Tata Steel - Financial Analysis

Working Capital Management

PROJECT REPORT April 2007 - June 2007 Submitted in partial fulfillment of the requirements for the award of two year full time, Masters in Business Administration By

Sony Mathew (Amrita School of Business) Under the guidance of

Ms. Sunanda Muralidharan Associate Professor (Finance) Amrita School of Business Ettimadai.

Mr. Pradeep Kumar Bal Senior Manager, Business Analysis Flat Products, Tata Steel Jamshedpur.

Amrita School of Business Amrita Vishwa Vidyapeetham Ettimadai, Coimbatore - 641 105

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Working Capital Management

Declaration

I hereby declare that the project entitled “Working Capital Management” is submitted in partial fulfillment of my MBA Degree “2006-2008” was carried out with sincere intention of benefiting the organization. The project duration was from 23rd April 2007 to 23rd June 2007. To the best of my knowledge it is an original piece of work done by me and it has neither been submitted to any other organization nor published at anywhere before.

Name: Sony Mathew Date: 23 rd June 2007 Place: TATA STEEL (Jamshedpur)

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Acknowledgement Whatever we do and whatever we achieve during the course of our limited life is just not done only by our own efforts, but by efforts contributed by other people associated with us indirectly or directly. I thank all those people who contributed to this from the very beginning till its successful end.

I sincerely thank Mr. Pradeep Kumar Bal (Senior Manager, Business Analysis, FP), person of amiable personality, for assigning such a challenging project work which has enriched my work experience and getting me acclimatized in a fit and final working ambience in the premises of Flat Product Business Centre (TATA STEEL).

I acknowledge my gratitude to Ms. Sunanda Muralidharan (Associate Professor, Amrita School of Business), for her extended guidance, encouragement, support and reviews without whom this project would not have been a success.

Last but not the least I would like to extend my thanks to all the employees at Flat Product department and my friends for their cooperation, valuable information and feedback during my project.

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Executive Summary

The project on Working Capital Management has been a very good experience. Every manufacturing company faces the problem of Working Capital Management in their day to day processes. An organization’s cost can be reduced and the profit can be increased only if it is able to manage its Working Capital efficiently. At the same time the company can provide customer satisfaction and hence can improve their overall productivity and profitability.

This project is a sincere effort to study and analyze the Working Capital Management of TATA Steel and also emphasis to Flat Product Profit Centre of TATA Steel. The project work was divided into two phases. The first phase was focused on making a financial overview of the company by conducting a Time series analysis of TATA Steel for the years 2002 to 2006 and a Comparative analysis of TATA Steel with its domestic competitors – SAIL, Jindal, Essar & Ispat for the year 2006 in a cma(cash monitoring arrangement) format emphasizing on Working Capital. The second phase was aimed at making a revised Working Capital projection for the Flat Products Profit Centre (FPPC) for the year 2007-08 preceded by conducting an operational overview, study of the valuation and controlling techniques and study of the credit sales policy of Flat Products Profit Centre of TATA Steel.

The internship is a bridge between the institute and the organization. This made me to be involved in a project that helped me to employ my theoretical knowledge about the myriad and fascinating facets of finance. And in the process I could contribute substantially to the organization’s growth.

The experience that I gathered over the past two months has certainly provided the orientation, which I believe will help me in shouldering any responsibility in future.

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Table of Contents 1. ABOUT THE COMPANY

3

1.1. Company Profile

3

1.2. Flat Products

4

2. WORKING CAPITAL MANAGEMENT

5

2.1. Introduction

5

2.2. Working Capital Analysis

6

2.3. Nature and Importance of Working Capital

6

2.4. The Importance of Good Working Capital Management

7

2.5. Working Capital Cycle

8

3. TIME SERIES ANALYSIS OF TATA STEEL FOR 2002-06

10

3.1. Working Capital Cycle

11

3.2. Holding Norms

12

3.3. Contribution to Current Assets

13

3.4. Schedule of Changes in Working Capital

14

3.5. Assessment of Working Capital Requirements

16

3.6. Funds Flow Analysis

16

3.7. Percentage Analysis of Different Cost Components Vis-À-Vis Net Sales

18

3.8. Profitability Analysis (As % of net sales)

18

3.9. Tax and Dividend Analysis (%)

19

3.10. Liquidity Ratios

20

4. COMPARATIVE ANALYSIS OF TATA STEEL WITH SAIL, JSW, ESSAR & ISPAT 4.1. Working Capital Cycle

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4.2. Holding Norms

23

4.3. Contribution to Current Assets

24

4.4. Assessment of Working Capital Requirements

25

4.5. Percentage Analysis of Different Cost Components vis-à-vis Net Sales

26

4.6. Profitability Analysis (As % of net sales)

26

4.7. Tax and Dividend Analysis (%)

27

4.8. Liquidity Ratios

28

5. FLAT PRODUCT PROFIT CENTRE (FPPC)…

29

5.1. Operational Overview of FPPC

29

5.2. Valuation and Controlling techniques

30

5.3. Credit Sales Policy for Flat Products

30

5.4. Gross Working Capital Projection for FPPC

32

6. RECOMMENDATIONS

33

7. ANNEXURE

35

8. REFERENCES

36

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1. ABOUT THE COMPANY 1.1 Company Profile

Established in 1907, Tata Steel is Asia's first and India's largest private sector steel company. Tata Steel is among the lowest cost producers of steel in the world and one of the few select steel companies in the world that is EVA+ (Economic Value Added).

Its captive raw material resources and the state-of-the-art 4.9 mtpa (million tonne per annum) plant at Jamshedpur, in Jharkhand State, India gives it a competitive edge. With the acquisition of Corus, Tata steel has become the fifth largest steel maker in the world. Soon the Jamshedpur plant will expand its capacity from 4.9 mtpa to 7 mtpa by 2008. The Company plans to further enhance its capacity, manifold through organic growth and investments. Its associated / subsidiaries constitutes about 24 mtpa making it’s total capacity about 29mtpa which is the fifth largest in the world. Out of this the steel business comprising of Flat Products, Long Products, RM Division, CSI Division, Shared Services constitutes 85% of its business. The rest comprising of Tubes, Bearings, Agrico Products constitutes the rest 15% business.

