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A STUDY ON THE WORKING CAPITAL MANAGEMENT OF NATIONAL FERTILIZERS LIMITED

A Summer Project Proposal for

Masters in international business


By

Satya prakash

Under the guidance of

Shri. M.A. Khan Manager (F&A) Corporate Office National Fertilizers Ltd.

Acknowledgement
The present report is an amalgamation of hard work and contribution of experience of eminent personalities. The project could not have been completed without the guidance of Mr. M. A. Khan who not only served as my supervisor and mentor but also encouraged me throughout my training program. He patiently guided me throughout and never accepting less than my best effort.

Here, I would like to express my greatest appreciation to all employees of National Fertilizers Limited for providing me their continued support and guidance in the completion of this project.

A STUDY ON THE WORKING CAPITAL MANAGEMENT OF NATIONAL FERTILIZERS LIMITED By

Satya prakash
We all know that working capital is the life-blood of all types of enterprises, manufacturing and trading both. It is constantly required to buy raw materials for payment of wages and other day-to-day expenses. Without adequate working capital, manufacturing operations will be crippled. It is a base on which all the activities of business enterprise depend. 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. So the project was aimed at understanding the working capital management of NFL.

The major objective of the study was to understand the working capital management of National Fertilizers Limited and its impact on the operating performance of the company. We also try to understand the liquidity position of the company and how stringent the company is to face the short term liabilities in this competitive business environment. Different factors were also identified which showed impact on the working capital of the company. The impact of working capital on profitability was also analyzed during the study. In addition to the above the effects of the ratios (Working Capital Ratio, Acid Test Ratio, Current Assets to Total Assets Ratio, Current assets to Sales Ratio, Working Capital Turnover Ratio, Inventory Turnover Ratio, Debtors Turnover Ratio and Cash Turnover Ratio) relating to working capital management and profitability were also analyzed. In the end we also tried to the working capital leverage for examining the sensitivity of ROE to changes in the level of gross working capital of the company.

The major findings are:

1. The mission of the company is to be the market leader of the company, but on the other hand it is trying to keep the debt equity ratio to a minimum. As a result the company is losing out on opportunity to leverage the opportunity of high demand in the Indian market and its current position of low debt to equity ratio to get loans for further expansion in the market and sectors in India (mostly towards the southern states). 2. The second major finding was that the profitability of the company has a positive relation with the accounts receivable of the company. This shows that in the Indian fertilizer industry in which most of the customers are farmers, who are poor, will be happy to see themselves get credit sales. This brings in more customers and higher sales. 3. Liquidity of the company is seen to be stable and good. It was also found that liquidity also has a positive impact on the profitability of the company. The analysis shows us that with increase in the liquidity of the company the profitability also gets a good lift. It has to be noted that, high liquidity can also have a bad effect on the company. So the balance has to be maintained. 4. It was also found that the ratios Working Capital Ratio, Acid Test Ratio, Current Assets to Total Assets Ratio, Inventory Turnover Ratio, Debtors Turnover Ratio and Cash Turnover Ratio contributed 70 percent of the variations in the profitability of the company. 5. Net sales of the company have only 31.6 percent impact on the change of working capital.

Methodology including collecting primary data from personnel from National Fertilizer limited. This was done through one to one interview and observation. Secondary data was also collected from the company library and annual reports for the last 20 years. Once the data was collected tests like correlation and regression test using excel were conducted and the data analyzed.

Table of Content

Page ACKNOWLEDGEMENT ABSTRACT TABLE OF CONTENTS LIST OF FIGURES LIST OF TABLES LIST OF ABBREVIATIONS 2 3 5 7 8 9

I. 1.1. 1.2. 1.3. 1.4. 1.5. 1.6. 1.7. 1.8. 1.9. 1.10.

PROFILE OF NATIONAL FETRILIZERS LIMITED INTRODUCTION TO NATIONAL FERTILIZERS LIMITED CORPORATE MISSION MARKETING AND SERVICES HUMAN RESOURCE INFORMATION TECHNOLOGY FINANCE SWOT ANALYSIS AWARDS AND RECOGNITIONS CORPORATE SOCIAL RESPONSIBILITIES MAJOR PRODUCTS AND SERVICES OFFERED BY NFL

11 11 13 13 14 14 15 15 16 16 17

II. 2.1. 2.2. 2.3. 2.4.

INTRODUCTION TO THE STUDY BACKGROUND OF THE STUDY PROBLEM STATEMENT NEED AND IMPORTANCE OF THE STUDY HYPOTHESIS

18 18 19 19 19

III.

RESEARCH DESIGN

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3.1. 3.1.1. 3.1.2.

METHEDOLOGY COLLECTION OF DATA TOOLS EMPLOYED

19 20 20

IV.

A THEORETICAL PERSPECTIVE OF WORKING CAPITAL MANAGEMENT 20 20 24 24 26 28

4.1. 4.2. 4.3. 4.4. 4.5.

INTRODUCTION TO WORKING CAPITAL MANAGEMENT NEED OF WORKING CAPITAL CONCEPT OF WORKING CAPITAL CLASSIFICATION OF WORKING CAPITAL DETERMINANTS OF WORKING CAPITAL

V. 5.1. 5.1.1. 5.1.2. 5.1.3. 5.1.4. 5.1.5. 5.2. 5.3. 5.4. 5.4.1. 5.4.2. 5.4.3. 5.4.4. 5.4.5.

PERFORMANCE ANALYSIS FINANCIAL PERFORMANCE REVIEW TURNOVER CURRENT RATIO QUICK/ACID TEST RATIO DEBT EQITY RATIO RETURN ON EQUITY ASSETS AND LIABILITIES CAPITAL EXPENDITURE WORKING CAPITAL LEVEL ANALYSIS WORKING CAPITAL LEVEL WORKING CAPITAL TREND ANALYSIS CURRENT ASSET CURRENT LIABILITIES CHANGES IN WORKING CAPITAL

31 31 31 31 32 33 34 35 36 36 36 37 39 40 41
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5.4.6. 5.4.7. 5.4.8. 5.5. 5.6. 5.7. 5.8.

OPERATING CYCLE WORKING CAPITAL AND PROFITABILITY WORKING CAPITAL AS A FUNCTION OF SALES RECEIVABLES MANAGEMENT INVENTORY MANAGEMENT CASH MANAGEMENT WORKING CAPITAL FINANCE AND ESTIMATION

42 45 48 49 51 54 59

VI. 6.1. 6.2. 6.3.

SUMMARY FINDINGS RECOMMENDATIONS REFERENCES

62 62 63 64

List of Figures

Figure No.

Description

Page 31 32 33 34 34 38 39 40 50 53 57

5.1 Performance Review Turnover 5.2 Liquidity Ratio Current Ratio 5.3 Liquidity Ratio Quick/Acid Test Ratio 5.4 Leverage Ratio Debt Equity Ratio 5.5 Performance Review Return on Equity 5.6 Working Capital Index 5.7 Current Asset Index 5.8 Current Liabilities Index 5.9 Receivable Index 5.10 Inventory Index 5.11 Cash Index

List of Tables

Table No. Description 5.1 Capital Expenditure of NFL 5.2 Size of Working Capital 5.3 Working Capital Variance Analysis 5.4 Variance Analysis of Current Assets 5.5 Variance Analysis of Current Liabilities 5.6 Changes in Working Capital 5.7 Operating Cycle 5.8 Correlation Analysis between Ratios relating to WC management and ROE 5.9 Correlation Matrix of Ratios relating to WC management and ROE 5.10 Multiple Regression Analysis of Ratios relating to WC management and ROE 5.11 Multiple Regression Analysis of Working Capital as a function of Net Sales Page 36 37 38 39 40 42 45 46 47 48 48

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5.12 Size of Receivables 5.13 Size of Subsidy 5.14 Average Collection Period 5.15 Size of Inventory 5.16 Inventory Holding Period 5.17 Size of Cash 5.18 Cash Cycle 5.19 Cash Credit

49 50 51 52 53 57 59 61

Abbreviations
ADSL APO ARO Asymmetric Digital Subscriber Line Accounts Payable Outstanding Accounts Receivable Outstanding
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ATR B2B CCC CII CMO CPP CTR CTSR CTTR D/E DIH DoF DSLAM DTR ERP FGCP FMS FO HRD IOD ISO IT ITR JVC

Acid Test Ratio Business to Business Cash Conversion Cycle Confederation of Indian Industry Chief Marketing Officer Creditors Payment Period Cash Turnover Ratio Current Assets to Sales Ratio Current Assets to Total Assets Ratio Debt to Equity Days of Inventory Holding Department of Fertilizers Digital Subscriber Line Access Multiplexer Debtors Turnover Ratio Enterprise Resource Planning Finished Goods Conversion Period Fertilizers Monitoring System Fuel Oil Human Resource Development Inventory in Days International Organization for Standardization Information Technology Inventory Turnover Ratio Joint Venture Company

KRIBHCO Krishak Bharati Cooperative Limited LAN LSHS MoU MPLS NFL Local Area Network Low Sulphur Heavy Stock Memorandum of Understanding Multiprotocol Label Switching National Fertilizers Limited

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NG OSHAS PBT PSU RCF RCP R-LNG RMCP ROE UVL WC WCC WCDL WCM WCR WIPCP WTR

Natural Gas Occupational Health and Safety Advisory Services Profit Before Tax Public Sector Undertaking Rashtriya Chemicals and Fertilizers Ltd. Receivables Conversion Period Re-liquefied natural Gas Raw Material Conversion Period Return on Equity Uravarak Videsh Limited Working Capital Working Capital Cycle Working Capital Demand Loan Working Capital Management Working Capital Ratio WorkIn-Process Conversion Period Working Capital Turnover Ratio

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I.

PROFILE OF NATIONAL FETRILIZERS LIMITED

1.1.INTRODUCTION TO NATIONAL FERTILIZERS LIMITED National Fertilizers Limited is the second largest producer of Nitrogenous Fertilizers in the Country with 15.8% share in domestic production of Urea achieved in the country during 2009-10. NFL has been upgraded as a schedule A company because of its constant good performance.

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It was incorporated on 23rd August 1974 with an authorized capital of Rs. 500 Crores and a capacity of 10.36 lakhs MT Nitrogen at its two manufacturing units at Bathinda and Panipat. Subsequently, on the reorganization of Fertilizer group of Companies in 1978, the Nangal Unit of Fertilizer Corporation of India came under the NFL fold. The Company expanded its installed capacity in 1988 by installing and commissioning of its Vijaipur gas based Plant in Madhya Pradesh.

The Vijaipur Plant was a landmark achievement in project management in India. The plant was completed well within time and approved project cost. In recognition of this achievement, the project was awarded the First Prize on Excellence in Project Management by Govt. of India. Subsequently the Vijaipur plant doubled its capacity to 14.52 lakh MTs by commissioning Vijaipur Expansion Unit i.e. Vijaipur-II in 1997. The annual capacity was subsequently re-rated w.e.f. 1.4.2000 from 7.26 lakh MT of urea to 8.64 lakh MT for Vijaipur-I & Vijaipur-II Plants each.

