Professional Documents
Culture Documents
ON
WORKING CAPITAL MANAGEMENT IN
HCL INFOSYSTEMS LIMITED
BY
ACKOWLEDGEMENT
Achievement is finding out what you would be then doing, what you have to do.
The higher the summit, the harder is the climb. The goal was fixed and we
began with a determined resolved and put in ceaseless sustained hard work.
Greater challenge, greater was our effort to overcome it.
This project work, which is my first step in the field of professionalization, has
been successfully accomplished only because of my timely support of wellwishers. I would like to pay my sincere regards and thanks to those, who
directed me at every step in my project work.
I would also like to thank the faculty members and the staff members of HCL
Infosystems Ltd. for their kind support and help during the project.
TABLE OF CONTENTS
Acknowledgement
Abstract
1. Introduction
The problems
Purpose of study
Research methodology
Scope of the study
Data sources
Limitations
2. Hindustan Computers Limited
3. HCL Infosystems An Overview
Companys history
HCL at a glance
Alliances and partnerships
Management team
Corporate information
4. Conceptual Framework
Introduction to Working Capital Management
Significance of working capital management
Liquidity vs Profitability: Risk Return trade off
Classification of working capital
Types of working capital needs
Financing of working capital
Factors determining working capital requirements
Working capital cycle
Sources of working capital
HCL financials
3
ABSTRACT
This project is based on the study of working capital management in HCL
Infoystems. An insight view of the project will encompass what it is all about,
what it aims to achieve, what is its purpose and scope, the various methods used
for collecting data and their sources, including literature survey done, further
specifying the limitations of our study and in the last, drawing inferences from
the learning so far.
HCL Infosystems Limited (HCL), is a leading domestic computer hardware
and hardware services company. HCL is engaged in selling manufactured ( like
PCs, servers, monitors and peripherals) and traded hardware ( like notebooks,
peripherals) to institutional clients as well as in retail segment. It also offers
hardware support services to existing clients through annual maintenance
contracts, network consulting and facilities management.
The working capital management refers to the management of working capital,
or precisely to the management of current assets. A firms working capital
consists of its investments in current assets, which includes short-term assets
cash and bank balance, inventories, receivable and marketable securities.
This project tries to evaluate how the management of working capital is done in
HCL Infosystems through inventory ratios, working capital ratios, trends,
computation of cash, inventory and working capital, and short term financing.
INTRODUCTION
The problems
Purpose of study
Research methodology
Scope of the study
Data sources
Limitations
INTRODUCTION:
HCL Infosystems.
THE PROBLEMS
In the management of working capital, the firm is faced with two key problems:
1. First, given the level of sales and the relevant cost considerations, what are the
optimal amounts of cash, accounts receivable and inventories that a firm should
choose to maintain?
2. Second, given these optimal amounts, what is the most economical way to
finance these working capital investments? To produce the best possible
results, firms should keep no unproductive assets and should finance with the
cheapest available sources of funds. Why? In general, it is quite advantageous
for the firm to invest in short term assets and to finance short-term liabilities.
PURPOSE OF STUDY
The objectives of this project were mainly to study the inventory, cash and
receivable at HCL Infosystems Ltd., but there are some more and they are The main purpose of our study is to render a better understanding of
the concept Working Capital Management.
To understand the planning and management of working capital at HCL
Infosystems Ltd.
To measure the financial soundness of the company by analyzing various
ratios.
To suggest ways for better management and control of working capital at
the concern.
RESEARCH METHODOLOGY
10
11
DATA SOURCES:
The following sources have been sought for the prep of this report:
Primary sources such as business magazines, current annual reports, book
on Financial Management by various authors and internet websites the
imp amongst them being : www.hcl.com, www.indiainfoline.com,
www.studyfinance.com .
Secondary sources like previous years annual reports, reports on working
capital for research, analysis and comparison of the data gathered.
While doing this project, the data relating to working capital, cash
management, receivables management, inventory management and short
term financing was required.
This data was gathered through the companys websites, its corporate
intranet, HCLs annual reports of the last five years.
A detailed study on the actual working processes of the company is also
done through direct interaction with the employees and by timely
studying the happenings at the company.
Also, various text books on financial management like Khan & Jain,
Prasanna Chandra and I.M.Pandey were consulted to equip ourselves
with the topic.
12
13
Type
Public
(BSE: 500179,BSE: 532281)
Founded
Headquarters
Noida, India
(Delhi metropolitan area), India
Key People
Industry
Revenue
&
CEO
Employees
Website
www.hcl.in
14
15
Companys history
HCL at a glance
Corporate information
16
17
HISTORY
HCL Infosystems Ltd is one of the pioneers in the Indian IT
market, with its origins in 1976. For over quarter of a century,
we have developed and implemented solutions for multiple
market segments, across a range of technologies in India. We
have been in the forefront in introducing new technologies and
solutions. The highlights of the HCL saga are summarized
below:
Y E AR H I G H L I G H T S
1976
1977
1980
- Formation of Far East Computers Ltd., a pioneer in the Singapore IT market, for
SI (System Integration) solutions
1983
- HCL launches an aggressive advertisement campaign with the theme ' even a
typist can operate' to make the usage of computers popular in the SME (Small &
Medium Enterprises) segment. This proposition involved menu-based
applications for the first time, to increase ease of operations. The response to the
advertisement was phenomenal.
