Larsen and Toubro Report

A REPORT ON “STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

submitted as partial fulfilment of the requirement of PGDM programme of ITM Business School, Siruseri, Chennai

BY KARTHICK M

Institute for Technology and Management, Chennai

Final Report June 2013

“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

Certificate of internship

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“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

Certificate of internship

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“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

AUTHORIZATION

I hereby declare that "A STUDY S TUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED‖ has been prepared by me during the academic year 2012-2014. 2012-2014. The project project was done under the supervision and able guidance of Prof. Dr.U.Jayalakshmi Srikumar of Institute for  Technology and Management, Chennai and Mr. V.Gopalan of (Larsen and toubro-ECC division) in partial fulfillment of the requirement for the Post Graduate Diploma in M anagement Course at the institute.

I also declare that this project is the result of my original work and has not been submitted to any other institution for the award of any degree or diploma.

Date: Place:

(Karthick M)

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“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

ACKNOWLEDGEMENTS

I express my gratitude to Prof. Lakshmi Mohan , Deputy Director of Institute for Technology and Management, Siruseri,Chennai for giving me this internship as a part of my curriculum. I thank my company guide Mr.V.Gopalan for the extended support and guidance he has shown to me during the period of internship. I owe many thanks to the guide of the project Prof.Dr.U.Jayalakshmi for her constant guidance and support. She had taken a great deal of effort to go through my work and gave valuable suggestions. My thanks and appreciations also go to the respondents whom I have the opportunity to meet for  their valuable inputs.

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“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

Certificate of Approval

The foregoing report titled ―A STUDY ON WORK ING CAPITAL IN LARSEN & TOUBRO LIMITED‖ is hereby approved as a creditable study of the project and has been presented in a satisfactory manner to warrant its acceptance as pre-requisite to the degree for which it was submitted. It is understood that by this approval, the u ndersigned do not necessarily endorse any conclusion drawn or opinion expressed therein, but app rove the report for the purpose for which it is submitted.

Panel of Examiners: 1) 2) 3)

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“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

TABLE OF CONTENTS S.NO

Particulars

1.

Introduction

Page no.

7 8 10 10 12 12

1.1 Company profile

1.2 Working capital 1.3 Objective of the study 1.4 Need of the study 1.5 Scope and significance 1.6 Limitation 2.

Review of the Literature

12

3.

Research methodology 3.1 Nature of the study 3.2 Period of study 3.3 Methodology 3.4 Tools applied in the study

17 17 17 17 18

4.

Data analysis and interpretation

18

5.

Findings

31

6.

Suggestions

32

7.

Conclusion

33

8.

References

34

List of illustrations:

1. 2. 3. 4. 5. 6. 7.

Working capital management curve Current ratio Liquid ratio Debt- equity ratio Debtors turnover ratio Creditors turnover ratio

19

Working capital ratio

30

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25 26 27 28 29

“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

1. INTRODUCTION 1.1 COMPANY PROFILE

Larsen & Toubro Limited (L&T) is a technology, engineering, construction and manufacturing company. It is one of the largest and most respected companies in India's private sector. Seven decades of a strong, customer-focused approach and the continuous quest for world-class quality have enabled it to attain an d sustain leadership in all its major lines of business. L&T has an international presence, with a global spread of offices. A thrust on international business has seen overseas earnings grow significantly. It continues to grow its overseas manufacturing footprint, with facilities in China and the Gulf region. The company's businesses are supported by a wide marketing and distribution network, and have established a reputation for strong customer support. L&T believes that progress must be achieved in harmony with the environment. A commitment to community welfare and environmental protection are an integral part of th e corporate vision. M/s Larsen & Toubro Ltd. ECC Division is prestigious organization having business worldwide, its ECC Division undertake engineering contracts of various construction in the field of Electrical, Mechanical & Civil Engineering. The Company having its headquarters at Chennai, and whole India is distributed in regions having respective regional headquarters, viz. Mumbai, Ahmadabad, Kolkata, Delhi, Hyderabad, Chandigarh etc. which coordinate all activities of sites within their region. Chattisgarh state have rich natural resources, coal is found in abundance thus various thermal  power plant are established at various places, Sipat Super Thermal Power Plant is one of the  biggest Thermal Power Plant, wherein our company execute construction of Boiler Erection & Electrical Cabling works and some other misc. works. Our Principal employer is M/s National Thermal Power Corporation Ltd. The workforce consists of 2500 workmen and Engineers and staff in various cadre, the workforce consist of employees from all over India. Operating Divisions: Engineering Construction & Contracts (ECC) Heavy Engineering Department (HED) Power  Electrical & Electronics (EBG)

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“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

Machinery & Industrial Products (MIPD) IT & Technology Services Financial Services Railway Projects 1.2 Working Capital Introduction of Working Capital Management