Three of the Units are strategically located in the high consumption areas of Punjab and Haryana. The Company has an installed capacity of 32.31 lakh MT of Urea. The company produced 33.30 lakh tonnes of Urea and recorded an annual sales turnover of Rs.5091 crores during 2009-10.
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NFL, a profitable public sector undertaking operates under the administrative control of Department of Fertilizers in the Ministry of Chemicals & Fertilizers. The Company is consistently making profits and registered a profit (PBT) of Rs.260 crores for the year 200910.The Companys strength lies in its sizeable presence, skilled manpower, Marketing and strong distribution network nationwide.

Aiming towards further growth, NFL is already in the process of revamping its three fuel oil based plants for change over its feedstock from FO/LSHS to NG/R-LNG and Capacity Augmentation of Urea at Vijaipur Unit. Towards reduction of Green House Gases, Company has already initiated action for various CDM (Clean development Mechanism) Projects so as to earn revenue in terms of carbon credits.

NFL in collaboration with M/s KRIBHCO and RCF has formed a joint venture company (JVC) named as Uravarak Videsh Limited (UVL) to explore investment opportunities abroad and within the country in Nitrogenous, Phosphatic and Potassic sectors and to render consultancy services for setting up Projects in India and abroad. A brown field gas based Urea plant at Barauni in Bihar has been entrusted to the above Joint venture Company. Kisan Urea NFLs popular brand is sold over a large marketing territory spanning the length and breadth of the country. The Company also manufactures and markets Bio-fertilizers and a wide range of industrial products which include Methanol, Sodium Nitrate, Sodium Nitrite, Nitric Acid, Sulphur, Liquid Oxygen, Liquid CO2, Liquid Nitrogen etc. The Company has also developed Neem coated Urea which on demonstration has shown improved results in terms of increase in yield by 4-5% and environment friendly. Accordingly Company has been manufacturing and selling Neem Coated Urea from its manufacturing plants since 2002-03. The Company is further focusing its thrust to widen the marketing operations of Neem coated Urea. The company has also taken initiative to make available other agro inputs under single window like quality seeds, Insecticides and Biopesticides by collaboration with other reputed organizations. R&D trials are under way for

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testing the efficacy of Bio-pesticides, elemental Sulphur, in collaboration with Agriculture Institutes.

NFL is known in the industry for its work culture, value added human resources, Quality Management, Safety, Environment, Concern for Ecology and its

commitment to social upliftment and to ensure their compliance, All NFL plants are certified and being maintained under ISO-9001 (2000), ISO-14001 and OSHAS-18001 by conforming to International Quality, Environmental and Occupational Safety and Hazards standards. With the certification of Corporate Office/Marketing operations under ISO-9001: 2000, NFL has become the first Fertilizer Company in the country to have its total business covered under ISO-9001 Certification.

Urea is an essential commodity under the Essential Commodities Act, 1955. The Department of Fertilizers (DoF) plans and monitors production, import and distribution of fertilizers and manage the subsidy for indigenous and imported fertilizers in the country. In this regard, DoF has set up an on line web based Fertilizers Monitoring System (FMS). Presently Fertilizer companies are allowed to market 50% of their total Urea produce outside EC allocation.

The Department of Public Enterprises, Government of India in order to improve accountability and giving higher autonomy to Public Sector Undertakings (PSUs), introduced the concept of MoU from early nineties NFL enters into a Memorandum of Understanding (MoU) with the Government for each year under which the Government undertakes to assist NFL with regard to availability of inputs, obtaining ECA allocations commensurate with the availability of fertilizers from NFL plants etc. NFL on its part undertakes to adhere to its production and movement plans, achieve its ECA allocation and provide regular feedback to the Administrative department. NFL signed first MoU with Department of Fertilizers (DoF) for the year 1991-92. The company has been awarded Excellent rating for the fiscal year 2008-09, which is 9th excellent rating in a row.

1.2.CORPORATE MISSION
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NFLs mission is to be the market leader in fertilizers and a significant player in all its other business, reputed for customer satisfaction, reasonable reward to shareholders, ethics, professionalism and concern for ecology and the community.

1.3. MARKETING AND SERVICES The complete farmer satisfaction through best services is the drawing force of NFLs marketing, strategy. The Company has expanded its program from improving the crop productivity at farm level to the overall development of the farming community. To provide the farmers high quality products in the right time, NFL has an extensive and integrated marketing network.

Marketing department is also responsible in the distribution of the fertilizer across India. The fertilizers produced at the plants are first sent to the three zonal marketing offices Bhopal, Chandigarh and Lucknow. From the zonal offices, the required amounts are transferred to the area offices across India. At these area offices it is stored at warehouses and then distributed to the wholesale dealers, who sell it ahead to the retailers and then the farmers. The marketing department gives a credit sale up to 30 days, after which interest is lewd on the amount. The credit is given to wholesalers based on dealer deposit, bank guarantee or advances. Discount is given to customers who pay back within 30 days.

The Company provides a comprehensive capsule of various fertilizer promotion activities, which includes agronomical programs, use of extension media, publicity and farmer development programs. Soil testing services are provided free of cost to the farmers to advocate the balanced use of fertilizers at economic levels. One mobile soil-testing unit caters to the need of the remotest of remote farmers in far areas and provides technical guidance to the farmer at field level. Other farm services include fertilizer demonstration on cultivators fields, field days, fertilizer/farmers mela, pilot project, adoption of villages etc. NFL also conducts various training programs to educate the farmers on the balanced use of fertilizer and its timely application besides providing guidance on pesticides and fungicides.
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1.4.HUMAN RESOURCE

The Corner stone of NFL's meritorious track record is its human resource. At NFL, they firmly believe that employees are the most valued resources. NFL has always been a forerunner in the fertilizer sector and this has been made possible through the company's trust on human resources development.

The Company's concern for its employees is reflected through its efforts in the area of health, safety and welfare of its employees. NFL not only meets the statutory obligations, but has undertaken numerous voluntary measures beyond the statutory requirements. The Company has well equipped hospitals, canteens recreation clubs, housing facilities, schools and safe working environment. The onus of NFL's high production levels, lay on harmonious and cordial industrial relations at all its manufacturing Units. The Company has not lost even a single man day on this account.

To cater to the needs of training and development, NFL has a well defined and well designed training plan. Major activities undertaken by HRD are the recruitment and training of Trainees at various levels viz. officers, supervisors and workers, organizing of developmental and functional programs based on training needs, as judged in the area of updating of technical, supervisory and managerial skills along with specialized requirements from time to time. Imparting of training to people from other organizations within India and abroad also forms as a part of training. HRD also works to formulate policies regarding manpower deployment on hire to other organizations within India and abroad. The services which have been developed in the area of Training and Development within the organization are readily available to other organizations within the laid policies and procedures of the Company.

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1.5.INFORMATION TECHNOLOGY

The company is using information technology in all of its business functions and now looking at integration of these functions through the implementation of Enterprise Resource Planning (ERP). On the IT Infrastructure front, the company has replaced its Leased Line based wide area network by setting up MPLS-Virtual Private Network, which is providing a secured and scalable connectivity amongst corporate office, units and marketing offices. The marketing mobile staff has been provided with high-speed data cards. DSLAMs/ADSL Routers have been provided at the units for LAN connectivity to remote locations through internal exchanges.

1.6.FINANCE

Finance department in NFL has different sections. One of the three main sections is the cash. This is where daily cash flow is managed. All payment are received and disbursed. All decisions regarding managing cash in the company is done in this section. The major part of their work is to distribute funds to the four units daily. They also take care of the payments to IOC, GAIL, Railways etc. They also manage the flow of cash. They have to make sure that company has enough cash to manage their daily and upcoming financial requirements. The next section is the budget section. As the name suggests they make the budgeting plans for the finance department. They also take care of the subsidy. They have to make sure that the
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subsidy bill is properly prepared and sent to FICC. The third most important section is the central finance; this is the accounting section of the company which takes care of the documentation and keeps tracks of the transactions that happen in the company. They are also in charge of creating balance sheet and profit and loss statements and the release of annual report yearly.

1.7.SWOT ANALYSIS

STRENGTH The companys strength lies in its brand loyal customers, its harmonious commitments on human resources, its efficient operations, internal relations, goodwill it has generated over the years through good work culture and fulfilling its social commitments. The strengths that drive its achievements are: Excellent track record and high profits An early starter in Fertilizer industry with 36 years of experience Highly motivated and dedicated workers Plants are located amidst high fertilizer consumption areas in the state of Punjab, Haryana and Madhya Pradesh. A well developed and efficient marketing/distribution network

WEAKNESS Control of major decision making is held by government officials Company doesnt take necessary measures to advertise its products Lot of policies, which restricts the decision making facility of managers No planned structure to achieve the mission of market leader in the company

OPPORTUNITIES Setting up of joint ventures/mergers in India and abroad Good demand for neem-coated Urea Scope for the growth of Bio-fertilizers Leveraging the location advantage of its production plants
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Changeover of feedstock from FO/LSHS to NG/RLNG will reduce the cost of production and help in being more competitive in the market. Increase in the demand for Industrial products.

THREATS Price rise of feed stocks FO/LSHS, NG/RLNG and Coal. Slow growth in UREA consumption Government policies Reduction in average under food production because of depletion in water levels. Scantly rains because of monsoon failure affects urea demand.

1.8.AWARDS AND RECOGNITIONS

Company excelled in performance in various areas, which got recognition from various quarters during the year.NFL plants have won several prestigious awards in the field of safety, productivity, energy, innovation, conservation and environment. NFL received the Excellent MoU rating for the ninth time for the year 2008-09. Vijaipur unit received Green Tech Safety Award 2009 in fertilizer sector from Green Tech Foundation, New Delhi, for best safety practices. It also received second award for bio-fertilizers in manufacturing sector for the year 2006-07 from National Productivity Council, New Delhi. Vijaipur and Panipat unit also received National Safety Awards. The Vijaipur unit of NFL also received the National Productivity Award for Bio-Fertilizers for the year 2002-03. It also bagged the Silver Award for outstanding achievement in Environment Management by M/s Green tech Foundation, Hyderabad in the year 2004-05. In addition Vijaipur unit was also able to get National Energy Conservation Award from Ministry of Power, Prashansha Patra from National Safety Council of India and National Energy Management Award from CII in the year 2005. The Panipat unit was awarded with the Golden Peacock Innovation Award from IOD, N. Delhi in the year 2005. The Bathinda unit was also awarded the Suraksha Puruskar for adopting Occupational Safety and Health Management Systems from NSC in the year 2004.
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1.9.CORPORATE SOCIAL RESPONSIBILITIES

NFL is committed towards improving the crop productivity and living standard of socioeconomically weaker sections of the society. Keeping with this strong commitment to rural development, NFL continue to facilitate the farming community in improving the crop productivity by educating farmers about the efficient use of fertilizers. In furtherance to this cause, during the year 2009-10, 424 field demonstrations and 161 R&D trials were undertaken on different crops in different areas. Around 60,000 soil samples were collected and tested for nutrient deficiency and analysis report provided to the farmers. Mass awareness campaign was undertaken through intensive farmers training to apply inputs including micronutrients as per soil test recommendations. Krishi melas, exhibitions, crop seminars, farmers and dealers training programmes and study tours were organized to disseminate information regarding improving farm technology and establish direct comunnication with the farmers and also to educate farmers of the balance useof fertilizers and its timely application besides providing guidance on pesticides and fungicides. A large number of crop literature in the form of folders, leaflets, pamphlets in local languages were distributed during these programmes. Krishi diary, an annual publication for farmers and kisan Sandesh, a season-wise crop advisory newsletter was adressed to the farmers. A number of health camps for women and children, animal health camps, vocational training programmes were organized.Water tank, water coolers, solar lights, tricycles, school furniture, books etc. were also distributed.

