CHAPTER-1

INTRODUCTION

1.1 INTRODUCTION

It can not be denied that the country, which has an intention of economic progress,
must be wedded with the doctrine growth and etc. Indian agriculture will continue to be the
mainstay of Indian economy in the foreseeable future. In spite of rapid growth of industrial
and service sector, agriculture still accounts for about one third of employment in the country.
In addition to ensuring continued food security for the population of nearly a billion,
agriculture determines the living standard of rural mass.

Food Security- Permanent Objectives:

India is a vast country with rapidly increasing population, one third of which lives
below the poverty line. Adequate quantities of food grains need to be made available to them
at affordable prices. Supplies to others with limited incomes also have to be at a reasonable
price.

Increasing food needs can not be meet though import as there involve enormous
risks in terms of availability, high prices, huge foreign exchange out go and even exploitation
in the world market. Hence there was the feelings and need for increasing domestic
production to facilitate assured and interrupted supply at low cost.

Vital Role of Fertilizer:

The supply of land available for agriculture is not only limited conversation of
forestland is no longer sustainable but also dwindling increasing housing, industrial and
urban needs must be met-cultivation has to become more intensive.

In view of very limited scope for increasing land area under cultivation, pre dominant
share of the required increase in food grains production has to come from in productivity.
This turn, is only possible by increasing supply of essential plant nutrients-Nitrogen
Phosphate and Potash-through application of chemical fertilizers.

PARADEEP PHOSPHATES LIMITED

BIRTH OF A GIANT

In mixed economy both public private sectors undertakings play vital roles
separately. But the constitution made by public sector undertaking can be distinguished well.
December 241981 witnessed the birth of a giant phosphate plant on the Indian subcontinent
with the incorporation of PARADEEP PHOSPHATES LIMITED popularly known as PPL.
The company was entrusted with the gigantic task of putting up Asia’s largest DAP fertilizer
technology and promises an area of prosperity for the farmers of our country.

BACKGROUND

Paradeep phosphate Limited (PPL) was established in December 1981 for setting a
phosphetatic fertilizer complex at Paradeep. Its Authorized is Rs.120 cores. In May 1982,
Island Republic of Nauru entered into an agreement with Govt. of India for 40% equity
participation subsequently, during 1986, Govt. of India’s share was reduced to 51% and Govt.
of Nauru’s share increased on 49%. The agreement also envisaged debt equity ration of 2:5:1.

PPL is one of the major Industries set up in Orissa with an investment of 630.82
cores. The cost of the PPL project considerably increased from the original estimate of
Rs.386.77 cores in 1982 The increase was mainly due to the substantial change in the project
profile, foreign exchange fluctuation, increase in debt servicing burden and delay in project
implementation. The company has been passing through extreme difficulties since beginning
due to reason beyond its control.

LOCATION

While the corporate office of PPL is located at Bhubaneswar and Marketing division
at New Delhi, Chandigarh, its manufacturing unit is located at Paradeep of Orissa. As
selection the plants site location is an important factor of success of any organization. The
location of the large Phosphate plant was recommended at Paradeep due to various reasons.
PPL is situated close to Taladanda irrigation canal and near to this Paradeep port which is 90
km last of Cuttack, with deep breathing facilities capable for landing of large ships of
40000MT to 50000Mt and with proper provision for fast unloading, freight of rock,
Phosphate and sulphur could be received considerably. Presently a channel is on progress to
extend the landing of ships up to the inside of the plant and which will benefit a lot to the
company in future some geographical factors which are favorable for the location of the plant
at Paradeep are is:-

+ Availability of necessary infrastructure facility

+ To obtain ammonia from either inland or through imports
+ Convenient location for production distribution in eastern & central zone

PPL plant is located in close proximity to a major port with 12 meter draft which enables
the company to bring in its requirements of about 1.5 million tones of imported raw material
in bigger shipment with considerable freight advantage.

a) The site is located near the broad gauge Paradeep Railway Station and is most
convenient for the transportation of goods by rail.
b) The site is well connected by road.
c) The site is close to Taladanda canal which meters the present fresh water requirement
and could meet the future requirement of the Industrial Complex.

The Corporate Mission

PPL’s mission is to manufacture and market fertilizers, chemicals and their by

products efficiently and economically and provide the farmers and other customers with
quality products and services to the benefit of national economy.

Committed to strengthening and promoting the economy of modernization Indian

agriculture and using an era of self-sufficiency in phosphate fertilizers PPL is pledged to
make available to the farmer quality DAP at the right time at the right price and at the door
steps.

1.2 OBJECTIVES OF THE STUDY:

WORKING CAPITAL MANAGEMENT:

 Investment in current assets represents a substantial portion of total investment.
Working capital is the amount funds necessary to cover the cost of operating the enterprise.
Funds deployed for short term are mainly for working capital or operational purposes
.Towards the day-to-day operation , a firm will have to provide money forwards the purchase
of raw materials, payment of wages and salaries , to extend credit to buyer of goods as well as
to meet other day-to-day obligation .It is really connected with the management of current
assets . The most important thing is to look at the entire set of funds that is invested in current
assets and look at it from the point of view are committed for maximizing production.

The challenging needs for working capital, whether in the form of stocks or
inventories or financing current assets, to meet the contingencies and to maintain the come to
influence the decision about the quantum and structure of working capital and its utilization.
Some of these factor, which come to influence the decision about the quantum and structure
of working capital and its utilization. Some of these factors arise from the mode of operation
of the economy, such as licensing procedure, the system of import allocation and distribution
policies. These also influence the volume of working capital that a company or a firm is
obliged to maintain.

Working capital planning should really form an integral part of the total corporate
planning process, particularly the long term financial plan of the firm. As issues in corporate
planning are beyond the scope of this studies, we shall limit our discussion here to the
planning and control of various forms of current assets. We have seen that the current assets
would take the form of cash and bank balance, investment in short term security, inventories
and sundry debtors. All these are major and critical area, which need careful planning.

The conceptual overview of decisions concerning current assets and current liabilities
was in keeping with an objective maximizing the overall value of the firm. Once decisions
are reached concerning these areas, the level of working capital, by definition, is also
determined.

