essar

A SUMMER TRAINING REPORTON

VEHICLE FINANSIS AND MARKET RESEARCH

FORCARGO MOTAR PVT.LTDGANDHIDHAM-KUTCHH

PREPARED BY MR.RAJENDRA D.CHAVADA

FOR PARTIAL FULFILLMENT OF P.G.D.M. PROGRAMME

PROJECT GUIDEMR.J.K.ADVANI

COLLEGE

PARUL INSTITUTE OF MANAGEMENT VADODARA

SHRI H.N.SHUKLA COLLGE OF MANAGEMENT STUDIES1

DECLARATION

The undersigned MISS GARGI RABADIA a student of M.B.A. hereby place the submission project on ESSAR CONSTRUCTION INDIA LTD.

The unit that, we have visited was PVT.ltd. Company. Its name is ECIL Situated at hazira in SURAT (GUJARAT)

I undersigned this project and this report was not Previously submitted to any organization.

GARGI RABADIA.


PREFACE

As per the syllabus prescribed by Saurashtra universityM.B.A. programme. It is compulsory to take summer training and

Prepare a report.

I have visited an industry that played dominant role to develop Practical viewpoint and made aware about the problems, opportunities. And situation of Industrial unit in the FINANCE DEPARTMENT.

The industrial training at ESSAR CONSTRUSCTION INDIA, LTD. Proved to be a golden opportunity for me enrich my knowledge By comparing practical Knowledge with theoretical knowledge.


ACKNOWLEDGEMENT

Wisdom is knowing what to do next…Skill is knowing how to do it…

And Virtue is doing it…!

To work the corporate environment of Essar has taught me all these three – Wisdom, Skill and Virtue. I would like to express my sincere feeling to all those who have guided and taken kind interest to me is useful to business and industry.

I express my deep sincere gratitude to all those persons who have helped me through out the project and without their kind co-operation this project would never have reached to it’s fruitfully conclusion.

First of all, I sincerely thank the management of Essar learning centre for allowing me to carry out my project in their organization.

I would like to thank Mr. AJOY GHOSE (Vice President ECIL) for giving me an opportunity to undertake the project at Essar Constructions India Ltd.

I would like to offer a special thanks to Mr. Patra sir, Mr. B.M. Kagzi and also I would like to thank the entire staff of the ECIL for their assistance and co-operation.

I would like to special thanks to our principal and my project guide Mr. Butalal Ajmera who has given me his precious time for making my report perfectly.

GARGI RABADIA


SR NO.

SUBJECT PG NO.

1. ESSAR GROUP PROFILE1.1 The Essar Group 91.2 History of Essar group 261.3 Mission & vision 301.4 Accreditation 33

2. INDUSTRY SENARIO 342.1 History of constructions 352.2 Introduction of industry 362.3 Construction industry and Indian economy 372.4 Technical human resources &

employment potential 38

2.5 Challenges to the construction industry 392.6 Concluding remarks for the construction

industry40

3. ESSAR CONSTRUCTIONS LTD. 413.1 The company 423.2 Expertise 433.3 Resources 453.4 Associations 483.5 Road ahead 493.6 Ongoing projects 513.7 Glimpse of ECL’s esteemed clientele 52


4. WORKING CAPITAL MANAGEMENT 53

4.1 INTRODUCTION 544.2 MEANING OF WORKING CAPITAL 55

5. SOURCES OF WORKING CAPITAL 575.1 Trade credit 575.2 Credit terms 575.3 Bank finance 585.4 Fund based 625.5 Non fund based 645.6 Opening of letter of credit 665.7 Some other sources of working capital 69

6. HISTORY & RECENT TRENDS IN WORKING CAPITAL 70

7. WORKING CAPITAL STRATEGY AT ESSAR 72

7.1 Levels of working capital 727.2 Profitability versus risk tradeoff for

alternative level of working capital investment

75

7.3 Capital investment 767.4 Optimal level of working capital

investment76

7.5 Proportions of short-term versus and long term financing

76

7.6 Cost of short term versus long term debt 777.7 Risk of long-term versus short-term debt 777.8 Profitability versus risk tradeoff for

alternative financing strategy78


7.9 Matching approach to asset financing 78

8. WORKING CAPITAL CYCLE AND POLICY

8.1 Factors influencing working capital 818.2 Working capital policy 818.3 Operating cycle analysis 828.4 Current asset investment approaches 838.5 Industry norm approach 838.6 Economic model approach 848.7 Strategic choice approach 848.8 Need of working capital 84

9. WORKING CAPITAL ANALYSIS 859.1 NET WORKING CAPITAL 89

10. RATIO ANALYSIS 90


EXECUTIVE SUMMERY

ESSAR COMPANY is a private ltd. Company owned by Ruia family.

Having six big units like steel, constructions, shipping, communication, oil,

and power.

The project includes overview of company and the details of

financial department like working capital analysis.

Recently ESSAR has also put their steps in agrotech business also.

It always follows leadership value. In coming years it is going to be largest

oil refinery of India.


THE ESSAR GROUP PROFILE


The ESSAR group is one of India’s largest corporate houses with interests spanning the manufacturing and services in both old and new

SHRI H.N.SHUKLA COLLGE OF MANAGEMENT STUDIES

ESSAR SHIPPING LTD.

ESSAR POWER LTD.

ESSAR GROUP

ESSAR TELECO

MLIMITED

ESSAR STEEL LTD.

ESSAR CONSTRU--CTION INDIA LTD.

ESSAR OIL & GAS LTD.

10

economies: Steel, Power, Shipping, Construction, Oil &Gas and Telecom.

The group’s enterprise value is approximately US$ 15 billion (Rs. 67,000 crore) and a turnover of over US$ 2.08 bn (Rs. 95 crore). Strategic investments made by the group over the past decade have resulted in the creation of tangible and intangible assets that are at the heart of the Indian economy.

Essar is one of India’s largest corporate houses with leadership position in the high-growth infrastructure sectors of Steel, Power, Construction, Communication, and Shipping & Logistic. It employs 20,000 people in 50 locations worldwide. The Group’s revenue guidance for the year ending March 2007 is over USD 4 billion. The entire group’s investments have been consolidated under Essar Global Ltd., along with its Ssix sectorial holding companies: Essar Steel Holdings Limited, Essar Energy Holdings Limited, Essar Power Holdings Limited, Essar communications holdings limited, Essar shipping & Logistic Holdings limited, and Essar construction India Limited.

The group takes pride in being a high-performance multinational organization, providing world-class services and products. Manned by a highly efficient and dynamic team of employees, the group is growing stronger every day. A committed corporate citizen, the group provides unwavering support to the community as well as initiates various social and ecological drives that have a positive impact on society.

ESSAR POWER


Essar power Limited set up India’s first new generation independent power project at Hazira, India in the early 1990’s. The 515 MW natural gas fired combined cycle has consistently set new standards of excellence in the Indian power sector and meets the highest operating benchmarks. This environment friendly plant operates with a plant availability factor in excess of 94%. In addition to multi-fuel capability, the plant has the lowest manpower to megawatt ratio and one of the lowest capital costs per megawatt in India.

Project under execution

Essar Power Limited is currently executing a captive gas based Combined Cycle Power Plant of 355 MW in two phases at Hazira, Gujarat for mitigating the increasing power demand of its group company Essar Steel Limited. The Phase-1 is operating in open cycle mode. The combined cycle operation has also been commissioned. The phase-2 is scheduled for March 2007.

Essar Power Limited has recently commissioned the 32 MW coal based captive power project at Vishakapatnam, India for meeting the power demand of its group company High-grade pellets Limited.

ESSAR SHIPPING


The Company

Essar Shipping Ltd. (ESL) is e of the world’s leading integrated sea logistics companies, with a special focus on transportation solutions for the global energy business. A strong management team of experienced marine professionals steers the company, maintaining customer focus, world-class operations, an impression safety record and a consistent financial performance. Their fleet accounts for almost 14% of India shipping fleet and they own the country’s largest VLCC (very Large crude carrier), which is also India’s first double hull, double bottom VLCC.

Rig to refinery – and beyond

As an end-to-end sea logistics provider, ESL serves customers across the value chain – form ‘rig to refinery-and beyond’; offering services in the areas of bulk transport, supply chain management and storage and distribution. They are global experts in the energy business, with over 20 years of oil-handing experience. Their fleet handles a daily average of eight million barrels of crude oil, 320,000 barrels of petroleum products and 355,000 tonnes of dry cargo.

ESL operates in three main business areas: first, their energy transportation group provides sea transportation management services to the global energy industry, including US, European and Indian oil companies. A key advantage is that they are one of the world’s largest independent


owner/operators of Suezmaxes tankers. In March 2004 we acquired first and largest double hull double-bottom VLCC. They have long-standing relationship with all the major global oil companies and chartered to international oil majors like Shell, Exxon/Mobil, Chevron, Stat oil, Ultramar Inc., BP Amoco and Texaco. Second, ESL’s integrated bulk/petroleum product transportation services group offers supply chain mgt. services for the sea transportation of bulk cargo and refined products. This group services Steel, power, cement, fertilizer and petroleum companies in South East Asia and India, for clients such as Indian Oil Corporation, Bharat petroleum and Hindustan petroleum. ESL also handles 5 million metric tonnes of coastal dry bulk cargo annually.

Third, to complete the integrated solution chain, their crude oil and refined products handling and storage group provides storage group and distribution services in India’s, through a wholly owned subsidiary vadinar oil Terminal Ltd., owns port and terminal facilities to handle the receipt, Storage and dispatch of crude oil and petroleum products at Vadinar in Jamnagar, Gujarat, which is an all-weather, deep- draft port.

A complete sea logistics provider

ESL is a truly global company, deriving nearly three-quarters of revenues from international business. Their fleet of vessels – made up of one VLCC, six Suezmaxes, three product tankers, five dry cargo bulk carriers, 11 mini-bulk is modern, sophisticated, and fuel-efficient and one of the India’s youngest, with an average are of 14 years against of 19 years. The Vadanir terminal extends the value chain of ESL’s sea logistics services by providing storage and handling facilities for 32 MTPA of crude oil and 14 MTPA of petroleum products.

World-class Standards

Essar Shipping is one of the world’s lowest-cost operators with an exemplary safety record. They handle their technical management entirely in-house, maintaining their fleet to the highest quality, safety and operational standards. T hey were the first Indian shipping company to


obtain the international safety management(ISM) code for their fleet of bulkers and tankers in July 1995, three years ahead of the international Maritime Organization’s (IMO) deadline. They were also the first Indian shipping to voluntarily comply with ISO 9002:1994 standards and have now upgraded to ISO 9001:2000 standards.

Their vessels received the US Coast Guard’s AMVER award for high maritime safety standards. They were the first Indian company to operate oil tankers in the highly competitive Atlantic region, especially to the US, which has stringent environment laws and heavy liabilities for failure. They are among the first shipping in the world to comply with the International Ship and Port Security (ISPS) code.