Vijaipur, Panipat, Bathinda and Nangal Units carried out various activities for the benefit of socially and economically weaker sections of the society in their peripheral areas. Health awareness programmes, medical camps were also organized. Finaincial aid, blankets, sewing machines etc. were provided to the poor and needy persons of the nearby villages. Scholarship to meritorious students belonging to SC/ST categories, stationery items, sweaters, furnitur items etc. were also distributed to school children. Community workin the

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surrounding villages such as construction of boundary walls, flooring work and other civil works at nearby schools were also carried out to provide better environment for the students.

1.10.MAJOR PRODUCTS AND SERVICES OFFERED BY NFL

Urea o Kisan Urea o Neem Coated Urea

Bio-Fertilizer o Nitrogen Bio-Fertilizer o Azetobactor o Rhizobium o Phosphorous Bio-Fertilizer

Industrial Products o Methanol o Nitric Acid Dilute o Ammonium Nitrate o Sulphur o Industrial Grade Urea o Liquid Oxygen o Liquid Nitrogen o Carbon Slurry o Carbon dioxide Gas o Anhydrous Ammonia o Sodium Nitrate o Liquid Argon o Liquid CO2 o Off Grade Methanol

Specialized Service o Commissioning Activities of Plant/Equipments o Heavy Equipment Erection supervision


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o Complete operation of Chemical plants on a continuous basis o Overall maintenance of plants o Special maintenance & repair services for rotatory equipment, like pumps, compressors, turbines etc. o Energy Audits leading to energy savings o Safety Audit Services o Design and monitoring of Environment Protection Systems o NDT, Corrosion and RLA services o Laboratory Services o Training of technical manpower in Operation Maintenance and Safety Management o Consultancy in Project Management

II.

INTRODUCTION TO THE STUDY

2.1.BACKGROUND OF THE STUDY

The Major Objective of this study is to understand the working capital management of National Fertilizers Limited and to suggest necessary measures to overcome the shortfalls if any in the industry The project Working Capital Management of National Fertilizers Limited describes about how the company manages its working capital and the various steps that are required in the management of working capital. Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's ability to fund operations, reinvest and meet capital requirements and payments. Understanding a company's cash flow health is essential in making investment decisions. A good way to judge a company's cash flow prospects is to look at its Working Capital Management (WCM).

Working capital refers to the cash of a business requires for day-to-day operations or, more specifically, for financing the conversion of raw materials into finished goods, which the
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company sells for payments. Other important items of working capital are levels of inventory, accounts receivables and accounts payables. Analysts look at these items for signs of a company's efficiency and financial strength. Since working capital is an important yardstick to measure the companys operational and financial efficiency the company should have a right amount of cash and lines of credit for its business needs at all times.

There are numerous instances in the history of business world where inadequacy of working capital i.e. when a firm finds it difficult to meet day to day affairs, has led to business failures. Operating expenses may have to be postponed, operating plans will go out of gear and enterprise objectives on investment slumps the suppliers and creditors of the firm may have to wait longer to raise their dues and will hesitate to extend further credit to the firm.

Thus efficient management of working capital is an important prerequisite for successful working of the business. It reduces the chances of business failures, and generates a feeling of security and confidence in the minds of stakeholders. This assures steadiness in the organization.

2.2.PROBLEM STATEMENT

To understand the working capital management in National Fertilizers Ltd. To analyze the liquidity position of NFL. To study the different factors that affects the working capital of the company. To assess the impact of working capital on profitability To examine the combine effect of the ratios relating to working capital management and profitability with the assistance of multiple correlation coefficient and multiple correlation coefficient and multiple regression equation and to test the significance of the regression coefficients.

To determine the working capital leverage for examining the sensitivity of ROE to changes in the level of gross working capital of the company

2.3.NEED AND IMPORTANCE OF THE STUDY


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This project is helpful in knowing the companys position of funds maintenance and setting the standards for working capital inventory levels, current ratio level, quick ratio, current asset turnover level and size of current liability etc.

This project is also useful as it combines the present year data with the previous year data and thereby it shows the trend analysis, i.e. increasing or decreasing funds. The project is done as a whole and will give an overall view of the organization and it is usefulness in further expansion decision to be taken by management.

2.4. HYPOTHESIS

H1: There is a significant impact of working capital on the profitability of the company H2: There is a significant impact that is created by the ratios (Working Capital Ratio, Acid Test Ratio, Current Assets to Total Assets Ratio, Current assets to Sales Ratio, Working Capital Turnover Ratio, Inventory Turnover Ratio, Debtors Turnover Ratio and Cash Turnover Ratio) relating to working capital management and profitability on the company. H3: There is a significant sensitivity of ROE to changes in the level of gross working capital of the company.

III.

RESEARCH DESIGN

3.1.METHEDOLOGY

Methodology may be a description of process, or may be expanded to include a philosophically coherent collection of theories, concepts or ideas as they relate to a particular discipline or field of inquiry. This project requires a detailed understanding of the concept Working Capital Management. Therefore, firstly we need to have a clear idea of, what is working capital, how it is managed in National Fertilizers Limited, what are the different ways in which the financing of working capital is done in the organization etc. In order to understand further data was collected from departments Finance and Accounting and Marketing department at corporate office.
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3.1.1. COLLECTION OF DATA There are two ways of collecting data Primary data and secondary data.

Primary Data The first handed information collected through various methods is known as primary data. The primary data was gathered through personal interaction with various functional and technical personnel of NFL. Some information was also collected by observation.

Secondary Data Secondary data is data collected by someone other than the user. Common sources of secondary data for social science include censuses, surveys, organizational records and data collected through qualitative methodologies or qualitative research. Secondary data was collected from various reports, annual reports, documents charts, internet etc.

The analysis of the information gathered has been made on the basis of the clarifications sought during the personal discussions with the concerned people and perception during the personal visits to the important areas of services. In marking observations identifying problems and suggesting certain remedies such emphasis was given on the basis of opinions gathered during the personal discussions and with the personal experience gained during the academic study of M.B.A course.

3.1.2. TOOLS EMPLOYED

Tools employed in the study are Microsoft Excel and Microsoft Word.

IV.

A THEORETICAL PERSPECTIVE OF WORKING CAPITAL MANAGEMENT

4.1.INTRODUCTION TO WORKING CAPITAL MANAGEMENT

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Working capital occupies a peculiar position in the capital structure of a company. The decision as to the adequacy of working capital is a complicated and yet a very important decision.

Working capital is the life-line of all types of enterprises, manufacturing and trading both. It is constantly required to buy raw materials, for payment of wages and other day-to-day expenses. Without adequate working capital, manufacturing operations will be crippled. For trading enterprises, the capacity to stock a variety of goods for sale depends upon its working capital. It is a base on which all the activities of business enterprise depend.

Many companies still under estimate the importance of working capital management. They consider it as a lever for freeing up cash from inventory, accounts receivable and accounts payable. By effectively managing these components, companies can sharply reduce their dependence on outside funding and can use the released cash for further investments or acquisitions. This will not only lead to more financial flexibility, but also create value and have a strong impact on a companys enterprise value by reducing capital employed and thus increasing asset productivity. High working capital ratios often mean that too much money is tied up in receivables and inventories. Typically, the knee-jerk reaction to this problem is to apply the big squeeze by aggressively collecting receivables, ruthlessly delaying payments to suppliers and cutting inventories across the board. But that only attacks the symptoms of working capital issues, not the root causes. A more effective approach is to fundamentally rethink and streamline key processes across the value chain. This will not only free up cash but lead to significant cost reductions at the same time.

Only those enterprises which have adequate working capital can survive in times of depression. The investment in raw materials becomes long- term investments during depression and cash flow declines due to fall in sale. In such circumstances only enterprises with adequate working capital can survive.

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Excessive working capital is equally unprofitable. The extra working capital is not utilized in business operations and earns no profit for the firm. It results in unnecessary accumulation of inventories, leading to inventory mishandling, waste, theft etc. The abundance of working capital would lead to waste and inefficiency.

Shortage of working capital funds renders the firm unable to avail attractive credit opportunities etc. The firm loses its reputation when it is not in a position to honor its short term obligations. As a result, the firm faces tight credit terms. It stagnates growth.

Definitions According to Guttmann & Dougall


Working capital is defined as current assets minus current liabilities. A positive position

means that a company is able to support its day-to-day operations. i.e. to serve both maturing short-term debt and upcoming operational expenses.

According to Park & Gladson The excess of current assets of a business (i.e. cash, accounts receivables, inventories) over current items owned to employees and others (such as salaries & wages payable, accounts payable, taxes owned to government)

Working capital like many other accounting terms and financial terms has been used by different people in different senses.

One school of thought believes that, as all capital resources are available to a business organization - from shareholders, bondholders, and creditors (secured and unsecured) works up in the business activities to generate revenues and facilitate future expansion and growth; they are to be considered as working capital.

Another school of thought links working capital with current assets and current liabilities. According to them, the excess of current assets over current liabilities is to be rightly considered as the working capital of a business organization.
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Working capital is descriptive of that capital which is not fixed. But, the more common use of working capital is to consider it as the difference between the current assets and the current liabilities. Current assets and current liabilities are assets and liabilities which arise in the course of business. The WC demonstrates the amount of liquid assets that are available to sustain and build the business by measuring companys efficiency and short-term financial health. As such, it carries great value to those who might be interested in investing in business or even purchasing it. Working capital, also known as net working capital, is a measurement of a businesss current assets, after subtracting its short-term liabilities. Sometimes referred to as operating capital, it is a valuation of the assets that a business or organization has available to manage and build the business. Generally speaking, companies with higher amounts of working capital are better positioned for success because they have the liquid assets that are essential to expand their business operations when required.

Characteristics of Working Capital Working capital is the life blood and nerve centre of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital.

The features of working capital distinguishing it from the fixed capital are as follows: Short term Needs: Working capital is used to acquire current assets which get converted into cash in a short period. In this respect it differs from fixed capital which represents funds locked in long term assets. The duration of the working capital depends on the length of production process, the time that elapses in the sale and the waiting period of the cash receipt.

Circular Movement:

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Working capital is constantly converted into cash which again turns into working capital. This process of conversion goes on continuously. The cash is used to purchase current assets and when the goods are produced and sold out; those current assets are transformed into cash. Thus it moves in a circular away. That is why working capital is also described as circulating capital.