That working capital is not determined in any active decision sense but fails out as residual
from the decisions just named. Thus, working capital current assets less current liabilities
have no economic meaning in the sense of implying some type of normative behaviour.
Accordingly to this line of reasoning, it is largely on accounting artifact. The term describes a
category of management decisions affecting specific types of current assets and current
liabilities .In turn, those decisions should be rooted in the overall valuation of the firm.

In the above back drop, the following objectives have been designed for the
systematic study.
1. To study the trends and the theoretical framework of the working capital.
2. To assess the impact of working capital finance under study.
3. To analyze and interpret the responsiveness of working capital finance during
the period of the study.
 4. To evaluate the cost consciousness and financial performance of the unit for the
period under consideration, and,
5. To suggest some remedial measures, if any, to improve the overall
performances.

1.3 SCOPE OF THE STUDY:

The present study is concentrated on the need, importance and responsiveness of

working capital finance on the public sector steel industry of India. Specifically, PARADEEP
PHOSPHATES LIMITED (PPL) has been chosen, is an integrated public sector fertilizer
plant of the country. However, to make the study more result oriented and facilitating
comparison at times, the information relating to other public sector as well as private
fertilizer plants is referred .It is pertinent to note that, the PPL so selected for the study will
be representative in character and throw some light for the other units of the industry.

The scope of working capital finance is very wide and broad based. It encompasses
within its fold the entire business operation. For theoretical understanding definition of
working capital needs, types,

sources, factors, theory of financing , bank financing , committee reports come under
the purview of present study along with type of decision involved in working capital
financing .For analytical and technical study, tools and techniques such as funds flow
statement , ratio analysis , permissible bank finance and their interpretation are included for
the study.

1.4 RESEARCH METHODOLOGY:

In order to draw some valuable conclusions it is decided to adopt appropriate

statistical techniques and principles at different parts of the work. The present study
covers six years, 2006-07 to 2011-12. The data so collected have been analyzed with the
help of different statistical tools like percentage analysis, ratio analysis, averages ,
standard deviations, co-efficient of correlation, regression analysis etc. .Diagrammatic
and graphic presentations are used in financial analysis.

Sources of Data

The present study is basically an impact study of responsiveness of working capital

finance on the economic performance mainly on the liquidity, profitability, solvency and
other parameters of the Paradeep Phosphates Limited.

The data required for the study has been collected from secondary sources and some
data from primary sources .All the published as well as unpublished information relating
 to PPL as a whole from annual reports, yearly statistics, financial performances report,
performances review, journals, reports and different books have been collected and used
in order to arrive at suitable decisions.

1.5 LIMITATIONS OF THE STUDY:

The present study is mainly based on the secondary data as published by the Para
deep Phosphates Limited .The study safely depends on the financial data obtained from
annual accounts of PPL for a period of only six years, 2006-07 to 2011-12. The data collected
from the above sources are not of detailed nature. The limitation of techniques used for
analyze could not be avoided and the impact of the limitation is felt well in the study. Hence,
after proper investigation the result may be used for any purpose.

1.6 ORGANISATION OF THE STUDY:

The entire study has been divided in to five chapters. Chapter-1 the introductory
chapter gives an overall idea about the present study.

Chapter-1 is basically devoted to analyze the historical growth of steel industry in

general and Paradeep Phosphates Limited particular.

Chapter-2 of the study deals with the review of theoretical literature of working
capital and methodological foundation in brief.

Chapter-3 is aimed at reviewing the responsiveness of working capital finance of

Fertilizer industry in India with particular references to PPL .

Chapter-4 is purely an analytical discussion of the working capital finance in PPL.

Chapter-5 conclusion
 CHAPTER-2

FERTILZER SCENARIO

& PPL

2.1 INTRODUCTION

Paradeep Phosphates Limited (incorporated in 1981) is a premier fertilizer company

engaged in manufacturing and marketing of complex phosphoric fertilizers. The company
was initially commissioned as a joint venture between Government of India and Republic of
Nauru and subsequently, in 1993 it was changed into a wholly owned Government of India
Enterprise. After disinvestment by Government of India in February 2002, the management
of the company is presently with the fertilizer majors - Zara-Chambal Group and OCP of
Morocco.
PPL produces about 1.2 million metric tones of DAP and other complex fertilizers annually.
The plant also produces intermediary products like Phosphoric Acid and Sulphuric Acid,
which are critical raw materials in the manufacture of phosphate fertilizers. The plant, located
in the port town of Para deep in the district of Jagatsinghpur in Orissa, has an installed
capacity of 7,20,000 metrictoness per annum of DAP (2,400 metric tons per day). PPL is one
of the largest integrated DAP plants in India. With a market share varying around 13%, it has
a strong presence in the complex fertilizer market - its products marketed under the popular
NAVRATNA brand represent a combination of multiple nutrients like Nitrogen, Phosphorus,
Potash and Sulphur etc. PPL’s range of products cater to almost all agricultural applications.
With a stellar turnaround, PPL is a case study in favour of privatization. The company’s focus
on performance and continuous efforts towards development are reflected in the FAI Awards
for Improvement in Overall Performance of the company in 2002-03, 2005-06, 2008-09 and
the Best Technical Innovation in the year 2005 - 06. PPL received the ISO 14001: 2004
certification in May 2006 for good environment management systems, reflecting the fact that
along with technical advancement, the company also values maintaining and working
towards a clean and safe environment.

2.2 FERTILIZER PRODUCTION

Production of nitrogen declined from 8.77 million tones during 2009-10 to 8.59
million tones during 20010-11 , a reduction of 180 thousand tones . This was despite the full
year contribution from the Oswald chemicals and Fertilizers plant at Shahajahanpur
commissioned in November 2009. The drop in production was the result of disruption
problems faced by some plants.

The production of ‘ppl also declined from 2.594 million ones in 2009-10 to 2.560
million tones during 2010-11 , a reduction of about 34 thousand tones. This was due to
various distortions in implementation of the ad hoc concession scheme leading to inadequate
realization from selling phosphetic fertilizers, on the other hand and delayed payment of
concretion amount , on the other thus , affecting production.

During April-September 2010, the C & f landed cost of imported phos acid and
ammonia was US $ 416.5 per tone and US $ 200 per tone respectively., which was more or
less the same as during the second half of 2009-10 .The price of phos acid in particular, was
maintained as a result of efforts by the users Consortium under the ages of FAI which
succeeded in securing from global suppliers, this price in respect of the requirements for the
entire year ending 31.3.2011.