Customer-led, flexible and Profitable

The needs of their customers drive their business and their core competencies are closely aliened to their requirements. They carefully study the geographical and product mix of their clients to provide the best solutions, optimizing their businesses and saving them time and money. Their customers know they can count on them for scheduling flexibility, reliability, availability and management accessibility. They also support clients with a comprehensive shipbroker network and a sophisticated e-backbone, which allows them to track their cargo status on a real-time basis.

Their lean organization and management give them the flexibility to respond quickly to customer needs and to market conditions. Their astute mix of long-term and spot contracts gives us a vessel utilization rate of around 95%. Since trending assets wisely are crucial in the shipping business, ESL has invested consistently during recessions to be able to profitable encase assets during revivals. ESL is publicly listed and has remained financially strong even during periods of industry, with consistently strong revenues and profit.

ESSAR OIL & GAS


The Company

Essar Oil Ltd. (EOL) is emerging as a leading integrated oil and gas company spanning the entire value chain, from deep within the earth all the way to the end-consumer. They have exploration and production (E&P) rights in some of India are most valuable oil and gas blocks. EOL is building a state-of-the-art refinery and a countrywide network of modern retail fuel outlets.

Exploration and Production

They were one of the first private companies to bid for exploration blocks in 1993. They won two onshore blocks in Rajasthan and one in the Mumbai offshore region, where they have completed the first phase and are moving into test grilling. They were than awarded a block each in the Cam bay basin (Gujarat) and Cachar (Assam). They believe that they have lowered the risks and increased the rewards of exploration by carefully selecting the blocks with maximum potentia They also won the Ratna and R-series for development and production, in partnership with ONGS and a major international company. The Ratne series, located south of the prolific Bombay High Field, holds an estimated 500 million barrels of oil reserves. Independent international engineering firms have certified its high latent value and EOL’s share is worth around US$ 230 million.

Their CBM (Coal Bed Methane) division pioneered a project in Mehsana, Gujarat using innovative technology to establish the presence of methane gas. Although the US the lone country to exploit CBM


commercially, EOL has already drilled three wells and is producing the gas experimentally, the only Indian company to do so. EOL has also won a CBM block in Raniganj, West Bengal.

Global-scale refinery

They were among the first to enter the refining sector when it was opened to private participation. Their US$ 2.14 bn (Rs.99 billion) refinery at Vadinar. This has achieved full financial closure, is two-third complete and will be commissioned in 24 months. With a capacity of 10.5 MTPA (that can rise to 12MTPA after de-bottlenecking), this world-class refinery complex focus on producing middle distillates like aviation turbine fuel, kerosene oil and high speed diesel, which from over 60% of India’s demand. They will also produce LGP and transport fuels including petrol conforming to Euro 3rd and 4th product quality standards for the domestic and export markets.

High automation, the latest technology and an ideal location on India’s West Coast will give them significant competitive advantages. They permission to import crude oil freely in VLCC’s, which offers considerable cost savings especially since they are one of the closest refineries to the Middle East, the main supply source for crude oil. With an eye on future value building, they have also created the infrastructure to double their refining capacity at a third of the cost and in half the time of a Greenfield project.

Marketing

Essar oil Ltd. Is one of the few Pvt. Co.’s permitted to market petroleum products in India. To serve retail customers ‘under brand ‘Essar


Oil’, EOL is building a modern, large countrywide distribution network of Retail Outlets. EOL is designing them as outlets offering value-added amenities and services that customers look for in individual market. Looking beyond the saturated larger urban markets, they are reaching out to consumers deep in India’s heartland. EOL is also the first private oil company to import high speed diesel. They are marketing this at competitive rates to bulk industrial consumers. In addition to petrol, diesel and lubricants, they will market a full range of fuels including naphtha, kerosene and fuel oil after the refinery is complete Their pipelines division is putting in place the Central India pipeline network. This 2,260 km long pipeline will connect our refinery to demand centre across the northern, western and central parts of India. Thus, with a presence in every rung of the value chain, EOl is all set to take over the future.

ESSAR TELECOM & BPO


Essar Teleholding Ltd. (ETHL) is holding company for the telecom interest of the US$ 3.6 billion Essar Group in India. It provides the group focus for Essar’s telecom imitates in the areas of cellular service broad and call centers. ETHL owns and operates the cellular properties of Haryana, Rajasthan and Uttar Pradesh (East) through its subsidiary ADIL.

Essar Telecom

Essar teleholings Ltd. (ETHL) is the holding company for the telecom interest of the US$ 3.6 billion Essar Group in India. It provides the Group focus for Essar’s telecom imitates in the areas of cellular services broad and call centers. ETHL owns and operates the cellular properties of Haryana, Rajasthan and Uttar Pradesh (East) through its subsidiary ADIL

Essar along with Hong Kong bases Hutchison whompoa is one of India’s largest cellular services providers covering all Indian metros and six Indian states. The subscriber base has swelled to 1.4 million subscribers and is growing rapidly. The states of Haryana, east U.P. and Rajasthan are an independently by Essar the Hutchison group in the metros of Delhi, Kolkata and Gujarat. In addition, Hutchison Essar South limited has begun operations in 2002 as a fourth cellular operator in the South Indian states of Andhra Pradesh, Karnataka and the metro of Chennai.

It is a major player in India’s communications sunrise. Essar connects people all over India with world-class network coverage and


services at price. Little wonder then, that in some corners of India you will see people using Essar’s mobile services were in land lines do not exist Essar’s telecom business thus operates through the following companies while essar teleholdoing limited is the holding company for Essar’s Telecom interests:

Hutchison Essar Telecom LimitedHutchison Essar South limitedAir Cell Digilink Limited

ESSAR CONSTRUCTIONS


From pipelines to ports, from industrial projects to intelligent building, and on to canals, township, highways, bridges and breakwaters-Essar Constructions Ltd has a rich and varied track record as a premier construction company. In fact, over the last 30 years, they have poured enough concrete to build that would circle the earth thrice.

As one of India leading engineering, procurement and construction (EPC) contractors, they have executed projects worth over US$ 3 bn (Rs 14000 crore) and are currently implementing projects worth US$ 2.5 bn (Rs 11625 crore). They skillfully bring together hundreds of engineers and tens of thousands of workers to complete our projects, always maintaining an uncompromising focus on quality and safety. Setting high benchmarks for themselves, they have consistently broken new ground and achieved a long list of firsts. For example they built the world’s largest gas-based sponge iron plant, were the first Indian company to setup an independent power plant, and pioneered the laying offshore oil and gas pipelines in India and built India’s first and longest island breakwater.

A history of expertise


They honed their skills as the turnkey contractor for most of the Essar Group’s world-class projects and supporting infrastructure, constructing most of the group’s current assets base of US$ 4.4 bn (Rs. 200 billion). That includes a 3.4 MTPA sponge iron plant, a 2.4 MTPA steel mill and a 515 MW power plat at Hazira, a 4 MTPA Pelletisation plat in Visakhapatnam, a cold rolling mill in Indonesia and a 10.5 MTPA oil refinery under construction at Vadinar, Gujarat. Indeed, the very origin of the Essar Group was in specialized marine construction. As they acquired a truly wide and solid base of experience in major areas of industrial and infrastructure construction, they evolved from being the Group’s projects division into Essar Projects Ltd. in 1990 and then into ECL.

Special Strengths

Simultaneously, they grew into a leading EPC contractor for other customer, both domestic and international. Here too, both their exposure and their expertise are wide ranging. Apart from their EPC capability in oil and gas, power and steel, marine construction is one of their special strengths. They have a unique capacity for underwater rock blasting dredging. They also have significant skills in constructing irrigation canals, siphons and bridges. ECL has a special expertise in pipelines for oil, gas and water as the only Indian company with over 20 years of experience in cross-country, onshore and offshore pipelines, from construction to commissioning. They have laid 2,500 km of pipelines and built 150 km of the prestigious Narmada canal. They are well equipped for infrastructure construction particularly in the areas of ports, jetties and roads they have built hundreds of kms of roads, including national and state highways and expressways.

Equally noteworthy are their long-term relationships with over 20 strategic partners, including multinational construction and engineering


companies from around word. For example, currently a consortium of ECL, Stroystransgaz of Russia is the EPS contractor for the 269 KM Bailadilla-Vizag slurry pipeline. This is world’s second longest slurry pipeline. Along with UEM of Malaysia, it is also building a 200-km, four-lane highway in Karnataka worth US$ 156 m (Rs. 720 crore).

Delighting customers, always

Little wonder, then, that a long and impressive list of client has turned to them, including most major Indian ports, the NationalHighway Authority of India, the Gujarat Water Supply and Sewerage Board, Gas authority of India, Hindustan Petroleum and ONGC. Their expertise is also internationally recognized, whether for the pipelines they laid in Qatar, the harbours they dredged in Sri Lanka or the cold rolling mill they built in Indonesia. What’s more, they have won important contracts from govt. agencies through local and international competitive bidding, meeting the stringent requirement of the World Bank and the Asian Development Bank.

Their clients can rely on our skilled, experienced team, a large, owned equipment bank of the latest construction equipment that is also available for hire; and their talent for scouting the globe to procure the best materials at competitive prices. They offer tailor-made solution to meet every customer need, on lump-sum turnkey basis or on item rate contracts. They have the flexibility to undertake infrastructure project either on an EPC, build-own-transfer or build-own-operate transfer basis. Thus, they are strategically placed to use their 30 years of project mgt. expertise to support the infrastructure explosion in India and abroad. ECL will always live up to the mission of achieving excellence through world-class practices and standards in quality, safety and project management.

OTHER BUSINESSES OF ESSAR


The Essar Group is a key player in the other blooming sector of India’s growing economy, such as Information Technology, Publishing and Agro-businesses.

Essar Information Technology Limited

EITL provides the full spectrum of services including consulting, Enterprise solution, e-business solution, Application & infrastructure and integration & mgt. of IT operation. Following the domain strategy of combining business and technical expertise, the company offer complete business solution in areas ranging from IT strategy formulations, IT infrastructure planning and implementation, to SAP Our core Competencies include:-

Business Consulting SAP implementation & Support and infrastructure Mgt.

Paprika Media


Launched in 2004, Paprika Media is the groups foray into publishing business is a separate entity with a dynamic and aggressive team. It tied up with the UK based publishing company time out in March 2004, to publish an Indian edition of the magazine. Time Out Mumbai was launched in Sept. 2004 as a fortnightly priced at Rest. 25 and has become an integral part of the entertainment of Mumbai. Paprika media plans to publish this title in other cities as well and is looking at opportunities in the entertainment and lifestyle space.

SESSAR AGROTECH LIMITED


EATL is an established name in agriculture produce catering to international markets. An offshoot of the Essar Group of Companies, it imbibes the experience of a group that has been running profitable and stable businesses spanning diverse sectors, for over quarter of a century and has all the vigor of a young company.