An Element of Permanency: Though working capital is a short term capital, it is required always and forever. As stated before, working capital is necessary to continue the productive activity of the enterprise. Hence so long as production continues, the enterprise will constantly remain in need of working capital. The working capital that is required permanently is called permanent or regular working capital.

An Element of Fluctuation: Though the requirement of working capital is felt permanently, its requirement fluctuates more widely than that of fixed capital. The requirement of working capital varies directly with the level of production. It varies with the variation of the purchase and sale policy; price level and the level of demand also. The portion of working capital that changes with production, sale, price etc. is called variable working capital.

Liquidity: Working capital is more liquid than fixed capital. If need arises, working capital can be converted into cash within a short period and without much loss. A company in need of cash can get it through the conversion of its working capital by insisting on quick recovery of its bills receivable and by expediting sales of its product. It is due to this trait of working capital that the companies with a larger amount of working capital feel more secure.

Less Risky: Funds invested in fixed assets get locked up for a long period of time and cannot be recovered easily. There is also a danger of fixed assets like machinery getting obsolete
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due to technological innovations. Hence investment in fixed capital is comparatively more risky. As against this, investment in current assets is less risky as it is a short term investment. Working capital involves more of physical risk only, and that too is limited. Moreover, working capital gets converted into cash again and again; therefore, it is free from the risk arising out of technological changes.

Special Accounting System not needed: Since fixed capital is invested in long term assets, it becomes necessary to adopt various systems of estimating depreciation. On the other hand working capital is invested in short term assets which last for maximum one year only. Hence it is not necessary to adopt special accounting system for them.

Among the most important items of working capital are levels of inventory, accounts receivable, and accounts payable. Working capital can be expressed as a positive or a negative number. When a company has more debts than current assets, it has negative working capital; when current assets outweigh debts, a company has positive working capital.

A company will try to manage cash by: Identifying the cash balance that allows it to meet day-to-day expenses but minimizes the cost of holding cash Finding the level of inventory that allows for continuous production but lessens the investment in raw materials and reduces reordering costs Identifying the appropriate source of financing, given the cash-conversion cycle.

It may be necessary to use a bank loan or overdraft. However, inventory is preferably financed by credit arranged with the supplier. If a company is not operating efficiently, this will show up as an increase in the working capital. This can be judged by comparing the amounts of working capital from one period to another. Slow collection and inventory turnover may signal an underlying problem in the companys operations.

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Advantages Proper management of working capital gives a firm the assurance that it is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short term debt and upcoming operational expenses. Disadvantages If a companys current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. A declining working-capital ratio over a longer time period could also be a red flag that merits further analysis. For example, it could be that the companys sales volumes are decreasing and, as a result, its accounts receivable are diminishing.

4.2.NEED OF WORKING CAPITAL

Working capital is among the many important things that contribute to the success of a business. Without it, a business may cease to function properly or at all. Not only does a lack of working capital render a company unable to build and grow, but it may also leave a company with too little cash to pay its short-term obligations. Simply put, a company with a very low amount of working capital may be at risk of running out of money. When a company has too little working capital, it can face financial difficulties and may even be forced toward bankruptcy. This is true of both very small companies and billion-dollar organizations. A company with this problem may pay creditors late or even skip payments. It may borrow money in an attempt to remain afloat. If late payments have affected the companys credit rating, it may have difficulty obtaining a loan at an affordable interest rate.

The need for working capital gross or current assets cannot be over emphasized. As already observed, the objective of financial decision making is to maximize the shareholders wealth. To achieve this, it is necessary to generate sufficient profits which will depend upon the magnitude of the sales among other things but sales cannot convert into cash. There is a need for working capital in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against goods sold. Therefore sufficient working capital is necessary to sustain sales activity. Technically this is refers to operating or cash cycle.
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4.3.CONCEPT OF WORKING CAPITAL

There are two concepts of working capital: Gross working capital Net working capital

Gross Working Capital The gross working capital is the capital invested in the total current assets of the enterprises. Current assets are those assets which can convert in to cash within a short period normally one accounting year. Constituents of Current Assets: Current assets are assets which are expected to be sold or otherwise used within one fiscal year. Typically, current assets include cash, cash equivalents, account receivable, inventory, prepaid accounts which will be used within a year, and short-term investments. Cash in hand and cash at bank Bills receivables/Sundry debtors Short term loans and advances Inventories of stock as: o Raw material o Work in process o Stores and spares o Finished goods Temporary investment of surplus funds Prepaid expenses Accrued incomes Marketable securities

Net Working Capital In a narrow sense, the term working capital refers to the net working capital. Net working capital is the excess of current assets over current liability.
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NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES

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, bills payable and outstanding expenses. Net working capital can be positive or negative.

Constituents of Current liabilities: Current liabilities are considered as liabilities of the business that are to be settled in cash within the fiscal year. Current liabilities include accounts payable for goods, services or supplies, short-term loans, long-term loans with maturity within one year, dividends and interest payable, or accrued liabilities such as accrued taxes.

Accrued or outstanding expenses Short term loans, advances and deposits Dividends payable Bank overdraft Provision for taxation, if it does not amount to appropriation of profit Bills payable Sundry creditors

The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital. Both the concepts have their own merits. The gross concept is sometimes preferred to the concept of working capital for the following reasons: It enables the enterprise to provide correct amount of working capital at correct time. Every management is more interested in total current assets with which it has to operate then the source from where it is made available. It take into consideration of the fact every increase in the funds of the enterprise would increase its working capital.
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This concept is also useful in determining the rate of return on investments in working capital.

The net working capital concept, however, is also important for following reasons: It is qualitative concept, which indicates the firms ability to meet to its operating expenses and short-term liabilities. It indicates the margin of protection available to the short term creditors. It is an indicator of the financial soundness of enterprises. It suggests the need of financing a part of working capital requirement out of the permanent sources of funds. Working capital, on the one hand, can be seen as a metric for evaluating a companys operating liquidity. A positive working capital position indicates that a company can meet its short-term obligations. On the other hand, a companys working capital position signals its operating efficiency. Comparably high working capital levels may indicate that too much money is tied up in the business.

The most important positions for effective working capital management are inventory, accounts receivable, and accounts payable. Depending on the industry and business, prepayments received from customers and prepayments paid to suppliers may also play an important role in the companys cash flow. Excess cash and no operational items may be excluded from the calculation for better comparison.

4.4.CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in two ways: On the basis of concept On the basis of time

On the basis of concept working capital can be classified as gross working capital and net working capital. On the basis of time, working capital may be classified as:
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Permanent or fixed working capital. Temporary or variable working capital

Permanent or Fixed Working Capital The operating cycle is a continuous feature in almost all the going concerns and therefore creates the need for working capital and their efficient management. However the magnitude of working capital required will not be constant, but will fluctuate. At any time, there is always a minimum level of current assets which is constantly and continuously required by a business unit to carry on its operations. This minimum amount of current assets, which is required on a continuous and uninterrupted basis, is after referred to as fixed or permanent working capital. This type of working capital should be financed (along with other fixed assets) out of long term funds of the unit. However in practice, a portion of these requirements also is met through short term borrowings from banks and suppliers credit.

Chart 5-1 Permanent Working Capital

The amount of current assets required to meet a firms long-term minimum needs are called permanent current assets. For e.g., In a manufacturing unit, basic raw materials required for production has to be available at all times and this has to be financed without any disturbance.
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Temporary or Variable Working Capital Any amount over and above the permanent level of working capital is variable, temporary or fluctuating working capital. This type of working capital is generally financed from short term sources of finance such as bank credit because this amount is not permanently required and is usually paid back during off season or after the contingency. As the name implies, the level of fluctuating working capital keeps on fluctuating depending on the needs of the unit unlike the permanent working capital which remains constant over a period of time.

The Temporary or Variable working capital is the amount of working capital which is required to meet the seasonal demands and some special exigencies. Variable working capital can further be classified as Seasonal Working Capital and Special Working Capital. The capital required to meet the seasonal need of the enterprise is called seasonal working capital. Special working capital is that part of working capital which is required to meet special exigencies such as launching of extensive marketing for conducting research, etc.

Temporary working capital differs from Permanent working capital in the sense that is required for short periods and cannot be permanently employed gainfully in the business.

4.5.DETERMINANTS OF WORKING CAPITAL

Working capital management is an indispensable functional area of management. However the total working capital requirements of the firm are influenced by the large number of factors. It may however be added that these factors affect differently to the different units and these keep varying from time to time. In general, the determinants of working capital which are common to all organizations can be summarized as under:

Nature of Business This is one of the main factors. Usually in trading businesses the working capital needs are higher as most of their investment is concentrated in stock or inventory. Manufacturing businesses also need a good amount of working capital to meet their production
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requirements. Whereas, those companies that sell services and not goods, on a cash basis require least working capital because there is no requirement on their part to maintain heavy inventories.

Size of Business In very small company the working capital requirement is quit high due to high overhead, higher buying and selling cost etc. as such medium size business positively has edge over the small companies. But if the business start growing after certain limit, the working capital requirements may adversely affect by the increasing size.

Credit Terms/Credit Policy Some time due to competition or custom, it may be necessary for the company to extend more and more credit to customers, as result which more and more amount is locked up in debtors or bills receivables which increase the working capital requirement. On the other hand, in the case of purchase, if the credit is offered by suppliers of goods and services, a part of working capital requirement may be financed by them, but it is necessary to purchase on cash basis, the working capital requirement will be higher. Credit terms greatly influence working capital needs. If terms are: buy on credit and sell by cash, working capital is lower buy on credit and sell on credit, working capital is medium buy on cash and sell on cash, working capital is medium buy on cash and sell on credit, working capital is higher.

Prevailing trade practices and changing economic condition do generally exert greater influence on the credit policy of concern. A liberal credit policy if adopted more trade debtors would result and when the same is tightened, size of debtors gets slim. Credit periods also influence the size and composition of working capital. When longer credit period is allowed to debtors as against the one extended to the firm by its creditors, more working capital is needed and vice versa. Collection policy is another influencing factor. A stringent collection policy might not only deter away some credit customers, but also force the existing customers to be prompt in settling dues resulting in lower level of working capital. The
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opposite holds well with a liberal collection policy. Collection procedure also influences the working capital needs. A decentralized collection of dues from customers and centralized payments to suppliers shall reduce the size of working capital. Centralized collections and centralized payments would lead to moderate level of working capital. But with centralized collections and decentralized payments, the working capital need would be the highest.

Seasonality

Seasonality of Production: Agriculture and food processing and preservation industries have a seasonal production. During seasons, when production activities are in their peak, working capital need is high. Seasonality in supply of raw materials: This also affects the size of working capital. Industries that use raw materials which are available during seasons only, have to buy and stock those raw materials. They cannot afford to buy these items in a phased way, since either supplies would get reduced or prices would be higher. Also, from the point of view of quality of raw materials, it pays to buy in bulk during the seasons. Hence the high level of working capital needed when season exists for raw materials.