At these levels, the reasonable farm gate cost of domestic DAP was working out to
about Rs:-11400 per tone. Together with the enhanced concession at Rs:-3000 per tone (after
the 6th July, 20010hike) the price to the farmer would have been about RS 84.00 per tone
which was significantly lower than about Rs:-10000 per tone in the previous year.

Despite these underlying favorable fundamentals, production and consumption of

phosphate was affected specially during Kharif 2010, primarily because the selling prices
were fixed at unrealistically low levels of Rs:-7400-7800 per tone in majority of the states.
The situation , however, improved during Rabi 2010-11 in view of the prices having been
fixed at realistic levels and their announcement before the commencement of the season.
.2.3 FERTILIZER SUBSIDY SCENARIO

The Union Budget for 2010-11 had provided for an allocation of RS 6148 cores towards
fertilizer subsidy which consisted of Rs 4500 cores on indigenous urea and Rs 1648 cores on
imported urea. As against the revised estimate for subsidy during the year was Rs 1350 cores
on imported urea.

Apart from covering requirements at the prevailing cost structure and selling prices on
likely production of about 15.8 million tones, revised estimate also subsumes some effect of
increase in the cost of production due to various escalations other than increase in
feedstock /fuel price July 2011. The latter was notified only in March 2011 and payments
made in May 2011 .Consequently, this impact would not have been reflected during 2010-11.

This lower subsidy on imported urea vis-à-vis the budget estimate, was mainly due to
lower quantum of imports during the year than in previous year, 2009-10, which was also the
basis for projection of the subsidy requirements.

The Union Budget of 2011-12 provides for an allocation of Rs 7190 cores towards
subsidy on urea which includes Rs 5240 cores on domestic production and Rs 1950 cores on
imported urea. The likely requirement of subsidy for (1) existing plants at cost structure prior
to recent hike in feedstock / fuel price (ii) additional subsidy to newly commissioned plants
of IFFCO-Aonla (expansion) and NFL-Bijapur (expansion) . (iii) Arrears on account of July
2011 feedstock /fuel price hike and (iv) impact of recent hike in feedstock/fuel price will be
about RS 6200 cores, thus leaving an uncovered gap of about Rs 1000 cores.

Moreover long pending revisions on account of various escalations and the need to
adequately compensate other elements of cost reasonably and necessary incurred , as well as
the impact of the likely changes under 7th Pricing /Recommendations of the HPC will require
corresponding adjustments in the subsidy out going during the year.

The revised estimate for concession on decontrolled P&K fertilizers for 2010-11 was
Rs 1674 cores which were lower than the Budget Estimate of Rs 2224 cores by
Rs 5550 cores. This was partly because of the lower consumptions of these fertilizers than
anticipated at the time of announcing the hike in for 2010-11 and partly, because of delay in
releasing payments due to the industry because of the procedural problems leading to throw
to the next year.

The budget for 2011-12 has made a provision of Rs 2000 core towards concession on
decontrolled P & K fertilizers which too will fall substantially short of likely requirements.
This not only does not take into account effect of increase in concession amount, 1.4.2011,
but also, fails to consider additional requirements due to increase in consumption beyond
base level of 2009-10.

The additional liability on account of need to compensate manufacturers of complex

fertilizers using captive amounts for steep hike in feedstock/fuel cost to maintain their
continued viability has also to be taken into account. It is hoped that suitable additional
provisions will be made during the course of year to facilitate timely payments to
manufacturers and prevent aggravation of liquidity problems.

2.4 CONCLUSION

Out review of developments in the fertilizer sector during 2010-11 and first half of
2011-12 brings out the substantial improvement on both the production and consumption
front during the current year. The momentum of recovery has, however, been stemmed during
the second half of 2011-12 arising primarily from delay concessions.

The constitutions of the high Powered Fertilizer Pricing Review Committee earlier
this year, is a welcome development. Its report / recommendations should go a long way in
developing a long-term, conducive and coordinated fertilizer policy. This augurs well for
ensuring continued health and growth of the industry.

The paper, however brings out certain disquieting developments such as steep
increase in prices of hydrocarbon feedstock, decision to put a cap on capacity utilization for
payment of subsidy under RPS, contemplated moves to reduce concession on Dap etc. these
would inevitably come in the way of maintaining viability of production.

The special problems of the manufacturers of SSP, AS, CAN and ACI have been
highlighted, in particular, the inequitable, unfair and discriminatory treatment meted out to
them in the overall policy dispersion. There is an urgent need to remove this distortion by
bringing these fertilizers at par with urea and complex phosphate fertilizers
including DAP.

Many of these problems can be tackled by bringing in a certain degree of transparency

in various exercises connected with formulation of the policy and its implementation .The
fertilizer industry needs to be involved so that the implications of various alternatives can be
assessed and industry’s view point effectively projected.

CHAPTER-3
 WORKING CAPITAL:

A THEORITICAL FRAMEWORK

3.1 INTRODUCTION

Working capital management concerned with the problems that arise in attempting to
manage the current assets, the current liabilities and the inter relationship that exists between
them. It is an integral part of the corporate planning process which gives consideration to the
planning and control of various forms of current assets. To measure the liquidity position of a
concern it is essential to analyze the working capital management of that concern. The
amount of working capital requirement of an enterprise reflects the solvency of the business.
In order to attain a reasonable margin of safety the current assets should be large enough to
cover the current liabilities.

Current assets are those assets which in the ordinary course of business can be
converted into cash within a short period of normally one accounting year which includes
cash in hand and bank balances. Bills receivables, Sundry debtors, Short –term loans and
advances , inventories, prepaid expenses and accrued incomes. Current liabilities are those
liabilities which are intended to be paid in the ordinary course of business within a short
period of normally one accounting year out of the current assets or the income of the
business. The basic current liabilities are accounts payable, bills payable, bank overdraft,
dividends payable, outstanding expenses, provision for taxation. The goal of working capital
management is an indicator of the financial soundness of an enterprise.

3.2 CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital gross concept and net concept. The term “gross
working capital” means the total current assets .The net working capital is the excess of
current assets over current liabilities.