Essar Argotic Limited was amongst the pioneers in the Indian Floriculture business. When it began its foray in to commercial production of Dutch variety of roses as far back as 1994, it was just a beginner in the international markets. But today, it is one of the leading players in exacting markets in Europe, Far-East, middle-East and Australia. It has been successful in establishing ‘Indus Fresh’ brand for Dutch roses and Exotic Vegetables. Through its quality conscious practices and strategic moves, the company has not only succeeded in tough international markets but managed to influence and enhance the overall perception of Indian companies as well. From a humble beginning that began from the slopes of Leoncavallo, the strong roots of Essar Argotic are spreading all across the globe


HISTORY OF ESSAR GROUP

The name of the company ‘ESSAR’ is getting from the first letter of the two brothers ‘SHASHI’ and ‘RAVI’ ‘S’ as ‘ESS’ and ‘R’ as ‘AR’ thus the combination of them make “ESSAR”

The essar group builds enduring value through:

Assets of $4.4bn (Rs. 20000cr.) in services & manufacturing. Rapid Growth in key sectors, build on firm foundations Setting & surpassing world-class benchmarks Using cutting-edge technology for strategic advantage Moving ever closer to customers and building strong brands Their valuable employees and their “positive attitude”

Ruia family has been in business and trading since the 1800s. when the family first move to Mumbai from Rajasthan in Western India in 1956, Nand kishore Ruia, the group founder, moved south to Chennai to begin independent business activities. In 1969, following the untimely demise of Nand kishore Ruia, his sons Shashi and Ravi Ruia took over the group. Along with a team of seasoned professionals, the Ruia have built the perfect platform for Essar’s accelerating growth, with a strong foundations at India’s industrial core and in the sunrise services sector, Essar has stayed firmly in the forefront of new opportunities. An early start has made us a key player in India’s exploding telecom market. Similarly, we set up India’s first independent power plant and its first new generation private steel plant.

From the beginning, the group was built on businesses at the heart of the Indian economy, often replacing foreign enterprises in India, such as in oil & gas services, construction or shipping. The year 1987 marked its entry into the core manufacturing sector, as Essar Construction began to build a hot briquette iron plant at Hazira. Over the next decade, it invested billions to build a 2.4 mtpa steel mill and a 515 MW power plant at Hazira, a 3.3 mtpa pelletisation plant in Vishakhapatnam, a 400,000 tpa cold rolling mill in Indonesia and a 12 mtpa oil refinery which is under construction at Vadinar, Jamnagar (Gujarat).


WORLD – CLASS STANDARDS: They insist on settings and surpassing world-class benchmarks in everything they do. No wonder they have the world’s largest gas-based sponge iron plant and are one of the world’s largest integrated sea logistics companies that owns India’s largest double hull, double bottom VLCC (Very Large Crude Carrier). All their business is highly integrated across the value chain and use the latest technology to stay strong and agile. They have invested several billion dollars on exclusive state-of-the-art technology because we believe that it confers strong strategic advantages.

TOUCHING MILLIONS OF LIVES: For decades, they have quietly touched the lives of millions of people with the steel to build cars, the oil to fuel, the power to light up thousands of lives and the pipelines to bring drinking water to remote villages. Today, they have come closer by connecting customers with our cellular phone services and talking to thousands of people through our call centers, a countrywide chain of fuel outlets and marketing steel at the retail level.

SBOARD OF DIRECTORS:


Shri. Shashi Ruia ChairmanShri. Ravi Ruia Vice chairmanShri. Prashant Ruia DirectorShri. Rewant Ruia DirectorMr. S. V. Venkatesan DirectorMr. J. Mehra DirectorMr. V. G. Raghavan DirectorMr. Vikram Amin Director (Sales & Marketing)Mr. Robin Banerjee Director (Finance)Mr. K. V. Krishnamurthy DirectorMr. Sanjeev Shriya DirectorDr. G. Goswami ICICI Bank Ltd. Nominee

MANAGEMENT TEAM OF ESSAR GROUP:

Shri. Shashi Ruia ChairmanShri. Ravi Ruia Vice chairmanShri. Prashant Ruia DirectorShri. Anshuman Ruia DirectorMs. Smiti Ruia Director

Shri. Rewant Ruia Director CORPORATE FUNCTIONS:

Mr. S. V. Venktesan Resident Director - ChennaiMr. J. Mehra Resident Director – New Delhi Mr. Jayesh Buch Resident Director- Ahmedabad Mr. Madhu S. Vuppulury Resident Director – New YorkMr. Suresh Sundaram Director – Corporate AviationMr. Adil Malia President – Human ResourceMr. Sunil Bajaj President – Corporate Affairs Mr. Mukesh Bhavnani President - LegalMr. Vijay Mehra Chief Information OfficerMr. V Krishnan Head- Corporate communicationMr. N.S. Paramshivam Head – Forex & TreasuryMr. Dinyar M. Jivaasha Head – Corp. Risk & Ins. Mgt.


MANAGEMENT TEAM OF ECIL

Mr. V. N. Paradkar

Chief Executive Officer

Mr. M. S. Ambegaonkar

Director - Pipeline Division

Mr. Prem Vardhan

Head - Civil & Marine Projects

Mr. J. K. Singh Director - Refinery ProjectsMr. V. Nandakumar

Director - Essar Engineering Centre

Mr. A. Subramaniam

Sr. VP - Projects, Hazira

Mr. R. N. Sarin Head - Heavy Engineering Division

Mr. J. N. Desai Sr. VP - Global Sourcing Division

Mr. B. Deb Purkayastha

CFO & Company Secretary

Mr. K.B.M Swamy

Sr.VP - Human Resources

Mr. Mohan Phatak

Head - Planning & Systems


MISSION & VISION OF ESSAR GROUP

MISSION: To create enduring value for customers and stakeholders in core manufacturing and service businesses, through world-class operating standards, state-of-the-art technology and the ‘POSITIVE ATTITUDE’ OF their people

VISSION:

There are 7 E’s which define the VISSION of the ESSAR GROUP.

1. EFFECTIVENESS:

Doing the right thing at right time. 2. EFFICIENCY:

Doing things in right way

Conserving resources

Being cost effective

Being simple

Observing system discipline.

3. ENTREPRENEURSHIP:

Creating opportunities


Innovating

Taking initiative 4. EMPOERMENT:

Nurturing self esteem

Providing self respect

Ensuring self worth

Creating trust

5. EDUCATION:

Sharing information & knowledge

Learning

Communicating

6. ETHICS:

Having transparent business operation.

7. ENVIRONMENTAL HARMONY:

Adding value to society

Creating sustainable development

ESSAR PHILOSOPHY


The success of the ESSAR GROUP is dependent on the development & realization of the potential of each of them. The mindset of yesterday’s manager was to accept compromise & keep things neat complacency, they should not be afraid to go against today’s currents because they know that tomorrow is theirs. They must work on a vision of what business can become.

ESSAR LEADERSHIP VALUE

Integrity at all times

Satisfaction to internal & external customers.

Facilitate all round excellence

Continuously innovate & create

Explore growth opportunities in new technologies.

Constantly focus on cost reduction.

ACCREDITATION


The Gujarat Water Supply & Sewerage Board (GWSSB)

The Gujarat Water Supply & Sewerage board (GWSSB) facilitated Essar for

its outstanding performance in infrastructure projects in the state of Gujarat

during the year 2001-2002 & for the timely completion of the Water

Pipeline project.


http://www.essar.com/constructions/accreditation.htm



HISTORY OF CONSTRUCTION INDUSTRY IN INDIA


INDIA IS A LAND of ancient civilization, with cities and

villages, cultivated fields, and great works of art dating back 4,000 years.

India's high population density and variety of social, economic, and cultural

configurations are the products of a long process of regional expansion. In

the last decade of the twentieth century, such expansion has led to the rapid

erosion of India's forest and wilderness areas in the face of ever-increasing

demands for resources and gigantic population pressures--India's population

is projected to exceed 1 billion by the twenty-first century.

INTRODUCTION OF CONSTRUCTION INDUSTRY IN INDIA


The construction industry is the second largest industry of the

country after agriculture. It makes a significant contribution to the national

economy and provides employment to large number of people. The use of

various new technologies and deployment of project management strategies

has made it possible to undertake projects of mega scale. In its path of

advancement, the industry has to overcome a number of challenges.

However, the industry is still faced with some major challenges, including

housing, disaster resistant construction, water management and mass

transportation. Recent experiences of several new mega-projects are clear

indicators that the industry is poised for a bright future. It is the second

homecoming of the civil engineering profession to the forefront amongst all

professions in the country.

CONSTRUCTION INDUSTRY AND NATIONAL ECONOMY


Presently, the annual expenditure budget of India is Rs.438,795 Crores against the backdrop of the total Gross National Product (GNP) of the country of about Rs.2200,000 Crores or more (www.indiabudget.nic.in, 2004). Over the years, more than half of the expenditure budget is spent on civil engineering works. Table 1 shows the investments made in the industry over the past years. The construction industry sets in motion the process of economical growth in the country; investment in this sector contributes 6.5% of Gross Domestic Product (GDP) growth (Das, 2003). Every Re.1 investment in the construction industry causes an Rs.0.80 increment in GDP as against Rs.0.20 and Rs.0.14 in the fields of agriculture and manufacturing industry, respectively. Statistics over the period have shown that compared to otherSectors, this sector of economic activity generally creates 4.7 times increase in incomes and 7.76 times increase in employment generation potentiality. Sustained efforts by the Indian construction industry and the Planning Commission have led to assigning the industry status to construction today. This means formal planning and above board financial planning will be the obvious destination of the constructionSector in the country, with over 3.1 Crore persons employed in it.

TECHNICAL HUMAN RESOURCE and EMPLOYMENT POTENTIAL


In India, traditionally the construction industry has been labor intensive as the labor is cheap and easily available. In 1995-96, approximately 1.50 Crores people were employed in this industry which is expected to be 3.26 Crores by the year 2004-2005 (Das, 2003). There are three categories of manpower involved in this industry consisting of the artisan level, the supervisory level and managerial level. It has been observed that every Rs.1 Crore, investment on construction project, generates employments of 22,000 unskilled man-days, 23,000 skilled or semiskilled man-days and 9,000 managerial and technical man-days approximately. With only 3% of total teaching in the country addressing the direct needs of the construction engineering and management aspects required in the construction industry, the 14th Engineering Congress on Human Capital Development in January 2002 observed that “in time to come, India will not have sufficient quality civil engineers even to undertake basic infrastructure work.” Urgent steps are to be initiated to reverse this trend of severe shortage of technical manpower.

CHALLENGES TO THE CONSTRUCTION INDUSTRY


The construction industry everywhere faces problems and challenges. However, in developing countries like India, these difficulties and challenges are present alongside a general situation of socio-economic stress, chronic resource shortages, institutional weaknesses and a general inability to deal with the key issues. There is also evidence that the problems have become greater in extent and severity in recent years. One of the charges leveled at the construction industry, as at the beginning of the 21st century, is that it has a poor record on innovation, when compared with manufacturing industries such as aerospace or electronics.

1. Housing

2. Environment

3. Transportation

4. Power

5. Natural hazards

ECIL has its own Transportation and Power plant so it has never face problem of these challenges.