Seasonality of demand for finished goods: In case of products like umbrella, rain-coats and other seasonal items, the demand is high during peak seasons. But the production of these items has to be continuous throughout the year to meet the high demand during peak seasons. Thus, working capital requirement would be higher.

Business Trade Cycle Trade cycle refers to the periodic turns in business opportunities from extremely peak levels, via a slackening to extremely tough levels and from there, via a recovery phase to peak levels, thus completing a business cycle. There are 4 phases of trade cycle. Boom Period more business, more production, more working capital. Depression period less business, less production, less working capital.
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Recession period slackening business, stock pile-up, more working capital. Recovery period recouping business, stock speedily converts to sales, less working capital.

Inflation Under inflationary conditions generally working capital increases, since with rising prices demand reduces resulting in stock pile-up and consequent increase in working capital.

Length of Production cycle The time lapse between feeding of raw material into the machine and obtaining the finished goods out from the machine is what is described as the length of manufacturing process. It is otherwise known as conversion time. Longer this time period, higher is the volume and value of work-in-progress and hence higher the requirement of working capital and vice versa.

System of Production process If capital intensive, high-technology automated system is adopted for production, more investment in fixed assets and less investment in current assets are involved. Also, the conversion time is likely to be lower, resulting in further drop in the level of working capital. On the other hand, if labor intensive technology is adopted, less investment in fixed assets and more investment in current assets, this would lead to higher requirement of working capital.

Growth and expansion plans Growth and expansion industries need more working capital than those that are static.

Profitability The profitability of the business may be vary in each and every individual case, which is in turn its depend on numerous factors, but high profitability will positively reduce the strain on working capital requirement of the company, because the profits to the extent that they earned in cash may be used to meet the working capital requirement of the company. Operating efficiency
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If the business is carried on more efficiently, it can operate in profits which may reduce the strain on working capital; it may ensure proper utilization of existing resources by eliminating the waste and improved coordination etc.

Apart from the above factors, dividend policy, depreciation policy, price level changes, operating efficiency and government regulations also influence the level and the size of working capital.

V.

PERFORMANCE ANALYSIS

5.1.FINANCIAL PERFORMANCE REVIEW

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5.1.1. TURNOVER Turnover for the company has been increasing steadily for the past ten years, with a growth of 81.23 percent since 2000-01. The marginal decrease/increase in sales turnover in the following years is on the account of decrease/increase in prices of petroleum products i.e. LSHS/FO at FO based units and substitution of Naphtha with RIL gas at Vijaipur resulting in decrease/increase in subsidy rate. This in turn results in decrease/increase in the amount of subsidy provided by the government, which in the end results in lower/higher turnover. Figure 5.1 Performance Review Turnover

LIQUIDITY RATIOS

5.1.2. CURRENT RATIO

Current ratio may be defined as a liquidity ratio that measures a company's ability to pay short term obligations. This ratio is also known as liquidity ratio, cash asset ratio and cash ratio. It is a measure of general liquidity and is most widely used to make the analysis for short term financial position or liquidity of a firm. It is calculated by dividing the total of the current assets by total of the current liabilities. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it
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will go bankrupt as there are many ways to access financing, but it is definitely not a good sign.

But as we see from the chart that the current ratio of NFL is well beyond 1, which shows that the company is stable and can easily counter any short term liabilities with ease. This was easily visible when the company decided to go for up-gradation of its plants and was able to handle its investments easily because of its high current ratio in the years 2009-10. Figure 5.2 Liquidity Ratio Current Ratio

5.1.3. QUICK/ACID TEST RATIO

An

indicator

of

company's

short-term

liquidity. The

quick

ratio measures a

company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio/ ATR, the better the position of the company. The quick ratio/ATR is more conservative than the current ratio, a more well-known liquidity measure, because it excludes inventory from current assets. Inventory is excluded because some companies have difficulty turning their inventory into cash. In the event that short-term obligations need to be paid off immediately, there are situations in which the current ratio would overestimate a company's

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short-term financial strength. Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at with extreme caution.

But when looking at the chart we can see that for NFL, the quick ratio/ATR is more than 1 with some exception in the early 2000s. This shows that the company is in a good position to handle its current liabilities and has passed the acid test. Also as said earlier, NFL with its upgradation plans, this excess liquidity will help it in the days to come. Figure 5.3 Liquidity Ratio Quick/Acid Test Ratio

LEVERAGE RATIO

5.1.4. DEBT EQITY RATIO

It is a measure of the company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase
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earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing

The debt equity ratio of NFL has been reducing continuously over the years. This is for the reason that NFL is trying to become a debt free company and has been striving for the same. But in the year 2010-11, this ratio is expected to go higher as many expansion and modernization projects have been carried out. Also since the D/E ratio is low, company is in a better position to get loans from the banks. Figure 5.4 Leverage Ratio Debt Equity Ratio

OTHER RATIOS

5.1.5. RETURN ON EQUITY

ROE indicates what return a company is generating on the owners' investment. Sometimes ROE is referred to as Stockholder's return on investment, it tells the rate that shareholders are earning on their shares. Companies that generate high returns relative to their shareholder's

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equity are companies that pay their shareholders off handsomely, creating substantial assets for each dollar invested.

From the chart we can see that the ROE of NFL has grown from a mere 5.57 percent in 2001 to 34.96 percent in 2010. This shows that the stockholders like government of India and some financial institutions are receiving a good value for their investments. Figure 5.5 Performance Review Return on Equity

5.2.ASSETS AND LIABILITIES

Current Assets Current assets are important to businesses because they are the assets that are used to fund day-to-day operations and pay ongoing expenses. A balance sheet account that represents the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business. Current assets include cash, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be readily converted to cash. Current assets of the company as per the balance sheet as at 31st March 2010 was recorded as Rs. 1959.67crores. As a result the current assets jumped up by 40.6 percent in comparison to the previous year. It was also seen that, this has been the trend for the last few years. Cash
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and Bank balance as we know plays an important part in the companys performance, has seen a tremendous jump from Rs. 107.6 crores in 2009 to Rs. 690.81 crores in 2010. This shows that company has a good amount of cash which the company was able to use in 201011, which reduced the amount of debt the company borrowed.

Fixed Assets A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year's time. Buildings, real estate, equipment and furniture are good examples of fixed assets.

Fixed assets for the years 2009-10 and 2008-09 have remained nearly the same. Only variation was found with respect to capital work in progress. There was an increase in capital work in progress from Rs. 17.49 crores (2008-09) to Rs.29.20 crores (2010-09). The increase in capital work in progress was due to the expenditure incurred on projects of energy saving and urea capacity enhancement in Vijaipur and changeover of feedstock at Nangal, Bhatinda and Panipat units.

Current Liabilities These are bills that are due to creditors and suppliers within a short period of time. Normally, companies withdraw or cash current assets in order to pay their current liabilities. In other words they are company's debts or obligations that are due within one year. Current liabilities appear on the company's balance sheet and include short term debt, accounts payable, accrued liabilities and other debts.

Current liabilities of NFL in the year 2008-09 were accounted to be Rs. 665.51 crores. In the year 2009-10, it was accounted as Rs. 578.53. This decrease in current liabilities is mainly on account of decrease in outstanding liability towards sundry creditors for raw materials and reduction in actual valuation of employee benefit scheme.

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5.3.CAPITAL EXPENDITURE

Table below shows the major expenditures of NFL. NFL had a reduction in expenditure from Rs. 5052.3 crores to Rs. 4888.12. This was mainly because of the reduction in raw materials consumed, which are petroleum products. Since the price of petroleum products fell, resulted in a decrease in the total expenditure. But on the other hand the prices of store and spares increased. Also salary escalation and additional provision to pension scheme also increased. Similar to the raw materials, because of reduction in price of petroleum product, the cost of Power and Fuel reduced. Also freight and handling which forms a major part of the expense reduced. Table 5.1 Capital Expenditure of NFL (Rs. Crores) 200910 Raw Materials Consumed Packaging Materials Stores and Spares Employees Remuneration and Benefits Power and Fuel Freight and Handling Repairs and Maintenance Production Urea (Lakh MT) 349.52 330.34 200809

2611.72 2832.32 80.11 31.39 85.9 19.06

1066.85 1240.39 228.68 76.57 33.3 232.66 65.57 33.44

5.4.WORKING CAPITAL LEVEL ANALYSIS

5.4.1. WORKING CAPITAL LEVEL

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The guiding principle for working capital is called the hedging principle or principle of selfliquidating debt or matching principle (different from the matching principle used in measuring accounting profit).

It is an accepted belief in business that the term of a funding arrangement must match the term of the investment itself. This means that any funds used for short-term assets or purposes should be financed from short term sources. Likewise investments in long term assets should be funded from long term sources. Therefore a key criterion for acquiring additional finance is matching up the life of the assets acquired with the term of the loan or other method of funding. For example, the buying of an unusually large quantity of inventory should be financed by a loan, or credit, with a repayment period of less than one year. The level of any long-term assets funded by short term debt shows the firm's level of 'aggression in its financing policy. Although this type of action may increase profits (due to the lower cost of short term debt) it greatly increases the risk of cash shortages if short term financing can't be renewed. Table 5.2 Size of Working Capital (Rs. Crores) CURRENT ASSETS Cash and Bank Balance Sundry Debtors Inventory Interest on Investments Loans and Advances Total Current Assets CURRENT LIABILITIES Sundry Creditors Security Deposits Advances from Customers 11.49 9.66 11.69 10.36 10.21 19.14 2005 437.68 40.12 2006 407.73 39.03 2007 487.31 40.37 2008 579.9 42.5 2009 603.9 44.91 2010 499.72 51.3 2005 133.48 435.06 350.84 0 87.94 1007.32 2006 11.83 824.47 324.49 0 110.93 1271.72 2007 13.39 1205.72 348.2 0 125.72 1693.03 2008 161.37 776.72 381.03 8.13 115.72 1442.97 2009 107.6 930.48 348.68 6.99 130.22 1523.97 2010 690.81 920.55 347.12 1.19 126.08 2085.75

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Other Liabilities Provisions Total Current Liabilities Net Working Capital

14.31 98.05 601.65 405.67

5.12 91.2 552.74 718.98

11.28 110.73 661.38 1031.65

14.86 168.3 815.92 627.05

6.49 219.6 885.11 638.86

8.37 219.12 797.65 1288.1

5.4.2. WORKING CAPITAL TREND ANALYSIS

Trend analysis is an improvement over the year to year analysis. When a comparison of Financial Statements covering more than 3 years is undertaken, the year to year analysis becomes cumbersome. In trend analysis, the changes are calculated for several successive years instead of two or three years. Therefore the trend analysis is a company's financial position over a long period of time. Trend analysis is important as it may point to basic changes in the nature of business and also helps in drawing meaningful conclusions regarding the operating performance over several years and the financial position of the enterprise. It is based on the idea that what has happened in the past gives an idea of what will happen in the future.

In working capital analysis the direction at changes over a period of time is of crucial importance. Working capital is one of the important fields of management. It is therefore very essential for an analyst to make a study about the trend and direction of working capital over a period of time. Such analysis enables as to study the upward and downward trend in current assets and current liabilities and its effect on the working capital position.