-HCL develops special program generators to speed up the development of
applications
1986
18
1991
1994
- HCL acquires and executes the first offshore project from IBM Thailand
- HCL sets up core group to define software development methodologies
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
- 1st to announce PC price cut in India, post duty reduction, offers Ezeebee at Rs.
17990
19
2005
2006
(till
June)
- Launch of HCL PC for India, a fully functional PC priced at Rs.9,990/- Rated as the No.1 Desktop PC company by IDC India -Dataquest
- 'Best Employer 2005' with five star ratings by IDC India -Dataquest.
- 'The Most Customer Responsive Company 2005'
-IT Hardware Category by The Economic Times -Avaya Global Connect.
-Top 50 fastest growing Technology Companies in India' & 'Top 500 fastest
Growing Technology Companies in Asia Pacific' by 'Deloitte & Touche'. by
'Deloitte & Touche'
-'7th IETE -Corporate Award 2005' for performance excellence in the field of
Computers & Telecommunication Systems by IETE.
-India 's 'No.1 vendor' for sales of A3 size Toshiba Multi Functional Devices for
the year '04 -'05 by IDC.
-Toshiba 'Super Award 2005 towards business excellence in distribution of
Toshiba Multifunctional products,
-Strategic Partners in Excellence' Award by In focus Corporation for projectors.
-'Most valued Business Partner' Award for projectors by In focus Corporation in
2005
- 75, 000+ machines produced in a single month
- HCL Infosystems in partnership with Toshiba expands its retail presence in
India by unveiling 'shop Toshiba'
- HCL Infosystems & Nokia announce a long term distribution strategy
- HCL the leader in Desktops PCs unveils India's first segment specific range of
notebooks brand - 'HCL Laptops'
- IDBI selects HCL as SI partner for 100 branches ICT infrastructure rollout
- HCL Infosystems showcases Computer Solutions for the Rural Markets in India
- HCL Support wins the DQ Channels-2006 GOLD Award for Best After Sales
Service on a nationwide customer satisfaction survey conducted by IDC
- HCL Infosystems First in India to Launch the New Generation of High
Performance Server Platforms Powered by Intel Dual - Core Xeon 5000
Processor
- HCL Forms a Strategic Partnership with APPLE to provide Sales & Service
Support for iPods in India
20
VISION STATEMENT:
"Together we create the Enterprises of Tomorrow"
MISSION STATEMENT:
"To provide world-class Information Technology solutions and services
in order to enable our customers to serve their customers better"
CORE VALUES:
Nothing transforms life like education.
We shall honor all commitments
We shall be committed to Quality, Innovation and Growth in every
endeavor
We shall be responsible corporate citizens
QUALITY POLICY:
"We shall deliver defect-free products, services and solutions to meet the
requirements of our external and internal customers, the first time, every time."
21
OBJECTIVES:
MANAGEMENT OBJECTIVES
To fuel initiative and foster activity by allowing individuals, freedom
of action and innovation in attaining defined objectives.
PEOPLE OBJECTIVES
To help people in HCL Infosystems Ltd., share companys success,
which
performance; to
recognize their individual achievements; and help them gain a sense of
satisfaction and accomplishment from their work.
22
These alliances on one hand give us access to best technology & products as
well as enhancing our understanding of the latest in technology. On the other
hand they enhance our product portfolio, and enable us to be one stop shop for
our customers.
23
MANAGEMENT TEAM:
Ajai Chowdhry
Co-Founder HCL, Chairman and CEO - HCL Infosystems.
An engineer by training, Ajai Chowdhry is one of the six cofounder members of HCL, India 's premier IT conglomerate.
J V Ramamurthy
Chief Operating Officer HCL Infosystems Ltd.
J V Ramamurthy has an engineering degree in Electronics &
Communications, from Guindy Engineering College, and a Masters'
degree in Applied Electronics from the Madras Institute of
Technology, both in Chennai.
Rajendra Kumar
Executive Vice President - Frontline Division HCL Infosystems Ltd.
Mr. Rajendra Kumar has been with HCL for over 30 years and has
seen HCL grow from a startup company to a gigantic conglomerate
that it is today.
24
CORPORATE INFORMATION:
BOARD OF DIRECTORS
COMPANY SECRETARY
AUDITORS
BANKERS
REGISTERED OFFICE
806, Siddharth,
96, Nehru Place, New Delhi - 110 019.
25
CORPORATE OFFICE
WORKS
26
Introduction
Significance of working capital management
Liquidity Vs profitability: Risk Return trade off
Classification of working capital
Types of working capital needs
Financing of working capital
Factors determining working capital requirements
Working capital cycle
Sources of working capital
HCL financials
Working capital position
Inventory management
Cash management
Receivables management
Managing payables (Creditors)
Financing current assets
Working capital & short-term financing
27
28
29
30
31
32
33
The need for current assets tends to shift over time. Some of these
changes reflect permanent changes in the firm as is the case when the
inventory and receivables increases as the firm grows and the sales
become higher and higher. Other changes are seasonal, as is the case
with increased inventory required for a particular festival season. Still
others are random reflecting the uncertainty associated with growth in
sales due to firm's specific or general economic factors.
34
35
36
37
38
Each of the areas- Stock (raw materials, WIP, and finished goods), trade
debtors, cash (positive or negative) and trade creditors can be viewed as
tanks into and from which funds flow.
Working capital is clearly not the only aspect of a business that affects the
amount of cash.
The business will have to make payments to government for
taxation.