CONCLUDING REMARKSFOR THE CONSTRUCTION INDUSTRY


In the years ahead, the construction industry in India has to

overcome various challenges - be it with respect to housing, environment,

transportation, power or natural hazards. Technocrats associated with the

Indian construction industry need to employ innovative technologies and

skilled project handling strategies to overcome these challenges. The

outstanding performance under demanding situations in the past will stand in

good stead and give confidence to the Indian construction industry to bring

about an overall development in the infrastructure of the nation. The gains of

large investments in the mega-projects eventually will feedback to the

construction industry itself in the form of better economy and improved

work conditions.


S

THE COMPANY The Essar Group was founded more than three decades ago by the Ruia family and is headed by Chairman Shashi Ruia and Vice Chairman Ravi Ruia. Essar Constructions Limited was one of the first


Companies to be started by the group and has close to forty years’ experience in diverse construction related activities The Company’s core areas have been cross country pipe laying, marine construction, and industrial and infrastructure projects of national importance. Undeniably India’s partner in progress, Essar Constructions Limited plays a major role in linking the countries with canals and cross country as well as undersea pipeline for water, oil and gas.

Vision: To be a global Engineering, Procurement and Constructions contracting Company.

Mission:

To achieve excellence in the field of Engineering,Procurement and Construction through world class practice and standards in quality, Safety and Project Management.

The Company’s core competency lies in:

1. Project conceptualization and design2. Projects Management3. Project Execution4. State of the art equipment for speedy execution of projects5. A commitment to quality and world class standards

EXPERTISE:


1. Pipelines Essar Constructions Limited has created for itself a niche market in the pipeline business and is the only Company in India with more than two decades of experience in Cross Country Onshore and Offshore Pipeline from Constructions to Commissioning. This pipelines transport Oil, Gas, Water and Iron Ore slurry.

2. Industrial Plants


As a turnkey contractor, major Industrial Projects have been executed for Steel Plants, Refineries, Power Plants and infrastructure Projects in India and overseas. As with every project that rolls out of ECL, stringent quality controls norms are maintained and followed during design, engineering, procurement and construction as to enable trouble free and smooth operations.

3. Marine Constructions

Essar has over three decades of experience in Marine Projects. It has undertaken diverse and challenging projects such as break water construction, construction of Ports and Jetties, wharves, sea water intakes, sheet pile jetties, trenches for underwater pipelines and pipe burials and sea bunds. It has also undertaken underwater drilling and blasting and dredging both in India and overseas. Every marine project has posed unique challenges and Essar Constructions has overcome them by using its expertise, ingenuity and pioneering path breaking solutions.

Resources:

1. Construction Equipments


Essar Constructions Limited has emerged as a leading EPC Company and today it has its own large fleet of constructions equipments. This helps in smooth execution of projects while keeping the execution cost to minimum. Pipe Layers, Piling Rigs, Heavy Duty Cranes, Excavators, Bending Machines, High Capacity Crawler Cranes, Dumpers, Tippers including India’s largest mobile crane are some of the cream equipment owned by the Company as on date. The best quality equipment with proven design and track record are used in all turnkey projects.

Essar Constructions Limited has state of the art equipment spread over several major projects sites in India, it is always maintained in top class condition by a special equipment service division.

2. Manpower


The Company has multi skilled and multi disciplined people power including well qualified engineer and project managers with manifold years of deeply embedded hands on expertise and experience. They have the ability to holistically visualize large and complex projects, carry out techno-commercial evaluation, terrain assessment, selection of the right people, select and source equipment and materials, work out finer details and complete the entire project well within the stipulated time and budget.

Company has bagged some of the prestigious EPC Contracts worth mentioning herein below:

The Company has bagged three new pipeline projects worth Rs. 368.39 Crore in Gujarat that demand extracting execution and matchless expertise. Two of the projects involve laying gas pipelines for Gujarat State Petronet Limited (GSPL). Essar Constructions Limited will lay cross country pipeline for GSPL that will connect Rajkot and Morbi industrial areas to the existing Baroda-Ahmedabad-Kalol pipeline. This contract for 24” buried trunk pipeline stretching 168 KMs and the second project involving 30 KMs of 18” pipeline from Anklav to Dhuvaran in Gujarat are valued at around Rs. 250 Crore. Both the projects involves the strenuous task of laying pipeline across Railways, Minor rivers, Roads and Canal Crossings etc.


Additionally, a project from Gujarat Water Resources Development Corporation Limited has been bagged by ECL. This will involve construction of a Pumping Station at Adundara and supplying and lying of 23.5 cm wide and 1.4 cm thick MS pipeline from Adundara to Sujlam Suflam Spreading Canal. GAIL (India) Limited has awarded EPC Contract to the consortium formed between DQE International, Peoples Republic of China and the Company for laying of pipeline and associated facilities of Spread II between Jalalpur (SV7) to Bhoirpada (IP Station 3) covering aDistance of 147 KM and overall commissioning of the total pipeline system for Dahej – Uran Pipeline Project of GAIL (India0 Limited for a total consideration of Rs. 130 Crore. Essar Constructions Limited has also entered into a sub-contract Agreement with JSC Stroytransgas, Russia for lying of Pipeline and Associated Facilities (Part I & Part II) for Mundra – Delhi Pipeline Project of Hindustan Petroleum Corporation Limited for a total consideration of Rs. 117 Crore. Essar Constructions Limited has also secured an EPC Contract for setting up of 140 MW Gas Fired Combined Cycle Power Plant in Hazira, Gujarat for Bhander Power Limited for a total contract value of Rs. 300 Crore.

Associations:


Essar Constructions Limited has long term relationship with certain multinational construction and engineering companies from all around the world. Currently, the Company is having a consortium arrangement with JSC Stroytransgaz (STG) of Russia, DQE International of China, Harbin Power Engineering Company Limited, China and SEPCO Electric Power ConstructionCorporation, China for doing the pipeline and Power Plant Projects. For Mass Rapid Transport System (MRTS) Projects, the Company has been short listed as one of the qualified bidders for the Hyderabad Mass Rapid Transport System by bringing the consortium of Singaporean Companies comprising of SembcorpEngineers & Construction PTE Limited, Singapore Technologies Electronics Limited, SMRT Engineering PTE Limited who have proven track record for developing the Mass Rapid Transportation System in far east countries.


ROAD AHEAD

Essar Constructions Limited is planning to concentrate on following five key sectors: -

1. Infrastructure: - Ports, Airports, Mass Rapid Transport, Light Rail Transport

2. Industrial: - Metallurgical, Petrochemical, Power

3. Cross country pipelines: - Oil, Gas, Water, Slurry

4. Real Estate: - High Rise Building, SEZs, Townships

5. Offshore: - Sub sea pipelines

Essar Constructions Limited has a strong order book position and is working on a number of proposals


And is hopeful of bagging some new projects in the Gulf Region. ECL has the expertise and a large pool of highly skilled engineers, backed by some of the most modern and sophisticated equipments in the Industry. Add to this, other national and international projects and our associations with internationally renowned EPC organizations, our growth is limited only to the opportunities.


ONGOING PROJECTS

Sr. No.

Name of Project and Location

Name of Client

Contract amount

Completion Stipulated

1 Rehabilitation and upgrading of Sira to Chitradurga Section km 122.3 to km 189 NH4 Road Work

National Highways Authority of India

Rs 253.24 Crores

30 months from Jan. 2002

2 Rehabilitation and upgrading of Chitradurga to Harihar Section km 207 to km 284 NH4 Road Work


Rs 264.87 Crores


3 Rehabilitation and upgrading of Harihar to Haveri Section - km 284 to km 340 NH4 Road Work


Rs 200.92 Crores


4 Water pipelines for Madurai-Theni Districts CWSS to Madurai City.

Tamil Nadu Water Suppy And Drainage Board, Madurai

Rs 42.70 Crores

18 months from Sept... 2002


A glimpse of ECL’S esteemed clientele:

Director General Naval Projects, Mumba

Mazgaon Docks Ltd.


i Essar Oil Ltd. / Abb Lummus Crest Mormugao Port Trust

Essar Power Ltd. National Highway Authority Of India

Essar Steel Ltd. New Mangalore Port Gas Authority Of India Ltd.

Nhava-Sheva Port Trust

Govt. Of Orissa Oil And Natural Gas Commission

Govt. Of Srilanka P.T. Essar Dhananjaya Gujarat Heavy Chemicals Ltd.

Polyolefins Industries Ltd.

Gujarat Water Supply & Sewerage Board

Qatar General Petroleum Corporation

Hindustan Petroleum Corporation Ltd. Royal Dutch Shell

Gujarat Water Infrastructure Ltd.

Sardar Sarovar Narmada Nigam Ltd.

Kakinada Port Trust Tamilnadu Cement Corporation

Kandla Port Trust Tuticorin Port Trust

Madras Port Trust Vishakhapatnam Port Trust

Indian Oil Corporation Gujarat State Petronet Ltd.

Tamilnadu Water Supply & Administration



INTRODUCTION OF WORKING CAPITAL MANAGEMENT

Working capital management is concerned with the management of current assets. It is an important and integral part of financial management as short-term survival is a prerequisites for long-term success. One aspect of working capital management is the trade-off between profitability and risk (liquidity). There is a conflict between profitability and liquidity. If a firm does not have adequate working capital, that is, it does not invest sufficient funds in current assets, it may become illiquid and consequently may not have the ability to meet its current obligations and, thus invite the risk of bankruptcy. If the current assets are too large, profitability is adversely affected.

The key strategies and considerations in ensuring a trade-off between profitability and liquidity is one major dimension of working capital management. In addition, the individual current assets should be efficiently managed so that neither inadequate nor unnecessary funds are locked up.


MEANING OF WORKING CAPITAL

There are two possible interpretations of working capital concept:

1. Balance Sheet Concept2. Operating Cycle Concept

It goes without saying that the pattern of management will be very largely influenced by the approach taken in defining it. Therefore the two concepts are discussed separately in a nutshell.

Balance Sheet Concept:

There are two interpretations of working capital under the balance sheet concept. It is represented by the excess of current liabilities and is the amount normally available to finance current operations but, sometimes working capital is also used as a synonym for gross or total current assets. In that case, the excess of current assets over current liabilities is called net working capital or net current assets. Economists like Mead, Mallot, Baker and Field support the latter view of working capital. They feel that current assets should be considered as working capital as the whole of its help to earn profit and the management is more concerned with the total current assets as they constitute the total funds available for operational purposes. On the other hand, economists like Lincoln and Saliers uphold the former view. They argue that (A) in the long run what matters is the surplus of current assets over current liabilities (B) it is this concept which helps creditors and investors to judge the financial soundness of the enterprise (C) what can always be relied upon to meet the contingencies, is the excess of current assets over the current liabilities since this amount is not to be returned and (D) this definition helps to find out the correct financial position of companies having the same amount of current assets.


