Working capital management

Working Capital Management

Construction Industry

The construction industry has grown to be a very important sector in India because of the infrastructure development it needs.

Over the past five years, the construction sector has grown faster than overall GDP. While the GDP growth rate has been in the range of 6 to 7 per cent, the construction industry has been

growing at a rate between 10% and 15 % annually. The sector is also second biggest in terms of employment

opportunities. It employs almost 14% of the total employable population of India.

Further, the construction industry creates a multiplier effect on core industries such as steel, cement, aluminum and petroleum etc.

Nature of the industry

It is an unorganized sector Traditionally, the sector has been dominated by small and

medium enterprises (SMEs) It’s a highly competitive market There are three major types of segments in this industry

infrastructure, real estate and industrial. Business in the construction industry is mainly tender based. At

times if not tender based, there can be negotiated contracts.

Financial Issues In this Industry

The majority of investments come from the public sector. Public- private partnership (PPP) projects have been identified as

the most suitable mode for the implementation of projects. The current budget has given a lot of importance to this sector. Finance here is of two types: fund based and non-fund based. In this industry a contract between the owner and the contractor

defines the financial matters of the project. The working capital depends largely, on the contractual terms &

conditions.

Contract

Contract is considered the most important document in this industry.

The execution of the project is defined by the contract. The flow of working capital largely depends on the type of

contract that the company has entered into. The following are the types of contract seen in this industry:

1. Lump sum contract

2. Item rate (Normal, basic rate, formula)

3. Fixed price contract The contractor had to follow the BOQs, if given in the contract

purchasing materials, and execution of other work.

JMC Projects (India) Ltd.

"It is about commitment for customer satisfaction through engineering excellence and quality construction."

Founded in 1982 as a construction company, JMC has successfully defined its objectives & positioned itself as one of the leading organizations in the construction industry. Today,

JMC has well equipped autonomous offices at strategic locations to effectively & efficiently serve it's customers spread across the nation. JMC got listed on NSE/BSE in

1994.KALPTARU POWER TRANSMISSION LTD. TOOK 51% stake of JMC in feb’05.

Areas Covered by JMC

Infrastructure• Roads I Highways• Bridge & Flyover• Underpass• Transportation Projects• Airport• Drainage Work

Industrial• Agrochemical• Automobile• Engineering I Cement• Chemical I Petrochemical Paint• Electronics / Consumer Good• Pharmaceutical• Sugar / Food Products• Textile

Buildings• Commercial Complex• Institutional Building• ITPark• Hospitals & Health Centre• Research &Development Centre• Hotel & Hostel• Housing

Power• Thermal Power Plant• Gas based Power Plant• Coal &Material Handling Plant• Captive Power Plant

Major Repeat Orders

Asian Paints

Bajaj Auto

Digital

EI Dupont

Prestige Estate

Alstom

Mantri Group

Elecon

Videocon

Welspun

Wipro

Zydus Cadila

IIM-Ahmedabad

Infosys Technologies

RGA Software

BHEL

Nirma

Tata Telecom

India’s 6th Largest Growing Small Cap. Company

237 261

502

921

1319

0

200

400

600

800

1000

1200

1400

2004-05 2005-06 2006-07 2007-08 2008-09

Financial Performance Turnover(Rs.In crore)

Financial Performance

3637

124

171202

0

50

100

150

200

250

2004-05 2005-06 2006-07 2007-08 2008-09

Net Worth (Rs. In Crore)

Working Capital Management

The goal of working capital management is to ensure that the firm is able to continue its operations and that is has sufficient cash flow to satisfy both maturing short term debt and upcoming operational expenses.

The current assets of particular construction industry accounts for around half of its total assets.

Excessive levels of current assets can easily result in a firm realizing a standard return on investment & too few current assets may incur shortage and difficulties in maintaining smooth operations.

Working Capital Cycle Site Information and Mobilization Expenses

Raw Materials, Components, Stores etc. Work-InProcess

AccountsPayable Wages, Salaries and

Construction Costs

Cash

Marketing Costs, GeneralAdministration & Financial Costs

Transfer ofProperty in

Goods

Sundry Debtors OR AccountsReceivable

Mobilization Advance fromClient

Flow Of Money

Tender (Earnest Money Deposit) Letter Of Intent/ Work Order Mobilization Advance Performance Guarantee Running Account Bills (Bill Of Quantity) Retention Money Liquidity Damages Defect Liability Period Final Completion

Inventory Management at JMC

Use of Integrated Software iPMS for all functions of inventory.

Co-ordination between construction, indent, purchasing, receiving testing, storage, handling, issue & scrap sale.

Centralized purchasing under direction and authority of competent procurement authority.

Communication between Planning dept., site, purchasing and vendors.

Proper storage and physical verification of materials & supplies.

Receivable Management at JMC

At JMC Account Receivables are one of the major component of working capital.

But from the debtors turnover ratio we can see that is not as good as it should be. The reason for same are:

1. Delay in certification of the final bills.

2. execution of items in anticipation of collection from clients.

3. Change of circumstances & financial condition of client JMC is trying to minimize their ave. collection period &

increase their ave. payment period.

Conclusion

The strength of the company is good reputation with finance providers and customer focus approach.

It has order backlog of Rs. 25000 mn, thus there will be healthy growth next year.

This industry has complicated tax structure, but introduction of GST will solve the problem to an extent.

Problems of high volatility in steel & cement prices & Shortage of manpower.

It has to compete with giants like L & T , HCC, B.L.Kashyap & simplex.

JMC can increase their debt-equity ratio is 0.97 indicating strong capital structure.

JMC interest coverage ratio declined from 6.12 to 3.52 which critical for the company, so its ability to meet interest expense is questionable.

Fixed assets turnover ratio is continuously increasing reflecting new investments

Importance is given to the infrastructure industry in the current union budget thus, an opportunity.