IMPACT OF WORKING CAPITAL MANAGEMENT & WORKING CAPITAL
LEVERAGE CHAPTER-1 INTRODUCTION1.1 Introduction of the study
Working capital management (WCM) is the management of short term
financing requirement of firm. This includes maintaining optimum
balance of working capital components receivable, inventory and
payables and using the cash efficiently for day-to-day operations.
Optimization of working capital balance means minimizing the
working capital requirements and realizing maximum possible
revenues. Efficient WCM increase firms free cash flow, which in
turn increases the firms growth opportunities and return to
shareholders. Even though firms traditionally are focused on long
term capital budgeting and capital structure, the recent trend is
that many companies across different industries focus on WCM
efficiency.Empirical result shows that ineffective management of
working capital management is one of the important factors causing
industrial sickness. Modern financial management aims at reducing
the level of current assets without ignoring the risk of stock
outs. Efficient management of working capital is thus an important
indicator of sound health of an organization which requires
reduction of unnecessary blocking capital of in order to bring down
the cost of financing. In the light of the above, an attempt is
made in this study to look into the working capital management in
iron mining industry.1.2 Statement of the problem Working capital
management is very important component of corporate finance because
it directly affects profitability of a company. Efficient
management of working capital means management of various
components of working capital in such a way that an adequate amount
of working capital is maintained for smooth running of a firm and
for fulfillment of twin objectives of profitability and liquidity.
Hence, the topic selected in the studying THE IMPACT OF WORKING
CAPITAL MANAGEMENT ON PROFITABILITY AND WORKING CAPITAL LEVERAGE ON
ASSETS IN IRON MINING INDUSTRY, NMDC LTD ( NATIONAL MINERAL
DEVELOPMENT CORPORATION), AT DONIMALI.1.3 Need of the studyWorking
capital is the life blood and nerve center of business. Working
capital is very essential to maintain smooth running of a business.
No business can run successfully without an adequate amount of
working capital. The main advantages or importance of working
capital are as follows:1. Strengthen the short term solvencyWorking
capital helps to operate the business smoothly without any
financial problem for making the payment of short-term liabilities.
Purchase of raw materials and payment of salary, wages and overhead
can be made without any delay. Adequate working capital helps in
maintaining solvency of the business by providing uninterrupted
flow of production.2. Enhance GoodwillSufficient working capital
enables a business concern to make prompt payments and hence helps
in creating and maintaining goodwill. Goodwill is enhanced because
all current liabilities and operating expenses are paid on time.3.
Regular supply of Raw MaterialQuick payment of credit purchase of
raw material ensures the regular supply of raw materials from
suppliers. Suppliers are satisfied by payment on time. It ensures
regular supply of raw materials and continuous production.4. Smooth
business operationWorking capital is really a life blood of any
business organization which maintains the firm in well condition.
Any day to day financial requirement can be met without any
shortage of fund. All expenses and current liabilities are paid on
time.5. Ability to face crisisAdequate working capital enables a
firm to face business crisis in emergencies such as depression.
1.4 Objectives of the studyStudy of Working capital is the most
widely used and powerful technique of financial analysis. The main
objective of present study is to know the financial condition of
the company. To analyze the investment in various current assets of
the company. To compute working capital ratios. To compute
profitability ratios. To analyze the impact of working capital on
profitability.1.5 Scope of the studyThe scope of project is only on
Donimalai (DIOM) branch of NMDC Ltd. The data collected and
analyzed for previous 4 years, from 2010-11 to 2013-14. This study
made only on limited area, i.e. DIOM of NMDC Ltd.1.6 Research
methodology Research methodology is a way to systematically solve
the research problem. It may be understood as a science of studying
how research is done systematically. In that various steps, those
are generally adopted by researcher in studying his problem along
with the logic behind them. The procedures by which researchers go
about their work of describing, explaining and predicting
phenomenon are called Methodology. Research design : Descriptive
and Analytical Research.Data collection sources: Primary and
Secondary data.Primary Data: The Primary Data is that, which is
collected for first time which is original in nature. In this study
the Primary Data has been collected from personal interaction with
finance manager and other staff members.
Secondary Data: The Secondary Data are those which have already
collected and stored. Secondary data easily get those secondary
from records, annual reports of the company etc. It will save the
time, money and efforts to collect data. The major source of data
for this project was collected through annual reports, profit and
loss account of 4 years period & some more information
collected from internet and text sources.Data analysis tools:
Current ratio, Quick ratio, Return on total assets, working capital
turnover ratio, inventory turnover ratio.1.7 Review of
LiteratureWorking capital management can be considered as an
important source of profitability of a firm. Many researchers
investigated the impact of working capital management on
profitability.1. Smith (1980) conducted a study on profitability
and liquidity and suggested that working capital management
directly influence risk and profitability of a firm. Hence it can
be inferred that effective working capital management can increase
the financial strength of a business.2. Soenen (1993) also
performed an analysis of working capital management and its
relationship with financial performance. His study was based on
firms and after the study he suggested that if the length of net
trade cycle increases then it affects the return on investment
negatively.3. Lamberson (1995) observed the impact of economic
activity on the working capital management policy. For this he took
a sample of 50 small firms of us for a time period of 12 years i.e.
1980-1991. He found tha,t economic expansion do not cause an
increase in the investment of working capital during a specific
period.4. Afza and Nazir (2008) reviewed their previous study to
estimate the impact of different type of working capital management
policies on financial performance of firms in different sectors.