The conventional definition of working capital on terms of the differences between the current assets and current liabilities somewhat confusing. Working capital is really what a part of long term finance is locked in and used for supporting current activities. Consequently, the larger the amount of working capital so derived,

Greater the proportion of long term capital resources siphoned off to short-term activities. It is difficult to say whether this is right or wrong. Apparently, when firm are warned about right working capital situation, the logic of the above definition would perhaps indicate diversion of long-term finances for short-term purposes. For, if short-term bank loan were procured to bring in cash, under the conventional method, working capital would evidently remain unchanged. Liquidation of debtors and inventory into cash would also keep the level of working capital according to this definition may produce a false sense of security at a time when cash resources in the absence of adequate profits. Again, under the conventional method, cash enters into the computation of working capital. But it may have been more appropriate to exclude cash from such calculations because one compares cash requirements with current assets less current liabilities. The implications of this in conventional working capital computations is that during the financial period current asset get converted into cash which after paying off the current liabilities, can be used to meet other operational expenses. The paradox, however, is that such current assets as are relied upon to yield cash must themselves to be supported by long-term funds until they are converted into cash.

At least three points seem to emerge from the above. 1. The balance sheet definition of working capital is perhaps not as

meaningful, except as an indication of the firm’s current solvency in repaying its creditors.

2. When firms speak of shortage of working capital, they in fact possible imply scarcity of cash resources.

3. In fund flow analysis an increase in working capital, as conventionally defined represents employment or application of funds.


Sources of Working Capital

In India the most prevalent practices to finance working capital is short term funds. The two most sources of finance for working capital are: (1) Trade Credit (2) Bank Borrowing.

Trade Credit

Trade credit is mostly an informal arrangement and is granted on an open account basis. A supplier sends good to buyer on credit, which the buyer accepts and in effect agrees to pay the amount due as per sales term in the invoice. Open account credit appears as sundry creditors on the buyer’s balance sheet. Also takes forms of bills payable/notes payable. It refers to the credit customer gets from supplier of goods in the normal course of business. Buying firms do not have to pay the cash immediately for the purchase rate and this deferral is, facilitate company to finance short term working capital, called trade credit.

Credit Trade

Credit term refer to the condition under which the supplier sells on credit to the buyer is required to pay the credit. It includes the due date and cash discount.

Benefits and Costs of Trade Credit:It is spontaneous sources of finance and its major advantages are:

Easy availability Flexibility Informality


Cost of trade credit: buyer should calculate the cost of foregoing cash discount to decide whether or not to avail cash discount. The following formula can be used:

%Discount * 360 100% Discount (credit-discount period)

Buyer should also consider the implicit costs of trade credit, and particularly of stretching account payable. These implicit costs may be built into the piece of goods and services. Buyer can negotiable for lower prices for payment in cash. Stretching account payable does generate additional short term finance, but it can prove to be very costly sources. The firm will have to sometimes forgone cash discount and required to penalty interest charges. Thus the firm will not be adversely affected. A firm should compare the opportunity cost of trade credit with other source of credit while making its financing decision.

Accrued expenses and deferred income:

These are spontaneous source of short term financing of working capital. Accrued expenses represent a liability that a firm has to pay for the services, which it has already received. It is an interest free source of financing but limited, as payment of accrued expenses can not be postponed for a long period. Similarly advance income will be received only there is a demand and supply gap or firms monopoly.

Bank Finance:

Bank finance is the most common negotiate sources of the working capital finance. It can be availed in the form of over draft, purchase/discount of bill and loan. Bank finance is regulated by loan.

Over draft


Under the facility, the borrower is allowed to withdraw funds in excess of the balance in his current account up to certain specified limit during a stipulated period. It is flexible arrangement from the borrower’s point if view, since they can withdraw and repay funds whenever they desire. Interest is charged on daily balance on the amount actually withdrawn subject to some minimum charges.

Cash credit

Popular method of bank finance and similar to over draft facility. A borrower is allowed fund from the bank up to the sanctioned limit. Cash credit sanctioned against the security of current assets. There is no commitment charges therefore interest is payable on the amount actually utilized by the borrower.

Purchases and discount of Bills:

Under this borrower obtain a credit from a bank against its bills. Before purchasing the bills, the bank satisfies itself as to the credit worthiness of a drawer. Bank holds the bills as security for the credit. When a bill is discounted, the borrower is paid the discounted amount of the bill bank collects the full amount of maturity.

Working capital loan

A borrower any sometimes require ad-hoc or temporary accommodation in excess of sanctioned credit limit to meet unforeseen contingencies. Banks provide such accommodation through a demand loan account or a separate “no-operable cash credit account. The borrower is required to pay a higher rate of interest above normal rate of interest on such additional credit.

Hypothecation


Under this working capital finance provide against the security of movable property, generally inventories. Banks generally grant credit hypothecation only to first class customer.

Pledge

Under this borrower is required to transfer the physical possession of the property offered security to the bank to obtain credit.

Mortgage

Transfer of legal or equitable interest in specific movable property of the payment of a debt.

Lien

It means right to the lender to remain property belonging to the borrower until they repays credit.


Source of working capital finance in Essar Construction Ltd.

The company does not finance all of its working capital from a single; rather it has a consortium of banks for financing its working capital needs. Main among them being State Bank of India. The prime source of financing working capital by company can broadly be classified in the following two categories:

Fund based

In this case there is an actual out flow of funds from the bank to the company. These can be further categorized as:

Cash credit WCDL EPC Pre shipment Post-shipment credit

Non fund based

In this case there is no actual out flow of funds from the bank to the company but the bank only make a commitment to pay if he company to pay if the company defaults to pay. These can also be further categorized as:

Letter of credit Bank guarantee Direct bill

FUNDS BASED


Cash credit (Overdraft)

Under this arrangement a pre-determined limit for borrowing is specified by bank. The borrower can draw as often as required, provided the outstanding does not exceed the cash credit limit and is covered by an adequate drawing power limit. The facility of repaying the amount partially or fully is also provided to the borrower. This form of advance is highly attractive from the borrower point of view because while borrower has the freedom of drawing the amount as a when required, interest is payable only on the amount outstanding in the account. This account operates against security in the form of pledge or hypothecation.

WDCL (Fixed Tenor Loan)

These are advances of amount, which are credited to the current account of borrower or related to them in cash. Interest is charge on the entire loan amount, irrespective of how much is drawn. Loans are payable either on demand or in periodical installment.

Pre-shipment credit

It is short term working capital finance specially provided to an exporter against the documentary evidence of having entered in to export communities. The packing credit is given at a pre-shipment stage and is given for the procurement of raw material, for meeting manufacturing and packing charges and the payment insurance premium and freight. The pre-shipment is to be liquidated against the proceeds of export documents tendered.

This facility is made avaible by banks at relatively lower rate to promote exports and is strictly governed by RBI guidelines. The banks provided this


form of finance at cheaper rate because they get refinance from the RBI at concessional rate. The difference between lending rate and refinance rate is profit margin of the banks.

Pre-shipment credit can be utilized either in rupee or in foreign currency. The RBI in its credit policy decided the interest rate for rupee credit. The rate uniform for all borrower and is not influenced by credit rating of the company. The interest rate for foreign currency credit are London inter bank offer rate (LIBOR) linked. Banks according of the borrower credit rating and bank’s cost of funds decide the spread over LIBOR.Post-shipment credit

Post-shipment finance is a post sale facility extended by the banks after the goods have been shipped and against the submission of expert document evidencing the dispatch of goods. This facility is given only in rupee.

NOTE:

Under these guidelines, for borrower enjoying working capital limit of rupees 10crore or above, the limit is require to be delivered through WCDL of 80% and cash credit of 20%. In order to meet the flexibility required for expert operation, the assessed limit packing credit is reduced from MPBF and 80% of the balance is delivered through WCDL and remaining 20% through cash credit and its various components.

NON FUND BASED

Letter of credit


A letter of credit is an arrangement under which a bank undertakes to pay against the document stipulated in the letter of credit provided term and condition of the same have been compiled with thus the liability purchaser’s supplement of L/C. The L/C opened by Essar Construction Ltd. Are irrevocable once and generally for a period of 90 or 180 days duration.

Parties are involved in L/C

Applicant (the purchaser) Beneficiary (supplier) L/C opening bank Advising bank Negotiating bank



Opening of the letter of credit

When importer and exporter agree on the commercial terms like delivery term, delivery schedule, payment terms etc. they enter into a contract. There after, the importer approaches their bank to upon a letter of credit in favor of the exporter. While making an application for letter of credit, the instruction to be given the applicant for credit. I.e. importer to the issuing bank must be clear and unambiguous.

L/C can be opened for material as well as services. The supplier draws a bill of exchange for the amount equivalent to invoice amount against this L/C and can get it discounted for immediate funds as soon as they get it back duly accepted by purchaser.

However in case of ESSAR the company have an arrangement for establishment of L/C as well as discounting the same on behalf of them and get their account credited. All the bank charges are to be bear by company. By following L/C Route Company enjoys the benefit of lower rate of effective interest as compare to cash credit. For added security the exporter can get the L/C confirmed by bank in his own country and in such situation the confirming bank has the liability in addition to the opening bank. Such types of L/C are known as confirmed L/C.Payment again L/C requires submission of following document:

Bill of exchange Commercial invoice Packing list Transport document: bill of lading Certificate of origin Insurance policy


Bank guarantee

The company takes bank guarantee because they do not want to local up their own funds as ideal security. Bank guarantees are of two types:

Financial bank guarantee Performance bank guarantee

The bank for deferred in cash of imports issue financial guarantee and performance guarantees are given on behalf of the company undertaking the fulfillment of the contract. In some cases the bank take counter guarantees. For availing this facility the company has to pay bank charges or commission.

Direct bills (Hundi)

It is an undertaking by the company to the bank, that it will make a payment to the bank on the due date, of the amount that is mentioned in that bill. Against this documents the bank hands over to the company the original documents received by it from the supplier. On the basis of these company can release the goods from the port or from the transporter. This facility enables the purchaser to get the goods without blocking any capital limit.

In case of the direct bill bank has no direct liability to the supplier for making payment. It is liable to pay if and only if the company may sometime issue and an irrevocable instruction to bank.

Instructing it to debit the companies current account and make payment to the supplier on the due date. Such type irrevocable instruction is required to be confirmed by the bank.


Some other source of working capital

Net gain from operation

This is the most desirable source of working capital it does not burden the business with external obligation. It is surplus amount left with the company after payment of dividend if any.

Sale of fixed assets

This occasional and irregular source and the concern usually depend on this.

Issue of shares

The share issue may not add to the interest burden like the borrowing from the bank but they result demand for dividend and the sharing the ownership in the business with new investors.

Commercial papers

Commercial paper is an instrument for raising short-term finance from money market. It is a substitute for existing working capital finance from bank. It is floated for the advantage of the obtaining short-term finance at a cheaper rate from market. It is enables corporate borrower to replace to bank finance their by obtaining advantage in term of the cost of funds. Credit rating from any of the registered rating agencies is a must before CPs are issued. The minimum ratubg a corporate should obtain is P2 of CRISIL or equivalent. However, it is presently not possible to place Cap’s in the market with a credit rating below P1, as there are no investors. Presently, P1 + rating company can place Cap’s at all in cost of about 11 to 12% p.a. vis-à-vis the cash credit rate of about 14 to 15% p.a the funding costs depends upon prevalent money market conditions which fluctuates.