Company in Observation: TATA STEEL The products of TATA STEEL can be broadly categorized into the following categories: • •

Flat Products. Long Products.

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1.2 Flat Products In keeping with the company’s commitment to redefine the future of Indian Steel, the Flat products business group at Tata Steel, today, is the country's largest manufacturer of world class steel products. With a stretched capacity of 2.5 million metric tonne of Hot Rolled, Cold rolled & Coated Products, Flat Products business group produces approx. 65% of total saleable steel.

Tata Steel's products include hot and cold rolled coils and sheets, galvanised sheets, tubes, wire rods, construction rebars, rings and bearings. In an attempt to 'decommoditise' steel, the company has introduced brands like Tata Steelium (the world's first branded Cold Rolled Steel), Tata Shaktee (Galvanised Corrugated Sheets), Tata Tiscon (re-bars), Tata Bearings, Tata Agrico (hand tools and implements), Tata Wiron (galvanised wire products), Tata Pipes (pipes for construction) and Tata Structura (contemporary construction material). The company has launched the Customer Value Management initiative with the objective of creating complete understanding of customer problems and finding solutions jointly. The company's Retail Value Management addresses the needs of distributors, retailers and end consumers. The company has also launched India's first steel retail store – steel junction - for making steel shopping a happy and memorable experience.

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2. WORKING CAPITAL MANAGEMENT

2.1 Introduction A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other is referred to as working capital management. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses. Implementing an effective working capital management system is an excellent way for many companies to improve their earnings. The two main aspects of working capital management are ratio analysis and management of individual components of working capital. Ratio analysis will lead management to identify areas of focus such as inventory management, cash management, accounts receivable and payable management.

The study objectives in working capital management particular to this study are: Ø To examine the impact of accounts receivables days, inventories days, accounts payable days and cash conversion cycle on return on total assets Ø To analyze the trend in working capital needs of firms and to examine the causes for any significant differences between the industries

Working Capital Components The term working capital refers to the amount of capital which is readily available to an organization. It is a measure of both a company's efficiency and its short-term financial health. That is, working capital is the difference between resources in cash or readily convertible into cash (Current Assets) and organizational commitments for which cash will soon be required (Current Liabilities). Current Assets are resources which are in cash or will soon be converted into cash in “the ordinary course of business”‘. Current Liabilities are commitments which will soon require cash settlement in “the ordinary course of business”. The working capital is calculated as: WORKING CAPITAL = CURRENT ASSETS-CURRENT LIABILITIES

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Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable, inventory). If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. Working capital also gives investors an idea of the company's underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, even if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations.

2.2 Working Capital Analysis The major components of gross working capital include stocks (raw materials, work-in-progress and finished goods), debtors, cash and bank balances. The composition of working capital depends on a multiple of factors, such as operating level, level of operational efficiency, inventory policies, book debt policies, technology used and nature of the industry. While inter- industry variation is expected to be high, the degree of variation is expected to be low for firms within the industry.

2.3 Nature and Importance of Working Capital The working capital meets the short-term financial requirements of a business enterprise. It is a trading capital, not retained in the business in a particular form for longer than a year. The money

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invested in it changes form and substance during the normal course of business operations. If it becomes weak, the business can hardly prosper and survive. The success of a firm depends ultimately, on its ability to generate cash receipts in excess of disbursements. On the one hand, working capital is always significant. This is especially true from the lender's or creditor's perspective, where the main concern is defensiveness: can the company meet its short-term obligations, such as paying vendor bills? But from the perspective of equity valuation and the company's growth prospects, working capital is more critical to some businesses than to others. At the risk of oversimplifying, we could say that the models of these businesses are asset or capital intensive rather than service or people intensive.

2.4 The Importance of Good Working Capital Management Working capital constitutes part of the Crown’s investment in a department. Associated with this is an opportunity cost to the Crown. (Money invested in one area may “cost” opportunities for investment in other areas.) If a department is operating with more working capital than is necessary, this over-investment represents an unnecessary cost to the Crown. From a department’s point of view, excess working capital means operating inefficiencies. In addition, unnecessary working capital increases the amount of the capital charges.

The Management of Working Capital The amounts invested in working capital are often high in proportion to the total assets employed and so it is vital that these amounts are used in an efficient and effective way. A firm can be very profitable, but if this is not translated into cash from operations within the same operating cycle, the firm would need to borrow to support its continued working capital needs. Thus, the twin objectives of profitability and liquidity must be synchronized and one should not impinge on the other for long. Investments in current assets are inevitable to ensure delivery of goods or services to the ultimate customers and a proper management of same should give the desired impact on either profitability or liquidity. If resources are blocked at different stages of the supply chain, this will prolong the cash operating cycle. Although this might increase profitability (due to increase sales), it may also adversely affect the profitability if the costs tied up in working capital exceed the benefits of holding more inventory and/or granting more trade credit to customers. Another component of working capital is accounts payable, but it is different in the sense that it does not consume

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resources; instead it is often used as a short term source of finance. Thus it helps firms to reduce its cash operating cycle, but it has an implicit cost where discount is offered for early settlement of invoices.

Approaches to Working Capital Management The objective of working capital management is to maintain the optimum balance of each of the working capital components. This includes making sure that funds are held as cash in bank deposits for as long as and in the largest amounts possible, thereby maximizing the interest earned. However, such cash may more appropriately be “invested” in other assets or in reducing other liabilities. Working capital management takes place on two levels: §

Ratio analysis can be used to monitor overall trends in working capital and to identify areas requiring closer management.

§

The individual components of working capital can be effectively managed by using various techniques and strategies.