For this they used a sample of 263 non-financial firms belonging to
17 different sectors listed at KSE from 1998-2003.5. Danuletiu
(2010) conducted an analysis on 20 companies of alba country. He
assessed the effect of working capital management efficiency on the
financial performance of these companies for a period of five years
i.e. 2004 to 2008. For his analysis he used Net Working Capital
(NWC) as a measure of long- term financial balance, Working Capital
Necessary (WCN) as a measure of short- term financial balance and
Net Treasury (NTt) a difference of both NWC and WCN.6. Singh and
asress (2011) also examined the effect of working capital solvency
level on profitability by their study a sample of 449 Indian
manufacturing firms. The study was based on a period of 10years
i.e. 1999-2008. For this purpose, Working Capital Requirement (WCR)
was selected as dependent variable and Total Operating Cost (TOC),
Cyles (n) and operational breakeven point (obep) as independent
variables.1.8 Limitation of the studyThe study conducted and done
is analytical subject to the following limitation The study is
mainly carried out based on the secondary data provided on the
financial statement. The financial statement is generally based on
historical or original cost. The current economic condition is
ignored.
CHAPTER-2 INDUSTRY PROFILE2.1 IntroductionIron is the second
most abundant metallic element in the Earths crust and accounts for
5.6% of the lithosphere. The principal minerals of iron are the
oxides (Hematite and magnetite), hydroxide (limonite and goethite),
carbonate (siderite) and supplied (pyrite). Iron, like most metals,
is found in the earths crust only in the form of an ore, i.e.
combined with other elements such as oxygen or sulfur.Hematite and
magnetite are two important iron ore from which iron is extracted.
Of these, hematite is considered to be superior owing to its high
grade. It is the basic raw material for iron and steel industry.
Steel is an alloy that consists mostly of iron and has carbon
content between 0.2% and 2.1% by weight, depending on the grade.
Steel is crucial to the development of any modern economy and is
considered to be the backbone of human civilization. The level of
per capita consumption of steel is treated as an important index of
the level of socioeconomic development and living standards of the
people in any country. It is a product of large and technologically
complex industry having strong forward and backward linkages in
term of material flow and income generation.HistoryIndia is one of
the earliest manufacturers and users of iron and steel in the
world. This is indicated from a number of references available in
the annals of metallurgical history. A survey of literature reveals
many documentary evidences, such as making of various surgical
instruments in the 3rd/4th century B.C. by Sushrut, presentation of
a gift of 30lb of Indian iron by King Porus to Alexander the great
on the bank of Jhelum (around 326 B.C.) and the use of different
weapons in various shapes and sizes in the ancient tomes.
The first signs of use of iron come from the Sumerians and the
Egyptians, where around 4000 B.C., a few items, such as the tips of
spears, daggers and ornaments, were being fashioned from iron
recovered from meteorites. Because meteorites fall from the sky
some linguists have conjectured that the English word iron (OE
isem), which has cognates in many northern and western European
languages, derives from the Etruscan aisar which means the
god.Summary India is one of the leading producers of iron ore, with
estimated total resources of over 28.5 billion tons (bt) of
hematite (Fe203) and magnetite (Fe304) taken together. Of the 294
iron ore mines in 2012, compared to 336 in 2010, 34 were in public
sector while the remaining 260 were owned by private firms in 2012.
In 2013, production was estimated at 142.9 million tons (Mt), which
is expected to increase to 284Mt in 2020 growing at compound annual
growth rate (CAGR) of 7.4%. Simultaneously, iron ore consumption
over the forecast period (2014-2020) is projected to increase to
238.3Mt in 2020.Indian scenario India is an important producer of
iron ore in the world contributing more than 7% of the production
and ranking fourth in term of quantity produced fallowing China,
Brazil and Australia. As per UNFC system (United Nations Framework
Classification) as on 1.4.2005, India possesses total hematite
resources of 14630 Mt of which 7004 Mt are reserves and 7626 Mt are
remaining resource. Major hematite resources are located mainly in
Jharkhand-4036 Mt (28%), Orissa-4761 Mt (33%), Chattisgarh-2731 Mt
(19%), Karnataka-1676 Mt (11%) and Goa-713 Mt (5%). The balance
resources are spread over the state of Maharashtra, Madhya Pradesh,
Andhra Pradesh, Rajasthan, Uttar Pradesh and Assam and altogether
contain around 4% of hematite. Total resources of iron ore in India
as on 1.4.2010 is about 28562 Mt.
Future ScenarioTotal reserves of iron ore in India, including
magnetite have been estimated at approximately 17 billion tons.
Fortunately, ores are of a fairly good quality.Current
ScenarioIndias iron ore exports have gone down by 28.16% during
April-December of the current fiscal to 11.17 Mt as gloom continues
over the sector due to the regular scenario mineral industries.
India, once the third largest exporter of iron ore, had exported
15.55 Mt of the mineral in the corresponding period of last fiscal,
data released by Federation of Indian Mineral Industries (FIMI)
showed. We expect the situation to continue as long as government
policy does not change.Indian iron ore exports have been hurt badly
in last few years due to mining bans in Goa and Karnataka, which
led to drastic fall in domestic production as well. Increase in
export duty to 30 percent on both types of iron ore, lumps and
fines, in December 2012, had also impacted the sector.Presently,
low grade iron ore (or fine) are being exported from Odisha,
Jharkhand, Rajasthan and Madhya Pradesh as mining is still banned
in Goa. Export of mineral is not permitted from Karnataka at
present.The Goa government had issued a notification to sell about
15 Mt iron ore through exports, as per a Supreme Court order.
However, none of it is expected to be exported.Industry is
estimating that Indias total iron ore production in the present
fiscal will be around 140 Mt, almost the same last year.
Iron Ore Mining Companies in India National Mineral Development
Corporation Ltd (NMDC Ltd). Odisha Mining Corporation Ltd. Sesa
Sterlite Ltd. Steel Authority of India Ltd. Tata Steel Ltd. Goa
Iron ore mining.