Working capital management is the device of finance. It is related to manage of current assets and current liabilities. After learning working capital management, commerce students can use this tool for fund flow analysis. Working capital is ver y significant for paying day to day expenses and long term liabilities. Meaning and Concept of Working Capital and its management

Working capital is that part of company‘s capital which is used for purchasing raw material and involve in sundry debtors. We all know that current assets are very important for proper working of fixed assets. Suppose, if you have invested your money to purchase machines of company and if you have not any more money to buy raw material, then your machinery will no use for any  production without raw material. From this example, you can understand that working capital is very useful for operating any business organization. We can also take one more liquid item of  current assets that is cash. If you have not cash in hand, then you cannot pay for different expenses of company, and at that time, your many business works may delay for not paying certain expenses. If we define working capital in very simple form, then we can say that working capital is the excess of current assets over current liabilities. Types of Working Capital 1.Gross working capital

Total or gross working capital is that working capital which is used for all the current assets. Total value of current assets will equal to gross working capital. 2. Net Working Capital  Net working capital is the excess of current assets over current liabilities.  Net Working Capital = Total Current Assets – Total Current Liabilities

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“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

This amount shows that if we deduct total current liabilities from total current assets, then  balance amount can be used for repayment of long term debts at any time.

3. Permanent Working Capital

Permanent working capital is that amount of capital which must be in cash or current assets for  continuing the activities of business. 4. Temporary Working Capital

Sometime, it may possible that we have to pay fixed liabilities, at that time we need working capital which is more than permanent working capital, then this excess amount will be temporary working capital. In normal working of business, we do n‘t need such capital. In working capital management, we analyze following three points 1) what is the need for working capital?

After study the nature of production, we c an estimate the need for working capital. If company  produces products at large scale and continues producing goods, then company needs high amount of working capital. 2) What is optimum level of Working capital in business?

Have you achieved the optimum level of working capital which has invested in current assets? Because high amount of working capital will d ecrease the return on investment and low amount of working capital will increase the risk of business. So, it is very important decision to get optimum level of working capital where both profitability and risk will be balanced. For  achieving optimum level of working capital, finance manager should also study the factors which affect the requirement of working capital and different elements of current assets. If he will manage cash, debtor and inventory, then working capital will automatically optimize.

3) What are main Working capital policies of businesses?

Policies are the guidelines which are helpful to direct business. Finance manager can also make working capital policies.

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“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

Working capital policy Liquidity policy

Under this policy, finance manager will increase the amount of liquidity for reducing the risk of   business. If business has high volume of cash and bank  balance, then business can easily pays his dues at maturity. But finance manger should not forget that the excess cash will not produce and earning and return on investment will decrease. So liquidity policy should be optimized. Profitability policy

Under this policy, finance manger will keep low amount of cash in business and try to invest maximum amount of cash and bank balance. It will sure that profit of business will increase due to increasing of investment in proper way but risk of business will also increase because liquidity of business will decrease and it can create bankruptcy position of business. So, profitability  policy should make after seeing liquidity policy and after this both policies will helpful for   proper management of working capital. 1.3 Objectives of the study: Primary objective:

•

To study the overall performance of the company for the selected  period of 5 years from 2007-2012.

Secondary objectives:

• • • •

To identify the financial strengths and weakness of the company. Through net profit ratio and other profitability ratios, understand the profitability of the company. To know the liquidity position of the company with the help of current ratio. To find out the utility of financial ratio in credit analysis and determining the financial capacity of the firm.

1.4 NEED FOR THE STUDY a) Business cycle:

In period of boom, when the business is prosperous there is need for larger amount of  working capital due to rise in sales, rise in prices, optimistic expansion of business etc. on the contrary, in times of depression, the business contracts, sales decline, difficulties are faced in collection from debtors and the firm may have a large amount of working capital.

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“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

b) Earning capacity and dividend policy:

Some firms have more earning capacity than others due to quality of their   products. Such firms generate cash profits from operations and contribute to their working capital. The dividend policy also affects the requirements of working capital. c) Growth and expansion of business:

In the beginning, the working capital requirements of a firm are low. However, with the gradual growth and expansion, its working capital needs also increase. Discernibility, larger  amount of working capital in a growing concern is required for its expansion programs. d) Capital structure of the firm:

If the shareholders have provided some funds towards the working capital needs, the management will find it relatively easy to manage working capital. If the firm has to depend entirely upon outside sources for both permanent and temporary working capital needs; it faces an uphill task under money conditions. e) Credit policy:

A firm making purchases on credit and sales on cash will always require lower amount of  working capital. On the contrary, a firm which is compelled to sell on credit and at the same time having no credit facilities may find itself in a tight corner. f) Profit margin:

Firms differ in their capacity to generate profit from business operations. Some firms enjo y a dominant position due to quality product or good marketing management of monopoly power in the market and earn a high profit margin. g) Liquidity and profitability:

If it is interested in improving its liquidity, it increases the level of its working capital. However, this policy is likely to result in a reduction of the sales volume, and therefore, of   profitability. A firm, therefore, should choose between liquidity and profitability and decide about its working capital requirements.

