A STUDY ON THE WORKING CAPITAL MANAGEMENT OF MADRAS CEMENTS LIMITED Report submitted in partial fulfillment of the requirements For the award of degree in Master of Business Administration Submitted by Bala venkatachalam.s Register no: 3511110836 Under the guidance of DR.V.BALASUBRAMAIAN Apr – May 2012 Page 1
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A STUDY ON THE WORKING CAPITAL MANAGEMENT OF
MADRAS CEMENTS LIMITED
Report submitted in partial fulfillment of the requirements
For the award of degree in
Master of Business Administration
Submitted by
Bala venkatachalam.s
Register no: 3511110836
Under the guidance of
DR.V.BALASUBRAMAIAN
Apr – May 2012
Page 1
Reg No – 3511110836
DECLARATION BY THE CANDIDATE
S.BALAVENKATACHALAM
Reg No – 3511110836
I MBA
SRM UNIVERSITY
CHENNAI
I hereby state that the report entitled, “A study on the working
capital management of Madras Cements Limited” was undertaken at
Madras Cements Limited (corporate head office) , R k salai,
Mylapore, Chennai, submitted to SRM UNIVERSITY, Chennai in
partial fulfillment of Master of Business Administration Degree is a
record of original work done by me and no part of this internship
report has been submitted for the award of any other Degree,
Diploma, Fellowship or other similar studies.
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ACKNOWLEDGEMENT
I put forth my heart and soul to thank The Almighty for being with me all
through my achievements, success and failures.
I express my sincere and whole hearted gratitude to the management of
Madras Cements Limited, Chennai for giving me a golden opportunity to
pursue a valuable project.
I extend my gratitude to Mr.Ramanarayanan (Manager-Accounts) for
guiding and helping me to solve all kinds of queries regarding the project
work. I would also like to thank him for his valuable suggestions and constant
encouragement at every step of my project work.
I sincerely thank Dr.jayashree suresh, SRM UNIVERSITY, for her
encouragement.
I extend my deep sense of gratitude to Dr.v.Balasubramanian, Faculty, and
SRM UNIVERSITY for providing support guidance and valuable ideas which
helped me to complete this project successfully.
Finally, I extend my heartfelt thanks to my friends and family members who
have been a source of inspiration and support throughout the project.
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EXECUTIVE SUMMARY
Madras Cements Ltd. is an India-based company that is principally engaged in the
manufacture of cement, ready mix concrete and dry mortar products. The
Company operates in two segments: cement and power generation from windmills.
The Company’s products include ordinary portland cement, portland pozzolana
cement and wind power. During the fiscal year ended March 31, 2011, the
Company’s cement production was 7.305 million tons; ready mix concrete division
had produced 59,589 cubic meters of concrete; dry mortar division had produced
27,156 tons of dry mortar, and wind farm division had generated 357200000
kilowatts hour.
The project entitled “Working Capital Management in Madras Cements Ltd”
deals in this segment. The term of study was kept limited to make the title true.
The purpose of the report is to get the in depth understanding of the process of
working capital management. With the growing Indian economy and the
government policies for infrastructure the demand for cement is increasing and
seeing this as an opportunity is under taking many new projects for expansion of
the production which are under implementation for increasing the capacity of the
plants. Working capital has been analyzed in two ways – overall study of the
working capital of Madras Cements Ltd and secondly, plant-wise working
capital of Madras cements ltd, since the company has fifteen plants in different
region and each plant has its own working capital.
The performance of the cement division of the company during the year was
satisfactory. During 2010-11 the cement production was 73.05 lacks tonnes,
compared to 80.26 lacks tonnes of the 2009-10.The clinker production at Alathiyur
and Jayanthipuram was lower at 34.96 in 2010-11 lacks tones as compared to
40.56 lacks tones the previous year of 2009-10 . The cement production at
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Alathiyur and Jayanthipuram was lower at 36.31 lack tones as compared to 47.9
lack tones during the previous year. The cement dispatches of Alathiyur and
Jayanthipuram units where 34.89 lack tones as compared to 47.5 lack tones during
last year.
During the 2010-11, the sale of cement was at 72.55 lack tonnes compared to 79.54
lacks tonnes the previous year of 2009-10.
The demand growth for the cement industry as a whole for the year of 2010-11 was
5%, compared to the growth of 11% for the previous year of 2009-10. The growth
percentage is the lowest in last several years.