One of the main goals of trend analysis is to forecast future values of the series. It allows a researcher to look at a pattern of change over a long period of time rather than at a single discrete point in time or over a short time so that better conclusions can be drawn.

Table 5.3 Working Capital Variance Analysis


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Year Total Current Assets (Rs. Crores) Total Current Liabilities (Rs. Crores) Net Working Capital (Rs. Crores) WC Variation (Base 2005) WC Yearly Growth

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

1007.32

1271.72

1693.03

1442.97

1523.97

2085.75

601.65

552.74

661.38

815.92

885.11

797.65

405.67 100 -

718.98 177.233 77.23%

1031.65 254.308 43.49%

627.05 154.571 -39.22%

638.86 157.483 1.88%

1288.1 317.524 101.62%

Index = 100 * (Index Year Amount / Base Year Amount) Chart 5.6 Working Capital Index

For the analysis year 2004-05 has been taken as the base with an index of 100 and the remaining index values are computed based on this base. It was observed that the in the year 2009-10 working capital increased by 101.62 percent compared to that in 2008-09. This is because of the reason that current assets increased by 36.86 percent but on the other hand current liabilities reduced by 9.88 percent. As we can see above that the normal trend of WC is of an upward one, except in the year 2007-08, when current assets fell and liabilities

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increased. This is because of the reason that the sundry debtors for that year reduced and the provision was increased.

Looking at the 2009-10 data, we can easily see that the company is well positioned in terms of working capital, as the bank balance has increased to Rs. 690.81 crores. This shows that the company has enough liquid cash to take care of any expenses that it occurs. This is also helpful taking in consideration that NFL is going for up-gradation of its plants.

5.4.3. CURRENT ASSET

A balance sheet item which equals the sum of cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses and other assets that could be converted to cash in less than one year. A company's creditors will often be interested in how much that company has in current assets, since these assets can be easily liquidated in case the company goes bankrupt. In addition, current assets are important to most companies as a source of funds for day-to-day operations. Table 5.4 Variance Analysis of Current Assets Year Total Current Assets (Rs. Crores) Variation (Base 2005) Yearly Growth 1007.32 100 1271.72 126.248 26.25% 1693.03 168.073 33.13% 1442.97 143.248 -14.77% 1523.97 151.29 5.61% 2085.75 207.059 36.86% 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Index = 100 * (Index Year Amount / Base Year Amount)

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Chart 5.7 Current Asset Index

For the analysis year 2004-05 has been taken as the base with an index of 100 and the remaining index values are computed based on this base. It can be observed that we see an upward trend in the current assets. In the last six years, from 2005 to 2010, the current assets have increased by 107.06 percent. In the year 2010, the rise was by 36.86 percent when compared to that in 2009. This was mainly because of the increase in cash and bank balance which also raised by an impressive 542.02 percent. The rest of the factors remained nearly the same. We also notice that sundry debtors contribute the most towards the current assets, which shows that NFL has a good credit policy and is also good at its collection management.

5.4.4. CURRENT LIABILITIES

Current liabilities are debts, accounts payable, interest due, trade credit, loans and other obligations that are due and payable within one year. Current liabilities are calculated and identified on a business balance sheet. Current liabilities as a total are information that is used as one measure of the financial condition of a company, especially in association with current assets to calculate the level of working capital.

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Table 5.5 Variance Analysis of Current Liabilities Year Total Current Liabilities (Rs. Crores) Variation (Base 2005) Yearly Growth 601.65 100 552.74 91.8707 -8.13% 661.38 109.928 19.65% 815.92 135.614 23.37% 885.11 147.114 8.48% 797.65 132.577 -9.88% 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Index = 100 * (Index Year Amount / Base Year Amount) Chart 5.8 Current Liabilities Index

For the analysis year 2004-05 has been taken as the base with an index of 100 and the remaining index values are computed based on this base. It can be observed that the current liabilities also show an upward trend, but compared to the year 2009, current liabilities has fallen by 9.88 percent in 2010. This is because of the reason that sundry creditors has reduced by 17.25 percent. This shows good sign for the company, as it is able to reduce the amount of credits it takes from its suppliers, which results in better goodwill for the company. It can also be seen that in the year 2010, NFL has collected more advances when compared to 2009.

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5.4.5. CHANGES IN WORKING CAPITAL The excess of current assets over current liabilities is referred to as the companys working capital. The difference between the working capital for two given reporting periods is called the change in working capital.

Changes in working capital is included in cash flow from operations because companies typically increase and decrease their current assets and current liabilities to fund their ongoing operations. When a company increases its current assets, its a cash outflow: The company had to shell out money to buy the extra assets. Likewise, when a company increases its current liabilities, its a cash inflow: The added liabilities, such as short term debt, provide money. A change in working capital simply shows the net effect on cash flows of this adding and subtracting from current assets and current liabilities. When a change in working capital is negative, the company is investing heavily in its current assets, or else drastically reducing its current liabilities. When a change in working capital is positive, the company is either selling off current assets or else raising its current liabilities. For many growing companies, changes in working capital is a little like capital spending. It is the money company is investing in things like inventory in order to grow. To get a true picture of the cash a company is generating before investment, one can add back changes in working capital to cash flow from operations. A negative value for changes in working capital could mean the company is investing heavily in growth, or that somethings going wrong. If a company is having trouble selling its goods, inventories will balloon, and changes in working capital will turn sharply negative.

There are so many reasons for the changes in working capital:

1. Changes in sales and operating expenses

There may be long run trend of change e.g. The price of raw material say coal, FO or NG may constantly raise resulting in the holding of large inventory
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Cyclical changes in economy dealing to ups and downs in business activity will influence the level of working capital both permanent and temporary Changes in seasonality in sales activities

2. Policy Changes The second major case of changes in the level of working capital is because of policy changes initiated by management and government. The term current assets policy may be refined as the relationship between current assets and sales volume

3. Technology Changes Change in working capital could be because of changes in technology. So to install these technologies in our business, more working capital is required.

Table 5.6 Changes in Working Capital (Rs. Crores) CURRENT ASSETS Cash and Bank Balance Sundry Debtors Inventory Interest on Investments Loans and Advances Total Current Assets CURRENT LIABILITIES Sundry Creditors Security Deposits Advances from Customers Other Liabilities 2009 107.6 930.48 348.68 6.99 130.22 1523.97 2009 603.9 44.91 10.21 6.49 2010 Percent Change 690.81 920.55 347.12 1.19 126.08 2085.75 2010 499.72 51.3 19.14 8.37 -17.25% 14.23% 87.46% 28.97% 6.39 8.93 1.88 104.18 542.02% -1.07% -0.45% -82.98% -3.18% 36.86% 561.78 Increase 583.21 9.93 1.56 5.8 4.14 Decrease

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Provisions Total Current Liabilities Net Working Capital

219.6 885.11 638.86

219.12 797.65 1288.1

-0.22% -9.88% 101.62% 649.24

0.48 87.46

From the above table we can observe the major changes that have happened between 2009 and 2010. We can easily see that major increase in the amount of cash and bank balance in the company. As a result the current assets increased by an amount of Rs. 561.78 crores. On the current liabilities side the percentage increase in the advances collected from customers is high, but when looked at the amount its very small. But an important this is to be noticed is that the sundry creditors has reduced by 17.25 percent and shows that the company has enough money to pay back its liabilities. It also brings goodwill to the company. To conclude we can see that the increase in current assets and decrease in sundry creditors, has resulted in working capital to increase by an impressive amount of Rs. 649.24 crores.

5.4.6. OPERATING CYCLE

Working capital is also known as revolving capital or a circular path of conversion. This revolution of cycle is called as the Operating Cycle. Available cash tends to be tied up in what is known as the Working Capital Cycle (WCC). Every business, regardless of what they do operates this cycle. To start any business cash is required; this cash is then used to purchase stock in order to generate a sale. When the stock is sold it is either by way of a cash sale or credit, creating a debtor.

When the debt is collected the WCC continues on. In a service industry the stock is client base or the service provided. The need of working capital arrived because of time gap between production of goods and their actual realization after sale. This time gap is called Operating Cycle or Working Capital Cycle. The operating cycle of a company consist of time period between procurement of inventory and the collection of cash from receivables. The operating cycle is the length of time between the companys outlay on raw materials, wages and other expanses and inflow of cash from sales of goods.

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Thus a revolution or cycle from cash to raw materials to work-in-progress, to finished goods, to debtors, and back to cash takes place. This revolution is called as operating cycle.

While waiting for cash to return, more stock has to be purchased to keep the business operating and to do so, many businesses use their overdraft facility which is costing them money. If there is no overdraft they use credit funds that could be better utilized elsewhere. The faster you can turn the WCC the faster the dollar returns and the less overdraft or credit funds you have to use. This is where efficiency in debt collection and stock turnover is the key.

Managing cash in any business is important. Many profitable businesses end up closing down simply because they could not get the cash to carry them in the short term. Beyond survival workshops emphasize the difference between cash flow and profits, constructs a cash flow budget for a business and analyses where does all the cash go. It will demonstrate the importance on the efficient operation of the working capital cycle, how to improve debtor collection and stock turnover to help increase cash holdings and reduce the overdraft limit.

Thus, the term operating cycle, refers to the length of time necessary to complete the following cycle of events: Conversion of cash into inventory Conversion of inventory into debtors Conversion of debtors into cash
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Stage 1: Cash to Inventory In this stage, cash first gets converted into raw materials, then work-in progress and then finished goods in a typical manufacturing concern. As regards non-manufacturing concerns, when the goods are purchased, cash gets converted into inventory. Stage 2: Inventory to Debtors The inventory thus produced or purchased, gets converted into debtors or receivables upon credit sales. Stage 3: Debtors to Cash The debtors or accounts receivables get converted back into cash when they make payment.

Length of Operating Cycle When raw materials remain in store pending issue for production for a less duration, when raw materials gets converted into WIP in a short duration, when finished goods remain in warehouse pending for sales for a short duration only, and when cash realizations out of sales are made quickly and finally when payment to creditors is made slowly, the operating cycle would be smaller and consequently the working capital will also be reasonable. Thus shorter duration of operating cycle indicates an efficient working capital management.

Operating cycle is an important concept in management of cash and management of cash working capital. The operating cycle reveals the time that elapses between outflow of cash and inflow of cash. Quicker the operating cycle less amount of investment in working capital is needed and it improves profitability. The duration of the operating cycle depends on nature of industries and efficiency in working capital management.

Calculation of Operating Cycle To calculate the operating cycle of NFL, last five year data is used.