When considering these techniques and strategies, departments need to recognize that each department has a unique mix of working capital components. The emphasis that needs to be placed on each component varies according to department. For example, some departments have significant inventory levels; others have little if any inventory. Furthermore, working capital management is not an end in itself. It is an integral part of the department’s overall management. The needs of efficient working capital management must be considered in relation to other aspects of the department’s financial and non-financial performance.

2.5 Working Capital Cycle Working capital cycle, also known as the asset conversion cycle, operating cycle, cash conversion cycle or just cash cycle, is used in the financial analysis of a business. The higher the number, the longer a firm's money is tied up in business operations and unavailable for other activities such as investing. The cash conversion cycle is the number of days between paying for raw materials and receiving cash from selling goods made from that raw material.

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Cash Conversion Cycle = Average Stockholding Period (in days) + Average Receivables Processing Period (in days) - Average Payables Processing Period (in days) with: §

Average Stockholding Period (in days) = Closing Stock / Average Daily

Purchases

§

Average Receivables Processing Period (in days) = Accounts Receivable /

Average

Daily Credit Sales §

Average Payable Processing Period (in days) = Accounts Payable / Average

Daily

Credit Purchases

A short cash conversion cycle indicates good working capital management. Conversely, a long cash conversion cycle suggests that capital is tied up while the business waits for customers to pay. The longer the production process, the more cash the firm must keep tied up in inventories. Similarly, the longer it takes customers to pay their bills, the higher the value of accounts receivable. On the other hand, if a firm can delay paying for its own materials, it may reduce the amount of cash it needs. In other words, accounts payable reduce net working capital.

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3. TIME SERIES ANALYSIS

Profit & Loss A/C *Rs in Crores 2001-02

2002-03

2003-04

2004-05

2005-06

Net Sales

6697.49

8721.32

10702.39

14493.16

15135.41

Cost of Production

5028.23

5877.12

6726.15

7746.20

8193.60

Cost of Goods Sold

5046.55

5749.53

6662.12

7479.79

8080.20

833.24

1999.50

2984.80

5709.32

5701.50

Interest

430.09

1657.09

2757.68

5480.52

5533.06

Profit/ (Loss) before Tax

206.95

1292.67

2492.47

5092.46

5127.34

Profit/ (Loss) after Tax

191.45

1030.79

1572.47

3258.80

3521.34

Dividend Payout / Drawing

147.11

295.19

368.98

719.51

719.51

Retained Profit

44.34

735.60

1203.49

2539.29

2801.83

Operating Profit before Interest Operating Profit after

Balance Sheet *Rs in Crores 2001-02

2002-03

2003-04

2004-05

2005-06

Total Current Liabilities

2999.03

4134.60

4278.43

5214.25

5197.43

Total Term Liabilities

4705.48

4225.61

3382.21

2739.70

2516.15

Total Net Worth

3445.96

3186.02

4515.86

7059.92

9755.30

Total Liabilities

12540.82

12386.45

13016.46

15843.29

18425.88

Total Current Assets

3095.39

3648.10

2808.52

4083.58

4237.60

Total Non-Current Assets

1242.89

1395.63

2957.76

4305.31

5227.69

Total Intangible Assets

988.99

0.00

155.97

214.82

253.27

Net Block

7213.55

7342.72

7094.21

7239.58

8707.32

Total Assets

12540.82

12386.45

13016.46

15843.29

18425.88

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3.1 Working Capital Cycle GWC CYCLE = (Inventory Period + Receivables Period) NWC CYCLE = (Inventory Period + Receivables Period - Payables Period)

2001-02

2002-03

2003-04

2004-05

2005-06

a) Raw Material consumption

1,400.61

1,749.97

2,245.42

3,020.42

3,024.38

b) Raw Material cons. per day

3.84

4.79

6.15

8.28

8.29

c) Raw Material inventory

212.15

262.30

292.82

603.70

707.54

d) Raw Material inv. holding days

55.29

54.71

47.60

72.95

85.39

A Inventory Period A1. Raw Material Conversion Period

A2. Work In Process Conversion Period a) Cost of production

5,028.23

5,877.12

6,726.15

7,746.20

8,193.60

b) Cost of production per day

13.78

16.10

18.43

21.22

22.45

c) Work In process inventory

36.25

14.65

9.28

32.42

23.93

d) Work In process holding days

2.63

0.91

0.50

1.53

1.07

A3. Finished Goods Conversion Period a) Cost of goods sold

5,046.55

5,749.53

6,662.12

7,479.79

8,080.20

b) Cost of goods sold per day

13.83

15.75

18.25

20.49

22.14

c) Finished goods inventory

429.19

556.78

620.81

887.22

1,000.62

35.35

34.01

43.29

45.20

88.96

90.97

82.11

117.78

131.66

a) Credit Sales

6,697.49

8,721.32

10,702.39

14,493.16

15,135.41

b) Sales per day

18.35

23.89

29.32

39.71

41.47

c) Debtors

1,073.66

958.47

651.30

581.82

539.40

d) Debtors outstanding days

58.51

40.11

22.21

14.65

13.01

d) Finished goods inv. holding days 31.04

Total inventory holding days (A1+A2+A3)

B Receivables Period

C Payables Period

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a) Credit purchases

5,046.55

5,749.53

6,662.12

7,479.79

8,080.20

b) Purchase per day

13.83

15.75

18.25

20.49

22.14

c) Creditors

1,497.89

1,731.17

1,983.60

2,319.96

2,534.03

d) Creditors outstanding days

108.34

109.90

108.68

113.21

114.47

147.47

131.08

104.33

132.43

144.66

39.13

21.18

-4.35

19.22

30.20

GROSS WC CYCLE (A+B) NET WC CYCLE (A+B-C)

3.2 Holding Norms 2001-02

2002-03

2003-04

2004-05

2005-06

Raw Material-Days

55.29

54.71

47.60

72.95

85.39

Stores & Spares-Days

316.50

227.96

248.92

205.06

219.01

Stocks in Process-Days

2.63

0.91

0.50

1.53

1.07

Finished Goods-Days

31.04

35.35

34.01

43.29

45.20

Receivables-Days

58.51

40.11

22.21

14.65

13.01

Payables-Days

108.34

109.90

108.68

113.21

114.47

Holding Norms 700.00 600.00

39

500.00

30

21

-4

19

2003

2004

2005

400.00 300.00 200.00 100.00 0.00 2002

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Raw Material

Stores and Spares

Stocks In Process

Finished Goods

Receivables

Payables-Days

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Ø Raw material holding period has increased by 55% while there has been an efficient Management in the stocks in process and stores & spares holding period this is depicted by a decrease of 60% and 30% in the holding days respectively Ø The credit receivables period has also been brought down considerably by about 77% which shows the efficiency of the debtors’ management. Ø The payables period has also been stretched alongside.