Fixed assets will be purchased and sold
Lessors of fixed assets will be paid their rent
Shareholders (existing or new) may provide new funds in the form
of cash
Some shares may be redeemed for cash
Dividends may be paid
Long-term loan creditors (existing or new) may provide loan
finance, loans will need to be repaid from time-to-time, and
Interest obligations will have to be met by the business
40
Unlike, movements in the working capital items, most of these nonworking capital cash transactions are not every day events. Some of them
are annual events (e.g. tax payments, lease payments, dividends, interest
and, possibly, fixed asset purchases and sales). Others (e.g. new equity
and loan finance and redemption of old equity and loan finance) would
typically be rarer events.
HCL FINANCIALS:
42
43
PARTICULARS
CURRENT
2006
100970
2005
81533
2004
54091
2003
45042
2002
55985
ASSETS
NET BLOCK
TOTAL ASSETS
CA/TA
7970
122479
82.44
5329
99139
82.24
4925
87076
62.12
4954
71285
63.18
5552
75205
74.43
The current asset percentage on total asset is the highest over the years.
This increasing percentage of current assets to the total assets at first
might indicate a preference for liquidity in place of profitability, but a
look into the nature of the business carried on by HCL Infosystems
reveal the reason behind it. How far their preference to current assets
has affected the sales is shown below.
NET CURRENT ASSET SALES
PARTICULARS
NET CURRENT
ASSETS
SALES
WORKING
CAPITAL %
INCREASE
SALES %
INCREASE
2006
40343
2005
34742
2004
14301
2003
18752
2002
27065
238136
16.12
199886
142.93
154295
-23.736
166604
-30.7
127003
-0.46
19.14
29.54
-7.38
31.18
8.7
The sales has increased and the profits risen despite the 16.12% increase
in working capital. But what is noteworthy here is that the firm has
managed to maintain the trend of an increase in net current assets.
Whether the change has worked for the company has to be analysed in
the context of the growth in sales as compared to the previous year.
There has been a 19.14% rise in the sales or revenue generated. This
44
2006
5.062:1
2005
6.519:1
2004
2.903:1
2003
3.785:1
The ratio of the net current asset to the fixed ones is an indicator as to the
liquidity position of the firm. This ratio has declined for the firm
compared to the previous year. There could be an argument as to whether
the increased ratio of working capital to net block is a conservative policy
and whether it would be detrimental to the interest of the company. Or,
whether it would have been proper if the company invested more into the
capital expenditure in the form of plant and machinery or invested in any
other form that would have got them an internal rate of return. What has
to be kept in mind before coming to a conclusion as to the policy of the
company, is the fact that the firm being primarily into assembling, its
investment in the fixed asset segment need not be high. A look into the
capacity utilization of the plant would reaffirm this point. It would be
ideal for the firm to continue in the same line and not have excessive
investment in the fixed asset as they can easily add onto this part.
INSTALLED
CAPACITY
1150000
600000
ACTUAL
PRODUCTION
581805
448121
45
% CAPACITY
UTILIZATION
50.59
74.69
2002
4.875:1
2004
525000
295192
56.23
INSTALLED
CAPACITY
250000
250000
350000
ACTUAL
PRODUCTION
267326
259617
297991
% CAPACITY
UTILIZATION
106.93
103.85
85.14
That the fixed assets of the firm are being put to efficient use and the firm
is trying for optimum capacity utilization is something that can be easily
deduced. Whether the current assets or the working capital of the firm has
anything to do with it is for us to see. An increased production in normal
circumstances means better raw material to finished goods conversion
rate, i.e. the firm is taking less of time in the production process and this
happens when the current asset employed in relation with the fixed ones
are at optimum. The other notable feature here is that though the firm has
added on to its installed capacity in all three years, they were still able to
increase the capacity utilization. That they have been able to do it shows
that the more current assets, especially inventory used in relation to the
fixed assets, i.e., plant and machinery and their management has only
helped in increasing their utilization to the maximum.
PARTICULARS
CURRENT ASSETS
CURRENT LIABILITES
2006
100970
60627
46
2005
81533
46791
2004
54091
39790
2003
45042
26290
2002
55985
28920
% CURRENT ASSETS
INCREASE
%CURRENT
LIABILITES INCREASE
23.84
50.7
20.09
-19.54
8.9
29.57
17.6
51.35
-9.1
19.45
The 16.12% increase in Net Current assets despite of the fact that there
has been an increase in the Current Assets by 23.84% and increase in
Current Liability has been by 29.57% over that of the previous year has to
be attributed to the fact that in 2005, the company showed such a high
increase in CA, that it is still being offset. This is an indication as to the
expanding operations of the firm. HCL has increased its current assets in
order to meet the increasing sales. The firms level of liquidity being
high, we need a check on whether it affects the return on assets.
INVENTORY MANAGEMENT
Inventories
47
Nature of Inventories
Inventories are stock of the product of the company is manufacturing for
sale and components make up of the product. The various forms of the
inventories in the manufacturing companies are:
Raw Material: It is the basic input that is converted into the
finished product through the manufacturing process. Raw materials
are those units which have been purchased and stored for future
production.
Work-in-progress: Inventories are semi-manufactured products.
They represent product that need more work they become finished
products for sale.
Finished Goods: Inventories are those completely manufactured
products which are ready for sale. Stocks of raw materials and
work-in-progress facilitate production, while stock of finished
goods is required for smooth marketing operations. Thus,
inventories serve as a link between the production and
consumption of goods.