Gross Operating Cycle Period = RMCP+WIPCP+FGCP+RCP-CPP

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RMCP - Raw Material Conversion Period WIPCP - WorkIn-Process Conversion Period FGCP - Finished Goods Conversion Period RCP - Receivables Conversion Period CPP - Creditors Payment Period

However, a firm may acquire some resources on credit and thus defer payments for certain period. In that case, Net Operating Cycle Period can be calculated as below: Net Operating Cycle Period = Gross Operating Cycle Period Payable Deferral period

Raw Material Conversion Period = Average Stock of Raw Material / Raw Material Consumption per day

Work in process Conversion Period = Average Stock of Work-in-Progress / Total Cost of Production per day

Finished Goods Conversion Period = Average Stock of Finished Goods / Total Cost of Goods sold per day

Receivables Conversion Period = Average Accounts Receivables / Net Credit Sales per day

Payable Deferral Period = Average trade Creditors / Average Credit Purchase per day

After computing the period of one operating cycle, the total number of operating cycles that can be computed during a year can be computed by dividing 365 days with number of operating days in a cycle. The total expenditure in the year when year when divided by the number of operating cycles in a year will give the average amount of the working capital requirement. Table 5.7 Operating Cycle (days)
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Year Inventory Period Account Receivables Period Account Payables Period Operating Cycle Cash Cycle

2005-06 34.33 64.02 42.97 98.35 55.37

2006-07 31.76 96.45 42.25 128.20 85.95

2007-08 32.14 88.49 47.03 120.63 73.60

2008-09 25.97 61.65 42.14 87.63 45.49

2009-10 24.94 67.23 39.56 92.17 52.61

The Table above shows that in the year 2010, NFL on an average took 52.61 days for converting its raw materials into cash. It also means that the company has to finance its inventory for 52.61 days. Similarly we can see that historical cash cycle has been around 2 months. The main reason for this because of the subsidy received. On an average NFL receives its subsidy after a period of three months, and payments of regular sales within one month.

5.4.7. WORKING CAPITAL AND PROFITABILITY

In this part of the analysis we try to understand the impact of working capital on profitability. In addition we also try to examine the combine effect of the ratios relating to working capital management and profitability with the assistance of multiple correlation coefficients and multiple correlation coefficients and multiple regression equation and to test the significance of the regression coefficients. In the end we try to determine the working capital leverage for examining the sensitivity of ROE to changes in the level of gross working capital of the company.

The ratios relating to working capital management which have been selected and computed for the study are Working Capital Ratio (WCR), Acid Test Ratio (ATR), Current Assets to Total Assets Ratio (CTTR), Current assets to Sales Ratio (CTSR), Working Capital Turnover Ratio (WTR), Inventory Turnover Ratio (ITR), Debtors Turnover Ratio (DTR) and Cash Turnover Ratio (CTR). For determining the sensitivity of ROE to change in the level of working capital, the working capital leverage has been computed. All statistical computations have been done through excel.
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Working Capital and Profitability - Correlation Analysis The co-efficient of correlation between selected ratios relating to working capital management and ROE are presented in Table 5.8. It is evident from the table the correlation coefficient between ROE and WCR is (-) 0.14. It indicated that there is a lower degree of negative association between the profitability and the working capital ratio of the company. The value of the correlation coefficient is found to be significant at 5 percent level. It is evident from these ratios that the increase in working capital is causing a negative effect on the profitability of the company so, lesser the working capital better it is.

Similarly, the correlation coefficient between ROE and ATR is (+) 0.27 which is found to be significant at 0.05 level. It reveals that there is also a lower degree of positive correlation between the two variables. In the end we can say that with the liquid assets increasing, it will result in more risk as well as higher profitability.

Thirdly, the coefficient of correlation between ROE and CTTR is (+) 0.17. It implies that there is a positive correlation between the two variables, at 5 percent level, the value of the correlation coefficient is found to be significant. Fourthly, the coefficient of correlation between CTSR and ROE is (+) 0.02 which is found to be significant at 5 percent level. It reflected a very lower degree of positive association between the two variables. Here we can say that the current assets to sales ratio dont have any effect on the efficiency of the working capital and the scope of profitability. Fifthly, the correlation coefficient between ROE and WTR is (+) 0.10, which indicates a lower degree of, positive correlation between these two variables. This value is found to be significant at 0.05 level. The steady movement of working capital turnover, the lower the working capital and greater is the profitability conforms to principle.

Sixthly, the co-efficient of correlation between ROE and ITR is found to be (+) 0.28 it viewing a moderately lower degree of positive correlation between the variables. Hence we can say that the company should try to keep a lower inventory to achieve more profitability in the future. Also this value is found to be significant at 0.05 level. Seventhly, the co64

efficient of correlation between ROE and DTR shows negative association of () 0.23. It is found to be significant at 0.05. This shows us that if the company has higher receivables, it will bring in more profitability to the stockholders. Lastly, the co-efficient of correlation (+) 0.35 between ROE and CTR shows moderate degree of positive association. This correlation is insignificant. Table 5.8 Correlation Analysis between Ratios relating to WC management and ROE ROE Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Correlation wrt ROE p-value wrt ROE 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.41 -0.14 0.27 0.17 0.02 0.10 0.28 -0.23 0.35 WCR 2.14 2.33 1.98 3.09 1.67 2.3 2.45 1.76 1.72 2.61 ATR 0.98 0.9 1.22 1.97 1.06 1.69 1.9 1.27 1.3 2.15 CTTR 0.53 0.57 0.52 0.49 0.48 0.56 0.65 0.5 0.56 0.72 CTSR 1.11 0.93 0.93 0.66 0.58 0.78 1.03 0.89 0.91 1.23 WTR 1.70 1.87 2.18 2.23 4.25 2.27 1.65 2.59 2.63 1.32 ITR 1.69 1.96 2.45 3.72 4.65 4.84 4.90 4.45 4.61 4.87 DTR 3.12 3.09 2.50 2.69 3.84 2.59 1.61 1.62 1.94 1.81 CTR 37.21 46.33 71.95 16.13 10.47 22.49 130.77 18.57 12.51 4.25 (%) 5.57 8.28 58.35 17.33 32.8 23.73 35.90 22.15 19.87 34.96

Impact of Working Capital Ratios on Profitability - Multiple Regression Analysis.

In order to understand influence on profitability, a linear multiple regression models were used. In table 5.10 multiple correlation and multiple regression techniques have been applied and impact of working capital on profitability of the company, the regression coefficients have been tested with the assistance of the most popular 't' test. In this study WCR, ATR, CTTR, ITR, DTR and CTR have been taken as the explanatory variable and ROE has been
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used as the dependent variable. For the purpose of selection of variable in this analysis, the correlation matrix representing the correlation coefficients between the explanatory variables has been constructed in Table 5.9. This table reveals that there is a very high degree of correlation between CTSR and WTR () (0.81). Due to this cause CTSR and WTR have not been used for analysis. The regression model used is this analysis is hereunder. ROI=b0 + b1 WCR + b2 ATR + b3 CTTR + b4 ITR + b5 DTR+b6 CTR, where b0, b1, b2, b3, b4, b5 and b6 are the parameters of the ROE to be estimated. Table 5.9 Correlation Matrix of Ratios relating to WC management and ROE WCR WCR ATR CTTR CTSR WTR ITR DTR CTR ROE(%) 1.00 0.69 0.35 0.13 -0.59 -0.04 -0.11 0.11 -0.14 1.00 0.58 0.18 -0.41 0.62 -0.56 0.06 0.27 1.00 0.76 -0.67 0.31 -0.54 0.25 0.17 1.00 -0.81 -0.19 -0.51 0.26 0.02 1.00 0.27 0.52 -0.36 0.10 1.00 -0.46 -0.14 0.28 1.00 -0.26 -0.23 1.00 0.35 1.00 ATR CTTR CTSR WTR ITR DTR CTR ROE(%)

The pooled regression results of the models exhibiting the impact of working capital on profitability of the company are presented in Table 5.10. Table exhibiting the relationship between the dependent variable ROE, and all the independent variables taken together and the impact of these independent variables on the profitability of the company. From the regression analysis we can see that when WCR increases by one unit the ROE decreases by 68.69 units. This again shows that for higher profitability working capital has to kept lower and well managed. Similarly when ATR increases by one unit the ROE increases by 93.64 units. This shows that higher liquidity brings a positive impact on the profitability of the company. When CTTR increased by one unit ROE decreases by 34.62 units. When ITR increased by one unit, profitability of the company decreases by 13.22 units which clearly signifies us that the company should keep a check on the inventory levels. When DTR
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increased by one unit, the ROE of the company stepped up by 11.81 units, which tells us that as the amount of receivables increase ROE also increases. Lastly if there is a unit increase in CTR, the company's profitability increased by 0.18 units. The multiple correlation coefficient of ROE on WCR, ATR, CTTR, ITR, DTR and CTR is 0.837. It reveals that the profitability of the company was highly influenced by WCR, ATR, CTTR, ITR, DTR and CTR. It is also evident from the value of R Square that the independent variables WCR, ATR, CTTR, ITR, DTR and CTR contributed 70 percent of the variations in the profitability of the company. Table 5.10 Multiple Regression Analysis of Ratios relating to WC management and ROE Variable WCR ATR CTTR ITR DTR CTR Constant Multiple R = 0.837 R Square = 0.7 Regression Coefficient -68.69 93.64 -34.62 -13.22 11.81 0.18 76.09 Standard Error 31.87 44.64 86.20 9.33 10.27 0.14 68.12 Adj. R Square = 0.099

Regression equation is given by: ROI = 76.09 68.89 WCR + 93.64 ATR 34.62 CTTR 13.22 ITR + 11.81 DTR + 0.18 CTR

5.4.8. WORKING CAPITAL AS A FUNCTION OF NET SALES Working Capital of a firm can be estimated with the help of regression analysis. Its a useful statistical technique which can be applied for the forecasting of the working capital required by a firm. It helps in making working capital requirement projections after establishing the average relationship between sales and working capital and its various components in the past years. This method of least square is used in this regard. This relationship between sales
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and working capital is given by the equation Y = a + bX. For this analysis the working capital and net sales for the last 19 years are considered. Table 5.11 Multiple Regression Analysis of Working Capital as a function of Net Sales Variable Constant Net sales Multiple R = 0.562 R Square = 0.316 Regression Coefficient 282.052 0.312 Standard Error 151.873908 0.111243154 Adj. R Square = 0.276

Regression equation is given by:

Working Capital = 282.052 + 0.312 Net sales

From the table we can see that multiple correlation co-efficient of working capital on net sales is 0.562. It reveals that the working capital of the company was moderately influenced by net sales. It is also evident from the value of R Square that the independent variable net sales contributed 31.6 percent of the variations in the working capital of the company. In the end we can say that if there is a unit change in the net sales of the company that would have caused because of the increase in 0.312 units of working capital. 5.5.RECEIVABLES MANAGEMENT

Receivables or debtors are the one of the most important parts of the current assets which is created if the company sells the finished goods to the customer on credit. Trade credit arises when firm sells its products and services on credit and does not receive cash immediately. It is essential marketing tool, acting as bridge for the movement of goods through production and distribution stages to customers. Trade credit creates receivables or book debts which the firm is expected to collect in the near future. The receivables include three characteristics:

It involve element of risk which should be carefully analyzed

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It is based on economic value. To the buyer, the economic value in goods or services passes immediately at the time of sale, while seller expects an equivalent value to be received later on

It implies futurity. The cash payment for goods or serves received by the buyer will be made by him in a future period.