3.3 Contribution To Current Assets 2001-02 2002-03 2003-04 2004-05 2005-06 Raw Material to Current Assets

0.07

0.07

0.10

0.15

0.17

Stores and Spares to Current Assets

0.11

0.09

0.12

0.09

0.10

Work In Process to Current Assets

0.01

0.00

0.00

0.01

0.01

Finished Goods Inventory to Current Assets

0.14

0.15

0.22

0.22

0.24

Total Inventory to Current Assets

0.33

0.32

0.44

0.46

0.51

Debtors to Current Assets

0.35

0.26

0.23

0.14

0.13

Contribution to Current Assets 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 2002 Raw Material

2003 Stores & Spares

2004 Work In Process

2005 Finished Goods

Ø Considerable increase in finished goods inventory over the years Ø Debtors have been highly reduced over the years

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3.4 Schedule of Changes in Working Capital Working Capital for 2002-2006 Current Assets Short term inv. in Govt./Trust Sec.

169.47

164.54

187.42

299.71

337.83

Fixed Deposit with Banks

11.00

152.10

0.20

0.04

0.04

Receivables

1073.66

958.47

651.30

581.82

539.40

Raw Materials

212.15

262.30

292.82

603.70

707.54

Cons. Stores & Spares

344.00

319.22

326.17

349.06

442.66

Stocks in Process

36.25

14.65

9.28

32.42

23.93

Finished Goods

429.19

556.78

620.81

887.22

1000.62

Advances to Suppliers

0.00

0.00

0.00

0.00

0.00

Advance Payment of Tax

187.67

425.66

39.83

44.02

75.02

Other Current Assets (incld. cash)

632.00

794.38

680.69

1285.59

1110.56

Total Current Assets

3095.39

3648.10

2808.52

4083.58

4237.60

Trade Creditors

1497.89

1731.17

1983.60

2319.96

2534.03

Advance Payments Received

83.01

95.74

133.59

199.51

185.07

Prov. for Tax

174.84

476.16

131.38

283.88

252.41

Dividend Payable

147.11

295.19

368.98

719.51

719.51

Other Statutory Liabilities

0.00

0.00

0.00

0.00

0.00

within a year

0.00

0.00

0.00

0.00

0.00

Other C.L & Provisions

1096.18

1536.34

1660.88

1691.39

1506.41

Total Current Liabilities

2999.03

4134.60

4278.43

5214.25

5197.43

Net Working Capital

96.36

(486.50)

(1469.91)

(1130.67)

(959.83)

Current Liabilities

T.L./Deb. instalments due

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Percentage Change in Current Assets & Liabilities for 2002-06 Current Assets Short term Inv. in Govt. /Trust Sec. (4.09)

(2.91)

13.91

59.91

12.72

Fixed Deposit with Banks

418.87

1282.73

(99.87)

(80.00)

0.00

Receivables

(16.08)

(10.73)

(32.05)

(10.67)

(7.29)

Raw Materials

18.35

23.64

11.64

106.17

17.20

Cons. Stores & Spares

43.64

(7.20)

2.18

7.02

26.81

Stocks in Process

23.68

(59.59)

(36.66)

249.35

(26.19)

Finished Goods

(4.09)

29.73

11.50

42.91

12.78

Advances to Suppliers

0.00

0.00

0.00

0.00

0.00

Advance Payment of Tax

28.66

126.81

(90.64)

10.52

70.42

Other Current Assets (incld. cash)

(12.95)

25.69

(14.31)

88.87

(13.61)

Total Current Assets

(4.04)

17.86

(23.01)

45.40

3.77

Trade Creditors

(3.80)

15.57

14.58

16.96

9.23

Advance Payments Received

(0.47)

15.34

39.53

49.35

(7.24)

Prov. for Tax

(2.97)

172.34

(72.41)

116.08

(11.09)

Dividend Payable

(20.00)

100.66

25.00

95.00

0.00

Other Statutory Liabilities

0.00

0.00

0.00

0.00

0.00

due within a year

0.00

0.00

0.00

0.00

0.00

Other Curr.Lia.& Provisions

13.52

40.15

8.11

1.84

(10.94)

Total Current Liabilities

0.97

37.86

3.48

21.87

(0.32)

Current Liabilities

T.L./Deb. Instalments

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3.5 Assessment of Working Capital Requirements (Maximum Permissible Bank Finance) 2001-02

2002-03

2003-04

2004-05

2005-06

1. Total Current Assets

3095.39

3648.10

2808.52

4083.58

4237.60

2. Current Liabilities

2582.04

3726.08

4034.34

5023.86

5053.81

513.35

(77.98)

(1225.82)

(940.28)

(816.21)

773.85

912.03

702.13

1020.90

1059.40

5. Actual / Projected Net W.C

96.36

(486.50)

(1469.91)

(1130.67)

(959.83)

6. Item 3 minus Item 4

(260.50)

(990.01)

(1927.95)

(1961.18)

(1875.61)

7. Item 3 minus Item 5

416.99

408.52

244.09

190.39

143.62

8. Max. Permissible Bank Finance

(260.50)

(990.01)

(1927.95)

(1961.18)

(1875.61)