48
49
Composition
Raw Material
Stores and Spares
Finished Goods
Work-in-progress
2006
6349
3713
13374
595
2005
7749
2987
7245
784
2004
6127
2622
6506
871
50
51
20079
1176.73
3.32
129.29
40.15
2008
682.05
1.86
184.53
99.20
2009
592.92
1.62
340.08
209.92
Work-in-progress
Particulars
2006
52
2005
2004
Cost of Production
Cost of Production/day
Work in progress inventory
WIP Holding days
191911
525.78
689.5
1.31
159651.19
437.4
827.52
1.89
113500.33
310.95
679.455
2.19
Finished Goods
Particulars
Cost of goods sold
Cost of goods sold/day
Finished goods inventory
Finished goods inventory Holding
days
2006
228177
625
10310
16
2005
178438.85
488.87
6875.725
14.06
20004
124768.92
341.832
5026.505
14.8
The time taken for the firm to realize its finished goods as sales has
increased as compared to last year. This growth in sales could be traced
back to the growing domestic IT market for the commercial as consumer
segment in India. HCL has around 15% of the market in desktop and it is
the market leader in this segment. So it is only natural that they are able
to better their conversion rate of finished goods to sales.
Operating Cycle
53
Particulars
Inventory conversion period
Average collection period
Gross operating cycle
Average payment period
Operating cycle
2006
38
70
108
22
86
2005
42
63
105
23
82
2004
45
66
111
17
94
The operating cycle of the firm reveals the days within which the
inventory procured gets converted to sales or revenue for the firm. This
time period is of importance to the firm as a lag here could significantly
affect the profitability, liquidity, credit terms, and the policies of the firm.
All the firms would like to reduce it to such extend that their cash inflows
are timely enough to meet their obligations and support the operations.
That the firm has been able to reduce the ratio is in itself an achievement
as they were having huge stocks of inventory. But the reduction in the
cycle could also be attributed to the boom in the market and the growth it
is expected to reach. This boom automatically ensures the demand for the
finished goods and thus helping in it to garner sales for the firm.
2006
92007
29070
75.99
2005
70784.27
27187.04
72.25
2004
42129.63
15645.51
72.92
A major chunk of the imports come from Korea and Taiwan and is
purchased in US$. The value of imported and indigenous raw material
consumed give a clear picture that if there is a change in the EXIM policy
of the government it is bound to affect the company adversely as more
than 70% of their consumption is from imports. But this is the scenario
witnessed in the industry as a whole and though HCL is into expanding
54
CASH MANAGEMENT
SOURCES OF CASH:
Sources of additional working capital include the following:
Existing cash reserves
Profits (when you secure it as cash!)
Payables (credit from suppliers)
New equity or loans from shareholders
Bank overdrafts or lines of credit.
Long-term loans
If you have insufficient working capital and try to increase sales, you
can easily over-stretch the financial resources of the business. This is
called overtrading.
Early warning signs include:
Pressure on existing cash
Exceptional cash generating activities e.g. offering high discounts
for early cash payment
Bank overdraft exceeds authorized limit.
Seeking greater overdrafts or lines of credit
Part-paying suppliers or other creditors
55
56
Cash-Current Liability
Particulars
Absolute Liquid Ratio
2006
0.24:1
2005
0.31:1
2004
0.11:1
The absolute liquid ratio is the best for three years and the cash balances
as to the current liability has improved for the firm. Firm has large
resources in cash and bank balances. While large resources in cash and
bank balances may seem to affect the revenue the firm could have earned
by investing it elsewhere as maintenance of current assets as cash and in
near cash assets and marketable securities may increase the liquidity
position but not the revenue or profit earning capacity of the firm.
Dividend Policy-Cash
Particulars
Dividend Policy%
Shift in Sales
Cash Balance
Cash in Hand
2004
210
154295
4463.43
118.33
57
2005
310
199886
14582.65
128.97
2006
400
238136
14529.29
128.97
58
The other notable feature in HCL statements has been the growing
dividend policy of the firm. The payment of dividend means a cash
outflow. Thus cash position is an important criterion at the time of paying
dividends. There is a theory that greater the cash position and ability to
pay dividends. The firm has adopted a policy of disbursing the revenue
earned as profits to the shareholders as dividends as could be seen from
the increasing % of dividends declared.
Particulars
PBIDT
Equity Dividend%
2006
14284
400
2005
15634
310
2004
14523
210
This could mean two things for the firm the amount of cash retained in
the business for capital expenditure purposes are minimal or nil. But
rather than investing more in plant and machine which they can at any
point in time by adding on a additional line if need they would like to
optimize their utilization in fixed assets at present. This also means that
the percentage of cash in hand maintained by the firm as a source of
liquidity could be reduced, i.e. the amount of idle cash in the business
could be made to a level which the firm feels optimum.
59
The firm feels that they should retain cash and it would be in the interest
of the firm as well as the shareholders. This would automatically mean as
decrease in Earning/share (EPS)(Basic EPS declined from 8 in 2005 to
6.74 in 2006). It would prompt more of investors being interested in the
shares of the company, which would boost the purchase of the securities
and increase the market price/share thus being beneficial for the firm.
Cash Flows
Cash Flows
Net Cash from Operating activities
Net Cash from Investing activities
Net Cash from Financing activities
2006
6924
-3515
-3512
2005
2675.57
15661.29
-8217.68
2004
13706.34
-2169.16
-11412.1
The firm has disposed of investments worth around 655 Crores to meet
its growing needs. The other notable feature is decline is the firms
inflows from operations primarily due to the reason that the cash
generated from the operations is the lowest in three years. And the firms
growing dividend policy has contributed to the outflows in financing
activities.
