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CAPITAL MANAGEMENT
SUBMITTED BY
MS. SREELEKHA K B
MBA FINANCE
This is to certify that the Project Work titled " THE STUDY ON
WORKING CAPITAL MANAGEMENT OF HCL INFOSYSTEMS " is a
bonafide work of Ms. SREELEKHA (Enrollment No. 0215370602)
carried out in partial fulfillment for the award of degree of MBA in
Finance of Pondicherry University under my guidance. This project
work is original and not submitted earlier for the award of any degree
or diploma or associateship of any other University or Institution .
Place : Chennai
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Date : 23.04.2017
STUDENT'S DECLARATION
I, Ms. Sreelekha K B hereby declare that the Project Work titled " The
study on Working Capital Management of Hcl Infosys Limited" is
the original work done by me and submitted to the Pondicherry
University in partial fulfillment of requirements for the award of
Master of Business Administration in Finance. This is a record of
original work done by me under the supervision of Dr.
Radjamanogary M.Com, MBA, M.Phil, Ph.D
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ACKOWLEDGEMENT
Achievement is finding out what you would be then doing, what you have to do.
The higher the summit, the harder is the climb. The goal was fixed and we
began with a determined resolved and put in ceaseless sustained hard work.
Greater challenge, greater was our effort to overcome it.
This project work, which is my first step in the field of professionalization, has
been successfully accomplished only because of my timely support of well-
wishers.
I would first of all thank my parents and my brother and like to pay my sincere
regards and thanks to who supported me all way through to complete my project
and also Almighty and my friends.
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EXECUTIVE SUMMARY
This project tries to evaluate how the management of working capital is done in
HCL Infosystems through inventory ratios, working capital ratios, trends,
computation of cash, inventory and working capital, and short term financing.
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TABLE OF CONTENTS
1. Introduction
1.1 The problems
1.2 Purpose of study
1.3 Research methodology
1.4 Scope of the study
1.5 Limitations
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3. Conceptual Framework
3.1 Introduction to Working Capital Management
3.2 Significance of working capital management
3.3 Liquidity vs Profitability: Risk – Return trade off
3.4 Classification of working capital
3.5 Types of working capital needs
3.6 Financing of working capital
3.7 Factors determining working capital requirements
3.8 Working capital cycle
3.9 Sources of working capital
3.10 HCL financials
3.11 Working capital position
3.12 Inventory management
3.13 Cash management
3.14 Receivables management
3.15 Managing payables (Creditors)
3.16 Financing current assets
3.17 Working capital & short-term financing
4. Analysis
4.1 Industry analysis
4.2 Financial graphs
5. Findings
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6. Concluding analysis
7. Suggestions and recommendations
Bibliography
Appendices
LIST OF TABLES
TABLE PARTICULARS
TABLE 1 HCL OVERVIEW
TABLE 2 HCL HISTORY
TABLE 3 CONSOLIDATED FINANCIAL PERFORMANCE
TABLE 4 WORKING CAPITAL POSITION
TABLE 5 NET CURRENT ASSET AND SALES
TABLE 6 CURRENT ASSETS AND FIXED ASSETS
TABLE 7 COMPUTERS ABD MICRO PROCESSOR BASED SYSTEM
TABLE 8 DATA GRAPHIC AND DISPLAY
TABLE 9 CURRENT ASSETS AND CURRENT LIABILITIES
TABLE 10 COMPOSITION OF INVENTORY
TABLE 11 CONVERSION PERIOD ANALYSIS
TABLE 12 CONVERSION PERIOD FOR RAW MATERIALS
TABLE 13 CONVERSION PERIOD FOR WIP
TABLE 14 CONVERSION PERIOD FOR FINISHED GOODS
TABLE 15 OPERATING CYCLE
TABLE 16 RAW MATERIAL CONSUMPTION
TABLE 17 CURRENT RATIO
TABLE 18 DIVIDEND POLIY CASH
TABLE 19 EQUITY DIVIDEND
TABLE 20 CASH FLOWS
TABLE 21 CASH FLOW FOR OPERATING ACTIVITIES
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TABLE 22 CASH FLOW FOR INVESTING ACTIVITIES
TABLE 23 RECEIVABLE MANAGEMENT
TABLE 24 DEBT SUMMARY
TABLE 25 COLLECTION POLICIES
TABLE 26 CURRENT WORKING CAPITAL LIMITS
TABLE 27 RENEWAL OF LIMITS
TABLE 28 SHORT TERM FINANCING- SECURED LOANS
TABLE 29 SHORT TERM FINANCING - UNSECURED LOANS
TABLE 30 YEAR END COMMERCIAL PAPERS
LIST OF FIGURES
FIGURES PARTICULARS
FIGURE 13 DIVIDEND
FIGURE 14 NETWORTH
FIGURE 15 BORROWINGS
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INTRODUCTION
INTRODUCTION
The project undertaken is on “WORKING CAPITAL MANAGEMENT IN HCL INFOSYSTEMS
LIMITED”.
It describes about how the company manages its working capital and the various steps that
are required in the management of working capital.
Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's ability to
fund operations, reinvest and meet capital requirements and payments. Understanding a
company's cash flow health is essential to making investment decisions. A good way to
judge a company's cash flow prospects is to look at its working capital management (WCM).
Working capital refers to the cash that a business requires for day-to-day operations or,
more specifically, for financing the conversion of raw materials into finished goods, which in
turn the company sells for payment. Among the most important items of working capital are
levels of inventory, accounts receivable, and accounts payable. Analysts look at these items
for signs of a company's efficiency and financial strength.
The working capital is an important yardstick to measure the company’s operational and
financial efficiency. Any company should have a right amount of cash and lines of credit for
its business needs at all times.
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This project describes how the management of working capital takes place at
HCL Infosystems.
In the management of working capital, the firm is faced with two key
problems:
First, given the level of sales and the relevant cost considerations, what are
the optimal amounts of cash, accounts receivable and inventories that a firm
should choose to maintain?
Second, given these optimal amounts, what is the most economical way to
finance these working capital investments? To produce the best possible
results, firms should keep no unproductive assets and should finance with the
cheapest available sources of funds. Why? In general, it is quite advantageous
for the firm to invest in short term assets and to finance short-term liabilities.
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1.2 PURPOSE OF STUDY
The objectives of this project were mainly to study the inventory, cash and
receivable at HCL Infosystems Ltd., but there are some more and they are -
To suggest ways for better management and control of working capital at the
concern.
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1.3 RESEARCH METHODOLOGY
Then comes the financing of working capital requirement, i.e. how the working
capital is financed, what are the various sources through which it is done.
And, in the end, suggestions and recommendations on ways for better
management and control of working capital are provided.
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1.4 SCOPE OF THE STUDY
Through this project I would study the various methods of the working capital
management.
The project would also be an effective tool for credit policies of the
companies.
This will show different methods of holding inventory and dealing with cash
and receivables.
This will show the liquidity position of the company and also how do they
maintain a particular liquidity position.
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1.5 LIMITATIONS OF THE STUDY:
We cannot do comparisons with other companies unless and until we have the
data of other companies on the same subject.
Only the printed data about the company will be available and not the back–end
details.
Future plans of the company will not be disclosed to the trainees.
Lastly, due to shortage of time it is not possible to cover all the factors and
details regarding the subject of study.
The latest financial data could not be reported as the company’s websites have
not been updated.
xv
HINDUSTAN COMPUTERS LIMITED
Type Public
(BSE: 500179,BSE: 532281)
Founded 11th August 1976
Headquarters Noida, India
(Delhi metropolitan area), India
Key People Shiv Nadar, Founder, Chairman & CEO
Sanjay Kumar Choudhary , Vineet Nayar
Industry Information Technology Services
Website www.hcl.in
xvi
Hindustan Computers Limited, also known as HCL Enterprise, is one of
India's largest electronics, computing and information technology company.
Based in Noida, near Delhi, the company comprises two publicly listed Indian
companies, HCL Technologies and HCL Infosystems.
HCL was founded in 1976 by Shiv Nadar, Ajai Chowdhry and four of their
colleagues. HCL was focused on addressing the IT hardware market in India for
the first two decades of its existence with some sporadic activity in the global
market. In 1981, HCL seeded a company focused on addressing the computer
training industry, NIIT, though it has currently divested its stake in the
company. In 1991, HP took minority stake in the company (26 per cent) and the
company was known as HCL HP for the five years of the joint venture. On
termination of the joint venture in 1996, HCL became an enterprise which
comprises HCL Technologies (to address the global IT services market) and
HCL Infosystems (to address the Indian and APAC IT hardware market). HCL
has since then operated as a holding company.
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2.3 AN OVERVIEW ABOUT THE COMPANY
xviii
Pondicherry (Electronics) and the other in Chennai (Mechanical) .The Company
has been accredited with ISO 9001:2000, ISO 14001, TS 16949 and ISO 13485.
2.4 HISTORY
Y E AR H I G H L I G H T S
- Foundation of the Company laid
1976 - Introduces microcomputer-based programmable calculators with wide
acceptance in the scientific / education community
- Launch of the first microcomputer-based commercial computer with a ROM
-based Basic interpreter
1977 - Unavailability of programming skills with customers results in HCL developing
bespoke applications for their customers
- Formation of Far East Computers Ltd., a pioneer in the Singapore IT market, for
1980 SI (System Integration) solutions
- HCL launches an aggressive advertisement campaign with the theme ' even a
typist can operate' to make the usage of computers popular in the SME (Small &
Medium Enterprises) segment. This proposition involved menu-based applications
1983 for the first time, to increase ease of operations. The response to the advertisement
was phenomenal.
-HCL develops special program generators to speed up the development of
applications
- Zonal offices of banks and general insurance companies adopt computerization
1986 - Purchase specifications demand the availability of RDBMS products on the
supplied solution (Unify, Oracle). HCL arranges for such products to be ported to
its platform.