677.49

1398.53

2172.04

2151.57

2019.23

2002

2003

2004

2005

2006

a. Net Profit after Tax

191.45

1030.79

1572.47

3258.80

3521.34

b. Depreciation

524.75

555.48

625.11

618.78

775.10

1.21

0.00

184.49

0.00

0.00

0.00

0.00

0.00

(other than Bank borrowings) 3. Working Capital Gap (1-2) 4. Min. stipulated Net Working Capital (25 % of Total C.A)

(Item 6 or 7, whichever is lower) 9. Excess Borrowing, if any representing shortfall in NWC

3.6 Funds Flow Analysis

1. SOURCES (LONG TERM)

c. Increase in Capital d. Increase in Term Liabilities

33.26

(including Public Deposits) e. Decrease in i. Fixed Assets ii.Other Non Current Assets

99.73

f. Others incld. Inc. in quasi equity

0.00

Amrita School of Business

16

Summer Project-2007

Working Capital Management

TOTAL LONG TERM SOURCES

849.19

1587.48

2197.58

4062.07

4296.44

479.87

843.40

642.51

223.55

i. Fixed Assets

649.82

780.42

313.12

673.43

ii. Other Non Current Assets

152.74

1562.13

1347.55

922.38

d. Dividend Payments / Drawings

147.11

295.19

368.98

719.51

719.51

TOTAL LONG TERM USES

796.93

1708.22

3087.63

3383.00

4093.35

3. Long Term Surplus / Deficit

52.26

(120.74)

(890.05)

679.07

203.09

(130.22)

552.71

(839.58)

1275.06

154.02

10.69

1144.04

308.26

989.52

29.95

6. Increase / decrease in W.C Gap

(140.91)

(591.33)

(1147.84)

285.54

124.07

7. Net Surplus / Deficit (3 - 6)

193.17

470.59

257.79

393.53

79.02

18.08

(8.47)

(164.43)

(53.70)

(46.77)

i. Inc. / dec. in stocks in trade

126.02

131.36

96.13

623.32

302.35

ii. Inc. / dec. in receivables

(205.65)

(115.19)

(307.17)

(69.48)

(42.42)

iii. Inc. / dec. in Adv. payments

0.00

0.00

0.00

0.00

0.00

iv. Inc. / dec. in other C.Assets.

(50.59)

536.54

(628.54)

721.22

(105.91)

2. USES (LONG TERM) a. Net Loss b. Decrease in Term Liabilities including Public Deposits) c. Increase in 2227.91

e. Others

(1 - 2) 4. Increase / decrease in Current Assets (as per details given below )

5. Increase / decrease in Current Liabilities other than Bank borrowings

8. Increase / decrease in Bank borrowings

Break-up of (4)

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Summer Project-2007

Working Capital Management

3.7 Percentage Analysis of Different Cost Components Vis-À-Vis Net Sales % of net sales 2001-02

2002-03

2003-04

2004-05

2005-06

Total Raw Material Consumed

20.91

20.07

20.98

20.84

19.98

Stores & Spares Consumed

5.92

5.86

4.47

4.29

4.87

Power & Fuel

10.74

9.03

6.77

5.37

5.93

Direct Labor

19.74

16.57

14.72

9.69

9.23

Other Mfg. Expenses

10.03

9.24

10.01

9.15

8.94

Depreciation

7.84

6.37

5.84

4.27

5.12

Cost of Production

75.08

67.39

62.85

53.45

54.14

Cost of Goods Sold

75.35

65.92

62.25

51.61

53.39

Selling, General & Adm. Expenses 12.21

11.15

9.86

9.00

8.94

Interest

6.02

3.93

2.12

1.58

1.11

Total operating Cost

93.58

81.00

74.23

62.19

63.44

There has been a considerable cut down in the various costs over the years depicting the improvement in operational efficiency. This is due to : Ø Increase in realization (Net realization per unit Net sales value) Ø Reduction in consumption

3.8 Profitability Analysis (as % of Net Sales) 2001-02

2002-03

2003-04

2004-05

2005-06

P.B.D.I.T

16.94

25.12

31.25

40.99

40.11

P.B.I.T

9.11

18.75

25.41

36.72

34.99

P.B.D.T

10.92

21.19

29.13

39.41

39.00

P.B.T

3.09

14.82

23.29

35.14

33.88

P.A.T

2.86

11.82

14.69

22.49

23.27

Amrita School of Business

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Summer Project-2007

Working Capital Management

Profitability Analysis 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 2002

2003 P.B.D.I.T

2004 P.B.I.T

P.B.D.T

2005 P.B.T

2006 P.A.T

Profitability has increased by about eight folds over the four years but there is only a nominal increase of 75% in 2006 from 2005 this because: Ø Operating cost has gone up proportionally higher than net sales from 2004-05 to 2005-06. Ø Full benefit of investment to increase capacity was not realized in FY06.

3.7 Tax and Dividend Analysis (%) 2001-02

2002-03

2003-04

2004-05

2005-06

Prov. for Tax / P.B.T

7.49

20.26

36.91

36.01

31.32

Dividend Rate

39.98

79.96

99.95

129.95

129.95

Dividend / P.A.T.

76.84

28.64

23.46

22.08

20.43

Retained Profit / P.A.T.

23.16

71.36

76.54

77.92

79.57

Over the years, the company has highly succeeded in satisfying the investors by increasing the dividend payout rate, at the same time retaining a considerable amount of profit. This is due to the following reasons: Ø Share capital has remained constant Ø Company has financed growth projects through internal accruals Ø There is substantial increase in PAT from 2001-05.Since dividend amount is constant or there is minor increase in dividend, dividend payout ratio has come down.

Amrita School of Business

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Summer Project-2007

Working Capital Management

3.8 Liquidity Ratios 2001-02

2002-03

2003-04

2004-05

2005-06

1.92

1.33

0.78

0.40

0.26

3.14

2.62

1.76

1.16

0.81

Current Ratio

1.03

0.88

0.66

0.78

0.82

Receivables / Current Liabilities

0.36

0.23

0.15

0.11

0.10

Inventory / Current Liabilities

0.34

0.28

0.29

0.36

0.42

Other CA/CL

0.27

0.30

0.17

0.25

0.23

P.B.I.T. /Interest

1.51

4.78

11.97

23.26

31.44

Interest / Total Borrowings

0.09

0.08

0.07

0.08

0.07

Term Liabilities / T.N.W (Funded Debt / Equity Ratio) Total Outside Liability/ T.N.W (Total Debt Equity Ratio)

The liquidity ratios implies there has been a considerable decrease in the net current asset level depicting the risk of solvency.