2006
-14166
-5221
13026
2005
-14510.69
-2683.92
6419.13
2004
-7106.68
-7221.11
14311.5
The cash from the operation has been subject to considerable change due
to the changes that could be adjusted towards trade receivables and trade
60
2006
13539
-65992
65312
2005
12277.44
-53075.99
65489.84
2004
28059.88
-59249.81
52087.36
The investments have reduced from the last year due to the redemption of
investments taken place to meet various needs such as increasing demand
in stock or inventory and to ensure better credit and receivables policy.
We can see that the firm has in these three years increased their cash
inflow from the investing activities by way of disposal of investments
when in need. That is the firm has redeemed to realize cash as to meet its
expanding operations, fund the inventory procurement and meet the
obligations.
The investments in mutual funds are beneficial to the firm in the context
that they contain interest bearing securities which add up as a source of
revenue for the firm unlike cash which remains idle and unproductive
when not in use. This reduction of dividend could be attributed to
disposal of investments in mutual funds and subsidiary. This disposal
creates a fund, which can be used by the company as and when the need
arises.
Instruments Used
The instrument used here are primarily cheques comprising of around
97% of what is used in. The rest 2-3% comprise of the letters of credit.
Thus working capital is the lifeline for every business. The main
advantages of sufficient working capital are:
It helps in prompt payment
Ensures high solvency in the company and good credit
standing.
Regular supply of material and continuous production.
62
RECEIVABLES MANAGEMENT
63
5.Check out each customer thoroughly before you offer credit. Use
credit agencies, bank references, industry sources etc.
6.Establish credit limits for each customer and stick to them.
7.Continuously review these limits when you suspect tough times are
coming or if operating in a volatile sector.
8.Keep very close to your larger customers.
9.Invoice promptly and clearly.
10.Consider charging penalties on overdue accounts.
11.Consider accepting credit /debit cards as a payment option.
12.Monitor your debtor balances and aging schedules, and don't let any
debts get too old.
Recognize that the longer someone owes you, the greater the chance you
will never get paid. If the average age of your debtors is getting longer,
or is already very long, you may need to look for the following possible
defects.
Poor collection procedures.
Lax enforcement of credit terms.
Slow issue of invoices or statements.
Errors in invoices or statements.
Customer dissatisfaction.
Weak credit judgement.
64
Debtors due over 90 days (unless within agreed credit terms) should generally
demand immediate attention. Look for the warning signs of a future bad debt.
For example..
1. Longer credit terms taken with approval, particularly for smaller orders.
2. Use of post-dated checks by debtors who normally settle within agreed
terms.
3. Evidence of customers switching to additional suppliers for the same
goods.
4. New customers who are reluctant to give credit references.
5. Receiving part payments from debtors.
The act of collecting money is one, which most people dislike for many
reasons and therefore put on the long finger because they convince themselves
that there is something more urgent or important that demand their attention
now. There is nothing more important than getting paid for your product or
service. A customer who does not pay is not a customer.
HERE ARE FEW WAYS IN COLLECTING MONEY FROM DEBTORS: Develop appropriate procedures for handling late payments.
Track and pursue late payers
Get external help if you own efforts fail.
Dont feel guilty asking for money .. its yours and you are entitled to it.
Make that call now. And keep asking until you get some satisfaction.
In difficult circumstances, take what you can now and agree terms for the
remainder, it lessens the problem.
When asking for your money, be hard on the issue but soft on the person.
Dont give the debtor any excuses for not paying.
Make that your objective is to get the money, not to score points or get
even.
PARTICULARS
2006
2005
2004
2003
5.21
5.80
5.53
6.62
70
63
66
55
A better turnover ratio implies for the firm, more efficiency in converting the
accounts receivable to cash. A firm with very high turnover ratio can take the
freedom of holding very little balances in cash, as their debtors are easily
realizable. In case of HCL, the collection period for the firm is 70 days.
PARTICULARS
2006
2005
2004
49.85
25
47
134.09
69.8
The debts doubtful have doubled but their percentage on the debts has almost
become half. This implies a sales and collection policy that get along with the
receivables management of the firm.
COLLECTION POLICIES:
It refers to the collection procedures such as letters, phone calls and other follow
up mechanism to recover the amount due from the customers. It is obvious that
costs are incurred towards the collection efforts, but bad debts as well as
average collection period would decrease. Further, a strict collection policy of
the firm is expensive for the firm because of the high cost is required to be
incurred by the firm and it may also result in loss of goodwill. But at the same
time it minimizes the loss on account of bad debts. Therefore, a firm has to
strike a balance between the cost and benefits associated with collection
policies.
The steps usually followed in collection efforts are:
Sending repeated letters and reminders to the customers
Personal visits
Using agencies involved in collection process
Making telephonic reminders
Initiating legal actions
Real Time Gross Settlement (RTGS)
Real Time Gross Settlement as such is a concept new in nature and though the
firm uses the system with all the members of the consortium, it is still in its
primal stage and will take time before all of the clients of the firm are willing to
accept it. The firm has made a proposal to the consortium of the banks during
appraisal for faster implementation of internet based banking facility by all the
banks and adoption of RTGS payment system through net.