2.2 Company Profile (NMDC LTD, OVERALL)Incorporated in 1958 as a
Government of India fully owned public enterprise. NMDC is under
the administrative control of the Ministry of Steel, Government of
India. Since inception involved in the exploration of wide range of
minerals including iron ore, copper, rock phosphate, lime stone,
dolomite, gypsum, bentonite, magnetite, diamond, tin, tungsten,
graphite, beach sands etc.NMDC is India's single largest iron ore
producer, presently producing about 30 million tonnes of iron ore
from 3 fully mechanized mines viz., Bailadila Deposit-14/11C,
Bailadila Deposit-5, 10/11A (Chhattisgarh State) and Donimalai Iron
Ore Mines (Karnataka State). NMDC Projects have following
accreditations ISO 9001: 2008 - QMS Certification for all its iron
ore mines and R&D Centre ISO 14001:2004 - EMS Certification for
all its production mines OHSAS 18001:2007 - OHMS Certification for
all its production minesStrong back up of an ISO 9001 certified
R&D Centre, which has been declared as the "Centre of
Excellence" in the field of mineral processing by the Expert Group
of UNIDO.NMDC has made valuable and substantial contribution to the
National efforts in the mineral sector during the last five decades
and has been accorded the status of schedule-A Public Sector
Company. In recognition to the Company's growing status and
consistent excellent performance, the Company has been categorized
by the Department of Public Enterprises as "NAVRATNA" Public Sector
Enterprise in 2008.
Consistent profit making and dividend paying company.
Results2011-122012-132013-14
Iron Ore Production (L+F)27.26 MT27.18 MT30.02 MT
Iron Ore Sales (L+F)27.30 MT26.27 MT30.50 MT
IncomeRs 13,301 croreRs 13,127 croreRs. 14.167 crore
Profit before taxRs. 10,759 croreRs. 9,465 croreRs. 9,759
crore
No. of Employees5924 (31.03.12)5777 (31.03.13)5664
(31.03.14)
The story of NMDC is woven around the dreamy hills and the deep
jungle land of Bastar in Chhattisgarh, known as Dandakaranya from
the epic periods. The Bailadila iron ore range - "The hump of an
ox" - in the local dialect, was remote, inaccessible and replete
with wild life. The range contains 1200 million tonnes of high
grade iron ore distributed in 14 deposits. The entire area was
brought to the mainstream of civilization by the spectacular effort
of NMDC by opening-up of mines. Today, Bailadila is a name to
reckon with in the world iron ore market because of its super high
grade iron ore. Bailadila complex possesses the world's best grade
of hard lumpy ore having +66% iron content, with negligible
deleterious material and the best physical and metallurgical
properties needed for steel making.NMDC is presently producing
about 20 million tonnes of iron ore from its Bailadila sector mines
and 10 million tonnes from Donimalai sector mines.
Because of its excellent chemical and metallurgical properties,
the calibrated ore from Bailadila deposits has substituted the iron
ore pellets in sponge iron making and hence became an important raw
material for three major gas-based sponge iron steel producers like
Essar Steel, Ispat industries and Vikram Ispat. In addition to
these three, the entire requirement of the Visakhapatnam Steel
Plant is also being met from Bailadila.The demand for steel will
continue to grow in the years to come and this in turn would call
for increased demand for iron ore. NMDC is gearing itself to meet
the expected increase in demand by enhancing production
capabilities of existing mines and opening up new mines - Deposit
-11B in Bailadila sector and Kumaraswamy in Donimalai sector. The
production capability would increase to around 50 million tonnes
per year in coming years.For Value addition NMDC is in the process
of developing a 3 mtpa steel plant at Jagdalpur and 2 pellet plants
at Donimalai (1.2 mtpa) and at Bacheli (2 mtpa). Besides, NMDC has
acquired Sponge Iron India Limited with plan for expansion to
produce billets.Foreign Venture: M/s NMDC has also prestigious
foregin venture also such as: Exploration of gold in Madagascer.
Exploration of gold in Tanzania. Exploration of diamond in
Namibia.India is in 4th place among twenty top crude steel
producing countries in world in previous years. Still India keeps
its place in global market.
Achievement of NMDC during the year 2013-14(Overall) Turnover
Rs. 12,058 Crore
Profit before tax (Including discounted operation)Rs. 9,759
Crore
Cash profitRs. 9,865 Crore
Net profit Rs. 6,420 Crore
Total assets Rs. 31,477 Crore
Net worth Rs. 29,983 Crore
Book value per share Rs. 75.62
Earnings per share Rs. 16.19
Return on capital employed 27%
Return on net worth 21%
Dividend Interim l ll Final
300%550%..
Value added per employee Rs. 178.54 Lakh
Output per man shift (Iron Ore) 30.47 Tonnes
Introduction to DIOM (Donimalai Iron Ore Mines)
The saga of NMDC includes the pioneering exploration activity
carried out for developing iron ore mines in Karnataka in various
regions like Kudremukh, Donimalai, Bababudan, Kumaraswamy and
Ramandurg. NMDC developed the Donimalai mine in this area to export
ore to Japan and South Korea. ISO 9002 Certification awarded in
February, 1999.Commissioned:October, 1977
Average grade:+ 65% Fe
Balance reserves:27.92 million tonnes(April,08)
Product:Lump 31.5 mm +6.3mm Fines: -10mm
Capacity:4.0 million tonnes of ROM ore/year
Port of Export:a. Chennai outer harbor. Capable of handling
ships of 1,30,000 DWT - 532 Kms. rail Linkb. Marmagoa port, Goa.
Capable of handling panamax size vessels - 370 Kms rail link
No. Of. Employees 1286 (as on 30/04/2012)
Company Profile (Donimalai Iron Ore Mines)
Donimalai Iron ore mine is an operating unit of National Mineral
Development Corporation Ltd is committed to achieve sustained
consistency in quality of Iron ore mined, processed and produced by
adopting and continuously improving scientific quality management
systems through active involvement of all the employees to ensure
optimum satisfaction of all the stake holders.N.M.D.C developed the
Donimalai mine in this area to export ore to Japan and South Korea.