Amrita School of Business

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Working Capital Management

4. COMPARATIVE ANALYSIS Profit & Loss A/C *For Year 2006 *Rs in Crores TATA

SAIL

JSW

ESSAR

ISPAT

Net Sales

15135.41

28081.41

8595.03

6168.66

4914.73

Cost of Production

8193.60

22272.36

6073.60

4817.56

4928.65

Cost of Goods Sold

8080.20

22272.36

6073.37

4773.15

4834.19

5701.50

4402.37

2444.22

1033.19

(173.48)

Interest

5533.06

3934.61

2037.41

475.12

(1158.55)

Profit/ (Loss) before Tax

5127.34

4498.20

1914.83

703.79

(1186.54)

Profit/ (Loss) after Tax

3521.34

2560.06

1562.63

690.34

(1191.00)

Dividend Payout

719.51

826.08

204.98

0.00

0.00

Retained Profit

2801.83

1733.98

1357.65

690.34

(1191.00)

Operating Profit before Interest Operating Profit after

Balance Sheet *For Year 2006 *Rs in Crores TATA

SAIL

JSW

ESSAR

ISPAT

Total Current Liabilities

5197.43

12428.14

2307.49

1570.04

2244.25

Total Term Liabilities

2516.15

4297.62

4173.03

8185.10

8261.09

Total Net Worth

9755.30

12601.41

5572.29

4031.47

3148.32

Total Liabilities

18425.88

30811.63

13065.47

13360.86

13025.36

Total Current Assets

4237.60

17498.91

2589.01

3892.08

2296.25

Total Non-Current Assets

5227.69

1049.94

2195.87

3070.33

729.16

Total Intangible Assets

253.27

215.82

194.87

0.00

1098.51

Net Block

8707.32

12162.14

8189.10

6398.45

8901.44

Total Assets

18425.88

30926.81

13168.85

13360.86

13025.36

Amrita School of Business

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Summer Project-2007

Working Capital Management

4.1 Working Capital Cycle GWC CYCLE = (Inventory Period + Receivables Period) NWC CYCLE = (Inventory Period + Receivables Period - Payables Period)

TATA

SAIL

JSW

ESSAR

ISPAT

a) Raw Material consumption

3,024.38

12,391.12

3,964.00

1,531.30

2,910.12

b) Raw Material cons. per day

8.29

33.95

10.86

4.20

7.97

c) Raw Material inventory

707.54

1,132.02

611.44

651.87

515.77

d) Raw Material inv. holding days

85.39

33.35

56.30

155.38

64.69

A Inventory Period A1. Raw Material Conversion Period

A2. Work In Process Conversion Period a) Cost of production

8,193.60

22,272.36

6,073.60

4,817.56

4,928.65

b) Cost of production per day

22.45

61.02

16.64

13.20

13.50

c) Work In process inventory

23.93

224.82

38.89

93.47

8.16

d) Work In process holding days

1.07

3.68

2.34

7.08

0.60

A3. Finished Goods Conversion Period a) Cost of goods sold

8,080.20

22,272.36

6,073.37

4,773.15

4,834.19

b) Cost of goods sold per day

22.14

61.02

16.64

13.08

13.24

c) Finished goods inventory

1,000.62

3000.00

195.29

238.69

207.33

49.16

11.74

18.25

15.65

41.77

56.63

35.91

58.23

54.31

a) Credit Sales

15,135.41

28,081.41

8,595.03

6,168.66

4,914.73

b) Sales per day

41.47

76.94

23.55

16.90

13.47

c) Debtors

539.40

1,881.73

245.16

540.16

594.13

d) Debtors outstanding days

13.01

24.46

10.41

31.96

44.12

d) Finished goods inv. holding days 45.20

Total inventory holding days (A1+A2+A3)

B. Receivables Period

Amrita School of Business

22

Summer Project-2007

Working Capital Management

C. Payables Period a) Credit purchases

8,080.20

22,272.36

6,073.37

4,773.15

4,834.19

b) Purchase per day

22.14

61.02

16.64

13.08

13.24

c) Creditors

2,534.03

2,426.23

509.41

1,071.99

898.65

d) Creditors outstanding days

114.47

39.76

30.61

81.97

67.85

144.66

110.65

80.79

212.67

125.07

30.20

70.89

50.17

130.70

57.22

GROSS WC CYCLE (A+B+C) NET WC CYCLE (A+B+C-D)

4.2 Holding Norms *For Year 2006 TATA

SAIL

JSW

ESSAR

ISPAT

Raw Material-Days

85.39

33.35

56.30

155.38

64.69

Stores & Spares-Days

219.01

150.89

146.39

196.23

137.19

Stocks in Process-Days

1.07

3.68

2.34

7.08

0.60

Finished Goods-Days

45.20

49.16

11.74

18.25

15.65

Receivables-Days

13.01

24.46

10.41

31.96

44.12

Payables-Days

114.47

39.76

30.61

81.97

67.85

Holding Norms 200.00 150.00

-6.33

26.7

31.6

ESSAR

ISPAT

49.5

100.00

24.6

50.00 0.00 TATA

SAIL

JSW

Raw Material

Stores and Spares

Stocks In Process

Finished Goods

Receivables

Payables

Amrita School of Business

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Summer Project-2007

Working Capital Management

Ø The holding norms of TATA are showing a negative value because it is in terms of net consumption value. For internal control purposes, this is used. While for external reporting, it is expressed in terms of net sales Ø The holding norms of TATA are far better when compared to their competitors as well as industry norms