3.3 TYPES OF WORKING CAPITAL

The working capital may divide into categories permanent working capital and
variable working capital .Permanent working capital may further divided into (a) Regular
working capital and (b) reserve Margin.

Regular working capital is the minimum amount of working capital required to ensure
circulation of current assets from cash to inventories, from inventories to receivables and
from receivables to cash and so on. Reserve working capital which may be provided for
contingencies that may arise at unstated periods such as strikes , rise in prices, depression
etc..
 Variable working capital is the amount of working capital which is required to meet
the seasonal demands and some special exigencies. Variable working capital can be further
divided as seasonal working capital and special working capital .The capital required to meet
the seasonal needs of the enterprise is called seasonal working capital .Special working
capital is that part of working capital which is required to meet special exigencies such as
launching of extensive marketing campaigns for conducting research etc.

3.4 WORKING CAPITAL RATIOS:

The ratio analysis is one of the most powerful tool of financial analysis .It is used as a
device to analyze and interpret the financial health of enterprise .A ratio is known as a
symptom like blood pressure the pulse rate or the temperature of an individual .It is with the
help of ratios that the financial statements can be analyzed more clearly and decisions made
from such analysis.

Ratio can be used with profit on measure the pulse of the working capital .The
following ratios can help us to diagnosed the working capital position of the enterprise. Such
ratios are usually called as measure of liquidity and profitability.

1. Current ratio

Current ratio may be defined as the relationship between current assets and current
liabilities. This ratio, also known as working capital ratio, is a measure of general liquidity
and is most widely used to make the analysis of a short term financial position or liquidity of
a firm.

Current assets include cash and those assets which can be easily converted into cash
within a short period of time generally, one year, such as marketable securities, bills
receivables, sundry debtors, inventories, work in progress, etc. Current liabilities are those
obligations which are payable within a short period of generally one year and include
outstanding expenses , bills payable, sundry creditors, accrued expenses , short-term
advances, income tax payable, dividend payable etc.

A relatively high current ratio is an indication that the firm is liquid and has the ability
to pay its current obligations in time as and when they become due. As a convention, the
minimum of 2.1 is refers to as a bankers rule of thumb or arbitrary standard of liquidity for a
firm

2. Acid test Ratio

Acid Test Ratio, also known as quick ratio is amore rigorous of liquidity than the
current ratio. Acid Text Ratio may be defined as the relationship between quick/liquid assets
are current liabilities. The quick asset indicates to cash life, likely to be turned into cash in a
short period of time can be include in the category of quick assets. The current liabilities
would include the payment, which is merely maturing immediately. The quick asset includes
current assets except closing stock.
 Usually a high acid test ratio is an indication that the firm is liquid and has the ability
to meet its current liabilities in time and on the other hand a low quick ratio represents that
the firm’s liquidity position is not good. As a convention, generally , a quick ratio of one to
one (1.1) is considered to be satisfactory.

3. Inventory Turnover Ratio:

The ratio is an index of the efficiency of stock management and production .It
measures the operating efficiency of the enterprise. The ratio is calculated by dividing the
cost of goods sold by the amount of average inventory at cost.

Inventory Turnover Ratio = (Cost of goods sold / Average Inventory at goods)

Inventory turnover ratio measure the velocity of conversion of stock into sales .
Usually a high inventory turnover indicates efficient management of inventory on the other
hand a low inventory turnover ratio indicates inefficient management of inventory. The norms
may be different for different firms depending upon the nature of industry and business
conditions .However, a study of the comparative or trend analysis of inventory turnover is
still useful for financial analysis.

4. Receivable Turnover Ratio:

Receivable turnover ratio indicates the number of times the value of debtors turnover
the more efficient is the management of debtors/sales or more liquid the debtors are.
Similarly low debtor turnover implies inefficient management of debtors /sales and less liquid
debtors. There is no rule of thumb which may be used as a norm to interpret the ratio as it
may be different from firm to firm depending upon the nature of business.

5. Average collection period:

The average collections period represents the average number of days for which a
firm has to wait before its receivables are converted into cash. It measures the quality of
debtor .Generally the shorter the average collections period the better is the quality of debtors
as a short collection period implies quick payment by debtors. If the collection period is short
the risk of likely bad debt will be reduced. The ratio is calculated by dividing total debtors by
sales per day. There is no rule of thumb, which may be used as a norm while interpreting this
ratio. For reference purpose credit of one month is considered desirable.

6. Payable Turnover Ratio:

The analysis for payables turnover ratio is basically the same as that of debtor
turnover ratio except in place of trade debtors. The trade creditors are taken as one of the
components of the ratio and in place average daily sales, average daily purchases are taken as
the other component of the ratio. Payables turnover ratio can be calculated in two forms.

Payable turnover Ratio = (Net Credit Annual Purchase / Average Trade Creditor)
 The ratio indicates the velocity with the creditors are turned over in relation to
purchase .Generally , higher the creditors velocity better it is or other wise lower the creditors
velocity, less favorable are the results.

7. Average Payment Period:

The average payment period ratio represents the average number of days taken by the
firm to pay its creditor. Generally lower the ratio, the better is the liquidity position of the
firm and higher and ratio less liquid is the position of the firm. To make correct interpretation
of this ratio, a comparative analysis of different firms in the same industry and the friend
may be found for various year.

8. Working Capital Turnover Ratio:

Working capital of a concern is directly related to sales. This ratio indicates the
velocity of the utilization of net working capital .It is a measure of efficiency of the
employment of the working capital. This ratio can be calculated as :

Working capital Turnover Ratio = (cost of sales / Average working Capital )

Usually a higher ratio indicates efficient utilization of working capital and a low ratio
indicates otherwise. This ratio can at best used by making of comparative and trend analysis
for different firms in the same industry and for various periods.

9. Inventory to Working Capital Ratio:

This ratio is an index of the position of over stocking .it shows what part of the
working capital is represented by the closing stock, whether the circulating capital is
unnecessarily blocked as a result of over-stocking. In fact the size of closing stocks must bear
a proper protection to the quantum of working capital. The higher is the cover given by
working capital the lower is the risk of loss by the likely fall in the value of inventory in
future. The ratio is calculated by dividing the close stock by the working capital .The
financial experts are of the opinion that the normally this ratio should not exceed 75% of the
working capital.