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“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

1.5 SCOPE AND SIGNIFICANCE OF THE STUDY:

Every business firm requires some amount of working capital. Even a fully equipped manufacturing firm is sure to collapse without having the following factors: • • • • •

An adequate supply of raw materials to process. Cash to meet the wage bill The capacity to wait for the market for its finished products and, The ability to grant credit to its customers. Similarly, a commercial enterprise is virtually good for nothing without merchandise to sell. Working capital, thus, is the back bone of a business. As a matter of fact, any organization, whether profit oriented o r otherwise will not be able to carry on productive and distributive activities smoothly without adequate working capital.

1.6 LIMITATIONS

•

The data collection is from the secondary source of information (i.e. balance sheet  provided by the firm) • The comparison and analysis are limited only for the five years. • The study is limited for a particular period

2. REVIEW OF LITERATURE

Every business needs funds for two purposes basically; they are for establishment and to carry day-to-day operations. Long term funds are required for establishment of the organization, it is required for production facility through purchase of fixed assets and it needs fixed capital and the funds which are needed for short term purposes for the purchase of raw materials, payment of wages, payment of day today expenses etc, the funds required for these are known as WORKING CAPITAL. Working capital refers to that part of the firm's capital which is required for financing short term or current assets such as cash, marketable securities, debtors and inve ntories. Funds, thus, invested in current assets keep revolving fast and are being constantly converted into Cash and this cash flow out in exchange for other current assets. Hence it is also known as CIRCULATING CAPITAL or REVOLVING CAPITAL or SHORT TERM CAPITAL .

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“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

According to GENESTENBERG:"Circulating capital means current assets of a company that are changed in the ordinary course of   business from one form to another, as for example, from cash to inventories, inventories to receivables into cash." Need for working capital cannot be over emphasized. Every business needs some amount of working capital. The need of working capital arises due to the time gap between production and realization of cash from sales. Thus, the working capital is needed for the following purposes:-a) for the purchase of raw materials, compone nts and spares. b) To  pay wages and salaries. c)To incur day-to-day expenses and overhead costs such as fuel, power  and office expenses etc. d)To met the selling costs as packing, advertising etc e)To provide credit facility to customers. f) To maintain the inventories of raw material, work-in-progress, stores and spares and finished stock. For studying the need of working capital in a business, one has to study the business under  varying circumstances such as a new concern, as a going concern and as one which has attained maturity. Many researchers have studied working capital from different views and in different environments. The following ones were very interesting and useful for our research According to El jelly, in 2004:Elucidated that efficient liquidity management involves p lanning and controlling current assets and current liabilities in such a manner that eliminates the risk of inability to meet due short-term obligations and avoids excessive investment in these assets. The relation between profitability and liquidity was examined, as measured by current ratio and cash gap (cash conversion cycle) on a sample of joint stock companies in Saudi Arabia using correlation and regression analysis. The study found that the cash conversion cycle was of more importance as a measure of liquidity than the current ratio that affects profitability. The size variable was found to have significant effect on profitability at the industry level. The results were stable and h ad important implications for liquidity management in various Saudi companies. First, it was clear that there was a negative relationship between profitability and liquidity indicators such as current ratio and cash gap in the Saudi sample examined. Second, the study also revealed that there was great variation among industries with respect to the significant measure of liquidity. According to De loof, in 2003:Discussed that most firms had a large amount of cash invested in working capital. It can therefore be expected that the way in which working capital is managed will have a significant impact on profitability of those firms. Using correlation and regression tests he found a significant negative relationship between gross operating income and the number of days

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“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

accounts receivable, inventories and accounts payable of Belgian firms. On basis of these results he suggested that managers could create value for their shareholders by reducing the number of  days accounts receivable and inventories to a reasonable minimum. The negative relationship  between accounts payable and profitability is consistent with the view that less profitable firms wait longer to pay their bills. According to Ghosh and Maji, in 2003:In this paper made an attempt to examine the efficiency of working capitalmanagement of the Indian cement companies during 1992 – 1993 to 2001 – 2002. For measuring the efficiency of  working capital management, performance, utilization, and overall efficiency indices were calculated instead of using some common working capital management ratios. Setting industry norms as target-efficiency levels of the individual firms, this paper also tested the speed of  achieving that target level of efficiency by an individual firm during the period of study. Findings of the study indicated that the Indian Cement Industry as a whole did not perform remarkably well during this period. According to Shin and Soenen, in 1998:Highlighted that efficient Working Capital Management (WCM) was very important for creating value for the shareholders. The way working capital was managed had a significant impact on  both profitability and liquidity. The relationship between the lengths of Net Trading Cycle, corporate profitability and risk adjusted stock return was examined using correlation and regression analysis, by industry and capital intensity. They found a strong negative relationship between lengths of the firm‘s net trading Cycle and its profitability. In addition, shorter net trade cycles were associated with higher risk adjusted stock returns. According to Sushma Vishnani, FCA, and Finance Faculty:It is felt that there is the need to study the role of working capital management policies on  profitability of a company. Conventionally, it has been seen that if a company desires to take a greater risk for bigger profits and losses, it reduces the size of its working capital in relation to its sales. If it is interested in improving its liquidity, it increases the level of its working capital. However, this policy is likely to result in a reduction of the sales volume, therefore of   profitability. Hence, a company should strike a balance between liquidity and profitability. In this paper an effort has been made to make an empirical study of Indian Consumer Electronics Industry for assessing the impact of working capital policies & practices on profitability during the period 1994 – 95 to 2004 – 05. The impact of working capital policies on profitabilityhas been examined by computing coefficient of correlation and regression analysis between profitability ratio and some key working capital polic y indicator ratios.