4.3 Contribution to Current Assets *For Year 2006 TATA

SAIL

JSW

ESSAR

ISPAT

Raw Material to CA

0.17

0.06

0.24

0.17

0.22

Stores and Spares to CA

0.10

0.06

0.06

0.11

0.06

Work In Process to CA

0.01

0.18

0.02

0.02

0.00

Finished Goods Inv. to CA

0.24

0.00

0.08

0.06

0.09

Total Inventory to CA

0.51

0.31

0.39

0.36

0.38

Debtors to CA

0.13

0.11

0.09

0.14

0.26

Contribution to Current Assets 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 TATA Raw Material

Amrita School of Business

SAIL Store And Spares

JSW Work In Process

24

ESSAR

ISPAT

Finished Goods

Debtors

Summer Project-2007

Working Capital Management

Ø Although the work in process inventory of Tata steel has been maintained very less, because of the raw materials and finished goods inventory inefficiency, the total inventory holding is high. Ø The debtors are managed efficiently by Tata steel.

4.4 Assessment of Working Capital Requirements (Maximum Permissible Bank Finance)

*For Year 2006 *Rs in Crores

TATA

SAIL

JSW

ESSAR

ISPAT

1. Total Current Assets

4237.60

17498.91

2589.01

3892.08

2296.25

2. Current Liabilities

5053.81

12084.88

2165.94

837.76

1802.87

(816.21)

5414.03

423.07

3054.32

493.38

Capital (25 % of Total C.A)

1059.40

4374.73

647.25

973.02

574.06

5. Actual / Projected Net W.C

(959.83)

5070.77

281.52

2322.04

52.00

6. Item 3 minus Item 4

(1875.61)

1039.30

(224.18)

2081.30

(80.68)

7. Item 3 minus Item 5

143.62

343.26

141.55

732.28

441.38

8. Max. Permissible Bank Finance

(1875.61)

343.26

(224.18)

732.28

(80.68)

2019.23

N.A.

365.73

N.A.

522.06

(other than Bank borrowings) 3. Working Capital Gap (1-2) 4. Min. stipulated Net Working

(Item 6 or 7, whichever is lower) 9. Excess Borrowing, if any representing shortfall in NWC

Amrita School of Business

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Summer Project-2007

Working Capital Management

4.5 Percentage Analysis of Different Cost Components Vis-À-Vis Net Sales *For Year 2006 TATA

SAIL

JSW

ESSAR

ISPAT

Total Raw Material Consumed

19.98

44.13

46.12

24.82

59.21

Stores & Spares Consumed

4.87

9.41

4.81

13.10

7.45

Power & Fuel

5.93

8.98

4.57

29.13

17.29

Direct Labor

9.23

14.80

1.85

1.60

2.64

Other Mfg. Expenses

8.94

2.23

6.74

2.49

2.08

Depreciation

5.12

4.30

5.80

7.82

11.63

Cost of Production

54.14

79.31

70.66

78.10

100.28

Cost of goods sold

53.39

79.31

70.66

77.38

98.36

Selling, General & Adm. Expenses

8.94

5.01

0.90

5.87

5.17

Interest

1.11

1.67

4.73

9.05

20.04

Total operating Cost

63.44

85.99

76.30

92.30

123.57

Ø Operating cost of Tata is very less showing good efficiency of its operations Ø Borrowings of Tata are also very less which is indicated by the low level of interest paid Ø Direct labor cost of Tata is lesser than Sail but higher than the other three steel companies

4.6 Profitability Analysis (as % of Net Sales)

*For Year 2006 TATA

SAIL

JSW

ESSAR

ISPAT

P.B.D.I.T

40.11

21.98

32.81

28.27

7.53

P.B.I.T

34.99

17.68

27.01

20.46

(4.10)

P.B.D.T

39.00

20.32

28.08

19.22

(12.52)

P.B.T

33.88

16.02

22.28

11.41

(24.14)

P.A.T

23.27

9.12

18.18

11.19

(24.23)

Amrita School of Business

26

Summer Project-2007

Working Capital Management

Profitability Analysis 50.00 40.00 30.00 20.00 10.00 0.00 (10.00)

TATA

SAIL

JSW

ESSAR

ISPAT

(20.00) (30.00) P.B.D.I.T

P.B.I.T

P.B.D.T

P.B.T

P.A.T

Ø Profitability of TATA is far better when compared to others

4.7 Tax and Dividend Analysis (%) *For Year 2006 TATA

SAIL

JSW

ESSAR

ISPAT

Prov. for Tax / P.B.T

31.32

43.09

18.39

1.91

(0.38)

Dividend Rate

129.95

20.00

40.67

0.00

0.00

Dividend / P.A.T

20.43

32.27

13.12

0.00

0.00

Retained Profit / P.A.T

79.57

67.73

86.88

100.00

100.00

Ø The dividend payout of TATA to investors is really good. Also a substantial amount of their profit is retained in the business.

Amrita School of Business

27

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Working Capital Management

4.8 Liquidity Ratios *For Year 2006 TATA

SAIL

JSW

ESSAR

ISPAT

0.26

0.35

0.78

2.03

4.03

0.81

1.35

1.21

2.42

5.13

Current Ratio

0.82

1.41

1.12

2.48

1.02

Receivables / Current Liabilities

0.10

0.15

0.11

0.34

0.26

Inventory / Current Liabilities

0.42

0.44

0.44

0.90

0.39

Other CA / CL

0.23

0.34

0.42

0.53

0.25

P.B.I.T. /Interest

31.44

10.62

5.71

2.26

(0.20)

Interest / Total Borrowings

0.07

0.11

0.10

0.07

0.12

Term Liabilities / T.N.W (Funded Debt / Equity Ratio) Total Outside Liability/ T.N.W (Total Debt Equity Ratio)

Ø The liquidity of Tata is highly threatened when compared to the other steel cos. Ø The funded debt with respect to equity is very less for tata depicting its less efficient usage of leveraging.