The Southern Region witnessed a decline of 4% in 2010-11 compared to a growth
of 5% during the previous year of 2009-10. Within the Southern Region, the
States of Andhra Pradesh and Kerala, which are important market segments for the
Company, had witnessed negative growth. Lower infrastructure spending and
slow-down in the realty sector have contributed to this subdued growth. While
there has been a decline in the demand, the cement industry has seen a growth in
the capacity additions on All India basis and specifically in the Southern Region.
These factors have adversely affected the sales volume of the Company for the
year.
It has shown substantial decline in turnover, cash profit, profit before tax
and profit after tax. The total turnover of company has registered a decline of
4.61% in 2010-11 whereas operating profits for the year where lower by 27.10% in
2010-11 mainly on account of decrease in the volume of blended cement in the
overall cement sales, lower realisation and ineffective cost control.
The profit before tax was down by 43.97% at Rs.297.19 crores in 2010-11 as
against Rs.530.45 crores in the previous year of 2009-10. The profit after tax is
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210.98 crores in 2010-11 as against Rs. 353.68 crores in the previous year of
2009-10. EPS was 8.87 as against 14.86 in the previous year.
The objective of this project work is to focus on the working capital of the Madras
Cements Ltd and exploring its potential in the company. The project contain the
basic postulates of working capital, procedure of analysis of working capital, ratio
being used to define the working capital and the impact of working capital in the
company in case of excess or inadequacy. Also, the project contains analysis of
estimation of working capital requirement and the procedure to estimate working
capital requirement in manufacturing and trading concern and from the data
available it can be concluded that it holds a very strong position in the market.
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CONTENTS
CHAPTER PARTICULARS PAGE NO
1 INTRODUCTION
1.1 INTRODUCTION ABOUT THE STUDY
1.2 Need of working capital
1.3 Objective of the study
1.4 Scope and design of the study
1.5 Limitations
2 ORGANISATIONAL PROFILE
2.1.Company profile
2.2. Company history
3 INDUSTRY PROFILE
3.1.Cement industry in India
3.2. Cement industry
4 THEORITICAL FRAME WORK
5 DATA ANALYSIS AND INTERPRETATION
6 CONCLUSION
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INTRODUCTION
Chapter1
1.1 DEFINITION OF WORKING CAPITAL:
In the words of Prof.S.C.Kuchhal, “Working capital has to be, regarded as one of
the conditioning factors in the long run operations of a firm which is often inclined
to treat it as an issue of short run analysis and decision-making”. In the words of
Shubin, “Working capital is the amount of funds necessary to cover the cost of
operating the enterprise”. In the words of Genestenbug, “Circulating capital means
current assets of a company that are changed in the ordinary course of business
from one form to another as for example from cash to inventories, inventories to
receivables, receivables into cash.
CONCEPTS OF WORKING CAPITAL:-
There are two concepts of working capital:
1.Gross working capital
2.Net working capital.
In the broad sense, the term working capital refers to the gross working capital and
represents the amount of funds invested in current assets. Current assets are those
assets, which in the ordinary course of business can be converted into cash with in
a short period of normally one accounting year. In a narrow sense, the term
working capital refers to the net working capital. Net working capital is the excess
of current assets over current liabilities.
Working capital = Current assets – Current liabilities.
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Net working capital may be positive or negative. When the current assets exceed
the current liabilities the working capital is positive and the negative working
capital results when the current liabilities are more than the current assets. Current
liabilities are those liabilities
which are intended to be paid in the ordinary course of business within a short
period or normally one accounting year out of the current assets or the income of
the business. The gross working capital concept is financial or going concern
whereas net working capital is an accounting of working capital. These two
concepts of working capital are not exclusive; rather both have their own merits.
Gross concept is very suitable to the company form of organization where there is
divorce between ownership, management and control. The net concept of working
capital may be suitable only for proprietary form of organizations such as sole-
trader or partnership firms. However, it may be made clear that as per the general
practice net working capital is referred to simply as working capital
1.2 NEED FOR WORKING CAPITAL
The need for working capital to run the day-to-day business activities cannot be
overemphasized. We will hardly find a business firm which does not require any
amount of working capital. Indeed, firms differ in their requirements of the
working capital. We know that a firm should aim at maximizing the wealth of its
shareholders. In its endeavor to do, a firm should earn sufficiently return from its
operations. Earning a steady amount of profit requires successful sales activity.
The firm has to invest enough funds in current assets for generating sales. Current
assets are needed because sales do not convert into cash instantaneously. There is
always an operating cycle involved in the conversion of sales into cash.