Public deposits

Many firms large and small solicit unsecured deposits from the public in

recent years mainly to finance their working capital requirement.

Inter-corporate deposits

It is deposit made by one company with another. Normally for period up to

six months. Such deposit can be called (3 days), 3 months deposit or 6

months deposit.


History and Recent Trends in Working Capital

Historically, the Indian commercial bank used to extend credit predominantly to trade. However, over the years, in keeping with the last industrialization of the economy, they have enlarged their operation to include a wide spectrum of services, including term lending and working capital finance. Working capital financing initially was the exclusive domain of the Indian commercial banks and was subject to strict control and regulation by the RBI. The RBI, commonly known as the MPBF method, laid down method of assessment of permissible finance by the bank. Industry wise specific norms for inventory and receivables were laid down by RBI which had to be followed by all banks. Prior approval of RBI was required before disbursal of funds the banks were required to execute post sanction supervision on the funds lent and their uses asking the corporate to submit various financial statements like the balance sheet and QIS I,II and III.

Credit Delivery System was decided by RBI. In case of funds lent above, a prescribed limit, financing to be compulsory done through “Consortium Arrangement” wherein a number of banks participate and the bank with the highest share is chosen as leader. Current assets and current liabilities were to be strictly classified according to the modalities prescribed by the RBI. Stringent control on end use of working capital finance. Interest rates are now determined by the RBI’s Credit Policy and Money market conditions, as reflected in the Primary Lending Rate of respective commercial bank. As compared to previous regulated rate of interest the borrower are now exposed to such fluctuations.


Recent Trends in Working Capital Financing :

Liberalization and opening up of Indian financial sector brought in a number of changes. The major ones being:

A no. of private banks like Indusind, Centurion, Global trust bank, etc, have entered the Indian banking sector and are offering a range of banking services including working capital financing. Apart from private and foreign banks even Development Financing institutions are extending working capital finance to repute corporate.

Relaxation of several RBI controls and changes in regulations, such as:

The MPBF method of working capital financing is longer compulsory. Banks have been given freedom to introduce their own method of assessment. Industry wise pre-determined norms have been removed allowing banks to set them as per their discretion. Earlier banks had to get prior approval of RBI before sanction & disbursal. The prior approval of RBI is no longer required there by reducing the time taken for disbursement of the approved limits.

Consortium practical approach of cash flow has been introduced as an alternative to the historical volume basis of MPBF for assessment of the working capital.

Introduction of commercial paper as a cheaper instrument for financing working capital thereby reducing the dependence on the bank finance. Borrowers are now allowed by RBI to borrow working capital funds in foreign currency from banks, out of their FCNR (B) deposits in lieu of rupee borrowing. This given tremendous leverage to exporters with natural hedge, to reduce their financing costs.

Relaxation of ECB (External Commercial Borrowing) guidelines by permitting corporate to borrow, without end-use restriction. Thus ECB funds can now be used for meeting the working capital needs.


Levels of Working Capital Management

In a “perfect” world, there would be no necessity for working capital assets and liabilities. In such a world, there would be no uncertainty, no transaction costs, information search costs, scheduling costs, or production and technology constraints. The unit cost of producing goods would not vary with the amount produced. Firms would borrow and lend at the same interest rate. Capital, labor, and product markets would reflect all available information and would be perfectly competitive. In such a world, it can be shown that there would be no advantage for firms to invest or finance in the short term.

But the world in which real firms function is not perfect. It is characterized by the firm’s considerable uncertainty regarding the demand, market price, quality, and availability of its own products and those of suppliers. There are transaction costs for purchasing or selling goods as securities. Information is costly to obtain, and the firms is faced with limits on the production capacity and technology that it can employee. There are fixed as well as variable cost associated with producing goods for sale, and there are spreads between the borrowing and leading rates for investments and financing of equal risk. Information is not equally distributed and may not be fully reflected in the prices in product and labor markets, and these markets may not be perfectly competitive.

These real world circumstances introduce problems with which the firm must deal. While the firm has many strategies available to address these circumstances, strategies that utilizes investment or financing with working capital accounts often offer substantial advantage over other techniques. For example, assume that the firm is faced with uncertainty regarding the level of its future cash flows and will incur substantial cost if it has insufficient cash to meet expenses. Several strategies may be formulated to address this uncertainty and the costs that it may engaged.


Among these strategies are some that involve working capital investment or financing such as holding additional cash balances beyond expected needs, holding a reserve of short term marketable securities, or arranging for the availability of additional short term borrowing capacity

One of these strategies (or a combination of them; may well be the least costly approach to the problem. Similarly, the existence of fixed set up costs in the production of goods may be addressed in several ways, but one possible alternative is to hold inventory.

By these examples, we see that strategies using working capital accounts are some of the possible ways firms can respond to many of the problems engendered by the imperfect and constrained world in which they deal. One of the major features of this world is uncertainty (risk), and it is this feature that gives rise to many of the strategies involving working capital accounts. Moreover, a firm’s net working capital position not only is important from an internal standpoint; it also is widely used one measure of the firm’s risk.

Risk, as used in this context, deals with the probability that a firm will encounter financial difficulties, such as the inability to pay bills on time. All other things being equal, the more net working capital a firm has, the more likely that it will be able to meet current financial obligations. Because net working capital is one measure risk, a company’s net working capital position affects its ability to obtain debt financing. Many loan agreements commercial banks and other lending institutions contain a provision requiring the firm on maintain a minimum net working capital position. Likewise, bond indentures also often contain such provision.

The overall policy considers both the level of working capital investment and it’s financing. In practice, the firm has to determine the joint impact of these two decisions upon its profitability and risk. However, to permit a better understanding of working capital policy, the working capital investment decision is discussed in this section, and the working capital financing decision is discussed in the following section.


The size and nature of a firm’s investment in current assets is a function of a number of different factors, including the following:

The type of products manufactured The length of the operating cucle The sales level (because higher sales require more investment in

inventories and receivables) Inventory policies Credit policies How efficiency the firm manages current assets. (Obviously, the more

effectively management economies on the amount of cash, marketable securities, inventories, and receivables employed, the smaller the working capital requirements).

For the purposes of discussion and analysis, these factors are held constant for the remainder of this topic. Instead of focusing on these factors, this section examines the risk-return tradeoff associated with alternative levels of working capital investments.


Profitability versus Risk Tradeoff for Alternatives Levels of Working Capital Investment

Before deciding on an appropriate level of working capital investment, a firm’s management has to evaluate the tradeoff between expected profitability and the risk that it may be unable to meet its finance obligations. Profitability is measured by the rate of (operating) return on total assets; that is EBIT/ total assets. The risk that the firm will encounter financial difficulties is related to the firm’s net working capital position.

Figure illustrates three alternative working capital policies. Each curve in the figure demonstrates the relationship between the firm’s investment in current assets and sales for that particular policy.

Policy C represents a conservatives approach to working capital management. Under this policy the company holds a relatively large proportion of its total assets in the form of current assets. Because the rate of return on current assets normally is assumed to is less than the rate of return on fixed assets, this policy results in a lower expected profitability as measured by the rate of return on the company’s total assets. Assuming that current liabilities remain constant, this type of policy also increase the company’s net working capital position, resulting in a lower risk that the firm will encounter financial difficulties.

In contrast to policy C, policy A represents an aggressive approach. Under this policy the company holds a relatively small proportion of its assets in the form of lower yielding current assets and thus has relatively less net working capital. A result, this policy yields a higher expected profitability and higher risk that the company will encounter financial difficulties.

Finally, policy B represents moderate approach, because expected profitability and risk levels fall between those of policy C and policy A.


Using net working capital as a measure of risk, the aggressive policy is most risky, and the conservative policy is the least risky.The current ratio is another measure of a firm’s ability to meet financial obligations as they come due. The aggressive policy would yield the lowest current ratio, and the conservative policy would yield the highest current ratio.

Optimal level of Working Capital Investment

The optimal level of working capital investment is the level expected to maximize shareholder wealth. It is function of several factors, including the variability of sales and cash flows and the degree of operating and financial leverage employed by the firm. Therefore no single working capital investment policy is necessarily optimal for all firms.

Proportions of Short-term and Long-term Financing

Not only does a firm have to be concerned about the level of current assets; it also has to determine the proportions of the short and long term debt to use it financing these assets. This also involves tradeoff between profitability and risk.

Sources of debt financing are classified according to their maturities. Specially, they can be categorized as being either short-term or long-term, with short-term sources having maturities of 1year or less and long-term sources having maturities of greater than 1 year.


Cost of Short-term versus Long-term debt

Historically long-term interest rates normally exceed short-term rates because of the reduced flexibility of long-term borrowing relative to short-term borrowing. Infact, the effective cost of long-term debt, even when short-term interest rates are equal to or greater than long-term rats. With long-term debt, in contras, the firm incurs the interest expense even during times then it has no immediate need for the funds, such as during seasonal or cyclical downturns. With short-term debt, in contrast, the firm can avoid the interest cost on unneeded funds by paying off the debt. Therefore, the cost of long term debt generally is higher than the cost of short-term debt.

Risk of Long-term versus Short-term debt

Borrowing companies have different attitudes toward the relative risk of long-term versus short-term debt than lenders. Whereas lenders normally feel that risk increase with maturity, borrowers feel that there is more risk associated with short-term debt. The reasons for this are two fold.

First, there is always the chance that a firm will not be able to refund its short-term debt. When a firm’s matures, it either pays off the debt as part of debt reduction programmed or arranges new financing. At time of maturity, however, the firm could be faced with financial problems resulting from such events as strikes. Natural disasters, or recessions that cause sales and cash inflows to decline. Under these circumstances the firm may find it very difficult or even impossible to obtain the needed funds. This could lead to operating and financial difficulties. The more frequently a firm must refinance debt, the greater is the risk of its not being able to obtain the necessary financing.

Second, short-term interest rates tend to fluctuate more over time than long-term interest rates. As a result, a firm’s interest expenses and expected earnings after interest and taxes are subject to more variation over time with short-term debt than with long-term debt.


Profitability versus Risk Tradeoff for Alternative Financing Strategy

Company’s need for financing is equal to the sum of its fixed and current assets. Currents assets can be divided into following two categories:

Permanent current assets Fluctuating current assets

Fluctuating current assets are those affected are those affected by the seasonal or cyclical nature of company sales. For example, a firm must make larger investments in inventories and receivable during peak selling periods than during other periods of the year.

Permanent current assets are those held to meet the company’s minimum long-term needs (for example, “safety stocks” of cash and inventories).

Matching Approach to Asset Financing

The fixed assets and permanent current assets lines are upward slopping indicate that the investment in these assets and by extension, financing needs tend to increase over time for a firm whose sales are increasing.