The debtors turnover ratio is completely dependent upon the credit policy
followed by the firm. The credit policy followed by the firm should be such that
the threat of bad debts and the default rate involved should be terminated.
PARTICULARS
2006
2005
2004
2003
16.44
15.68
21.29
21.14
PAYMENT PERIOD
22
23
17
16
That the creditors turnover ratio has declined and payment period has increased
indicate that the company has got a leeway in making the payment to the
creditors by way of increased time.
With creditors they are having pre-agreements and have undertaken
arrangements with them, which they believe to be the best in the business and
these are fixed.
(NOTE: Acceptances are not included in the computation of creditors turnover)
Consider the following: Who authorizes purchasing in your company - is it tightly managed or
spread among a number of (junior) people?
Are purchase quantities geared to demand forecasts?
Do you use order quantities, which take account of stock holding and
purchasing costs?
Do you know the cost to the company of carrying stock?
Do you have alternative sources of supply? If not, get quotes from major
suppliers and shop around for the best discounts, credit terms as it reduces
dependence on a single supplier.
How many of your suppliers have a return policy?
Are you in a position to pass on cost increases quickly through price
increases to your customers?
If a supplier of goods or services lets you down can you charge back the
cost of the delay?
Can you arrange (with confidence!) to have delivery of supplies staggered
or on a just-in-time basis?
There is an old adage in business that "if you can buy well then you can sell
well". Management of your creditors and suppliers is just as important as the
management of your debtors. It is important to look after your creditors- slow
payment by you may create ill feeling and can signal that your company is
inefficient (or in trouble!).
Remember that a good supplier is someone who will work with you to enhance the future
viability and profitability of your company.
It is for a period less than one year and includes working capital funds from
banks, public deposits, commercial paper etc.
Spontaneous financing:
It refers to automatic sources of short-term funds arising in normal course of
business. There is no explicit cost associated with it. For example, Trade
Credit and Outstanding Expenses etc.
Depending on the mix of short and long term financing, the company can
follow any of the following approaches.
Matching Approach
In this, the firm follows a financial plan, which matches the expected life of
assets with the expected life of source of funds raised to finance assets. When
the firm
follows this approach, long term financing will be used to finance fixed assets
and permanent current assets and short term financing to finance temporary or
variable current assets.
Conservative Approach
In this, the firm finances its permanent assets and also a part of temporary
current assets with long term financing. In the periods when the firm has no
need for temporary current assets, the long-term funds can be invested in
tradable securities to conserve liquidity. In this the firm has less risk of facing
the problem of shortage of funds.
Aggressive Approach
In this, the firm uses more short term financing than warranted by the
matching plan. Under an aggressive plan, the firm finances a part of its current
assets with short term financing.
Relatively more use of short term financing makes the firm more risky.
fixed assets, a higher CA/FA ratio indicates a conservative current assets policy and a
lower CA/FA ratio means an aggressive current assets policy assuming other factors to
be constant. A conservative policy i.e. higher CA/FA ratio implies greater liquidity and
lower risk; while an aggressive policy i.e. lower CA/FA ratio indicates higher risk and
poor liquidity.
The current assets policy of the most firms may fall between these
two extreme policies. The alternative current assets policies may be shown
with the help of the following figure.
FUND BASED
300
200
500
NON-FUND BASED
250
100
350
In order to finance the working capital needs of the firm in the form of Working
Capital Demand Loan, there is a consortium of nine banks. The consortium if
banks provide a fund based limit of 125 Crores which comprises of cash credit
and working capital demand loans and non-fund based limits which has bank
gurantee and letter of credit subject to a limit of 1375 Crores. The Lead Bank
in this consortium of banks is State Bank of India and the second lead bank is
ICICI. It is SBI, which fixes the limit on the basis of consortium. They, in
consultation of the company decide the allocation of limit to various member
banks. The allocation cannot be higher than the limits fixed by it. SBI is the
biggest contributor in the consortium for both fund and non-fund based limits
with about
31.30 in funds and 34.02 in non-fund limits. The ratio of both limits for the
year 2006 is 0.23:0.77
It is on the basis of the accounts receivable that the banks come to an agreement
with regards to the limits imposed. Though it is the fund based limits that
finance the working capital requirements, the non-fund based limits are
important for the management of the working capital as there might be clients
who are not willing to sell on open credit and might be demanding letters of
credit before any advances.
RENEWAL OF LIMITS
LIMITS
FUND BASED
NON FUND BASED
TOTAL
2006
11500
48500
60000
2005
11500
38500
50000
2004
11500
28500
40000
All banks sanction the limits for a period of one year. Thereafter it is to be
renewed every year. SBI appraises the limit on the basis of consortium. The
individual banks appraise for their own individual limit. The non fund based
limits of the firm in consortium financing has been subjected to change for the
past two years as per the requirements of the firm and the consent of the lead
bank to its proposal. It was around 385 Crores in 2005 and had been risen to
around 485 Crores in 2006.
A proposal has been made by the firm to further appraise the limits by 100
Crores to 585 Crores in view of the growing operations of the firm with full
interchangeability between letter of credit and bank guarantee limits for
operational flexibility. Allocation of the fund based and non based limits among
the banks based on operational convenience rather than allocating the fund
based and non fund based on the same ratio is also among the proposals made
by the firm.
The company needs to provide the following information to bank for appraisals:
CONSORTIUM MEETING :
All the members of the consortium are required to meet to discuss various
issues relating to the working facilities. As per RBI guidelines, the lead bank,
i.e., SBI should ensure that one consortium meeting is held every quarter snd
this meeting has to be arranged by HCL.