From above information a common question will arise in new persons
mind. I.e. where is this Donimalai Iron Ore Mine situated in India?
Answer for that question is;
Forming part of Narasingapura village panchayat, Donimalai is
situated in Sandur taluk of Bellary District in Karnataka. It is an
approachable by road from Sandur, which is 10 kms away.Donimalai
derives its name from the shape of hill in the local language i.e.
Kannada, Doni means BOAT and Malai means HILL. The hill range is in
the shape of inverted boat and hence named as
Donimalai.Construction of Donimalai started in 1972 and commercial
production started in 1977 October, which is connected by rail and
road to all major cities in the country. The basic mineral of iron
at Donimalai in hematite and from this different product like basic
grade lump ore, fine ore are produced after processing of Run Off
Mine Ore ( ROM ).The Donimalai Mine came into operation with a
capital investment of Rs.41 crores of which foreign exchange
component is Rs 2.4 crores. An about 7 million tons of excavation
is done per annum.Valued customers of DIOM Rashtriya Ispat Nigam
Ltd., (VSP) KIOCL Ltd., Essar Steels Ltd., JSW Steel Ltd., Ispat
Industries Ltd., CG based Sponge Iron Units. Welspun Max Steel
Ltd., Visveswaraya Iron & Steel Plant. Aparant Iron & Steel
Co. Ltd., Tata Metalliks Ltd., Southern Iron & Steel Co. Ltd.,
MMTC Ltd., Vikram Sponge Iron Ltd.,Social Service of DIOM1.
Construction of Multipurpose community hall. 2. Construction of
Anganavaadi schools & class rooms.3. Providing electrical
fitting & water supply.4. Visit of doctor to nearby village,
health camps.5. Providing bus facility for marketing, attending
schools by student in different region like Sandur, Yeswanth
pura.6. Free hospital facilities to their employees as well as to
their family members.7. Financial assistance to farmers in the year
2005.8. Donation for development of Jubilee Park at Bellary.9.
Temple renovation work, repairs and maintenance work of road.
Various Department in DIOM- NMDC Ltd.There are seven
departments:1. Personnel department.2. Mining department.3.
Materials management department.4. Information system.5. Civil
department.6. Finance department.7. Service department.1. Personnel
department Establishment section:This section deals with
attendances particulars of employees, workmens and medical
facilities. It also deals with bills, scholarship to children of
the employees, calculation of the gratuity, insurance or salary
certificate, services certificate etc., of the employees working in
NMDC. Estate section:This section deals with preparation of
seniority list of the employees, allotment of houses according to
the seniority of the employees, allotment of houses on rental
basis, outside parties calculation of rent etc.2. Mining department
This is very big department consisting of 202 staff consisting
workmen, junior officer, executive headed by DGM. Mining, heavy
earth moving machineries are run in the field, records, conducting
weekly meetings deals by this department. The main aim is to
achieve quality production with available resources in fixed time.
Maintenance and services are also taken care by this department.
Plant divisions:Plants in NMDC, DIOM divided into 3 i.e. crushing
plant where ore is crushed, screening plant where ore is screened
and loading plant where ore is loaded into wagons. The plant
mechanical aspects headed by charges of respective plants. Service
division:This department mainly deals with the electrical work of
the township i.e. wiring, attending to the complaints, taking care
of sub stations etc.3. Material departmentThis department is
divided into 3 department i.e. purchase section, stores section and
inventory control section. Purchase section:This section deals with
purchase of required items for the project. The purchase are made
on the basis of issue of limited tender enquires and receiving
quotations, scrutiny of offers by committee, placing order etc.
Stores section:The stores section is divided into 2 i.e. Main
stores and Valley stores (sub store). The main stores deals with
maintaining stock of heavy earth moving equipments i.e. spares,
parts etc., maintaining of records etc., the valley stores also
deals with keeping stock of spares and materials etc. Inventory
control:This section deals with maintaining records of items
according to value, code vendor etc. this section also deals with
the items of moving and non-moving nature.
4. Finance and accounts department Establishment: maintaining
attendance, bills, medical bills and other miscellaneous works are
taken care by this department. Compilation section: budget cost,
final reports, balance sheet, profit and loss accounts etc. are
prepared in this section. Budget costing: budget for capital items,
moving and non-moving items, their costs etc. are worked out in
this section.2.3 Vision, Mission, Quality Policy and
PromotersVision:Donimalai iron ore mine is an operating unit of
NMDC Ltd is committed to achieve sustained consistency in quality
of iron ore mine, processed and produced by adopting continually
improving scientific quality management system through achieves
involvement of all the employees to ensure optimum satisfaction of
all the stakeholders.Mission:To emerge as a global environment
friendly mining organisation with International Standards of
excellence, rendering optimum satisfaction to all its stake
holders.Quality Policy:Donimalai iron ore mine, an operating unit
of NMDC Ltd, is committed to achieve sustained consistency in
quality of iron ore mined, processed and produced by adopting and
continually improving scientific quality management system through
active involvement of all employees to ensure optimum satisfaction
of all stakeholders.
Promoters: Central government of India (90%). And other
shareholders (10%).2.4 Production and ServicesDonimalai iron ore
mines has the fallowing range of products. LumpDonimalai iron ore
lump size 6mm-30mm. Fines Donimalai iron ore fines size is
10mm.