One way in which a firm can meet its financing needs by using approach in which the maturity structure of the firm’s liabilities is made to correspond exactly to the life of its assets. This is illustrated in figure – 3. As can be seen, fixed and permanent current assets are financed with long-term debt and equity funds, whereas fluctuating current assets are financed with short-term debt. Application of this approach is not as simple as it appears. However, in practice the uncertainty associated with the lives of individual assets makes the matching approach difficult to implement.


Working Capital Cycle and Policy

Cash flows in a cycle into, around and out of a business. It is the business’s life blood and every manager’s primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, run out of cash and expire. The faster a business expands the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profit and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm’s total profits.

There are two elements in the business cycle that absorb cash – inventory (stock and work-in-progress) and receivables (debtors owing you money). The main sources of cash are payables (your creditors) and Equity and loans.

Each component of working capital (namely inventory, receivables and payables) has two dimensions…..TIME…..and MONEY. When it comes to managing working capital – TIME IS MONEY. If you can get money to move faster around the cycle or reduce the amount of money tied up, the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you will have additional free money available to support additional sales growth or investment. Similarly, if you can negotiate improved terms with supplier e.g. get longer credit or an increased credit limit; you effectively create free finance to help fund future sales.


If you……Collect receivables (debtors) faster

Collect receivables (debtors) slower

Get better credit from supplier

Shift inventory (stocks) faster

Move inventory (stocks) slower

Then……

You release cash from the cycle

Your receivables soak up cash

You increase your cash resources

You free up cash

You consume more cash

It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. if you do pay cash, remember that this is now longer available for working capital. Therefore, if cash is tight, consider other ways of financing capital investment – loans, equity, leasing etc. similarly, if you pay downs a plug hole; they remove liquidity from the business.


Factors influencing Working Capital:

Working capital needs of a firm are influenced by numerous factors. The important ones are:

Nature of business Seasonality of operations Production policy Market condition Condition of supply

Strategy of constant production in Essar Construction Ltd. Not affected by seasonal fluctuations.

Working Capital Policy

Two important issues in formulating the working capital policy are:

What should be the ratio of current assets to sales? What should be the ration of long-term financing to short-term

financing?


Profit Criterion for Current Assets:

Current assets can be easily and the value realized to liquidation would be more or less equal to the amount invested initially, and the profit per year can be calculated as:

P = I* (r-k)

I = Initial investment P = Profit R = Rate of returnK = Cost of Capital

Operating Cycle Analysis:

Raw material and store storage period Work in process stage Finishing goods inventory stage Debtors collection stage

Operating cycle is helpful forecasting and control of working capital


Current Asset Investment Approaches:

A basis question that arises in case of working capital management is how a management finances appropriate level of investment in current assets? There are basically three broad approaches, which a management may take. There are

Industry norm approach Economic model approach Strategies choice approach

Industry Norm Approach

In this approach the industry practice or norm is used to arrive at the target levels of investment of current assets. Of course, there would be year to year or inter firm fluctuation and differences. Over a period of time, the industry adjusting to its environment and risks is expected to have settled down to and average 30, 60 and 90 days to raw material as inventory.

The norm could be less of a reality and more a myth, like Marshall’s representative firm, or the statistician’s mean.

Everyone might more or less do what other is doing, resulting in imitating behavior.

The possibility of drift determined by environment changes and inadequate internal adjustments

Absence of an impetus to search for better solutions than those embedded in the norms through economic or strategies approach.

In spite of these problems, the industry norm approach has arrived by forces of history and tradition. A careful use of this approach can under certain conditions provide useful benchmark especially for new entrants.


Economic Model Approach:

The economic model approach signifies an explicit rational model of profit maximization or cost minimization. The approach arrives at an optimal solution for a case making trade – off between risk and profitability, using economic decision criterion. Economic order quantity model is typical e.g. of this approach.

The economic model approach avoids the myth of the means, implicit in the industry norm approach. It is nearer to reality in basing itself on the assumptions that every company at particulars point in time represents more of less a unique case. Even so the approach has been tried in limited way, in part because of its restrictive assumptions and exclusive reliance on financial or economic variables and total conditions. This approach however incorporates that profit motive is inherent in business decision. Even if such model can provide indicative solution it can prove helpful in day-to-day management of funds.

Strategies Choice Approach:

It is possible to take the position that there are no ideal solutions to the working capital problem of company. As condition and goals change, solution must be worked out every time to fit each unique situation. Without letting conventional restrictions limit our choice. There is thus concept of strategies choice involved in the area of current asset management.

Need of the Working Capital:

Company’s working capital is used to pay short-term obligations such as accounts payable and buying inventory. If company’s working capital dip too low, its risk running cut of cash. Even very profitable business can run into trouble if they lose the ability to meet their short-term obligations. The calculator assists you in determining working capital needs for the next year.


WORKING CAPITAL ANALYSIS

NET WORKING CAPITAL APPROACH:

According to this approach, deducting the current liabilities from the current asset can arrive at working capital. The following table represents the current asset, current liabilities and their % composition and net working capital.

COMPONENTS OF CURRENTS ASSETS: (Rs. In “000”)Particulars 2003-04 2004-05 2005-06 2006-07

Inventories 1,341,438 1,802,212 2,820,662 3,999,139Sundry debtors

460,472 673,283 829,422 971,656

Cash & Bank Balance

457,982 359,309 717,402 1,159,855

Loans & Advances

932,061 945,055 3,770,406 4,470,984

Current Assets

3,191,953 3,779,859 8,137,892 10,601,634

%COMPOSITION OF CURRENT ASSET :

Particulars 2003-04 2004-05 2005-06 2006-07 AVG.Inventories 43.03 47.68 34.66 37.72 40.77Sundry debtors

14.43 17.81 10.19 9.17 12.90

Cash & Bank Balance

14.35 9.51 8.82 10.94 10.91

Loans & Advances

29.20 25.00 46.33 42.17 35.66


% composition of current assets

0%

20%

40%

60%

80%

100%

120%

2003-04 2004-05 2005-06 2006-07

Year

%

Series4Series3Series2Series1

Analysis:

From the above table and chart we find that inventory and loans & advances plays major role in current assets. We can also say that according to demand of finished good the inventory level of the company varies. Previously company’s most purchase done through credit purchase and hence cash & bank balance have minor role in current assets of the company. But now it has not specific credit policy.

Company suffers losses in the year 2005-06, due to which loan and advances was an increased and sundry debtor decreased. On an average other components of the current assets, loan &advances 35.66%, inventory 40.77%, sundry debtor 12.90%, cash &bank balance 10.91%.


COMPONENT OF CURRENT LIABILITY :

(Rs. In “000”)particulars 2003-04 2004-05 2005-06 2006-07Acceptances 404,919 1,107,366 1,035,539Sundry creditors

814,722 1,837,271 2,267,068 3,946,848

Advances from customers

639,042 621,042 3,091,819 3,034,763

Other liabilities

40,692 52,767 81,437 267,525

Interest accrued but not due on loans

390 - 2,332 14,194

Current Liabilities

2,287,900 2,916,071 6,550,022 8,298,869

% COMPOSITION OF CURRENT LIABILITIES

Particulars 2004 2005 2006 2007Acceptances - 13.89 16.90 12.48Sundry creditors

35.61 63 34.61 47.56

Advances from customers

27.93 21.30 47.20 36.57

Other liabilities

1.77 1.80 1.24 3.22

Interest accrued but not due on loans

0.02 - 0.04 0.17


Analysis:

From the above chart and diagram we find that the sundry creditors and advances from customers contribute larger part of current liabilities and it increases year by year.


NET WORKING CAPITAL

Particulars 2004 2005 2006 2007Net Working Capital

904,053 863,788 1,587,870 2,302,765

Net working capital

0

500000

1000000

1500000

2000000

2500000

2003-04 2004-05 2005-06 2006-07

Year

Am

out i

n R

upee

s

Analysis:

As we show above chart we find that company’s capital decreasing in the year 2004-05. But next year company bounced back and had positive net working capital. And it is increasing since that time. It is good sign for the company.

As shown in above diagram we can say that ECIL is having good net working capital, which is good for growth of the company.



INTRODUCTION OF RATIO ANALYSIS

Introduction

Ratios are widely used tool of interpretation of financial statements. They provide clues to the changes in the financial statements. Ratio analysis as such is not the end by itself. Ratios, in fact identify the areas which require further investigation. Ratio analysis involves computing and interpreting the relationship between the relevant financial items. These financial items are drawn from the various financial statements.

Ratios: what?

A ratio expresses a mathematical relation between two items. In the financial ratios, these items are financial in nature and generally found in the balance sheet/ income statement/cash flow statement. It can be expressed in as a percent, rate, or proportion, or days.

Ratios: A tool for comparison

Inter-firm comparison Intra-firm Comparison

Ratio Analysis: Increasing Importance

Many users rely on others to monitor/compare the performance of the companies. Employees depend on the professional bodies, professional trainers or the senior executives to monitor performance. Small investors depend on their brokers or depend on the published literature. Now day’s organizations, like ICICI Direct.Com, provide such help on line. Professional fund managers develop their own research resources for such an analysis. Many well known business schools and professional organizations frequently conduct training programmers and workshop on these issues.


There is a fierce competition to accumulate as much information as possible. Such an effort increases the knowledge about the players, which in turn helps in getting the best deal.

Ratio Analysis: Analysis of What?

Computation of ratio is easy but its analysis or interpretation is not. The computation and interpretation of ratios is a subjective process. It depends on the nature of the person using the information.

A small investor is generally interested in the ability of the company to pay the regular dividend.

A large investor may be interested in the profit generating ability of the company.

An employee may be interested to know the ability of the company to meet its expenses.

A banker may be interested in the ability of the company to service the debt on time and repay the debt when it matures.

A professional manager may be interested in maximizing the market capitalization of the company.

So there large number of ratios one can compute. However, to be meaningful, a ratio must refer to an economically useful relationship. On the basis of the functional relevance the ratios can be clubbed into the four categories:

Liquidity Ratios Solvency Ratios

Profitability Ratios

Efficiency Ratios


Liquidity Ratios:

A group of ratios, which help in analyzing the ability of the company to meet the short-term obligations. These ratios show the following

Relationship between the current assets and current liabilities: The relationship shows the ability of the current assets to meet the current liabilities and also it shows the mode of financing the current assets. Following ratios provide such an understanding:

Current Ratio Liquid Ratio

Absolute Cash Ratio

Composition of the current assets and current liabilities. The composition shows the quality of the assets and liabilities. The quality of current assets and current liabilities can be analyzed with the help of the following ratios:

Inventory Turnover Ratio Debtor Turnover Ratio

Creditors Turnover Ratio

Working Capital Turnover Ratio


Current Ratio:

The current ratio is the ratio of total current assets to total liabilities. The ideal current ratio of any firm is 2:1. The current ratio of a firm measures is short term solvency, that is, ability meet short term obligations. The higher the current ratio, the larger is the amount of rupees available per rupee of current liability, the more is the be firm’s ability to meet current obligations and the greater is the safety of funds of short term creditors. It is important to note that a very high ratio of current asset to current liabilities may be indicative of slack management practices, as it might signal excessive inventories for the current requirement and poor credit management in term of over extended accounts receivables.