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- HCL assists customers to migrate from flat-file based systems to RDBMS
- HCL enters into a joint venture with Hewlett Packard
1991 - HP assists HCL to introduce new services: Systems Integration, IT consulting,
packaged support services ( basic line, team line )
- HCL acquires and executes the first offshore project from IBM Thailand
1994
- HCL sets up core group to define software development methodologies
- Starts execution of Information System Planning projects
1995 - Execution projects for Germany and Australia
- Begins Help desk services
- Sets up the STP ( Software Technology Park ) at Chennai to execute software
1996 projects for international customers
- Becomes national integration partner for SAP
- Kolkata and Noida STPs set up
1997
- HCL buys back HP stake in HCL Hewlett Packard
1998 - Chennai and Coimbatore development facilities get ISO 9001 certification
- Acquires and sets up fully owned subsidiaries in USA and UK
1999 - Sets up fully owned subsidiary in Australia
- HCL ties up with Broadvision as an integration partner
- Sets up fully owned subsidiary in Australia
- Chennai and Coimbatore development facilities get SEI Level 4 certification
- Bags Award for Top PC Vendor In India
2000 - Becomes the 1st IT Company to be recommended for latest version of ISO 9001 :
2000
- Bags MAIT's Award for Business Excellence
- Rated as No. 1 IT Group in India
-Launched Pentium IV PCs at below Rs 40,000
2001
-IDC rated HCL Infosystems as No. 1 Desktop PC Company of 2001
-Declared as Top PC Vendor by Dataquest
-HCL Infosystems & Sun Microsystems enters into a Enterprise Distribution
2002 Agreement
- Realigns businesses, increasing focus on domestic IT, Communications &
Imaging products, solutions & related services
- Became the first vendor to register sales of 50,000 PCs in a quarter
- First Indian company to be numero uno in the commercial PC market
2003
- Enters into partnership with AMD
- Launched Home PC for Rs 19,999
- 1st to announce PC price cut in India, post duty reduction, offers Ezeebee at Rs.
17990
- Maintains No.1 position in the Desktop PC segment for year 2003
- Becomes the 1st company to cross 1 lac unit milestone in the Indian Desktop PC
market
2004
- Partners with Union Bank to make PCs more affordable, introduces lowest ever
EMI for PC in India
- Registers a market share of 13.7% to become No.1 Desktop PC company for year
2004
- Crosses the landmark of $ 1 billion in revenue in just nine months
2005 - Launch of HCL PC for India, a fully functional PC priced at Rs.9,990/-
- Rated as the No.1 Desktop PC company by IDC India -Dataquest
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- 'Best Employer 2005' with five star ratings by IDC India -Dataquest.
- 'The Most Customer Responsive Company 2005'
-IT Hardware Category by The Economic Times -Avaya Global Connect.
-Top 50 fastest growing Technology Companies in India' & 'Top 500 fastest
Growing Technology Companies in Asia Pacific' by 'Deloitte & Touche'. by
'Deloitte & Touche'
-'7th IETE -Corporate Award 2005' for performance excellence in the field of
Computers & Telecommunication Systems by IETE.
-India 's 'No.1 vendor' for sales of A3 size Toshiba Multi Functional Devices for the
year '04 -'05 by IDC.
-Toshiba 'Super Award 2005 towards business excellence in distribution of Toshiba
Multifunctional products,
-Strategic Partners in Excellence' Award by In focus Corporation for projectors.
-'Most valued Business Partner' Award for projectors by In focus Corporation in
2005
- 75, 000+ machines produced in a single month
- HCL Infosystems in partnership with Toshiba expands its retail presence in India
by unveiling 'shop Toshiba'
- HCL Infosystems & Nokia announce a long term distribution strategy
- HCL the leader in Desktops PCs unveils India's first segment specific range of
2006 notebooks brand - 'HCL Laptops'
- IDBI selects HCL as SI partner for 100 branches ICT infrastructure rollout
(till - HCL Infosystems showcases Computer Solutions for the Rural Markets in India
June) - HCL Support wins the DQ Channels-2006 GOLD Award for Best After Sales
Service on a nationwide customer satisfaction survey conducted by IDC
- HCL Infosystems First in India to Launch the New Generation of High
Performance Server Platforms Powered by Intel Dual - Core Xeon 5000 Processor
- HCL Forms a Strategic Partnership with APPLE to provide Sales & Service
Support for iPods in India
xxi
VISION STATEMENT:
MISSION STATEMENT:
CORE VALUES:
QUALITY POLICY:
xxii
"We shall deliver defect-free products, services and solutions to meet the
requirements of our external and internal customers, the first time, every time."
2.5 OBJECTIVES:
MANAGEMENT OBJECTIVES –
PEOPLE OBJECTIVES –
xxiii
2.6 ALLIANCES and PARTNERSHIPS:
HCL Infosystems has alliances with global technology leaders like Intel, AMD,
Microsoft, Bull, Toshiba, Nokia, Sun Microsystems, Ericsson, nVIDIA,
SAP, Scansoft, SCO, EMC, Veritas, Citrix, CISCO, Oracle, Computer
Associates, RedHat, Infocus, Duplo, Samsung and Novell.
These alliances on one hand give us access to best technology & products as
well as enhancing our understanding of the latest in technology. On the other
hand they enhance our product portfolio, and enable us to be one stop shop for
our customers.
xxiv
2.7 MANAGEMENT TEAM:
Ajai Chowdhry
Co-Founder HCL, Chairman and CEO - HCL Infosystems.