Amrita School of Business

28

Summer Project-2007

Working Capital Management

5. FLAT PRODUCT PROFIT CENTRE (FPPC)

5.1 Operational Overview of FPPC

Cost Centre

FPPC

INPUT

PROCESS

OUTPUT

Iron Ore, Coal, Coke, Sinter

Blast Furnace

Hot Metal

Hot Metal + Scrap

LD2

Liquid Steel

Liquid Steel

Slab Caster

Slab

Slab

HSM

HRC

HRC

CRM Galvanized

CRCA

Amrita School of Business

29

Summer Project-2007

Working Capital Management

5.2 Controlling & Valuation Techniques Valuation Techniques Ø The Stores & Spares are valued at actual cost of production Ø Work In Process & Finished Goods are valued using process/absorption costing for reporting purposes and using standard costing for decision making purposes Ø Obsolete Inventory is valued using XYZ Analysis

Control Techniques Ø The Stores & Spares are controlled using ABC Analysis Ø For Work In Process & Finished Goods, a sales plan is prepared based on the previous years actual production and sale and a target is fixed based on it. The current year’s production is so controlled not as to exceed the plan. Ø Obsolete Inventory is controlled using XYZ Analysis Ø For controlling the debtors, a credit limit is fixed based on the business value (order size) and customer type. The credit controlling committee will continuously monitor the debtors based on this technique.

5.3 Credit Sales Policy for Flat Products 1.

Distributors Sales to distributors are made on the basis of cash and carry. Tie up with banks where

distributors are financed by bank through an arrangement which is termed as Channel Finance.

2.

OE Customers Majority of the OE customers are routed through bank financing which is termed as OE Financing.

The arrangement is made with banks whereby banks pay to Tata Steel on the date of invoicing and the customers pay to the bank on the due date as per terms of credit sales. Bank financing charges at the agreed rate is borne by Tata Steel.

Amrita School of Business

30

Summer Project-2007

Working Capital Management

Tender Sales A maximum of 45 days credit would be extended to such customers. At times, such credits are secured by LC or BG, if felt necessary.

3.

Other customers Other customers having transactions with Tata Steel are also covered by financing scheme

through banks and the arrangement is termed as RP whereby the debit on account of sale is transferred in favour of the bank. Financing charges on account of RP is borne by Tata Steel.

4.

Allowances for trade receivables Ø Customers making early payment before due date are entitled to a maximum cash discount (EPD) @ 12% P.A. Ø There are cases of quantity discount which are generally on a quarterly basis which varies from product to product. Ø Credit period varies between 30 to 60 days.

Amrita School of Business

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Summer Project-2007

Working Capital Management

5.4 Gross Working Capital Projection for FPPC The gross working capital projection is prepared from the inventory projection and debtors’ projection for the year 2007-08. The inventory projection is prepared from the production plan which is prepared according to the capacity, yield loss and lead time, obtained from the operations department of the FPPC. The debtors’ projection is prepared from the sales plan obtained from the marketing division of FPPC prepared according to the market demand, market share, and market potential of the products.

Accordingly the Inventory Projection for the year 2007-08 is obtained as: Opening Inventory (Closing Balance) Add Production (Production Plan)

Inventory Projection 2007-08

Less Sales (Sales Plan) =Inventory Projection

and the Debtors’ Projection for the fiscal 2007-08 is obtained as Opening Debtors (Closing Balance) Add Sales (Qty*Value)

Debtors Projection 2007-08

Less Collection (Credit Policy) =Debtors Projection

FPPC Gross Working Capital - Summary (Rs Crs) FPPC Total

1007

40 Days

1067

37 Days

1070

35 Days

170

169

162

132

117

410

474

496

288

291

288

FY'06 A

FY'07 A

FY'08 New Projected

147

Debtors

Amrita School of Business

FG

32

WIP

Stores and Spares Stk

Summer Project-2007

Working Capital Management

6. RECOMMENDATIONS Measures to Improve Working Capital Management at Flat Product Profit Centre (FPPC) of TATA Steel: Ø The essence of effective working capital management is proper cash flow forecasting. This should take into account the impact of unforeseen events, market cycles, loss of a prime customer and actions by competitors. So the effect of unforeseen demands of working capital should be factored in by FPPC. This was one of its reasons for the variation of its revised working capital projection from the earlier projection. Ø It pays to have contingency plans to tide over unexpected events. While market-leaders can manage uncertainty better, even other companies must have risk-management procedures. These must be based on objective and realistic view of the role of working capital. Ø Addressing the issue of working capital on a corporate-wide basis has certain advantages. Cash generated at one location can well be utilized at another. For this to happen, information access, efficient banking channels, good linkages between production and billing, internal systems to move cash and good treasury practices should be in place. Ø An innovative approach, combining operational and financial skills and an all-encompassing view of the company’s operations will help in identifying and implementing strategies that generate short-term cash. This can be achieved by having the right set of executives who are responsible for setting targets and performance levels. They could be then held accountable for delivering, encouraged to be enterprising and to act as change agents. Ø Effective dispute management procedures in relation to customers will go along way in freeing up cash otherwise locked in due to disputes. It will also improve FPPC’s customer service and free up time for legitimate activities like sales, order entry and cash collection. Overall, efficiency will increase due to reduced operating costs. Ø Collaborating with the customers instead of being focused only on own operations will also yield good results. If feasible, helping them to plan their inventory requirements efficiently to match FPPC’s production with their consumption will help reduce inventory levels. This can be done with suppliers also. Ø Working capital management is an important yardstick to measure a company operational and financial efficiency. This aspect must form part of the FPPC’s strategic and operational

Amrita School of Business

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Summer Project-2007

Working Capital Management

thinking. Efforts should constantly be made to improve the working capital position. This will yield greater efficiencies and improve customer satisfaction. Ø Inventories should be managed on a line-by-line basis using the 80/20 rule. Ø Periodical analytical review can help the FPPC to focus its attention on critical areas. Ø Placing the responsibility for collecting the debt upon the centre that made the sale. i.e., cold rolled, hot rolled, galvanized etc.

Amrita School of Business

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