10. Current Assets to Bank Borrowing Ratio:

Generally current assets are financed through bank borrowings. So bank borrowing is
an important sources of financing current assets or Gross Working Capital .This ratio shows
the efficient use of bank borrowings to finance gross working capital of a firm. Higher the
ratio grater is the efficient use of borrowings. This ratio is calculated by dividing current
assets by bank borrowings.

11. Working Capital to Long - Term Investment Ratio:

Ratio of working capital to long-term investment explains the relationship of long-

term investment and working capital .It shows that what is the proportion of working capital
and what is the proportion of long term investment. A study of this ratio in the proportion
units under the study has been made in subsequent pages. The ratio of working capital to long
term investment is calculated by dividing the amount of working capital by the amount of
long-term investment.

3.5 CONCLUSION

“Working capital is the life blood and controlling nerve centre of a business. “No
business can be successfully, run without an adequate amount of working capital. To avoid
the shortage of working capital at once, an estimate of working capital requirements should
be made in advance so that arrangements can be made to produce adequate working capital.

The pattern of receipts and payments of cash in its turn again will have its own
contribution to the development of a particular for of working capital. But cash transactions
are not only factors that take care of working capital. Liquidity and reduction of cost of
capital etc. are some of the criteria which require a specific treatment of the management of
working capital of its own.

We have emphasized that the firm should maintain a sound working capital position
and that there should be optimum investment in working capital. The finance manager must
determine levels and composition of current asset. He must see that right sources are tapped
to finance current assets and current liabilities are paid in time. Hence comes in the role of
human relations in the field of “Financial Management.
 CHAPTER: 4

WORKING CAPITAL FINANCE IN PPL:

AN ANALYSIS

4.1 INTRODUCTION

Till nationalization (1969), the main source of finance for working capital in India
was the short-term loans provided by the commercial banks. They meet on an average 59 %
of working capital (current assets) finance. The percentage was as high as 65 % to 70 % in
case of sugar and iron and steel industries and fertilizer Industries .The main form of short
term loans were in the form of cash credits. These advances were usually against the security
of current assets usually against the security of current assets of the borrowing company. The
security oriented system adopted by the banks to favor borrowers with strong financial
resources irrespective of commercial function.

4.2 WORKING CAPITAL FINANCE AT PPL

Prior to March 1969, there was no fixed government policy regarding financing the
working capital and the govt. constantly reviewed its policies. Once the Govt. has viewed that
the funds provided by the Govt. and other financial institutions are primarily intended for
creation of capital assets and requirements of working capital have normally to met by the
cash credit arrangement criticized utilization of depreciation funds for working capital
requirement and viewed that public undertakings should arrange bank loan for working
capital requirements. This issue was also raised by the Committee on Public Undertaking
(COPU).

If a public sector undertaking insists to transfer its entire account from one public
sector bank to another or make any change in the membership of consortium of banks
financing it. It is open to it settle the matter in consultation with the bank concern.
Government also provided same guidelines to financial institutions regarding financial
assistances to public sector undertaking.

After clearly knowing the Govt. Policy regarding working capital financing now a
brief discussion on PPL’s approach towards working capital finance have been made in
subsequent paras. PPL’s sources of finance have been divided in to two parts. Internal source
& External source. Internal source consists of depreciation, provisions, reserve and surplus
and plough back of profits. The external sources consists of share capital, loan funds (secured
loans, inter unit current account), and other liability’s gets the bank assistances from State
Bank of India, Syndicate Bank , Punjab National Bank, in the form of cash credit secured by
hypothecation of property ( land, machinery) raw materials, semi/finished products, stores
and spare parts , book debts and other assets of the company.

The working capital of PPL varied between Rs 9943 lakhs and Rs 15758 lakhs.The
working capital were Rs 9943 lakhs, RS 6496 lakhs, Rs 11990 lakhs,Rs 18684 lakhs,Rs
15758 lakhs, Rs 8125 lakhs respectively during out period of study 2006-07 to 2011-12.The
gross working capital was varied between Rs 36258 lakhs to Rs 57025 and will be RS 66500
lakhs in 2011-12.

4.3 ANALYSIS OF WORKING CAPITAL FINANCE:

Working capital Finance analysis is an information processing system designed to

provide data for decision makers. The information is basically derived from published
financial statement .Users of the working capital information system are decision makers
concerned with evaluating the economic situation of the firm and predicting its future course.
The major groups of users are investors, for making portfolio decisions, management for
evaluating the operational and financial efficiency of the firm as a whole and of submit
lenders, for determining the credit worthiness of loan applicant

In the present study, this section deals with the overall consideration in the
management of working capital finance in Paradeep Phosphates Limited from analysis and
interpretation point of view the following point are highlighted briefly in relation to working
capital finance.

 Funds flow analysis

 Working capital gap
 Trend analysis
 Ratio analysis
 Statistical analysis

Funds Flow Analysis:

The funds flow statement is a statement which shows the movement of funds and is a
report of the financial operation of the business undertaking. It indicates the various means by
which funds were obtained during a particular period and the ways to which funds were
employed. Analysis of funds flow may be divided in to two parts;

(i) changes in working capital and

 (ii) analysis of sources and uses of funds

Statement of Changes in Working capital:

Statement of changes in working capital is prepared to show the changes in the

working capital between the two balance sheet dates. This statement is prepared with the help
of current assets and current liabilities derived from the two balance sheet dates.

(a) An increase in current assets increases working capital

(b) A decrease in current assets decreases working capital

( c) An increase in current liabilities decreases working capital and

( d) A decrease in current liabilities increase working capital.