An engineer by training, Ajai Chowdhry is one of the six co-
founder members of HCL, India 's premier IT conglomerate.
J V Ramamurthy
Chief Operating Officer HCL Infosystems Ltd.
J V Ramamurthy has an engineering degree in Electronics &
Communications, from Guindy Engineering College, and a Masters'
degree in Applied Electronics from the Madras Institute of
Technology, both in Chennai.
Rajendra Kumar
Executive Vice President - Frontline Division HCL Infosystems Ltd.
Mr. Rajendra Kumar has been with HCL for over 30 years and has
seen HCL grow from a startup company to a gigantic conglomerate
that it is today.
xxv
2.8 CORPORATE INFORMATION:
Whole-time Director
J.V. Ramamurthy
Directors
S. Bhattacharya
D.S. Puri
R.P. Khosla
E.A. Kshirsagar
Anita Ramachandran
T.S. Purushothaman
Narasimhan Jegadeesh
V.N. Koura
xxvi
BANKERS State Bank of India
Canara Bank
HDFC Bank Ltd.
ICICI Bank Ltd.
Societe Generale
Standard Chartered Bank
State Bank of Patiala
State Bank of Saurashtra
xxvii
3. WORKING CAPITAL MANAGEMENT
CONCEPTUAL FRAMEWORK
xxviii
Working capital is commonly defined as the difference between current assets
and current liabilities.
It refers to firm's investment in current assets. Current assets are the assets,
which can be converted into cash within a financial year. The gross working
capital points to the need of arranging funds to finance current assets.
It refers to the difference between current assets and current liabilities. Net
working capital can be positive or negative. A positive net working capital
will arise when current assets exceed current liabilities. And vice-versa for
negative net working capital. Net working capital is a qualitative concept. It
indicates the liquidity position of the firm and suggests the extent to which
working capital needs may be financed by permanent sources of funds. Net
working capital also covers the question of judicious mix of long-term and
short-term funds for financing current assets.
xxix
3.2 Significance Of Working Capital
Management
For one thing, the current assets of a typical manufacturing firm account
for half of its total assets. For a distribution company, they account for even
more.
xxx
There is an inevitable relationship between sales growth and the level of
current assets. The target sales level can be achieved only if supported by
adequate working capital. Inefficient working capital management may
lead to insolvency of the firm if it is not in a position to meet its liabilities
and commitments.
xxxi
3.3 LIQUIDITY VS PROFITABILITY: RISK - RETURN
TRADE OFF
Flexibility
But short-term financing is more risky than long-term financing.
Following table will summarize our discussion of short-term versus
long-term financing.
The need for current assets tends to shift over time. Some of these
changes reflect permanent changes in the firm as is the case when the
inventory and receivables increases as the firm grows and the sales
become higher and higher. Other changes are seasonal, as is the case
with increased inventory required for a particular festival season. Still
others are random reflecting the uncertainty associated with growth in
sales due to firm's specific or general economic factors.
Any amount over and above the permanent level of working capital is
temporary, fluctuating or variable working capital. The position of the
required working capital is needed to meet fluctuations in demand
consequent upon changes in production and sales as a result of seasonal
changes.
The permanent level is constant while the temporary working capital is
fluctuating increasing and decreasing in accordance with seasonal
demands as shown in the figure.
Sintech has a good position in its segment and they are also spending their
operations in the domestic market as well as in foreign market. The scale of
operations and the size it holds in the market makes it a must for them to
hold their inventory and current asset at a huge level.
The upper portion of the diagram above shows in a simplified form the
chain of events in a manufacturing firm. Each of the boxes in the upper
part of the diagram can be seen as a tank through which funds flow.
These tanks, which are concerned with day-to-day activities, have funds
constantly flowing into and out of them.
The chain starts with the firm buying raw materials on credit.
In due course this stock will be used in production, work will be carried
out on the stock, and it will become part of the firm’s work-in-progress.
Work will continue on the WIP until it eventually emerges as the finished
product.
As production progresses, labor costs and overheads need have to be met.
Of course at some stage trade creditors will need to be paid.
When the finished goods are sold on credit, debtors are increased.
They will eventually pay, so that cash will be injected into the firm.
Each of the areas- Stock (raw materials, WIP, and finished goods), trade
debtors, cash (positive or negative) and trade creditors – can be viewed as
tanks into and from which funds flow.
Working capital is clearly not the only aspect of a business that affects the
amount of cash.
HCL Infosystems has the following sources available for the fulfillment
of its working capital requirements in order to carry on its operations
smoothly:
Banks:
Commercial Papers:
Commercial Papers have become an important tool for
financing working capital requirements of a company.
Commercial Paper is an unsecured promissory note issued
by the company to raise short-term funds. The buyers of the
commercial paper include banks, insurance companies, unit
trusts, and companies with surplus funds to invest for a short
period with minimum risk.
HCL issues Commercial Papers and had 4000 commercial
papers in the year 2006.
3.10 HCL FINANCIALS:
PARTICULARS FY 15 FY 14
DEPRECIATION 32 52
TAX EXPENSES 1 11
PROFIT /(LOSS) AFTER TAX -254 -185
The current asset percentage on total asset is the highest over the years.