ProductionAchievement% of change
2012-132013-14
Iron ore (lakh tonnes)271.84300.2510.45%
Sponge iron (tonnes)36289.0029734.36(-)18.06%
2.5 Area of OperationStatutory auditorsOn the basis of
comptroller and auditor general of India, New Delhi, and the
company appointed the fallowing firms of chartered accountants as
statutory auditors of the company for the year
2013-14.SL.NoUnitStatutory Auditors
1Head office, R & D Center, SIU & ConsolidationM/s,
Venugopal &ChenoyChartered AccountantsHyderabad 500 001
2Kirandul, Bacheli, Raipur, NSP, JagdalpurCentral work shopVizag
officeM/s, Brahmayya & Co,Chartered AccountantsVisakhapatnam
530 003
3DonimalaiM/s, P K Subramaniam & Co,Chartered
AccountantsRaichur 584 001
4PannaM/s, Gopal Gupta & Co,Chartered AccountantsAllahabad
211 001
2.6 Infrastructure Facilities Fully mechanized mines:1.
Infrastructure Construction of roads and bridges. Electrification
of home lights & public buildings. Construction of house for
slum dwellers. Provision of drinking water.
2. Health care Free medical treatment at project hospitals.
Medical camps.
3. Literacy and education NMDC is siksha sahayog yojana.
Residential school at nagarnar. Education improvement program.
Balika siksha yojana.2.7 Competitors Jindal iron and steel company
limited. Kudremukh Iron Ore Company limited. Sesa Goa limited.
Resurgere mines & minerals India limited. Essel mining &
industry limited.
2.8 SWOT AnalysisStrengths Larger reserves of high grade of iron
ore consisting principally of hematite ore with Fe content of
predominantly > 64%. Largest producer of iron ore by volume.
Resources making the Company a low cost producer - the Company's
cost of production are competitive with those of the leading iron
ore producers in the world. The Company is seeking to further cover
its cost across all of its operations. Financial strength
characterized by high net worth, zero debt, good credit rating.
Good work culture - skilled, experienced and dedicated workforce.
Good Brand image of NMDC's iron ore in domestic/international
market. Highly mechanized iron ore mines. Availability of
technology and infrastructure of existing projects in Bailadila to
add new projects in the area with comparatively less investment.
Core competence in iron ore mining. Developing expertise in
international acquisition space.Weakness Geographically remote
location of the projects acting as deterrent in attracting and
retaining talent and also for reaching supplies and services. Delay
in forest and environmental and other clearances affecting time
schedules for opening and commissioning new mines and affecting our
investment plans. Extreme foggy weather conditions causing stoppage
of mining operations at Bailadila complex during monsoon months.
The Company has not diversified into other sector. As such, any
adverse impact on the mining sector hits the profitability of the
Company.
Opportunities Continue diversifying and expanding its mining
activities and products. Expand and establish its presence as an
integrated producer of iron and steel. Continue to be a low cost,
efficient and environmentally friendly mining Company. Augment
resources, improve infrastructure and enhance technology through
joint ventures and commercial tie-ups - the company seeks to
augment its resources and reserves, improve its infrastructure and
enhance its technology through joint ventures and commercial
tie-ups. Financial powers for investment in new projects as a
Navaratna Company.Threats Disturbances due to Maoists activities in
Bailadila area. Intense competition from private sector in securing
fresh mining leases, resulting in denial of leases in many cases
and litigation delaying actions. Inability to secure additional
reserves of iron ore that can be mined at competitive costs or
cannot mine existing reserves at competitive costs, profitability
and operating margins may be affected. Entry of MNCs and other
Indian private companies into iron ore mining. The industry being
cyclic in nature, NMDC is exposed to sharp fluctuations in demand
for its products. The Company faces risks in respect of high
inventory of stocks and its disposal.
2.9 Future growth and prospects Bailadila deposit-11/B: As part
of plan to enhance production, the construction of Deposit 11B mine
at an expanded capacity of 7.0 Million Tons of ROM per annum has
been taken up. Kumaraswamy Iron Ore Project: As an addition to
present Donimalai Iron Ore Mine and augmenting production capacity
towards achieving the target of 50 MTPA in NMDC and 12 MTPA in
Karnataka, the construction of Kumaraswamy Iron Ore Mine with
capacity of 7.0 MTPA was taken up with an estimated capital outlay
of Rs. 898.55 Crs. MECON is appointed as EPCM consultant. The
entire project is being executed through six packages. Orders are
placed for Crushing Plant Package, Downhill conveyor Package,
Electrics and Substation package and Service Centre facilities
packages and the works are in progress. Civil works are completed
for Primary & Secondary Crusher house, Dumper platform, Mine
office Building. Erection & trial runs of Primary &
Secondary Crusher is completed. Civil & Structural works of
Downhill conveyor system are under progress. The project is
expected to be complete during the FY 2014-15. MTPA Pellet Plant at
Donimalai: One of the main objectives of this project is to prolong
the life of Tailing Dam at Donimalai by using the slimes for making
pellets. M N Dastur & Co. is appointed as EPCM consultant.
Execution of Project is divided into Six Packages. The estimated
capital expenditure is Rs.572 Crores. All the packages are ordered.
Major civil works completed. Major Technological equipment erection
is completed and some of the equipment trial runs taken. Project is
scheduled to be completed in FY 2014-15. Doubling of Railway Line:
NMDC has entered into a MoU with Indian Railways on 21.12.2012 for
the above work of 150 km length at an estimated cost of Rs.826.57
Crores at 2010-11 price level for which an amount of Rs.75 Crores
has been deposited by NMDC during May 2013.
Steel Plant at Bellary: In pursuance of the MoU signed between
the Government of Karnataka and your Company, action for setting up
of 3 MTPA Integrated Steel Plant at Bellary, in the State of
Karnataka has been initiated by the Company. Acquisition of about
3000 acres of land for the proposed steel plant through Karnataka
Industrial Areas Development Board (KIADB) was under progress
subsequent to publication of statutory preliminary notifications in
the gazette of Karnataka in this respect.