TABLE 4.1
CHANGES OF WORKING CAPITAL AT PPL
(Rs. In Lakh)

PARTICULARS 2011-12 2012-13 2013-14 2014-15 2015-16

A.CURRENT
ASSETS :
INVENTORIES 20678 26616 35651 46845 35105
SUNDRY
13618 5452 10967 11995 18634
DEBTORS
OTHERS 1962 2971 3607 2777 3286
TOTAL OF A 36258 35039 50225 61617 57025
CURRENT
LIABILITIES &
PROVISIONS
CURRENT
LIABILITIES & 26315 28543 38235 42933 41267
PROVISIONS
NET WORKING
9943 6496 11990 18684 15758
CAPITAL ( A-B)
INCREASE IN
WORKING 0 -3447 +5494 +6694 -2926
CAPITAL
PERCENTAGE 0 -3.8% +84.57% +55.83% -15.66%

SOURCE
ANNUAL ACCOUNTS OF PPL FINANCIAL RESTRUCTURING OF PPL
Table-4 .1 denotes the position of changes in working capital at PPL in 2011-12 the total
working capital decreases by Rs 3447 lakhs. Because current assets decreased and current
liabilities increased .The investment in sundry debtors was very high in 2015-16.
2011-12 the working capital decreased by Rs.3447 lakhs from the previous year 2011-12.
This was due to highly decrease in sundry debtors and increase in current liabilities and
provision in 2012-13 the working capital increased by Rs.5494 lakhs from the previous year
2011-12. This was due to increase in inventories. Others sources and a significant increase in
sundry debtors to Rs.10967 lakhs from the previous year Rs.5452 lakhs i.e. nearly 1.8 times.
In 2013-14 the working capital increased by Rs.6694 lakhs from the previous year 2013-14.
This happens due to more increase in inventories and sundry debtor than increase in current
liabilities and provisions .In the 2014-15 the working capital decreased Rs 2926 lakhs over its
previous year. This was due to more decrease in inventories than increase in cash and bank
balances and decrease in current liabilities and provisions. From provisional data of 2015-16
the working capital has decreased by RS 3695 Lakh from the previous year 2014-15 .This
due to high increase in current liabilities and provisions.

Trend Analysis:

The significance of a trend analysis of ratios lies in the fact that the analysis can know
the direction of movement, whether the movement is favorable or unfavorable. In other
words, whether the financial position of a firm is improving or deteriorating over the years .In
table 4.1the trend analysis between current assets ( gross working capital ), current liabilities
(short term finance) and net working capital of PPL , has been presented.

TABLE- 4.2
WORKING CAPITAL TREND INDICES OF PPL

(Rupees In Lakh)

Year Current Assets Current Liabilities Working Capital

2010-11 36258 100 26315 100 9943 100

2011-12 35039 96.6 28543 108.5 6496 65.3

2012-13 50225 138.5 38325 145.3 11990 120.6

2013-14 61617 169.9 42933 163.2 18684 187.9

2014-15 57025 157.3 41267 156.8 15758 158.5

2015-16 63532.43 175.22 51469.09 195.59 12063.32 121.32

SOURCE:ANNUAL ACCOUNTS OF PPL, FINANCIAL RESTRUCTURING OF PPL

In the table 4.2, the figures of the year 2011-12 has been taken as base year and 100
Trend indices are calculated in relation to the year. Each year’s figure is divided by the base.
Table 4.1 shows that the current assets have continuously increases in all years except 2012-
13 to 2014-15.It seems that the company is increasing its investment in current asset year by
year except in 2012-13 which is satisfactory .IN absolute figure the current assets was Rs
36258 Lakh in 2015-16 and reached at RS 57025 Lakh in 2014-15 and from provisional data
has reached at Rs 63532.43 Lakh in 2015-16

The figures of current liabilities are satisfactory as compared

with the current asset. The short term finance was 100 in 2011-12 and
reached at 156.8 in 2014-15 nearly 1.57 times as compared to 1.57
terms of current assets. The initial figures of current liabilities was RS 26315 Lakh in 2011-
12 and reached at Rs 41267 Lakh .IN 2014-15 and has reached at Rs 51469.09 Lakh in 2015-
16.From current liabilities trend analysis it indicates that the company is average in collecting
short-term sources of finance.

The figure in working capital indicates that in increase in working capital is going in
parallel with the current assets and liabilities. The trend index which was 100 in the initial
year 2011-12 has reached at 121.33 in 2015-16 gone up to 1.221 times .IN the absolute
figures the amount was RS 9943 Lakh and reached at Rs 12063.34 Lakh in 2015-16.The
increase in working capital is correlated with increase in current assets .

From the above analysis it may be concluded that the working capital financing
position of PPL is satisfactory up to 2014-15 data .For 2015-16 it is not satisfactory, because
of 1.75 times increase in gross working capital and a 1.96 times increase in short-term ,
finance does not leads to nearly 1.21 times lead in net working capital. Proper control over
current liabilities is necessary.

The trends have been graphically shown in figure 4.2 where years have been taken on
the horizontal axis and the trend index has been taken on vertical axis. It is clearly shown in
the picture that current liabilities trend is up word to the base line, the trend lines of current
assets and working capital increase with the increase in current liabilities. So the company
have to control of PPL is increasing with increase in current liabilities .So the company have
to control the current liabilities.

Ratio Analysis:

The overall working analysis of PPL is undertaken to examine the liquidity position
during the entire period and to know about working capital finance position of the company.
The working capital ratio in the present study consists of current ratio, quick ratio,
receivables turnover ratio, inventory turnover ratio, working capital turnover ratio, inventory
to working capital .Current assets to total assets ratio etc. There are also some financing ratio,
bank borrowing to total borrowing , working capital to long term investment etc. have been
analyzed. These ratios have been highlighted in the following discussion.

Current Ratio:

Current ratio may be defined as the relationship between current assets and current
liabilities. It is the most widely used to make the analysis of a short term financial position of
liquidity of a firm. IT is calculated by dividing the total current assets by total of the current
liabilities. A relatively high current ratio is an indication that the firm is liquid and has the
ability to pay its current obligations in time as and when they become due. A ratio equal or
near to the rule of thumb of 2.1 current assets double the current liabilities, is considered to
be satisfactory.
TABLE- 4.3
CURRENT RATIO

(Rupees In Lakh)
Year Current Assets Current Liabilities Ratio
2010-11 36258 26315 1.38:1
2011-12 35039 28543 1.23:1
2012-13 50225 38325 1.31:1
2013-14 61617 42933 1.44:1
2014-15 57025 41267 1.38:1
2015-16 63532.43 51469.09 1.23:1
Average 1.33:1

SOURCE: Annual Accounts of PPL :

It appears from the table 4.3 that the current assets of PPL varies between Rs 35039 Lakh and
RS 66500 Lakh with a fluctuating trend .The current liabilities also shown a nearly increasing
trend varies between Rs 26315 Lakh and RS 58375 Lakh . The Current Ratio has moved
between1.14: 1 to 1.44: 1during the period of the study. The overall average ratio is 1.31:1
which shows a good position of the ratio. As conventions, a standard 2:1 is considered to be
satisfactory .