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“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

According to Charles O. Egbu, (2004):Innovation is viewed as a major source of competitive advantage and is perceived to be a prerequisite for organizational success and survival. The ability to innovate depends largely on the way in which an organisation uses and exploits the resources available to it. The paper explores the importance of knowledge management (KM) and intellectual capital (IC) in organisations. It also considers the critical factors that lead to successful innovations and the role of KM and IC in this regard. The paper argues that effective management of knowledge assets involves a holistic approach to a host of factors. It is also sug gested that there are a host of factors that combine indifferent ways to produce successful organizational innova tions. It recommends that more is needed on the education and training of construction personnel and that the education and training programmes should reflect the nature of innova tion and KM dimensions as very complex social processes. According to Kenneth A. Froot and Jeremy C. Stein in 1998:We develop a framework for analyzing the capital allocation and capital structure decisions facing financial institutions. Our model incorporates two key features: (i) value-maximizing  banks have a well-founded concern with risk management; and (ii) not all the risks they face can  be frictionlessly hedged in the capital market. This approach allows us to show how bank-level risk management considerations should factor into the pricing of those risks that cannot be easily hedged. We examine several applications, including the evaluation of proprietary trading operations , and the pricing of unhedgeable derivatives positions. We also compare our approach to the RAROC methodology that has been adopted by a number of banks.

According to Pradeep Singh (2008):Empirically analysed that a firm‘s working capital consists of its investments in current assets, which includes short-term assets — cash and bank balance, inventories, receivable and marketable securities. Therefore, the working capital management refers to the management of the levels of  all these individual current assets. On the other han d, inventory, which is one of the important elements of current assets, reflects the investment of a firm‘s fund. Hence, it is necessary to efficiently manage inventories in order to avoid unnecessary investments. A firm, which neglects the management of inventories, will have to face serious problems relating to long-term profitability and may fail to survive. With the help of better inventory management, a firm can reduce the levels of inventories to a considerable degree. ‗This paper tries to evaluate the effect of the size of inventory and the impact on working capital through inventory ratios,

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“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

working capital ratios, trends, computation of inventory and working capital, and liquidity ranking. Finally, it was found that the size of inventory directly affects working capital and it's management. Size of the inventory and working capital of Indian Farmers Fertilizer Cooperative Limited (IFFCO) is properly managed and controlled compared to National Fertilizer Ltd. (NFL). According to Pedro Juan Garcı´a-Teruel and Pedro Martı´nez-Solano (2007):Conducted research for the object of the research presented in this paper is to provide empirical evidence on the effects of working capital management on the profitability of a sample of small and medium-sized Spanish firms. The results, which are robust to the presence of endogeneity, demonstrate that managers can create value by reducing their inventories and the number of days for which their accounts are outstanding. Moreover, shortening the cash conversion cycle also improves the firm‘s profitability. The aim is to ensure that the relationships found in the analysis carried out are due to the effects of the cash conversion cycle on corporate profitability and not vice versa. According to Naila Iqbal (2001):Examined that for increasing shareholder's wealth a firm has to a nalyze the effect of fixed assets and current assets on its return and risk. Working Capital Mana gement is related with the Management of current assets. The Management of current assets is different from fixed assets on the basis of the following points i.e. Current assets are for short period while fixed assets are for more than one year. The large holdings of current assets, especially cash, strengthens Liquidity position but also reduces overall profitability, and to maintain an optimum level of liquidity and profitability, risk return trade off is involved ho lding Current assets. Only Current Assets can be adjusted with sales fluctuating in the short run. Thus, the firm has greater  degree of flexibility in managing current Assets. The management of Current Assets helps a firm in building a good market reputation regarding its business and economic condition. According to Vellanki S. Kumar, Awad S.Hanna, Teresa Adams (2000):Conducted research and examined that the systematic assessment of working capital requirement in construction projects deals with the analysis of various quantitative and qualitative factors in which information is subjective and based on uncertainty. There exists an inherent difficulty in the classical approach to evaluate the impact of qualitative factors for the assessment of  working capital requirement. This paper presents a methodology to incorporate linguistic variables into workable mathematical propositions for the assessment of working capital using fuzzy set theory. This article takes into consideration the uncertainty associated with many of the