Reclaimer in operation at Donimalai Mines, NMDC Ltd
2.10 Financial Statement (Overall)
CHAPTER-3 THEORETICAL BACKGROUND OF THE STUDY3.1 Meaning of
working capitalThe working capital is refers to the excess of
current assets over the current liabilities in the liquid portion
of total enterprises capital which constitutes a margin of buffer
for maturing obligations with in the ordinary operating cycle of
business.The term working capital literally means capital used for
conducting the day to day operation. It refers to that part of
total capital which is used for carrying out the routine and
regular business operations. In short, it is the amount of funds
used for financing the short-term operation.Definition of working
capitalAccording to principals board of the American Institute of
certified public USA has defined:Working capital is sometimes
called networking is represented by the excess of current assets
over the current liabilities and identified the relatively liquid
portion of total enterprises capital which constitutes a margin of
buffer for operating cycle of business.According to Weston and
Brigham:Working capital refers to a firm investment in short-term
assets cash, short-term security, accounts receivables and
inventory.3.2 Nature of working capital 1. Current assets and
current liabilities.2. Negative or positive in nature.3. Short
period.4. Out flow and inflow of cash.
3.3 Factor affecting working capital1. Nature of business.2.
Production policy.3. Market condition.4. Seasonal fluctuations.5.
Growth and expansion activities.6. Operation efficiency.7. Credit
policy.8. Sales growth.9. Dividend policy.3.4 Concept of working
capitalThere is two categories of working capital are as
follows:
Gross working capital Gross working capital refers to the firms
investment in current asset. Current assets are those assets which
can be converted into cash within an accounting year or operating
cycle and include cash, short-term securities, debtors (accounts
receivable or book debts) bills receivable and stock
(inventory).Gross working capital concepts focuses attention on two
aspects of current assets management Optimize investment in current
assets. Financing of current assets.The consideration of the level
of investments in current assets should avoid two danger points
excessive and inadequate investment in current assets.Net working
capital (defined in two ways) It is the excess of current assets
over current liabilities. It is that portion of a firms current
assets which is financed by long-term funds.Net working capital
refers to the difference between current assets and current
liabilities. Current liabilities are those claims of outsiders
which are expected to mature for payment within an accounting year
and include creditors (accounts payable), bills payable and
outstanding expenses. Net working capital can be positive or
negative. A positive net working capital occurs when current assets
are in excess of current liabilities. A negative net working
capital occurs when current liabilities are excess of current
assets.
3.5 Types of working capital
Permanent/fixed working capital. Temporary/variable working
capital. Permanent / fixed working capitalIt refers to that minimum
amount of investment amount of investment in all current assets
which is required at all times to carry out the minimum level of
business activities. In other words, it represents the current
assets which are required on a continuing basis over the entire
year. This part of working capital is fixed irrespective of changes
in the operation.There is a need for current assets for smooth flow
of operating cycle which is a continuous process. Hence the need
for current assets is felt regularly. In any business certain fixed
portion of current asset is always required referred to as
permanent or fixed working capital.
It is a type of working capital which keeps on fluctuating from
time to time depending on business activities. It indicates the
need for additional current asset required at different times.
Temporary or variable or fluctuating working capital Additional
inventory has to be procured to support sales during peak sales
period. Investment in inventories decreases during depression
period.Thus it is extra working capital required to support the
changing in the production and sales activities. It is usually
financed from short term sources of finance such as bank
credit.Working capital may be changed in the fallowing
circumstances: Changes in salesThe changes in sales and operating
may be either in the form of increase or decrease. An increase in
the volume of sales in bound to be accompanied by higher level of
cash, inventory and receivable, the decline in sales has exactly
the opposites effect a decline in the need for working capital. A
change in the operating expenses rises or decline as similar effect
as the level of working capital. Policy changesThe second major
cause of changes in the level of working capital is policy changes
because it is initiated by the management. There is wide choice in
the matter of current policy. The term current asset policy may be
defined as the relationship between current assets and sales
volume. A term fallowing a constructive policy in this aspect
having a high level of current assets in relation to sales says
deliberately option for less conservative policy and vice-versa.
Technology changesTechnology changes can be cause significant in
the level of working capital. If a new place emerges as a result of
technological development, then shorten the operating cycle.3.6
Operating cycleOperating cycle is defined as the time gap between
sales and their actual realization into cash. The operating
includes three steps, which is as follows:The first steps, the cash
gets converted into inventory. This includes purchases of raw
materials, conversion of raw material into work in progress,
finished goods and finally the transfer of goods to stock at the
end of the manufacturing process.The second step, of the cycle the
inventory is connected into receivables as credit sales are made to
customers.Third step, presents the stages when receivable are
collected this step complete the operating cycle. The firm has
moved from cash to inventory to receivables and to cash
again.Operating cycle
3.7 Financing of working capital requirementsAnother commonly
used source for financing working capital needs is the banking
finance. Fallowing forms are help to know about banking finance to
fulfill the working capital requirements. Bank overdraft. Cash
credit. Bills discounting. Working capital loan. Regulations of
bank finance. Tondon committee. Chore committee recommendation.3.8
Estimating working capital requirementsA firm as to ensure a
balance between the two and for doing this it is of paramount
importance to prepare an estimate of working capital is also known
as working capital. A statement showing estimate of working capital
is also known as working capital budget. The greatest advantage of
preparation of working capital budget is that it facilitates
planning of the level of holding current assets.Fallowing steps are
taken in predict the working capital requirementsEstimating the
current assets In the prediction of working capital it essential to
predict the current assets. Current liabilities current assets
include the fallowing assets. Stock of raw material, work in
progress and finished goods. Sundry debtors.