This increasing percentage of current assets to the total assets at first
might indicate a preference for liquidity in place of profitability, but a
look into the nature of the business carried on by HCL Infosystems
reveal the reason behind it. How far their preference to current assets
has affected the sales is shown below.
The sales has increased and the profits risen despite the 16.12% increase
in working capital. But what is noteworthy here is that the firm has
managed to maintain the trend of an increase in net current assets.
Whether the change has worked for the company has to be analysed in
the context of the growth in sales as compared to the previous year.
There has been a 19.14% rise in the sales or revenue generated. This
would automatically suggest towards a very efficient working capital
management where the assets of the firm which are short-term in nature
have been utilized optimally in connection to their fixed assets. The firm
has gone towards such a dramatic shift in their working capital position
might be because of the tremendous growth witnessed in the domestic
IT market
The ratio of the net current asset to the fixed ones is an indicator as to the
liquidity position of the firm. This ratio has declined for the firm
compared to the previous year. There could be an argument as to whether
the increased ratio of working capital to net block is a conservative policy
and whether it would be detrimental to the interest of the company. Or,
whether it would have been proper if the company invested more into the
capital expenditure in the form of plant and machinery or invested in any
other form that would have got them an internal rate of return. What has
to be kept in mind before coming to a conclusion as to the policy of the
company, is the fact that the firm being primarily into assembling, its
investment in the fixed asset segment need not be high. A look into the
capacity utilization of the plant would reaffirm this point. It would be
ideal for the firm to continue in the same line and not have excessive
investment in the fixed asset as they can easily add onto this part.
That the fixed assets of the firm are being put to efficient use and the firm
is trying for optimum capacity utilization is something that can be easily
deduced. Whether the current assets or the working capital of the firm has
anything to do with it is for us to see. An increased production in normal
circumstances means better raw material to finished goods conversion
rate, i.e. the firm is taking less of time in the production process and this
happens when the current asset employed in relation with the fixed ones
are at optimum. The other notable feature here is that though the firm has
added on to its installed capacity in all three years, they were still able to
increase the capacity utilization. That they have been able to do it shows
that the more current assets, especially inventory used in relation to the
fixed assets, i.e., plant and machinery and their management has only
helped in increasing their utilization to the maximum.
The 16.12% increase in Net Current assets despite of the fact that there
has been an increase in the Current Assets by 23.84% and increase in
Current Liability has been by 29.57% over that of the previous year has to
be attributed to the fact that in 2014, the company showed such a high
increase in CA, that it is still being offset. This is an indication as to the
expanding operations of the firm. HCL has increased its current assets in
order to meet the increasing sales. The firm’s level of liquidity being
high, we need a check on whether it affects the return on assets.
Raw Material: It is the basic input that is converted into the finished
product through the manufacturing process. Raw materials are those units
which have been purchased and stored for future production.
Ordering Costs: This term is used in case of raw material and includes
all the cost of acquiring raw material. They include the costs incurred in
the following activities:
Requisition
Purchase Ordering
Transporting
Receiving
Inspecting
Storing
Warehousing Cost
Handling
Administrative cost
Insurance
Deterioration and obsolescence
They are more into retail than earlier and at present more than 650
retail outlets branded with HCL sign ages and more are in the
pipeline
The company in order to meet its raw materials requirements could
have gone for frequent purchases, which would have resulted in
lesser cash flows for the firm rather than the high expenditure
involved when procuring in at bulk. The reason why the firm has
gone for these bulk purchases because of the lower margins and the
discounts it availed because of procuring in bulk quantities.
The time taken to convert raw materials to finished goods is very minimal
Work-in-progress
Finished Goods
The time taken for the firm to realize its finished goods as sales has
increased as compared to last year. This growth in sales could be traced
back to the growing domestic IT market for the commercial as consumer
segment in India. HCL has around 15% of the market in desktop and it is
the market leader in this segment. So it is only natural that they are able
to better their conversion rate of finished goods to sales.
Operating Cycle
The operating cycle of the firm reveals the days within which the
inventory procured gets converted to sales or revenue for the firm. This
time period is of importance to the firm as a lag here could significantly
affect the profitability, liquidity, credit terms, and the policies of the firm.
All the firms would like to reduce it to such extend that their cash inflows
are timely enough to meet their obligations and support the operations.
That the firm has been able to reduce the ratio is in itself an achievement
as they were having huge stocks of inventory. But the reduction in the
cycle could also be attributed to the boom in the market and the growth it
is expected to reach. This boom automatically ensures the demand for the
finished goods and thus helping in it to garner sales for the firm.
A major chunk of the imports come from Korea and Taiwan and is
purchased in US$. The value of imported and indigenous raw material
consumed give a clear picture that if there is a change in the EXIM policy
of the government it is bound to affect the company adversely as more
than 70% of their consumption is from imports. But this is the scenario
witnessed in the industry as a whole and though HCL is into expanding
its operation to Uttaranchal it in the present state is would be affected by
a change in the import duty structure.