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“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

 project resource variables and these are reflected satisfactorily in the working capital computations. A case study illustrates the application of the fuzzy set approach. The results of  the case study demonstrate the superiority of the fuz zy set approach to classical methods in the assessment of realistic working capital requirements for construction projects. According to Maynard E. Rafuse (1996):Argues that attempts to improve working capital by dela ying payment to creditors are counter productive to individuals and to the economy as a whole. Claims that altering debtor and creditor  levels for individual tiers within a value system will rarely produce an y net benefit. Proposes that stock reduction generates system wide financial improvemen ts and other important  benefits. Urges those organizations seeking concentrated working capital reduction strategies to focus on stock management strategies based on ―lean supply-chain‖ techniques. 3. RESEARCH METHODOLOGY 3.1 Nature of the study

A study in this topic in L&T is necessary and it is very important in Working Capital ratios of  the company which helps in knowing liquidity, solvency, profitability and turnover position of  the company. It also helps in studying the composition of various items of Current Asset and Current Liability. This helps in framing control measures of items of Current Asset and Cu rrent Liability. 3.2 Period of Study

The period of study was limited to three months during January to March of 2013. During this period all the required data was collected through secondary sources and anal yzed with the help of financial tools of analysis. 3.3 Methodology

The objective of the study is to anal yze the Working Capital position of the compan y for  the past five years 2008 to 2012. The major sources of data were secondary data (i.e.) published annual reports and financial reports etc. Discussion with the officials of the company. • Firstly, the position of the Working Capital has been analyzed through various Working Capital ratios with the help of data availab le in the financial statement of  the past five years. • Secondly, an analysis of the various items of Current Asset and Current Liabilities for past five years has been done.

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“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

3.4 Tools applied in the study

The various tools applied in the study to analyze the Working Capital position o f the company are as follows: • •

Ratio Analysis Comparison of balance sheet for the last five years.

4. DATA ANALYSIS AND INTERPRETATION Calculation of working capital: Particulars

2008

2009

2010

2011

2012

Inventories

4305.90

5805.05

1415.37

1577.15

1776.62

Sundry debtors

7365.01

10055.52

11163.70

12427.61

18729.84

Cash and bank   balance Other current assets Loans and advances Investments

964.46

775.29

1431.87

1730.35

1778.12

-

-

6353.22

11049.25

11917.64

3663.82

6790.60

5997.45

8225.29

9128.04

-

-

-

-

6787.19

Interest accrued on investment Total (A)

14.32

21.56

-

-

-

16313.52

23448.02

26361.61

35009.65

50117.45

Current liabilities Liabilities

11648.42

14775.88

19054.50

25589.82

34243.76

Provisions

2035.42

3066.53

2188.36

2233.43

2112.04

Total (B)

13683.84

17842.41

21242.86

27823.25

36355.80

Working capital C.A. (-) C.L.

2629.68

5605.61

5118.75

7186.40

13761.65

Current assets

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“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

Working capital 16000 14000 12000 10000 8000

Working capital

6000 4000 2000 0 2008

2009

2010

2011

2012

Inference:

The working capital was kept increasing over the years from 2008-2012. The activity of the company was increased. Their businesses were extended in various sectors and worldwide. There was an huge profit margin every year so that all the shareholders are paid dividend.

Working capital is calculated by the difference between current assets and current liabilities.

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“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

4.1 COMPARATIVE BALANCE SHEET STATEMENT FOR THE YEAR ENDED 2007-2008 Particulars

2007(in crore)

2008(in crore)

INCREASE/ DECREASE

% CHANGES

LIABILITIES: Shareholders Fund: Share capital Reserves & surpluses Employee stock option Loan Fund: Secured loans

56.65 5660.28 51.5

58.47 9382.22 114.39

1.82 3721.94 62.89

3.21 65.75 122.12

245.4

308.53

63.13

25.72

1832.35 204.88

3275.42 244.33

1443.07 39.45

78.75 19.25

8157.13 1180.13 17388.32

11741.72 2035.42 27160.50

3584.59 855.29 9772.18

43.94 72.47 56.20

Unsecured loans Deferred tax liabilities Current liabilities & Provisions: Liabilities Provisions TOTAL LIABILITIES: ASSETS: Fixed asset Intangible asset Fixed asset held for sale Investment Deferred tax assets Current Assets Interest accrued on investments Inventories Sundry Debtors Cash & Bank balance Loans & advances Miscellaneous expenses Other current assets

2144.04 80.65 3104.44 164.69

3553.43 92.01 6922.26 182.96

1409.39 11.36 3817.82 18.27

65.73 14.08 122.98 11.09

26.52

14.32

-12.2

-46

3001.14 5504.64 1094.43 2257.93 9.84 -

4305.91 7365.01 964.46 3757.08 3.06 -

1304.77 1860.37 -129.97 1499.15 -6.78 -

43.47 33.79 -11.88 66.39 -68.09 -

TOTAL ASSETS

17388.32

27160.50

9772.18

56.20

Interpretation: There is an increase in employee stock option of 122.11% and investments have increased by 122.98 for the year 2007-08.