Any advance payment of expanses. Cash and blank balances.For the
forecast the level of inventories, it is necessary to calculate the
expected holding period of each type of inventory or stock. In case
of debtors, on an average how much credit will be allowed to the
debtors should be estimated. For advance payments it is necessary
to estimate the amount that will have to be paid as advance. As far
as cash and bank balance should be estimated.Estimating the current
liabilitiesThe second step in estimating working capital
requirement is to estimate the current liabilities. The current
liabilities include trade creditors, bills payables, bank
overdraft, and expenses due but not paid and other short term
liabilities. In estimating creditors and bills payable, how much
credit will be allowed by the creditors, should be estimated
carefully.
3.9 Working capital leverageWorking capital leverage reflects
the sensitivity of return on investment (earning power) to changes
in the level of current assets. . To express the formula for
working capital leverage we will use the following symbols:Working
capital leverage (WCL) = CA / TA CA
CA=value of current assets (gross working capital)CA=change in
the level of current assetsFA=value of net assetsTA=value of total
assets (TA = CA + FA)EBIT=earnings before interest and
taxesROI=return on investment defined as EBIT / TA
If there is decrease in current assets:Working capital leverage
(WCL) = CA / TA - CA
If there is increase in current assets:Working capital leverage
(WCL) = CA / TA + CA
CHAPTER-4 DATA ANALYSIS AND INTERPRETATION4.1 The investment in
various current assets.Table 4.1.1 showing investment in various
current assets. (Amount in
crores)Particulars/years2011201220132014
CURRENT ASSETS
Inventories 28.0268.67133.2397.97
Trade receivables16.42468.31489.87904.33
Cash and bank balances10.591.443.535.20
Short-term loans and advances20.55127.47142.4843.57
Other current assets00.0120.0260.051
Total current asset75.58
665.90
769.14
1051.12
Graph 4.1.1 showing the total current assets
4.2 Calculation of NET WORKING CAPITALTable 4.2.1 showing Net
working capital (Amount in
crores)Particulars/years2011201220132014
CURRENT ASSETS
Inventories 28.0268.67133.2397.97
Trade receivables16.42468.31489.87904.33
Cash and bank balances10.591.443.535.20
Short-term loans and advances20.55127.47142.4843.57
Other current assets00.0120.0260.051
Total current asset(A)75.58
665.90
769.14
1051.12
CURRENT LIABILITIES
Trade payable94.5797.80103.04124.32
Other current liabilities92.54204.40211.63216.35
Short term provisions0000
Total current liabilities(B)187.12302.21314.67340.67
NET WORKING CAPITAL(A-B)-111.54363.69454.47710.45
Graph 4.2.1 showing NET WORKING CAPITAL
Interpretation:From the above analysis in the year 2011 there is
negative working capital. Negative working capitalmeans that the
business currently is unable to meet its short-term liabilities
with its current assets. Therefore, an immediate increase in sales
or additional capital into the company is necessary in order to
continue its operations.From the year 2012 onwards there positive
working capital and it has been increasing. Positive working
capitalmeans that the business is able to pay off its short-term
liabilities. Also, a high working capital can be a signal that the
company might be able to expand its operations.
4.3 Computation of Working Capital RatiosCurrent ratio/ Working
Capital ratio.This ratio is also called as working capital ratio.
It is an index of the short term solvency of concern. It shows the
extent to which current assets may diminish in value carrying any
losses in respect of the payment to short term creditors. Thus, it
is an indication of the ability of enterprise in regard to meeting
its current liabilities. A current ratio of 2:1 is considered as
satisfactory.
Table 4.3.1 showing current ratio (Amount in crores)
YearsCurrent assets (Amt in crore)Current liabilities(Amt in
crore)Current ratio
201175.58187.12.40:1
2012665.90302.212.20:1
2013769.14314.672.44:1
20141051.12340.673.08:1
Graph 4.3.1 showing current ratio
Interpretation:From the above analysis, the current ratio is
less than 1 in the year 2011. Ifcurrent ratio is below 1(current
liabilities exceed current assets), then the company may have
problems paying its bills on time. However, low values do not
indicate a critical problem but should concern the management.From
the year 2012 the current ratio is higher than 2:1 and has been
increasing which is considered as acceptable, because the higher
the current ratio is, the more capable the company is to pay its
obligations.Current ratio gives an idea of company's operating
efficiency. A high ratio indicates "safe" liquidity, but also it
can be a signal that the company has problems getting paid on its
receivable or have long inventory turnover, both symptoms that the
company may not be efficiently using its current assets.
Liquid Ratio/ Acid Test Ratio/ Quick RatioQuick ratio is the
second ratio to measure the solvency of the company. This ratio is
very useful to test the ability of the firm to meet its short term
obligation out of short term assets. Quick ratio of 1:1 is
considered a fair indication of the good current financial position
of enterprise. Quick assets refers to the assets, which can convert
into cash as early as possible, it wont take lot of time like
current assets.
(Quick Assets = Current Asset-Inventory)Table 4.3.2 showing
quick ratio (Amount in crores)YearQuick assets(current
assets-inventory)Current liabilitiesRatio
201147.56187.12.25:1
2012597.23302.211.98:1
2013635.91314.672.02:1
2014953.15340.672.80:1
Graph 4.3.2 showing Quick ratio
Interpretation:From the above analysis the quick ratio is less
than 1 in the year 2011. Aquick ratio lower than 1:1may indicate
that the company relies too much on inventory or other assets to
pay its short-term liabilities.From the year 2012 the quick ratio
is 1.98 and is been increasing constantly. Ifquick ratio is higher,
company may keep too much cash on hand or have a problem collecting
its accounts receivable. Higher quick ratio is needed when the
company has difficulty borrowing on short-term notes. A quick ratio
higher than 1:1 indicates that the business can meet its current
financial obligations with the available quick funds on hand.