A major chunk of their current assets are in the form of inventory and the
change in technology will invariably be a threat faced by the firm. The
question of technology applying here like says a certain device going say
out of fashion or outdated. For e.g. TFT monitors being in demand more
than CRT.
If you have insufficient working capital and try to increase sales, you
can easily over-stretch the financial resources of the business. This is
called overtrading.
Those cheques are either handed over to the CMS agencies or bank of the
particular location take charge of whole collection.
These CMS agencies or bank send those cheques to the clearing house to
make them realized. These cheques can be local or outstation.
The CMS agencies or bank send information to the central hub of the
company regarding realization/cheque bounced.
The central hub passes on the realized funds to the company as per the
agreed agreements.
The CMS agencies or concerned bank provides the necessary MIS to the
company as per requirement.
In cash management the collect float taken for the cheques to be realized
into cash is irrelevant and non-interfering because banks such as Standard
Chartered, HDFC and CitiBank who give credit on the basis of these
cheques after charging a very small amount. These credits are given to
immediately and the maximum time taken might be just a day. The
amount they charge is very low and this might cover the threat of the
cheque sent in by two or three customers bouncing. Even otherwise the
time taken for the cheques to be processed is instantaneous. Their Cash
Management System is quite efficient.
Cash-Current Liability
Dividend Policy-Cash
The other notable feature in HCL statements has been the growing
dividend policy of the firm. The payment of dividend means a cash
outflow. Thus cash position is an important criterion at the time of paying
dividends. There is a theory that greater the cash position and ability to
pay dividends. The firm has adopted a policy of disbursing the revenue
earned as profits to the shareholders as dividends as could be seen from
the increasing % of dividends declared.
The firm feels that they should retain cash and it would be in the interest
of the firm as well as the shareholders. This would automatically mean as
decrease in Earning/share (EPS)(Basic EPS declined from 8 in 2014 to
6.74 in 2015). It would prompt more of investors being interested in the
shares of the company, which would boost the purchase of the securities
and increase the market price/share thus being beneficial for the firm.
Cash Flows
The firm has disposed of investments worth around 655 Crores to meet its
growing needs. The other notable feature is decline is the firm’s inflows
from operations primarily due to the reason that the cash generated from
the operations is the lowest in three years. And the firm’s growing
dividend policy has contributed to the outflows in financing activities.
The cash from the operation has been subject to considerable change due
to the changes that could be adjusted towards trade receivables and trade
payables. The outflows in inventory have become as low as 37% of what
it was last year despite an increase in the inventory consumption by
16.64%. The resulting reduction in the cash outflows might be because of
the inventories being procured more on credit. That the cash from
operations has declined has affected the current liability index of the firm.
The investments have reduced from the last year due to the redemption of
investments taken place to meet various needs such as increasing demand
in stock or inventory and to ensure better credit and receivables policy.
We can see that the firm has in these three years increased their cash
inflow from the investing activities by way of disposal of investments
when in need. That is the firm has redeemed to realize cash as to meet its
expanding operations, fund the inventory procurement and meet the
obligations.
The investments in mutual funds are beneficial to the firm in the context
that they contain interest bearing securities which add up as a source of
revenue for the firm unlike cash which remains idle and unproductive
when not in use. This reduction of dividend could be attributed to
disposal of investments in mutual funds and subsidiary. This disposal
creates a fund, which can be used by the company as and when the need
arises.
Cash vs. Marketable Securities
Thus working capital is the lifeline for every business. The main
advantages of sufficient working capital are:
Have the right mental attitude to the control of credit and make sure
that it gets the priority it deserves.
Establish clear credit practices as a matter of company policy.
Make sure that these practices are clearly understood by staff, suppliers
and customers.
Be professional when accepting new accounts, and especially
largerones.
Check out each customer thoroughly before you offer credit. Use credit
agencies, bank references, industry sources etc.
Establish credit limits for each customer and stick to them.
Continuously review these limits when you suspect tough times are
coming or if operating in a volatile sector.
Keep very close to your larger customers.
Invoice promptly and clearly.
12.Monitor your debtor balances and aging schedules, and don't let any
debts get too old.
Recognize that the longer someone owes you, the greater the chance you
will never get paid. If the average age of your debtors is getting longer,
or is already very long, you may need to look for the following possible
defects.
Debtors due over 90 days (unless within agreed credit terms) should
generally demand immediate attention. Look for the warning signs of a
future bad debt. For example…..
Longer credit terms taken with approval, particularly for smaller orders.
Use of post-dated checks by debtors who normally settle within agreed
terms.
Evidence of customers switching to additional suppliers for the same
goods.
New customers who are reluctant to give credit references.
Receiving part payments from debtors.
Make that call now. And keep asking until you get some satisfaction.
In difficult circumstances, take what you can now and agree terms for the
remainder, it lessens the problem.
When asking for your money, be hard on the issue – but soft on the person.
Don’t give the debtor any excuses for not paying.
Make that your objective is to get the money, not to score points or get even.
The debts doubtful have doubled but their percentage on the debts has almost
become half. This implies a sales and collection policy that get along with the
receivables management of the firm.