The
graphical
representation has
been shown in figure 4.3 where
years have been taken in horizontal axis and ratio on vertical axis. The
ratio shown in the picture reveals the ups and downs during the period of the study.

Quick Ratio:

Quick ratio, also known as Acid Test or Liquid ration, is a more rigorous test of
Liquidity than the current ratio. The term liquidity” refers to the ability of a firm to pay its
short –term obligations as and when they become due. The quick ratio can be calculated by
dividing the total of the quick assets by total current liabilities. Quick assets includes all
current assets expect inventory and prepaid expenses. Usually, a high quick ratio is a better
indication for the firm. As a conversion a quick ratio of one to one (1:1) is considered to be
satisfactory

TABLE-4.4
 QUICK RATIO

(Rupees In Lakh)

Year Quick Assets Current Liabilities Ratio

2010-11 15580 26315 0.59:1

2011-12 8423 28543 0.30:1

2012-13 14574 38235 0.38:1

2013-14 14772 42933 0.34:1

2014-15 21920 41267 0.53:1

2015-16 26440 51469 0.51:1

Average 0.44:1

Table – 4.4 reveals that the quick ratio of PPL varied between 0.30:1 and 0.59:1 on an overall
average at 0.44:1.It was very much lower than the standard norm 1:1 throughout the period of
the study. This indicates that the liquidity position of PPL is not sound at all .The coefficient
of standard deviation in quick assets was 34.04 while it was 22.52 in case of current
liabilities. This shows that current liabilities vary less than quick assets.

SOURCE: Annual Accounts of PPL

The graphical representation of quick ratio has been shown in the figure 4.4 , where
the years have been taken in horizontal axis and the ratio on vertical axis. The ratio shows a
fluctuating trend during the period of study.

Receivables Turnover Ratio & average Collection Period:

Debtors turnover ratio includes indicates the velocity of debt-collection of a firm .In
simple words, it indicates the number of times the debtors are turned over during a year. It is
calculated dividing net credit sales by Trade Debtors. Generally, higher the value of debtors
turnover the more efficient is the management of debtors /sale or more liquid are the debtors.
 The average collection period ratio represents the average number of days for which a
firm has to wait before its receivables are converted in to cash. It measures the quality o
debtors. This is calculated dividing number of working days by debtor s turnover ratio.
Generally, the shorter the collection period, the better is the quality of debtors.

TABLE- 4.5
RECEIVABLES TURNOVER RATIO & AVERAGE COLLECTION PERIOD
(Rs In Lakhs)
Year Receivables Sales Ratio Average
collection
 Period
(Days)
2010-11 13618 44889 3.3:1 111
2011-12 5452 36485 6.7:1 55
2012-13 10967 79385 7.2:1 51
2013-14 11995 70544 5.9:1 62
2014-15 18634 58467 3.1:1 118
2015-16 23225 83982 3.6:1 101
Average 5.0:1 83

SOURCE: Annual Reports of PPL

Table 4.5 reveals that both debtor’s turnover ratio and average collection period are in a very
bad condition PPL. The Co-efficient of correlation between receivables and sales which is
0.23 suggests that the two figures are positively very correlated. The co-efficient of standard
deviation was 33-19 for receivables and 25.3 in case of sales. This suggests that the
receivables varied more than the figure of sales.

The above analysis have been shown in figure – 4.5 where the years have been taken
on horizontal axis.
 Collection period and ratio have taken on vertical axis. It is clearly shown in the
figure in which year the receivables turnover ratio is low, the average collection period is
high in that year and vice-versa. The company PPL should try to increase the sale and
decrease the debtor s amount.

Inventory Turnover Ratio:

Every firm has to maintain a certain level of inventory of finished goods as as to be

able to meet the requirements of the business .Inventory turnover ratio, also known as stock
velocity is normally calculated as sales/Inventory. It measure the velocity of management of
inventory because more frequently the stock are sold, the lesser amount of money is required
to finance the inventory.

The ratio of net sales to inventory is computed by dividing the net sales by the books value of
inventory the ratio is expressed in times.

TABLE -4.6
INVENTORY TURNOVER RATIO
(Rs In Lakhs)

Year Inventory Sales Ratio (Times)

2010-11 20678 44889 0.46:1

2011-12 26616 36485 0.73:1

2012-13 35651 79385 0.45:1

2013-14 46845 70544 0.66:1

2014-15 35105 58467 0.60:1

2015-16 37092 83982 0.44:1

Average 0.56

SOURCE: Annual Reports of PPL

Table 4.6 reveals that this ratio varies between 0.45 times and 0.84 times .It shows a
fluctuating trend of inventory turnover ratio. ON the overall ratio the inventory turnover was
0.62 times which was far from standard norm 8 times .The co-efficient of standard deviation
for inventory is 26.60 and for sales 25.30 which shows that the figures of inventory fluctuates
more as compared to the figures of sale. The Co-efficient of correlation between both the
figures come to 0.67 which how that the two figures have moved in the same direction. It is
also apparent from table -4.6 that both figures, i.e. inventory and sales registered on
increasing trend through out the period.

The graphical representations has between shown in figure 4.6 .The figure shows a
fluctuating trend’s the company should try to minimize over stock position and a increase in
sale.

Working Capital Turnover Ratio:

Working capital of a concern is directly related to sales .Working capital turnover ratio
indicates the velocity of the utilization of net working capital. This ratio indicates the number
of times the working capital is turned over in the course of a year.