Loan agreement
Hypothecation agreement for movable machinery
Hypothecation agreement for movables and book debts
Counter Indemnity
The above are the standard agreements asked for by the banks. The common
seal has to be witnessed by the company secretary and one of the directors of
the company.
As of 2005, no additions or deletions were made to the consortium of the banks.
But over the years the number of banks in the consortium have been reduced.
Indian Banks and State Bank of Hyderabad are the two banks which were
earlier a part of the consortium.
Other than the investment in current assets, the firm also has to be concerned
with short-term to long-term debt as this plays a very important role in
determining the amount of risk undertaken by the firm. That is , the firm not
only has to be concerned about current assets but also the sources through
which they are financed. A firm before financing in either of the two, has to take
into consideration various aspects. While short term might seem the ideal way
to finance your assets than the long term due to shorter maturity period and also
less of costs are involved, there is an inherent risk in short term financing due to
fluctuating interest rates and due to the reason that the firm might be unable to
reay the amount in a shorter span of time.
SECURED LOANS
SHORT TERM
LONG TERM
TOTAL
2006
3849
0
3849
2005
4991.28
530.07
5521.35
2004
6903.7
0
6903.7
2003
4987.52
3461.36
8448.88
%SHORT TERM
100
90.4
100
59.03
Under secured loan cash credit, along with non fund based facilities, foreign
currency term loan from banks are secured by way of hypothecation of stock-intrade, book debts as first charge and by way of second chanrge on all the
immovable and movable assets of the parent company. Term loan in Indian
rupees from a bank is subject to a prior charge in favour of companys bankers
on book debts and stock in trade for working capital facilities.
UNSECURED LOANS
SHORT TERM
LONG TERM
TOTAL
% SHORT TERM
2006
15104
11
15115
99.93
2005
2593.39
17
2610.39
99.348
2004
63.94
169.51
233.45
27.38
2003
76.84
3261.42
3338.26
2.3
Here HCL has a major portion of their financing done through short term
financing than long term financing. The preference of short term financing to
long term as such is not the part of any policy employed by the firm but it was
due to the reason that the interest rates in short term were more investor friendly
and the cost involved in them were also low. At present, we can see that the firm
is moving more towards long term financing as the interest terms in the long
term has reduced compared to the short term.
2006
2005
2004
2003
COMMERCIAL
PAPERS
4000
2500
---
3000
ANALYSIS
Industry analysis
Financial graphs
Concluding analysis
Suggestions and recommendations
Bibliography
INDUSTRY ANALYSIS
INDUSTRY STRUCTURE AND DEVELOPMENTS
FINANCIAL GRAPHS
Dividend:
The Company distributed dividends @ 100% per share in each of the first
three quarters of the current year. The company proposes to pay a final
dividend of 100% per fully paid up equity share of Rs. 2/- each. The
interim dividends paid together with proposed final dividend total to
400% for the current year, entailing an outflow of Rs. 156 crores,
including distribution tax.
During the year, the Company allotted 4.2 lakh shares under Employee
Stock Option Scheme realizing Rs. 4.4 crores.
CONCLUDING ANAYSIS
The working capital position of the company is sound and the various
sources through which it is funded are optimal.
The company has used its dividend policy, purchasing, financing and
investment decisions to good effect can be seen from the inferences made
earlier in the project.
The debts doubtful have been doubled over the years but their percentage
on the debts has almost become half. This implies a sales and collection
policy that get along with the receivables management of the firm.
The returns have been affected by a marked growth in working capital
and though a 29.75% in 2006 return on investment is good, but it got
reduced as compared to 39.01% return in 2005.
The various ratios calculated are an indicator as to the fact that the
profitability of the firm and sales are on a rise and also the deletion of the
inefficiencies in the working capital management.
The firm has not compromised on profitability despite the high liquidity
is commendable.
HCL Infosystems has reached a position where the default costs are as
low as negligible and where they can readily factor their accounts
receivables for availing finance is noteworthy.
BIBLIOGRAPHY
Following sources have been sought for the preparation of this report:
Corporate Intranet
Financial Statements (Annual Reports)
Direct interaction with the employees of the company
Internet ----www.hclinfosystems.in
Textbooks on financial management I.M.Pandey
Khan and Jain
Prasanna Chandra
APPENDICES
industry's norm. Additionally, even though there are not enough liquid assets to
satisfy current obligations, Operating Profits are more than adequate to service
the debt. Accounts Receivable are among the industry's worst with 28.44 days
worth of sales outstanding. This implies that revenues are not being collected in
an efficient manner. Last, inventories seem to be well managed as the Inventory
Processing Period is typical for the industry, at 21.29 days.
