
increasing. Positive working capital means that the business is able to
pay off its short-term liabilities. Also, a high working capital can be a signal
that the company might be able to expand its operations.
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Table
Current Assets
Current Liabilities
4.3.1
showing
current
ratio
(Amount in crores)
Years
Current assets
Current
(Amt in crore)
liabilities
Current ratio
2011
75.58
(Amt in crore)
187.12
2012
665.90
302.21
2.20:1
2013
769.14
314.67
2.44:1
2014
1051.12
340.67
3.08:1
.40:1
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Ratio
1.5
1
0.5
0
2011
2012
2013
2014
Years
Interpretation:
From the above analysis, the current ratio is less than 1 in the year 2011.
If current ratio is below 1 (current liabilities exceed current assets), then
the company may have problems paying its bills on time. However, low
values
do
not
indicate
critical
problem
but
should
concern
the
management.
From the year 2012 the current ratio is higher than 2:1 and has been
increasing which is considered as acceptable, because the higher the current
ratio is, the more capable the company is to pay its obligations.
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Quick assets
current liability
(Amount in
crores)
Year
Quick assets
Current
(current
liabilities
Ratio
assetsinventory)
2011
47.56
187.12
.25:1
2012
597.23
302.21
1.98:1
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2013
635.91
314.67
2.02:1
2014
953.15
340.67
2.80:1
Quick ratio
3
2.5
2
Ratio
1.5
1
0.5
0
2010.5
2011
2011.5
2012
2012.5
2013
2013.5
2014
2014.5
Years
Interpretation:
From the above analysis the quick ratio is less than 1 in the year 2011.
A quick ratio lower than 1:1 may indicate that the company relies too
much on inventory or other assets to pay its short-term liabilities.
From the year 2012 the quick ratio is 1.98 and is been increasing constantly.
If quick ratio is higher, company may keep too much cash on hand or have
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Page 47
(Amount in
crores)
Years
COGS
Sales
(total
(Iron ore)
Ratio
expensesselling
expenses)
Page 48
2011
411.06
1931.20
.21:1
2012
438.32
1911.47
.23:1
2013
987.09
2736.56
.36:1
2014
1057.75
3140.07
.34:1
20%
32%
2011
2012
2013
2014
Interpretation:
Low inventory turnover ratio is a signal of inefficiency, since inventory
usually has a rate of return of zero. It also implies either poor sales or excess
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Page 50
Sales
Sundary Debtor ' s
(Amount in
crores)
Years
Sales
Debtors
Ratio
(Trade
Receivables)
2011
1931.19
468.31
4.08
2012
1911.47
1642.46
1.18
2013
2736.56
489.87
5.59
2014
3140.07
904.33
3.47
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3
2
1
0
2010.5
2011
2011.5
2012
2012.5
2013
2013.5
2014
2014.5
Years
Interpretation:
A high receivables turnover ratio implies either that the company
operates on a cash basis or that its extension of credit and collection of
accounts receivable are efficient. Also, a high ratio reflects a short lapse of
time between sales and the collection of cash, while a low number means
collection takes longer.
The lower the ratio is the longer receivables are being held and the risk to
not be collected increases. A low receivables turnover ratio implies that
the company should re-assess its credit policies in order to ensure the timely
collection of credit sales that is not earning interest for the firm.
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(Amount in
crores)
Year
Net sales
Net working
Ratio
capital
(As per table
2011
1931.19
4.2.1)
-111.54
2012
1911.47
363.69
5.26
2013
2736.56
454.47
6.02
2014
3140.07
710.45
4.42
-17.31
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Ratio
2011
5.26
6.02
2012
2013
4.42
2014
-5
-10
-15
-17.31
-20
Years
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Net Profit
100
Net Sales
(Amount in
crores)
Years
Net profit
Net sales
Percentage
2011
1527.28
1931.19
79.08%
2012
1442.15
1911.47
75.44%
2013
1789.71
2736.56
65.40%
2014
2155.35
3140.07
68.64%
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Percentage
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
2010.5
2011
2011.5
2012
2012.5
2013
2013.5
2014
2014.5
Years
Interpretation:
The profit margin ratio directly measures what percentage of sales is made
up of net income. In other words, it measures how much profits are produced
at a certain level of sales.
This ratio also indirectly measures how well a company manages its
expenses relative to its net sales. That is why companies strive to achieve
higher ratios. They can do this by either generating more revenues why
keeping expenses constant or keep revenues constant and lower expenses.
Since most of the time generating additional revenues is much more
difficult than cutting expenses, managers generally tend to reduce spending
budgets to improve their profit ratio.
Like most profitability ratios, this ratio is best used to compare like sized
companies in the same industry. This ratio is also effective for measuring
past performance of a company.
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Workingcapital leverage=
Current Asset
Total Asset ( Current Asset )
Page 57
Particular
Current
2011
2012
2013
2014
88.54
678.92
781.35
1082.89
240.52
1640.07
175.79
201.75
329.06
842.99
957.14
1284.64
1527.28
1442.15
1789.71
2155.35
assets
Net fixed
asset
Total asset
Earning
before tax
(Amt in crores)
Years
Current
Asset(CA)
Total Asset(TA)
+ CA
Working
capital
(= TA + .20*CA)
leverage
2011
2012
2013
88.54
678.92
781.35
346.77
978.77
1113.41
CA
TA + CA
.25
.69
.70
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2014
1082.89
1501.22
.72
Graph 4.5 showing working capital leverage assuming 20% increase in
current asset
Working capital leverage
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
0.7
0.69
0.72
0.25
2011
2012
2013
2014
Years
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