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TYPES OF WORKING CAPITAL:
Working capital may be classified in two ways:
a. The basis of concept.
b. On the basis of time.
On the basis of concept, working capital can be further classified into:
a. Gross working capital.
b. Net working capital.
On the basis of time, working capital can be further classified
a. Permanent or Fixed working capital.
b. Temporary or variable working capital.
Gross working capital
Gross working capital is represented by the total sum of all current assets of an
organization. The gross working capital is also known as current capital or
circulating capital.
Net Working capital
Net working capital is the difference between the current liabilities. The concept of
net working capital helps the management to look forward the permanent sources
for financing the working capital. The working capital management has to examine
the proportion of the current assets, which has to be financed by permanent capital
or long term, borrowings.
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Permanent working capital.
Permanent working capital is that part of capital, which is permanently ,locked up
in the circulation of current assets and in keeping it’s moving. It can be classified
into:
i. Regular working capital and
ii. Reserve margin working capital.
Regular working capital
It is the minimum amount of liquid capital needed to keep up the circulation of
from cash to inventories to receivables and back again into cash.
Reserve margin working capital
It is the excess over the need for regular working capital that should be provided
for contingencies such as raising prices, business depressions, and strikes, fibers,
unexpected severe competition and special operations such as experiments with
products or with the method of distribution and the like which can be undertaken
only if sufficient funds are available.
Variable working capital
The variable working capital refers and denotes that the amount of funds over and
above the fixed working capital to take care of seasonal shifts etc. This variable
working capital also referred to as fluctuating or temporary working capital and
should be financed by short-term sources of funds.
The variable working capital changes with the volume of business. It maybe sub-
divided into:
I .Seasonal.
ii. Special working capital.
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The capital required to meet the seasonal needs of industry is termed as seasonal
working capital. On the other hand the special working capital is that part of the
variable working capital which is required for financing operations such as
inauguration of extensive marketing campaigns and carrying out special jobs and
similar other operations that are outside the usual business of buying, fabricating
and selling.
Excess Working Capital
There are problems associated with excess working capital. Firstly, more funds
would make the management complacent and it may invest this money in
unnecessary accumulation of inventory resulting in locking of investment. There is
another possibility that the firm may think of speculation inventory items in
quantities more than needed and these gains may not be realized due to price
fluctuations. The excess working capital also known as surfeit of working capital,
which promotes accumulation of inventories, permissive, credit policies and slack
collection procedures .Due to excess working capital, complacency develops and
management efficiency deteriorates
Inadequate Working Capital
If working capital is not adequate, the organization will come across certain
problems. The adverse effects of inadequate working capital are business failures,
reduction in profitability and consequent decline in return on investment (ROI).
The company will not be able to take advantage of full capacity utilization and the
growth that is desired cannot be achieved when enough funds are not available at
the right point of time. All the operating plans cannot be successfully implemented
when funds are in short supply. In adequate working capital can also lead to
temporary insolvency of a firm.
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FACTORS DETERMINING THE WORKING CAPITAL
REQUIREMENTS:
The working capital requirements of a concern depend upon a large number of
factors such as nature and size of business, the character of their operations, the
length of production cycles, the rate of stock turnover and the state of economic
situation.
1. Nature or character of business
The working capital requirements of a firm basically depend upon the nature of its
business. Public utility undertakings like electricity, water supply and railways
need very limited working capital because they offer cash sales only and supply
services, not products and as such no funds are tied up in inventories and
receivables
2. Size of business/scale of operations
The working capital requirements of a concern are directly influenced by the size
of its business which may be measured in terms of scale of operations. Greater the
size of a business unit, generally large will be the requirements of working capital.
3. Production policy
In certain industries the demand is subject to wide fluctuations due to seasonal
variations. The requirements of working capital, in such cases, demand upon the
production could be kept either steady by accumulating inventories during slack
periods with a view to meet high demand during the peak season or the production
could be curtailed during the slack season and increased during the peak season.
4. Manufacturing process/length of production cycle
Longer the process period of manufacture, larger is the amount of working capital
required. The longer the manufacturing time, the raw materials and other supplies
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have to be carried for a longer period in the process with progressive increment of
labor and service costs before the finished product is finally obtained
5. Seasonal variations
In certain industries raw material is not available throughout the year. They have to
buy raw materials in bulk during the season to ensure an uninterrupted flow and
process them during the entire year.
6. Credit policy
The credit policy of a concern in its dealings with debtors and creditors influence
considerably the requirements of working capital .a concern that purchases its
requirements on credit and sells its products/services on cash requires lesser
amount of working capital.