Inventory/stock turnover ratioIt is ascertain by dividing the
cost of goods sold by the average inventory. This ratio is known as
Inventory turnover ratio.This ratio establishes the relationship
between the cost of goods sold during a given period and average
amount of inventory held during that period. This ratio reveals the
number of times stock is replaced during a given accounting
period.
(COGS=Total Expenses-Selling Expenses) Table 4.3.3 showing
Inventory turnover ratio (Amount in crores)YearsCOGS (total
expenses-selling expenses)Sales (Iron ore)Ratio
2011411.061931.20.21:1
2012438.321911.47.23:1
2013987.092736.56.36:1
20141057.753140.07.34:1
Pie chart 4.3.3 showing Inventory turnover ratio
Interpretation: Low inventory turnover ratiois a signal of
inefficiency, since inventory usually has a rate of return of zero.
It also implies either poor sales or excess inventory. A low
turnover rate can indicate poor liquidity, possible overstocking,
and obsolescence, but it may also reflect a planned inventory
buildup in the case of material shortages or in anticipation of
rapidly rising prices.High inventory turnover ratioimplies either
strong sales or ineffective buying (the company buys too often in
small quantities, therefore the buying price is higher).A high
inventory turnover ratio can indicate better liquidity, but it can
also indicate a shortage or inadequate inventory levels, which may
lead to a loss in business.High inventory levels are usual
unhealthy because they represent an investment with a rate of
return of zero. It also opens the company up to trouble if the
prices begin to fall.A good rule of thumb is that if inventory
turnover ratio multiply by gross profit margin (in percentage) is
100 percent or higher, then the average inventory is not too
high.Debtor Turnover RatioDebtors turnover ratio measures the
liquidity of the firms. It is similar to inventory turnover ratio.
It is the technique which indicates the number of items debtors are
converted into cash and gives the same idea of credit and
collection is also high and the amount blocked in debtors is for
short period. This ratio shows the efficiency achieved in using the
funds invested in receivables. Funds invested in receivable are not
available for other profitable uses.It indicates the speed with
which debtors are being collected. The higher the turnover ratio
indicates the better will be trade credit management or more chance
of bad debts and the lower turnover ratio and long collection
period reflects the managements inefficiency in collecting the dues
or less chance of bad debts.
Table 4.3.4 showing debtors turnover ratio (Amount in
crores)YearsSalesDebtors (Trade Receivables)Ratio
20111931.19468.314.08
20121911.471642.461.18
20132736.56489.875.59
20143140.07904.333.47
Graph 4.3.4 showing Debtors turnover ratio
Interpretation: Ahigh receivables turnover ratioimplies either
that the company operates on a cash basis or that its extension of
credit and collection of accounts receivable are efficient. Also, a
high ratio reflects a short lapse of time between sales and the
collection of cash, while a low number means collection takes
longer.The lower the ratio is the longer receivables are being held
and the risk to not be collected increases. Alow receivables
turnover ratioimplies that the company should re-assess its credit
policies in order to ensure the timely collection of credit sales
that is not earning interest for the firm.
Working Capital Turnover RatioWorking capital is concerned
directly to the sales. Working capital is excess of current assets
over current liabilities. This ratio indicates weather business is
being operated on small or large amount of working capital in
relation to sales.The efficiency of money used as working capital
is determined by computing how many times the working capital is
turned over a given period.Table 4.3.5 showing working capital
turnover ratio (Amount in crores)YearNet salesNet working
capital(As per table 4.2.1)Ratio
20111931.19-111.54-17.31
20121911.47363.695.26
20132736.56454.476.02
20143140.07710.454.42
Graph 4.3.5 showing working capital turnover ratio
4.4 Computation of Profitability RatioThis ratio of net profit
sales. It indicates relationship between net profit and net sales
in terms of percentage. Net profit is the balance of P&L
account which is calculated after charging all operating and
non-operating expenses and incomes.
Table 4.4 showing Net Profit Ratio (Amount in crores)YearsNet
profitNet salesPercentage
20111527.281931.1979.08%
20121442.151911.4775.44%
20131789.712736.5665.40%
20142155.353140.0768.64%
Graph 4.4 showing Net Profit Ratio
Interpretation:The profit margin ratio directly measures what
percentage of sales is made up of net income. In other words, it
measures how much profits are produced at a certain level of
sales.This ratio also indirectly measures how well a company
manages its expenses relative to its net sales. That is why
companies strive to achieve higher ratios. They can do this by
either generating more revenues why keeping expenses constant or
keep revenues constant and lower expenses.Since most of the time
generating additionalrevenuesis much more difficult than cutting
expenses, managers generally tend to reduce spending budgets to
improve their profit ratio.Like most profitability ratios, this
ratio is best used to compare like sized companies in the same
industry. This ratio is also effective for measuring past
performance of a company.
4.5 Computation of Working Capital LeverageWorking capital
leverage reflects the sensitivity of return on investment (earning
power) to changes in the level of current assets.
Table 4.5 showing various requirement for computation of Working
capital leverage (Amount in crores)Particular2011201220132014
Current assets88.54678.92781.351082.89
Net fixed asset240.521640.07175.79201.75
Total asset329.06842.99957.141284.64
Earning before tax1527.281442.151789.712155.35
Note: NMDC Ltd has no Interest to be paid
Table 4.5.2 showing working capital leverage assuming 20%
increase in current asset (Amt in crores)YearsCurrent
Asset(CA)Total Asset(TA)+ CA(= TA + .20*CA)Working capital
leverage
201188.54346.77.25
2012678.92978.77.69
2013781.351113.41.70
20141082.891501.22.72
Graph 4.5 showing working capital leverage assuming 20% increase
in current asset
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