Current ratio = Current asset Current liabilities

PARTICULER 2004-05 2005-06 2006-07

Current Asset Rs(in crore)

2150.81 2395.68 3873.57

Current Liabilities Rs(in crore)

11763.32 882.06 1551.47

Current Ratio 1.83 2.71 2.49


Graphical Representation

0

0.5

1

1.5

2

2.5

3

1

2004-20052005-2006

2006-2007

Interpretation: From graphical representation we can observe that current ratio improve from 2004-05 to 2005-06 means firm’s liquidity improved. Higher ratio is preferable because it shows better short term solvency but very high ratio of current ratio to current liability is indication of poor credit management and firm may not make full use of its borrowing capacity.


QUICK RATIO:

Quick Ratio = Quick assetCurrent Liabilities

It is a measurement ability to convert of firm’s ability to convert its current assets quickly into cash in order to meet its current liabilities. Thus it is quick or asset liquidity. The quick ratio is ratio between current assets current liabilities and is calculated by dividing quick assets by current liabilities. The ideal value of quick ratio is 1:1.

The term quick assets refers to current assets which can be converted into cash immediately or at a short notice without diminishing of value.

PARTICULAR 2004-05 2005-06 2006-07Quick Asset Rs(in crore)

604.56 900.60 1827.88

Current Liabilities Rs(in crore)

1176.32 882.06 1551.47

Quick Ratio 0.56 1.02 1.178



Acid test ratio is superior to the current ratio. An acid test ratio of 1:1 is considered satisfactory as a firm can easily meet all current claims. So from graphical representation we can observe that quick ratio improved from 2005-06 to 2006-07. It means firm’s ability to meet current liability increase.

0

0.2

0.4

0.6

0.8

1

1.2

Quick Ratio

2004-20052005-2006

2006-2007

Interpretation: Quick ratio shows liquidity of firm it’s same as current ratio but it’s more stringent than current ratio. Because it exclude inventory


and advances means those current asset which can not easily convert in cash. Liquidity in term of ability of firm to meet obligation immediately and that can be meet current asset and those entire asset which can easily convert in to cash.

INVENTORY TURNOVER RATIO

Inventory turnover ratio = Cost of goods sold Average stock

The number of times the average stock is turned over during the year is known as inventory turnover. It is computed by dividing the cost of goods sold by the average in the business. The ideal valve of this ratio is 8 to 12 times. The ratio is very important in judging the ability of management with which it moves the stock. The higher the turnover, the more profitable the business would be. A low turn over indicates accumulation of slow moving, obsolete and low quality goods, which is a danger signal to the management.

PARTICULAR 2004-05 2005-06 2006-07Cost of goods sold

2574.29 3465.12 4205.04

Average inventory

637.63 813.75 1209.28

Inventory turnover ratio

4.03 4.25 3.48



0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

1

2004-2005

2005-2006

2006-2007

Interpretation: This ratio show mainly how fast inventories is sold in year 2005-06 ratio is highest it means inventory sold at very rapid rate which increase liquidity position of firm. From graph we can see on an average ratio remain constant.


DEBTORS TURNOVER RATIO:

Debtors turn over ratio = Net credit sales Average debtors

Net credit sales=Gross credit sale-return

Debtor’s turnover ratio supplements the information regarding the liquidity of one item of current assets of the firm. The ratio measures how rapidly debts are collected. A high ratio is indicative of shorter time leg between credit sales and cash collection. A low ratio shows that debts are not being collected rapidly.

PARTICULAR 2004-05 2005-06 2006-07Sales Rs(in crore)

3700.95 6116.71 6182.58

Average Debtors 339.26 432.48 505.73Debtors Turnover Ratio

10.9 14.14 12.22



Interpretation: Debtors are one important part of current asset. Higher ratio indicate shortest time lag between credit sales and collection of cash. Ratio is increasing from 2005-06 shows that firm’s condition form liquidity point of view improved means collection process becomes more efficient. So firm required less working capital for its current operation.


0

2

4

6

8

10

12

14

16

1

2004-2005

2005-2006

2006-2007

DEBT TO EQUITY RATIO

D/E Ratio = Long term debt Shareholder’s equity

The relationship between borrowed funds and owner’s capital is a popular measure of the Long term financial solvency of a firm. The relationship is shown by the debt-equity ratio. This ratio reflects relative claims of creditors and shareholders against the assets of the firm. The relationship between outsider’s claims and owner capital can be shown in different ways and accordingly.

PARTICULAR 2004-05 2005-06 2006-07Long term debt Rs(in crore)

4833.57 4876.64 8185.1

Shareholder equity

1079.03 1038.25 2785.29

Debt to equity ratio

4.48 4.47 2.94



0

0.5

11.5

2

2.5

3

3.5

44.5

1

2004-20052005-2006

2006-2007

Interpretation: As per we can see debt ratio is very low in year 2006-07 compare to other year. At same time its very good condition from creditors point of view because firm have enough funds to meet obligation. Ratio is high in 05-06 which dangerous for creditors. If firms fail financially creditors loose very high at same time interruption of creditors increase in operation.


DEBT TO CAPITAL RATIO:

Debt to capital ratio = Long term debtPermanent Capital

The relationship between creditor’s finds and owner capital can also be expressed in term of another leverage ratio. Here, the outside liabilities are related to the total capitalization of the firm and not merely to the shareholders equity.

PARTICULAR 2004-05 2005-06 2006-07Long term debt Rs(in crore)

4833.57 4876.64 8185.10

Permanent Capital Rs(in crore)

5822.87 5914.89 10970.39

Debt to Capital ratio

0.83 0.82 0.74



0.68

0.7

0.72

0.74

0.76

0.78

0.8

0.82

0.84

1

2004-20052005-2006

2006-2007

Interpretation: Ratio decreased from 2004-05 to 2006-07. Lower ratios are better condition for creditors of firm. It means proportion in total capital employed is very less compared to owner firms which so sufficient safety margin available to creditor. But it reduces possibility of equity trading so firm cannot utilize its ability for capital gearing.


OPERATING RATIO

Operating Ratio= Cost of good sold Operating Expenses Sale * 100

It is ratio showing relationship between cost of goods sold plus operating expenses and sales its shows the efficiency of the management this ratio suggest that a particular share of selling price is absorbed by cost of sales and other operating expenses and the remainder is left for the owner of the business. Hence, the higher this ratio, the less profitable it is, because it would prove insufficient to pay dividend and create necessary reserves.

PARTICULAR 2004-05 2005-06 2006-07EBIT Rs(in crore)

472.25 1542.46 1207.01

Sales Rs(in crore)

3700.95 6116.71 6182.58

Operating Profit Ratio

11.73% 25.22% 19.58%



0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

2004-20052005-2006

2006-2007

Interpretation: From graph we can see ratio is very less in year 2004-05 and its highest in year 2005-06.Now as the ratio showing firm’s ability to meet expenditure means how much proportion of firm’s sale available to meet seeling, general and financial expenses. The implication of high expenses ratio is that only small percentage of sale is available for meeting financial liabilities like interest, tax and dividend change in ratio is because of different factor which cause change in selling price or operating expenses like growing competition etc.


NET PROFIT RATIO

Net Profit Ratio=Net Profit / sales*100

Net profit margin is indicative of management ability to operate the business with sufficient success not only to recover from revenue of the period, the cost of merchandise or services, the expenses of operating the business and the cost of borrowed funds but also leave a margin of reasonable compensation to the owners for providing their capital at risk.

PARTICULAR 2004-05 2005-06 2006-07Net Profit Rs(in crore)

57.99 590.15 530.18

Sales Rs(in crore)

3700.95 6116.71 6182.58

Net Profit Ratio 1.49% 9.65% 8.57%



0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%8.00%9.00%

10.00%

1

2004-20052005-2006

2006-2007

Interpretation: From graph we can see net profit margin was negative means initially firm’s ability was so poor that it could not meet even expenses. Than after firm’s ability improved day by day. On an average net profit was high in the year 05-06 compare to other years.


RETURN ON CAPITAL EMPLOYED

Return on Capital Employed= EBIT/Share Capital+ Reserves+ Long term Loan

Here the profits are related to the total capital employed. The term capital employed refers to long term funds supplied by the creditors and owners of the firm. Thus the capital employed basis provides a test of profitability related to the sources of long tem funds. The higher the ratio, the more efficient is the use of capital employed.

PARTICULAR 2004-05 2005-06 2006-07EAT+INT.-TAX 409.59 1033.32 841.26AVG. TOTAL CAP. EMPLOYED

7152.33 7172.48 9367.5

ROCE 5.72% 14.4% 8.98%



0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

1

2004-20052005-2006

2006-2007

Interpretation: From graph we can see ratio is very high in 05-06 compare to other year. Ratio improving year by year. From ratio we can see firm utilize very efficiently its capital employed. Thus the capital employed basis provided a test of profitability related to source of long term funds. In year firm utilize its capital very efficiently which make firm to earn more profit on capital employed.


RETURN ON SHAREHOLDER EQUITY

Return on shareholder equity=EAT/Average total shareholder’s equity

This profitability ratio carriers the relationship of return to the source of funds yet another step further. While the ROCE express the profitability of a firm in relation to the funds supplied exclusively the return on the owner’s funds. The holders of preference share enjoy a preference over equity shareholders in respect of receiving dividends.

PARTICULAR 2004-05 2005-06 2006-07EAT Rs(in crore) 59.99 590.15 530.18Avg.Total Shareholder’s Equity

704.69 1058.64 1895.14

ROSE 8.51% 56.74% 27.96%



0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

1

2004-20052005-2006

2006-2007

Interpretation: From this graph we can easily observe ratio is highest in year 05-06 compare to other years. In that year return available to preference as well as ordinary share holder is high. It will ultimately encourage investor by providing attractive return and will prove very useful for firm to raise fund for future growth.


CONCLUSION

Finally I like to conclude that through its uniqueness and providing quality products, ESSAR has made its name on top in production capacity and producing best quality products. It is a company which has succeeded due to its hard work and sincerity of its employees. So it is truly the employees company. Its success also lies in the co-ordination of its different department. Here the relationship between them and it existed without and discord. They believe ESSAR as their family and also in positive attitude.

My summer training at ESSAE CONSTRUCTION was a matchless and a one of a kind experience. This was the first time in my life that I had a real and practical exposure to the vast corporate world, which I am soon going to part of.

In short span, I got to learn a lot. I now have a better understanding of how exactly the corporate culture works and how the organizational culture should be defined.

The training was an enlightening experience to understand, observe, associate and finally establish a link between the theoretical and practical concepts in management.


BIBILIOGRAPHY

ANNUAL REPORTS OF THE COMPANY

REFERANCE BOOKS FINANCIAL MANAGEMENT KHAN & JAIN

WEBSITES WWW. ESSAR.COMWWW. MONEY CONTROL.COMWWW. CONSTRUCTION INDUSTRY.COM




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