7. Business cycle
Business cycle refers to alternate expansion and contraction in general an
activity .In a period of i.e. when the business is prosperous there is a need for
larger amount of working capital due to increase in sales, rise in prices, optimistic
expansion of business, etc.
8. Working capital cycle
The working capital cycle starts with the purchase of raw materials and ends with
the realization of cash from the sale of finished products. This cycle involves
purchase of raw materials and stores. Its conversion into stocks of finished goods
through work -in-progress with progressive increment of labor and service costs,
conversions of finished stock into sales, debtors and receivables and ultimately
realization of cash and this cycle continues again from cash to purchase of raw
material and so on.
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9. Price level changes
Changes in the price level also affect the working capital requirements. Generally
the rising prices will require the firm to maintain larger amount of working capital,
as more funds will be required to maintain the same current assets. The effect of
rising prices may be different for different firms.
10. Other factors
Certain other factors such as operating efficiency, management ability,
irregularities of supply, import policy, asset structure, importance of labor ,banking
facilities, etc, also influence the requirements of working capital.
OBJECTIVES:
promote the growth of the cement interest
To promote the customer interest
To identify newer application of cement usage
1.3 OBJECTIVES OF THE STUDY:
1. To Study working capital management in MADRAS CEMENTS Ltd.
2. To Examine an overview of working capital management.
3. To Analyze at the possible remedial measures to improve company’s working
capital performance in the near future.
4. To Evaluate the efficiency of the company in utilizing its Current Assets.
1.4 SCOPE OF THE STUDY
The scope of the study is limited only to MADRAS CEMNTS and is confined to 4
years i.e. 2005-06 to 2008-09 annual reports.
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DESIGN OF THE STUDY
METHODOLOGY
The present study is mainly about the working capital management of MADRAS
CEMENTS ltd. On the basis of the objectives of the study it was decided to use
ratio analysis and analysis of individual components of working capital as these are
universally accepted techniques for analyzing the short term liquidity position of
the firm. For the purpose of the analysis the following ratios have been used:
1 WORKING CAPITAL MANAGEMENT RATIOS
1. Working capital ratio/Current ratio.
2. Quick ratio/Acid test ratio.
3. Working capital turnover ratio.
4. Working capital performance ratio.
5. Current asset turnover ratio.
I. CASH MANAGEMENT
1. Cash turnover ratio.
II. INVENTORY MANAGEMENT
1. Raw materials turnover ratio.
2. Work in process turnover ratio.
3. Finished goods turnover ratio
DEBTORS MANGEMENT
1. Debtor’s turnover ratio.
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SOURCES:
The study is based on the analysis of data from the annual reports of MADRAS
CEMENTS Ltd. The data used in the present study are mainly of two types:
primary data and secondary data.
1. The primary data is collected through the discussions made with the officials of
MADRAS CEMENTS Ltd.
2.The secondary data is collected through the annual reports published by the
company and company website.
1.5 LIMITATIONS:
The present study limits itself to the study of working capital management. In the
present study the analysis is mainly based on secondary data given in the annual
reports published by MADRASCEMENTS Ltd. The limitations prevailing in the
secondary sources are self evident in the study. Despite their weakness, they
continue to be the only source for comparison of the results of the analysis. The
present study is carried taking this into consideration.
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COMPANY
PROFILE
Page 18
Chapter 3
3.1 COMPANY PROFILE
Company Overview:
Madras Cements Ltd is the flagship company of the Ramco Group, a
well-known business group of South India. It is headquartered at Chennai. The
main product of the company is Portland cement, manufactured in five state-of-the
art production facilities spread over South India, with a current total production
capacity of 10.49 MTPA. The company is the fifth largest cement producer in the
country. Ramco Group is the most popular cement brand in South India. The
company also produces Ready Mix Concrete and Dry Mortar products, and
operates one of the largest wind farms in the country.
Integrated Cement Plants
Ramasamy Raja Nagar, Virudhunagar, Tamil Nadu
Alathiyur, Ariyalur District, Tamil Nadu
Ariyalur, Govindapuram, Ariyalur District, Tamil Nadu
Jayanthipuram, Andhra Pradesh
Mathodu, Chitradurga District, Karnataka
Grinding Units
Uthiramerur, Kanchipuram District, Tamil Nadu
Valapady, Salem District, Tamil Nadu
Kolaghat, Purba Medinipur District, West Bengal
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Packing Terminals
Nagercoil Packing Unit, Kumarapuram, Aralvaimozhi, Kanyakumari