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“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

FOR THE YEAR ENDED 2008-2009 Particulars

2008(in crore)

2009(in crore)

INCREASE/ DECREASE

% CHANGES

LIABILITIES: Shareholders Fund: Share capital Reserves & surpluses Employee stock option Loan Fund: Secured loans

58.47 9382.22 114.39

117.14 12106.89 235.66

58.67 2724.67 121.27

100.34 29.04 106.01

308.53

1102.38

793.85

257.3

3275.42 244.33

`5453.65 435.16

2178.23 190.83

66.50 78.10

11741.72 2035.42 27160.5

14775.88 3066.53 37293.29

3034.16 1031.11 10132.79

25.85 50.65 37.30

3553.43 92.01 6922.26 182.96

5053.78 140.82 8263.72 386.69

1500.35 48.81 1341.46 203.73

42.22 53.04 19.37 111.35

14.32

21.56

7.24

50.55

Sundry Debtors Cash & Bank balance Loans & advances Miscellaneous expenses Other current assets

4305.91 7365.01 964.46 3757.08 3.06 -

5805.05 10055.52 775.29 6790.6 0.26 -

1499.14 2690.51 -189.17 3033.52 -2.8 -

34.81 36.53 -19.61 80.74 -91.5 -

TOTAL ASSETS

27160.5

37293.29

1013.79

37.30

Unsecured loans Deferred tax liabilities Current liabilities & Provisions: Liabilities Provisions TOTAL LIABILITIES: ASSETS: Fixed asset

Intangible asset Fixed asset held for sale Investment Deferred tax assets Current Assets Interest accrued on investments Inventories

Inference: While comparing the year 2008-09, there is an increase in the share capital by 100.34% and employee stock option by 106.01%

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“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

FOR THE YEAR ENDED 2009-2010 Particulars

2009(in crore)

2010(in crore)

INCREASE/ DECREASE

% CHANGES

Share capital Reserves & surpluses Employee stock option Loan Fund: Secured loans

117.14 12106.89 235.66

120.44` 17882.22 308.98

3.3 5775.33 73.32

2.81 47.70 31.11

1102.38

955.73

-146.65

-13.3

Unsecured loans Deferred tax liabilities Current liabilities & Provisions: Liabilities Provisions

5453.65 435.16

5845.1` 389.27

391.45 -45.89

7.17 -10.55

14775.88 3066.53 37293.29

19054.50 2188.36 46744.60

4278.66 -878.17 9451.31

28.95 -28.63 25.34

ASSETS: Fixed asset

5053.78

6223.08

1169.30

23.13

Intangible asset

140.82

142.68

1.86

1.33

Fixed asset held for sale Investment

8263.72

13705.35

5441.63

65.84

Deferred tax assets

386.69

311.88

-74.81

-19.35

21.56

0

-21.56

-100

5805.05

1415.37

-4389.68

-75.62

Sundry Debtors Cash & Bank balance

10055.52 775.29

11163.70 1431.87

1108.18 656.58

11.02 84.68

Loans & advances

6790.6

5997.45

-793.15

-11.68

Miscellaneous expenses Other current assets

0.26 0

0 6353.22

-0.26 6353.22

-100 0

TOTAL ASSETS

37293.29

46744.60

9451.31

25.34

LIABILITIES: Shareholders Fund:

TOTAL LIABILITIES:

Current Assets Interest accrued on investments Inventories

Inference: There is an increase in cash balance by 84.68% [22]

“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

FOR THE YEAR ENDED 2010-2011 Particulars

2010(in crore)

2011(in crore)

INCREASE/ DECREASE

% CHANGES

LIABILITIES: Shareholders Fund: Share capital Reserves & surpluses Employee stock option Loan Fund: Secured loans

120.44 17882.22 308.98

121.77 21356.18 368.31

1.33 3473.96 59.33

1.10 19.42 19.20

955.73

1063.04

107.31

11.22

5845.1 398.27

6098.07 549.74

252.97 160.47

4.32 41.22

19054.50 2188.36 46744.60

25589.82 2233.43 57380.36

6535.32 47.39 10635.76

34.29 2.16 22.75

ASSETS: Fixed asset

6223.08

7236.98

1013.9

16.29

Intangible asset

142.68

221.15

78.47

54.99

Fixed asset held for sale Investment

13705.35

14684.82

979.47

7.14

Deferred tax assets

311.88

286.27

-25.61

-8.21

-

-

-

-

1415.37

1577.15

161.78

11.43

Sundry Debtors Cash & Bank balance

11163.70 1431.87

12427.61 1730.35

1263.91 298.48

11.32 20.84

Loans & advances

5997.45

8188.69

2191.24

36.53

Miscellaneous expenses Other current assets

6353.22

11027.34

4674.12

73.57

TOTAL ASSETS

46744.60

57380.36

10635.76

22.75

Unsecured loans Deferred tax liabilities Current liabilities & Provisions: Liabilities Provisions TOTAL LIABILITIES:

Current Assets Interest accrued on investments Inventories

Inference: There was an increase in employee stock option of 19.20% and other current assets by 73.57% [23]

“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

FOR THE YEAR ENDED 2011-2012 Particulars

2011(in crore)

2012(in crore)

Increase/ Decrease

% Changes

Share capital:

121.77

122.48

0.71

0.58

Reserves & Surpluses

21724.49

25100.54

3376.05

15.5

Long term borrowings

5425.41

5330.06

-95.35

-1.75

Deferred tax liability

263.47

133.01

-130.46

-49.51

Long term liability

32.41

376.02

343.61

1060.19

Long term provisions

242.08

275.05

32.97

13.61

Current liabilities

29300.37

36355.80

7055.43

24.07

TOTAL LIABILITIES:

57110.00

67692.96

10582.96

18.53

Fixed assets

7415.53

8363.66

948.13

12.78

Investments

7400.84

9084.71

1683.87

22.75

Loans & Advances

3317.06

4042.80

725.74

21.87

Current Assets

38975.77

46074.65

7098.88

18.21

Cash & Bank balances

0.80

127.14

126.34

15792.5

TOTAL ASSETS:

57110.00

67692.96

10582.96

18.53

LIABILITIES: Shareholder’s funds:

ASSETS:

Inference: There was an increase in long term liability by 1060.19% and also in cash and bank balance by 15792.5%

[24]

“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

Working capital Ratios: 1. Current Ratio: It is given by the formula current assets divided by current liabilities. Year

Assets

Liabilities

Current Ratio

2007-2008

16313.52

13683.84

1.19

2008-2009

23448.02

17842.41

1.31

2009-2010

26361.61

21242.86

1.24

2010-2011

34951.14

27823.25

1.25

2011-2012

46074.65

36355.80

1.27

current ratio 1.32 1.3 1.28 1.26 1.24 1.22

current ratio

1.2 1.18 1.16 1.14 1.12 2007-2008

2008-2009

2009-2010

2010-2011

2011-2012

Inference: From the above table it is observed that in 2007-2008 the ratio is 1.19 it is quiet low. It may be due to the absence of information related to short term investments.

[25]

“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

2. Quick Ratio: It is given by the formula liquid assets divided by current liabilities. Year

Liquid Assets

Current Liabilities

Liquid ratio

2007-2008

12007.61

13683.84

0.87

2008-2009

17642.97

17842.41

0.98

2009-2010

24946.24

21242.86

1.17

2010-2011

33373.99

27823.25

1.19

2011-2012

44298.03

36355.80

1.21

Liquid ratio 1.4 1.2 1 0.8 Liquid ratio

0.6 0.4 0.2 0 2008

2009

2010

2011

2012

Inference: The ideal quick ratio is 1;1. Since there is no information related to short term investments it is low for the first two years.

[26]

“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

3. Debt – equity ratio: It is given by the formula: Total long term debts divided by shareholder’s funds Year

Long term debts

Share holder’s funds

Debt-Equity Ratio

2007-2008

3583.99

9555.08

0.38

2008-2009

6556.03

12459.69

0.52

2009-2010

6800.83

18311.64

0.37

2010-2011

7161.11

21846.26

0.32

2011-2012

10156.94

25223.02

0.40

Debt-equity ratio

0.6 0.5 0.4 0.3 0.2 0.1 0 2008

2009

2010

2011

2012

Inference: Higher debt capacity is available since institutional norms require 1.5:1 for financing the projects. Generally the ratio is higher for capital intensive projects.

[27]

“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

4. Debtors turnover ratio: Year

Receivables

Credit sales

Debtors Turnover ratio

2007-2008

7365.01

25187.48

107 days

2008-2009

10055.52

34045.04

108 days

2009-2010

11163.70

36995.93

110 days

2010-2011

12427.61

43886.17

103 days

2011-2012

18729.84

53737.78

127 days

It is given by the formula :

Receivables ------------------------------------ X

365

Credit sales

Debtors turnover ratio 140 120 100 80 Debtors turnover ratio 60 40 20 0 2008

2009

2010

2011

2012

Inference: It indicates the level of the company. There is adequate capital reserve in the company, so progress is very good and so there is no delay in payment settled to debtors. It indicates a good sign.