This ratio measures the efficiency with which the working capital is being used by a
firm .A higher ratio indicates efficient utilization of working capital .This is calculated by
dividing sales by working capital. The number of units is expressed as times.
 TABLE 4.7
WORKING CAPITAL TURNOVER RATIO
Years Working Sales Working Capital
Capital Turnover Ratio

2010-11 9943 44889 4:51:1

2011-12 6496 36485 5:56:1

2012-13 11990 79385 6:67:1

2013-14 18684 70544 3:85:1

2014-15 15758 58467 3:70:1

2015-16 12063 83982 0:96:1

Average 5.21

SOURCE: Annual Reports of PPL

Table 4.7 shows that the working capital turnover ratio of PPL is decreasing for three
years and increasing for the last two years. For 2011-12 it is projected to be around 6.67.The
working capital turnover ratio of PPL has been varied between 3.85 times and times during
the period of the study. The overall working capital turnover ratio was 5.16 times which is
lower than the standard norm 8 times. The management of PPL should try to increase the
working capital turnover. The Co-efficient of standard deviation was 35.88 of working capital
and 25.30 for sales. The Co-efficient of correlation for both the figures was 0.66 which shows
that working capital and sales are moderately correlated.
The
graphical
representation of
working
capital
turnover ratio
(times) has been
depicted in the figure
-4.7. The figure shows that the working capital turnover ratio
is fluctuating through out the years 2006-07 to 2011-12

4.4 CONCLUSION:

Working Capital finance attempts to examine the sources of financing .The study of
working capital behavior occupies an important place in financial management .It involves
deciding upon the amount and composition of current assets and how to finance these assets.
These decisions involve a trade off between risk and return of a firm. A firm can choose
short-term or long term source of finance. If the firm uses more of short-term funds for
financing both current and fixed assets, its financing policy is considered aggressive and
risky. Its financing policy will be considered conservative if it makes relatively more use in
financing its assets. A balanced approach is to finance permanent current assets by long term
sources and temporary current assets by short term sources of finance.

Bank borrowing is an important source of working capital finance. It can be availed in

the forms of overdraft, cash credit, purchase/discount of bills and loans. Bank finance is
regulated by the Reserve Bank Of India .Each company’s working capital need is determined
as per the prescribed norms. These norms are based on the recommendations of the Tondon
committee and later on the chore committee .The availability of bank credit to industry in
India has been the subject matter of regulation and control, the idea being to secure alignment
of bank credit with planning priorities and ensure its equitable distribution to various sectors
of the Indian economy.

CHAPTER-5
FINDINGS, SUGGESTION & CONCLUSION

5.1 MAJOR FINDINGS

The purpose of the present study is to examine the pattern and identify the sources of
working capital finance for the study data have been collected from the primary and from the
secondary sources for a period of six years, 2006-07 to 2011-12.Diffrent accounting and
financial ratios and statistical tools have been used for the analysis of the study. This
analyzed data have been represented in the form of gross working capital, net working
capital, funds flow analysis, working capital gap and ratio analysis. Various statically tools
average, standard deviation, co-efficient of standard deviation, co-efficient of co-relation
analysis have been used for the analysis purpose.

The source of financing working capital in PPL has been divided to two parts internal
source and external sources. The internal sources consists of depreciation, provisions, reserve
and surplus and ploughing back of profits. The external sources consists of borrowing from
banks, share capital, current liabilities other sources and subsidies from government.

On the overall financing working capital it is observed that the external sources which
mostly consists of borrowing from banks and inter unit current were played the most
important role in financing working capital in PPL.

Analysis of working capital is the touchstone to test the efficiency with which short-
term funds are employed. The trends of current assets are continuously increasing expect in
2007-08 and 2010-11 as compared to their respective previous years ands current liabilities
continuously increasing expect 2010-11 over the period of study and net current assets
(working capital) in fluctuating through out the study years. The working capital decreased
for the last years due to decrease in current assets and increase in current liabilities.

Good management of public enterprises is needed for optimum progress and

achieving the goals of the nation. Effective utilization of finance in public enterprises of a
country assists the all round development of enterprises, raises national income and improves
living standards. At the end, it may be concluded that for achieving working capital efficiency
the inter-departmental efforts is needed.

5.2 SUGGESTIONS

The above findings lead the following suggestions.

1. It is suggested that the company should try to increase the working capital
turnover ration, which indicates the velocity of the utilization of net working
capital.

2. The company is keeping excess proportion of current assets in comparison with

current liabilities. Since the return from fixed assets is more than current assets, it
would be wise to divert some of the excess funds locked up in current assets to
fixed assets in the form of machinery etc. In other words PPL has been
conservative in this area.

3. It is suggested that the company should try to increase internal sources. Because
the company in most cases external sources. The long run financial health of the
company can only be improved through efficient trading activities.

5.3 CONCLUSION

In a developing country like India financing of working capital holds the key to open
the flood gates for perennial flow of internal finance and external finance .For capital
formation which of course is imperative for building and institutional base. However, the
fulfillment of this objective alone in a growing and developing society would not help
achieve the social and national objectives. Land and Building, Plant and equipment and many
other such fixed tangibles are no doubt needed to provide a strong structural base but the
working capital is all the more needed as “motor force” to make the fixed tangibles more
affective and turn out what is most needed by the society. The mode of administration of
working capital determines to a very large extent the success or failure of overall operations
of an enterprise. Many times in shortage of working capital and Inadequacy of finance are
given out as its main cause. In the ultimate analysis, it may be found that it was
mismanagement of resources of the firm that converted on otherwise successful business in to
an unsuccessful one. Inadequacy of working capital is a symptom and sometimes in excess
for, but by no means the cause of, business failure. Proper financing as well as management
of working capital is, therefore, of crucial importance for the success of an enterprise.
 BIBLOGRAPHY

A. BOOKS

Agrawal, N.K : Management of working capital, Sterling Publishers

Pvt. LTD, New Delhi, 1983.
Chandra Prasana : Financial Management, Tata MC Graw Hill publishing
Company Ltd. New Delhi.
Gupta L.C : Banking and Working capital Finance, Macmillan,
1978
Gupta, Shashi, K. &
Sharma, R.K : Management Accounting, Kalyani publishers, New
Delhi-Ludhiana.
Krishnamurthy, K &
Pradhan R.S : Management of Working Capital,National Book
Organization,New Delhi,1986.
Sharma . B.S : Financial planning in public sector in India-A
Management Approach,Vikas publishing House, Pvt.
Ltd.,New Delhi,1974.

B. REPORTS AND MANUALS

Annual Reports (Including plant Accounts), PPL.

Annual performance plan, PPL.
-Annual Statistics, PPL.
-Annual Statistics, PPL.
-Financial Year Books of PPL.
PPL’s Corporate Plan up to 2016 A.D.
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