COLLECTION POLICIES:
It refers to the collection procedures such as letters, phone calls and other follow
up mechanism to recover the amount due from the customers. It is obvious that
costs are incurred towards the collection efforts, but bad debts as well as
average collection period would decrease. Further, a strict collection policy of
the firm is expensive for the firm because of the high cost is required to be
incurred by the firm and it may also result in loss of goodwill. But at the same
time it minimizes the loss on account of bad debts. Therefore, a firm has to
strike a balance between the cost and benefits associated with collection
policies.
Personal visits
Real Time Gross Settlement as such is a concept new in nature and though the
firm uses the system with all the members of the consortium, it is still in its
primal stage and will take time before all of the clients of the firm are willing to
accept it. The firm has made a proposal to the consortium of the banks during
appraisal for faster implementation of internet based banking facility by all the
banks and adoption of RTGS payment system through net.
The debtor’s turnover ratio is completely dependent upon the credit policy
followed by the firm. The credit policy followed by the firm should be such that
the threat of bad debts and the default rate involved should be terminated.
PAYMENT PERIOD 22 23 17 16
That the creditors turnover ratio has declined and payment period has increased
indicate that the company has got a leeway in making the payment to the
creditors by way of increased time.
There is an old adage in business that "if you can buy well then you can sell
well". Management of your creditors and suppliers is just as important as the
management of your debtors. It is important to look after your creditors- slow
payment by you may create ill feeling and can signal that your company is
inefficient (or in trouble!).
Remember that a good supplier is someone who will work with you to enhance the future viability and
The firm has to decide about the sources of funds, which can be availed to
make investment in current assets.
It is for a period less than one year and includes working capital funds from
banks, public deposits, commercial paper etc.
Spontaneous financing:
Depending on the mix of short and long term financing, the company can
follow any of the following approaches.
Matching Approach
In this, the firm follows a financial plan, which matches the expected life of
assets with the expected life of source of funds raised to finance assets. When
the firm
follows this approach, long term financing will be used to finance fixed assets
and permanent current assets and short term financing to finance temporary or
variable current assets.
Conservative Approach
In this, the firm finances its permanent assets and also a part of temporary
current assets with long term financing. In the periods when the firm has no
need for temporary current assets, the long-term funds can be invested in
tradable securities to conserve liquidity. In this the firm has less risk of facing
the problem of shortage of funds.
Aggressive Approach
In this, the firm uses more short term financing than warranted by the
matching plan. Under an aggressive plan, the firm finances a part of its current
assets with short term financing.
Relatively more use of short term financing makes the firm more risky.
The financial manager should determine the optimum level of current assets so
that the wealth of shareholders is maximized. A firm needs fixed and current
assets to support a particular level of output
The level of current assets can be measured by relating current assets. Dividing
current assets by fixed assets gives CA/FA ratio. Assuming a constant level of
fixed assets, a higher CA/FA ratio indicates a conservative current assets
policy and a lower CA/FA ratio means an aggressive current assets policy
assuming other factors to be constant. A conservative policy i.e. higher CA/FA
ratio implies greater liquidity and lower risk; while an aggressive policy i.e.
lower CA/FA ratio indicates higher risk and poor liquidity. The current assets
policy of the most firms may fall between these two extreme policies. The
alternative current assets policies may be shown with the help of the following
figure.
31.30 in funds and 34.02 in non-fund limits. The ratio of both limits for the
year 2015 is 0.23:0.77
It is on the basis of the accounts receivable that the banks come to an agreement
with regards to the limits imposed. Though it is the fund based limits that
finance the working capital requirements, the non-fund based limits are
important for the management of the working capital as there might be clients
who are not willing to sell on open credit and might be demanding letters of
credit before any advances.
RENEWAL OF LIMITS
LIMITS 2015 2014 2013
FUND BASED 11500 11500 11500
NON FUND BASED 48500 38500 28500
TOTAL 60000 50000 40000
All banks sanction the limits for a period of one year. Thereafter it is to be
renewed every year. SBI appraises the limit on the basis of consortium. The
individual banks appraise for their own individual limit. The non fund based
limits of the firm in consortium financing has been subjected to change for the
past two years as per the requirements of the firm and the consent of the lead
bank to its proposal. It was around 385 Crores in 2014 and had been risen to
around 485 Crores in 2015.
A proposal has been made by the firm to further appraise the limits by 100
Crores to 585 Crores in view of the growing operations of the firm with full
interchangeability between letter of credit and bank guarantee limits for
operational flexibility. Allocation of the fund based and non based limits among
the banks based on operational convenience rather than allocating the fund
based and non fund based on the same ratio is also among the proposals made
by the firm.
The company needs to provide the following information to bank for appraisals:
Write Up on company
CONSORTIUM MEETING :
All the members of the consortium are required to meet to discuss various
issues relating to the working facilities. As per RBI guidelines, the lead bank,
i.e., SBI should ensure that one consortium meeting is held every quarter snd
this meeting has to be arranged by HCL.
There are various documents that need to be signed at the time of renewal or
inducting any bank to the consortium. The various documents are as follows:
Loan agreement
Counter Indemnity
The above are the standard agreements asked for by the banks. The common
seal has to be witnessed by the company secretary and one of the directors of
the company.