[28]

“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

5. Creditors Turnover ratio: Year

Credit Purchases

Average Accounts Payable

Creditors turnover ratio

2007-2008

19130.46

11690.21

1.64

2008-2009

26232.01

14671.11

1.79

2009-2010

28453.55

18947.99

1.50

2010-2011

33431.62

25589.82

1.31

2011-2012

41020.18

36355.80

1.12

The creditor’s turnover ratio is given by the formula: credit purchases divided by average accounts payable. Inference: The working capital management is very efficient. Creditors settle their disputes in a short span so that work gets easier. There can also be more number of new projects created.

Creditors turnover ratio 1.8 1.6 1.4 1.2 1 Creditors turnover ratio 0.8 0.6 0.4 0.2 0 2008

2009

2010

2011

2012

[29]

“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

6. Working capital turnover ratio:

Year

Net sales

Net working capital

Working capital turnover ratio

2007-2008

24854.69

2629.65

9.45

2008-2009

33646.69

5605.48

6.00

2009-2010

36675.95

5118.65

7.17

2010-2011

43495.61

7127.42

6.10

2011-2012

53170.52

9718.85

5.47

Working capital ratios 10 9 8 7 6 5

Working capital ratios

4 3 2 1 0 2008

2009

2010

2011

2012

Inference: The working capital ratio is not consistent throughout the year 2008-2012. In the present year 2011-12 the ratio is decreasing because there is no proportionate increase in NET SALES when compared to NET WORKING CAPITAL. [30]

“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

5. FINDINGS

The following has been found in the thesis: a) Current ratio of the company is 1.19 for the year 2007-08 and it increased to 1.31 in the year  2008-09.Further it declined in the subsequent years.  b) Quick ratio of the company for the period 2008-2012 varies from 0.87 in the year 2008 to 1.21 in the year 2012. The maximum been 1.21 in the year 2012 and the minimum being 0.87 in 2008. c) Debt-equity ratio of the company is 0.38 in the year 2008 and it increases to 0.52 in the next year, then again it falls to 0.37 in the subsequent year. d) Debtor ‘s turnover ratio during the period of study varies from107 days in the year 2008 to 127 days in the year 2012.The maximum is 127 days and minimum is 103 days in 2011. e) Creditor‘s turnover ratio indicates the number of times the cr editors are turned over during a year. The creditor ‘s turnover ratio is increasing upto 2008-2009 then it gets decreasing till 2012, which is a good sign for the company. f) Working capital turnover ratio stood at 9.45 in the year 2008, it got decreased to 5.47 in 2012. It is mainly due to the fact that there is low sales volume in year 2012 compared to 2011. g) The share capital and the secured loans of the company for the year 2009 increases by 100.3% and 257.30% from the previous year 2008. Similarly the fixed assets and the inventories of the company increased by 42.22% and 34.81% in the year 2009. h) For the year 2009& 2010, the reserves and surplus of the company increased to 17882.22 in 2010 which is 47.70% of the previous year 2009.The investments and the liquid cash & bank   balances of the company increased by 58.22% and 84.68% in the year 2010. The stock   balance has come down by 75.62% and the miscellaneous expenses have completely written off to scratch in the year 2010.

[31]

“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

6. Suggestions:

•

During the year 2009 there was sudden hike in price of  Raw materials, the company cannot do anything against the economical changes.

•

This is due to the company‘s commitment to its c lients with the minimum use of  the raw materials the company should work with it.

•

The company should keep an eye on to maximize the production so that the share value of the company will be increased so that the company will get more  business.

•

The company should able to verify that the due payments they have get at proper  time so that there will not be delay in getting payment.

•

The company should follow the method of getting income over the fixed asset.

•

The company can maintain its interest coverage ratio.

•

The company should not disturb its fixed asset frequently that will affect the turnover  ratio.

•

The company should maximize stock and it should not be dead stock this will lead to loss of money and place. So the company should utilize its inventory according to the production.

•

The working capital of the company that is the current asset and the current liability should be maintained properly by this it helps in avo iding Bank   borrowing and long term source of funds.

[32]

“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

7. Conclusion:

The main aim of using working capital is to maintain equilibrium between the current assets and current liabilities. Both inadequate and redundant working capital situation is dangerous. Thus, the firm will have adequate working capital without excess being wasted instead of getting inversed. Based on study being carried out at L&T ECC division, it can inferred that the Company‘s working capital position is good further the compan y has shown good growth this can read by their projects made around the world. The company is growing into immense size this can be understood by recent contribution to built CHENNAI METRO RAIL PROJECT AND ITC GRAND CHOLA  – A PREMIUM LUXURY SEVEN STAR HOTEL which is recently completed at Chennai. The company has utilized the investment proposals and all the ratios have mostly satisfied the standard norms in the past five years.

[33]

“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

8.References: 1. 2. 3. 4. 5. 6.

www.google.com www.lntecc.com www.wikipedia.com www.moneycontrol.com Annual reports from Larsen and toubro limited for the year 2008-2012. Working capital management by R.K.Sharma.

[34]

“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

[35]

“A STUDY ON WORKING CAPITAL IN LARSEN & TOUBRO LIMITED”

[36]