Jun 30
2004
Jun 30
2005
Jun 30
2006
Restated
Restated
Reclassified
1,452.3
2,512.7
2,149.2
1,976.5
114.8
1,573.6
3,137.7
2,939.9
1,567.1
4,086.3
5,286.9
4,916.4
Accounts Receivable
4,390.4
6,103.1
7,691.4
10,520.0
228.2
400.5
468.1
593.4
TOTAL RECEIVABLES
4,618.7
6,503.6
8,159.5
11,113.4
Inventory
2,804.2
3,493.9
4,696.1
7,918.8
107.0
163.0
146.0
287.8
23.8
56.4
86.8
84.8
9,120.8 14,303.2
18,375.3
24,321.2
1,406.1
1,731.9
2,431.0
Currency in
Millions of Indian Rupees
As of:
Jun 30
2007
Assets
Short-Term Investments
Other Receivables
Prepaid Expenses
1,404.7
Accumulated Depreciation
-749.1
-744.9
-852.4
-966.5
657.0
659.8
879.5
1,464.5
--
--
0.2
0.8
2,190.9
--
--
--
59.1
--
--
--
Other Intangibles
--
95.3
32.4
30.9
--
5.1
71.8
16.0
12,027.9 15,063.4
19,359.2
25,833.4
Goodwill
Long-Term Investments
TOTAL ASSETS
Accounts Payable
Accrued Expenses
Short-Term Borrowings
3,390.6
4,100.9
5,964.8
8,298.5
100.4
101.0
140.4
209.8
--
307.9
784.9
1,182.4
690.4
499.6
0.4
892.5
30.1
80.9
77.4
252.8
2,914.6
3,377.3
4,687.9
5,216.6
536.4
965.8
557.9
775.2
7,662.6
9,433.4
12,213.7
16,827.8
15.8
7.2
60.1
284.0
109.0
73.5
107.6
124.8
13.9
3.8
1.0
--
7,801.3
9,517.9
12,382.4
17,236.6
Common Stock
328.9
334.4
337.5
338.3
673.9
883.7
1,044.5
1,087.9
3,193.2
4,297.3
5,565.2
7,141.4
30.6
30.1
29.6
29.2
4,226.6
5,545.5
6,976.8
8,596.8
TOTAL EQUITY
4,226.6
5,545.5
6,976.8
8,596.8
12,027.9 15,063.4
19,359.2
25,833.4
Long-Term Debt
TOTAL LIABILITIES
Retained Earnings
Jun 30
2004
Jun 30
2005
Jun 30
2006
Restated
Restated
Reclassified
1,751.1
2,277.0
2,803.6
3,159.5
180.1
152.4
124.3
144.0
--
--
--
4.1
180.1
152.4
124.3
148.1
-0.4
-1.6
0.5
0.6
-79.6
-84.9
-61.5
-55.2
0.0
0.5
--
--
292.8
31.2
79.6
271.8
14.8
14.4
7.2
9.2
-1,593.4
-1,993.4
-1,724.7
-3,158.8
-423.3
-689.7
-1,202.2
-3,222.7
1,471.8
1,561.6
2,759.5
3,112.2
1,614.0
1,267.5
2,786.3
264.7
-180.7
-267.8
-424.3
-674.5
Currency in
Millions of Indian Rupees
NET INCOME
Change in Inventories
Capital Expenditure
As of:
Jun 30
2007
3.5
10.7
80.3
1.6
73.7
841.4
-1,453.6
289.0
30.8
622.4
-1,683.3
-231.9
41.1
169.5
--
--
200.8
231.3
200.5
1,837.2
241.9
400.8
200.5
1,837.2
--
--
-172.3
-74.7
-707.9
-302.7
--
-250.0
-707.9
-302.7
-172.3
-324.7
283.3
215.2
163.9
44.2
-866.2
-1,047.4
-1,526.6
-1,546.1
-866.2
-1,047.4
-1,526.6
-1,546.1
-98.9
-95.4
-132.0
-216.1
-1,147.8
-829.5
-1,466.5
-205.5
497.1
1,060.4
-363.5
-172.7
Year over year, HCL Infosystems Ltd. has seen revenues remain relatively flat
(113.7B to 116.9B), though the company was able to grow net income from
2.8B to 3.2B. A reduction in the percentage of sales devoted to cost of goods
sold from 93.21% to 92.53% was a key component in the bottom line growth in
the face of flat revenues.
Jun 30
2004
Jun 30
2005
Jun 30
2006
Restated
Restated
Reclassified
43,064.4 77,478.9
113,683.1
116,853.0
-35.7
61.6
63.8
TOTAL REVENUES
43,064.4 77,443.2
113,744.7
116,916.8
38,701.3 71,496.1
105,964.4
108,121.4
Currency in
Millions of Indian Rupees
Revenues
Other Revenues
As of:
--
Jun 30
2007
GROSS PROFIT
4,363.1
5,947.1
7,780.3
8,795.4
2,268.8
3,305.9
3,764.3
4,527.1
180.6
152.4
124.3
148.1
--
-84.0
84.8
91.2
2,449.4
3,374.3
3,973.4
4,766.4
OPERATING INCOME
1,913.7
2,572.8
3,806.9
4,029.0
-82.8
-77.6
-132.6
-214.6
Interest Expense
223.8
Interest and Investment Income
132.1
146.1
208.0
49.4
68.5
75.4
9.2
37.9
145.0
-144.4
189.6
32.0
--
--
--
2,033.0
2,786.3
3,737.9
4,227.8
79.6
85.0
61.5
55.2
0.4
1.6
-0.5
-0.6
2.3
87.2
4.0
4.7
Insurance Settlements
2.3
3.7
4.0
4.7
--
84.0
--
--
2,115.1
2,960.1
3,802.9
4,287.1
364.0
683.1
999.3
1,127.6
1,751.1
2,277.0
2,803.6
3,159.5
NET INCOME
1,751.1
2,277.0
2,803.6
3,159.5
1,751.1
2,277.0
2,803.6
3,159.5
1,751.1
2,277.0
2,803.6
3,159.5