SBI appraises the limit on behalf of the consortium. It in consultation with the
company decided the allocation of the limit to various member banks. The
allocation of any member bank cannot be higher than the limit sanctioned by it.
The drawing power for it fund based limits out of the consortium are
determined on the basis of the stock statement submitted by the company. HCL
is required to submit the stock statement to all member banks in consortium for
every month.
Every quarterly and half quarterly intervals, the firm submits Financial Follow
Up Reports I and II. FFR I is an extract of the balance sheet. In this report, the
company is required to submit the details of sales, current assets and current
liabilities for the quarter and the estimates for the current year. FFR II – the
company is required to prepare P&L, B/S and Cash Flow in a different format.
The information is to be provided for the last year (actual), current year half
yearly results (actual) and the estimates for the next year.
Under secured loan cash credit, along with non fund based facilities, foreign
currency term loan from banks are secured by way of hypothecation of stock-in-
trade, book debts as first charge and by way of second chanrge on all the
immovable and movable assets of the parent company. Term loan in Indian
rupees from a bank is subject to a prior charge in favour of company’s bankers
on book debts and stock in trade for working capital facilities.
Here HCL has a major portion of their financing done through short term
financing than long term financing. The preference of short term financing to
long term as such is not the part of any policy employed by the firm but it was
due to the reason that the interest rates in short term were more investor friendly
and the cost involved in them were also low. At present, we can see that the firm
is moving more towards long term financing as the interest terms in the long
term has reduced compared to the short term.
4. ANALYSIS
4.1 INDUSTRY ANALYSIS
INDUSTRY STRUCTURE AND DEVELOPMENTS
Dividend:
The Company distributed dividends @ 100% per share in each of the first
three quarters of the current year. The company proposes to pay a final
dividend of 100% per fully paid up equity share of Rs. 2/- each. The
interim dividends paid together with proposed final dividend total to
400% for the current year, entailing an outflow of Rs. 156 crores,
including distribution tax.
Net worth/ Shareholders Fund:
Net Worth grew from Rs. 698 crores as at previous year-end to Rs. 860
crores as on June 30, 2016. Share capital as at year-end is Rs. 34 crores
divided into 16.9 crores shares of Rs. 2/- each. Reserves & surplus as at
year-end are Rs. 826 crores after appropriating Rs 156 crores for
dividends. Book value per share grew from Rs. 41.3 as at June 30, 2006
to Rs.50.8 as at June 30, 2016.
During the year, the Company allotted 4.2 lakh shares under Employee
Stock Option Scheme realizing Rs. 4.4 crores.
Borrowings: Year-end loan balances increased from Rs. 85 crores as on June
30, 2015 to Rs. 236 crores as on June 30, 2017. The increase in loan balances
was mainly to fund growth in Computing Business including System
Integration. Debt-Equity ratio [Debt/(Debt+Equity)] is 22%.
The following sources have been sought for the preparation of this report:
The working capital position of the company is sound and the various sources
through which it is funded are optimal.
The company has used its dividend policy, purchasing, financing and
investment decisions to good effect can be seen from the inferences made
earlier in the project.
The debts doubtful have been doubled over the years but their percentage on the
debts has almost become half. This implies a sales and collection policy that get
along with the receivables management of the firm.
The returns have been affected by a marked growth in working capital and
though a 29.75% in 2017 return on investment is good, but it got reduced as
compared to 39.01% return in 2016.
The various ratios calculated are an indicator as to the fact that the profitability
of the firm and sales are on a rise and also the deletion of the inefficiencies in
the working capital management.
The firm has not compromised on profitability despite the high liquidity is
commendable.
HCL Infosystems has reached a position where the default costs are as low as
negligible and where they can readily factor their accounts receivables for
availing finance is noteworthy.
7. SUGGESTIONS AND RECOMMENDATIONS
HCL Infosystems is managing its working capital in a good manner, but still
there is some scope for improvement in its management. This can help the
company in raising its profit level by making less investment in accounts
receivables and stocks etc. This will ultimately improve the efficiency of its
operations. Following are few recommendations given to the company in
achieving its desired objectives:
Though the present collection system is near perfect, the company as due to
the increasing sales should adopt more effective measures so as to
counter the threat of bad debts.
BIBLIOGRAPHY
Following sources have been sought for the preparation of this report:
Corporate Intranet
Financial Statements (Annual Reports)
Direct interaction with the employees of the company
Internet ----www.hclinfosystems.in
Textbooks on financial management -
I.M.Pandey
APPENDICES
FINANCIAL STATEMENTS FOR HCL INFOSYSTEMS LTD.
Currency in
Millions of Indian Rupees
2013 2014 2015 2016
ASSETS
TOTAL CASH AND SHORT TERM INVESTMENTS 1,567.1 4,086.3 5,286.9 4,916.4
Year over year, HCL Infosystems Ltd. has seen revenues remain relatively flat
(113.7B to 116.9B), though the company was able to grow net income from
2.8B to 3.2B. A reduction in the percentage of sales devoted to cost of goods
sold from 93.21% to 92.53% was a key component in the bottom line growth in
the face of flat revenues.
Selling General & Admin Expenses, Total 2,268.8 3,305.9 3,764.3 4,527.1
223.8