The sales of goods on credit basis are an essential part of the modern competitive economic system. The credit sales are generally made up on account in the sense that there are formal acknowledgements of debt obligation through a financial instrument. As a marketing tool, they are intended to promote sales and there by profit. However extension of credit involves risk and cost, management should weigh the benefit as well as cost to determine the goal of receivable management. Thus the objective of receivable management is to promote sales and profit until that point is reached where the return on investment in further funding of receivables is less than the cost of funds raised to finance that additional credit.

Table 5.12 Size of Receivables Year Account Receivables (Rs. Crores) Variation (Base 2005) Yearly Growth 435.06 100 824.47 189.507 89.51% 1218.42 280.058 47.78% 789.29 181.421 -35.22% 942.76 216.697 19.44% 932.71 214.387 -1.07% 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Index = 100 * (Index Year Amount / Base Year Amount)

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Chart 5.9 Receivable Index

We can observe from the table that the accounts receivable has increased by around twice from 2005 to 2010. For the last two years the accounts receivables have been pretty stable. This shows that NFL has a good credit policy and collection process. This also shows the reliability of their customers of paying in time.

NFL receives its receivable through its customers and the government in the form of subsidy. Subsidy in PSUs forms a major part of their turnover. A subsidy (also known as a subvention) is a form of financial assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry (e.g., as a result of continuous unprofitable operations) or an increase in the prices of its products or simply to encourage it to hire more labor (as in the case of a wage subsidy). For the fertilizer industry the government allocates a subsidy amount in their budget. And this subsidy is then distributed among the fertilizer companies based on their production. Table 5.13 Size of Subsidy Year Subsidy Turnover 2004-05 1748 3474 2005-06 1957 3591 2006-07 2217 3866 2007-08 2518 4114 2008-09 3444 5127 2009-10 3396 5091

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Percent share of Subsidy in Turnover 50.32% 54.50% 57.35% 61.21% 67.17% 66.71%

As we can see above that the size of subsidy has been more than 50 percent and in the year 2010, it was as high as 66.71 percent. This clearly shows how much of subsidy is provided by the government to control the price of fertilizers in India.

Average Collection Period The average collection period measures the quality of debtors since it indicate the speed of their collection. The shorter the average collection period, the better the quality of the debtors since a short collection period implies the prompt payment by debtors. The average collection period should be compared against the firms credit terms and policy judges its credit and collection efficiency. The collection period ratio thus helps an analyst in two respects. In determining the payment ability of debtors and thus the efficiency of collection efforts. Secondly in ascertaining the firms comparative strength and advantages related to its credit policy and performance. The debtors turnover ratio can be transformed in to the number of days of holding of debtors. Table 5.14 Average Collection Period Year Account Receivables Turnover Account Receivables Period (days) 2005-06 5.70 64.02 2006-07 3.78 96.45 2007-08 4.12 88.49 2008-09 5.92 61.65 2009-10 5.43 67.23

From the observation we can see that on an average the account receivable is around 2 months. This is mainly for the reason that subsidy from government is received with a delay of 3 months and the daily sales payment is received within a period of 30 days. This 2 months of receivable period is considered to be good, which in turn tells us the effectiveness of the collection and credit policy of the company.

NFL provides credit based on its credit policies set by the top management. The time limit for the payment without any penalty is 30 days and a penalty interest is lewd on the amount,
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which is around 2 percent above bank rate. Also company provides discounts to customers who pay early. The discount is given on the rate of Rs. 1.2 per day of early payment.

5.6.INVENTORY MANAGEMENT

Inventory management is primarily about specifying the size and placement of stocked goods. Inventory management is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods. The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods and demand forecasting. Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business needs shift and react to the wider environment. Inventory management involves a retailer seeking to acquire and maintain a proper merchandise assortment while ordering, shipping, handling, and related costs are kept in check. Systems and processes that identify inventory requirements, set targets, provide replenishment techniques and report actual and projected inventory status. Handles all functions related to the tracking and management of material. This would include the monitoring of material moved into and out of stockroom locations and the reconciling of the inventory balances. Also may include ABC analysis, lot tracking, cycle counting support etc. Management of the inventories with the primary objective of determining/controlling stock levels within the physical distribution function to balance the need for product availability against the need for minimizing stock holding and handling costs.

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The term inventory is used to designate the aggregate of those items of tangible assets which are Finished goods (saleable), Work-in-progress (convertible) and Material and supplies (consumable).

In financial view, inventory defined as the sum of the value of raw material and supplies, including spares, semi-processed material or work in progress and finished goods. The nature of inventory is largely depending upon the type of operation carried on. For instance, in the case of a manufacturing concern, the inventory will generally comprise all three groups mentioned above while in the case of a trading concern, it will simply be by stock- in- trade or finished goods.

In company there should be an optimum level of investment for any asset, whether it is plant, cash or inventories. Again inadequate disrupts production and causes losses in sales. Efficient management of inventory should ultimately result in wealth maximization of owners wealth. It implies that while the management should try to pursue financial objective of turning inventory as quickly as possible, it should at the same time ensure sufficient inventories to satisfy production and sales demand. The objectives of inventory management consist of two counterbalancing parts. Firstly to minimize the firms investment in inventory and secondly to meet a demand for the product by efficiently organizing the firms production and sales operation.

This two conflicting objective of inventory management can also be expressed in term of cost and benefits associated with inventory. That the firm should minimize the investment in inventory implies that maintaining an inventory cost, such that smaller the inventory, the better the view point obviously, the financial manager should aim at a level of inventory which will reconcile these conflicting elements. Some objectives are as follows:

To have stock available as and when they are required. To utilize available storage space but prevents stock levels from exceeding space available. To maintain adequate accountability of inventories assets.
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To provide, on item by- item basis, for re-order point and order such quantity as would ensure that the aggregate result confirm with the constraint and objective of inventory control.

Table 5.15 Size of Inventory Year Inventory (Rs. Crores) Variation (Base 2005) Yearly Growth 2004-05 350.84 100 2005-06 324.49 92.4895 -7.51% 2006-07 348.2 99.2475 7.31% 2007-08 381.03 108.605 9.43% 2008-09 348.68 99.3843 -8.49% 2009-10 347.12 98.9397 -0.45%

Index = 100 * (Index Year Amount / Base Year Amount) Chart 5.10 Inventory Index

We can see that the inventory has remained newly the same for the last six years. This is mainly because there has been no change in the production capacity of the plants. The minor variations that are visible are mainly because of the varying prices of petroleum products.

Inventory Holding Period

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The reciprocal of inventory turnover gives average inventory holding in percentage term. When the numbers of days in year are divided by inventory turnover, we obtain Days of Inventory Holding (DIH). Inventory management involves a retailer seeking to acquire and maintain a proper merchandise assortment while ordering, shipping, handling, and related costs are kept in check. Systems and processes that identify inventory requirements, set targets, provide replenishment techniques and report actual and projected inventory status.

Number of Days Inventory = 365 days / Inventory Turnover Ratio The number of days inventory is also known as average inventory period and inventory holding period. A high number of days inventory indicates that, there is a lack of demand for the product being sold. A low days inventory ratio (inventory holding period) may indicate that the company is not keeping enough stock on hand to meet demands. The number of days inventory and inventory turnover ratios are included in the financial statement ratio analysis spreadsheets highlighted in the left column, which provide formulas, definitions, calculation, charts and explanations of each ratio. Table 5.16 Inventory Holding Period Year Inventory Turnover Inventory Period (days) 2005-06 10.63 34.33 2006-07 11.49 31.76 2007-08 11.36 32.14 2008-09 14.05 25.97 2009-10 14.63 24.94

The table shows that on an average, NFL holds 25 days of inventory at a time. It can be seen that over the years, inventory period has been reducing, which is a good sign. It shows that NFL is improving its inventory management. This period is on the higher side because of the usage of coal at its units (except Vijaipur). This value will reduce drastically once all the other units will be up-graded to gas units.

NFL has an excellent monitoring system of inventory monitoring. The different units send monthly inventory reports of corporate office for records and maintenance. Where they are

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analyzed for any discrepancies and immediately corrected. The document used are material receipt notes, daily transfer register, issue slips, stock ledgers etc.

Rarely in case of raw materials there is delay in supply and if then any contingency plan is prepared and the problem is eliminated quickly. There is hardly any damage to the finished goods but still there may be some damage as the goods are hygroscopic in nature and the damage is 1 to 1.5 percent of the total product which is negligible. All the stocks of NFL are hypothecated to bank so that bank can finance the requirements. Sometimes problem of stock out arises in case of coal, which get moist and wet during transit but these problems are not that acute to hamper the production process.

5.7.CASH MANAGEMENT

Cash is money that is easily accessible either in the bank or in the business. It is not inventory, it is not accounts receivable, and it is not property. These might be converted to cash at some point in time, but it takes cash on hand or in the bank to pay suppliers, to pay the rent, and to meet the payroll. Profit growth does not always mean more cash.

Profit is the amount of money you expect to make if all customers paid on time and if your expenses were spread out evenly over the time period being measured. However, it is not your day-to-day reality. Cash is what you must have to keep the doors of your business open. Over time, a company's profits are of little value if they are not accompanied by positive net cash flow. You can't spend profit; you can only spend cash.

Cash Flow refers to the flow of cash into and out of a business over a period of time. The outflow of cash is measured by the money you pay every month to salaries, suppliers, and creditors. The inflows are the cash you receive from customers, lenders, and investors.

Positive Cash Flow

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If the cash coming into the business is more than the cash going out of the business, the company has a positive cash flow. A positive cash flow is very good and the only concern here is managing the excess cash prudently.

Negative Cash Flow If the cash going out of the business is more than the cash coming into the business, the company has a negative cash flow. A negative cash flow can be caused by a number of problems that result in a shortage of cash, such as too much or obsolete inventory, or poor collections on accounts receivable. If the company doesn't have money in the bank or can't borrow additional cash at this point, it may be in serious trouble.

A Cash Flow Statement is typically divided into three components so that you can see and understand both the internal and external sources and uses of cash.

Operating Cash Flow (Internal) Operating cash flow, often referred to as working capital, is the cash flow generated from internal operations. It is the cash generated from sales of the product or service of your business. Because it is generated internally, it is under your control.

Investing Cash Flow (Internal) Investing cash flow is generated internally from non-operating activities. This component would include investments in plant and equipment or other fixed assets, nonrecurring gains or losses, or other sources and uses of cash outside of normal operations.

Financing Cash Flow (External) Financing cash flow is the cash to and from external sources, such as lenders, investors and shareholders. A new loan, the repayment of a loan, the issuance of stock and the payment of dividend are some of the activities that would be included in this section of the cash flow statement. Knowing when, where, and how your cash needs will occur, Knowing what the best sources are for meeting additional cash needs; and, Being prepared to meet these needs when they
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occur, by keeping good relationships with bankers and other creditors. Daily cash, and Longterm (annual, 3-5 years) cash flow projections to help firms to develop the necessary capital strategy to meet their business needs. They also prepare and use historical cash flow statements to gain an understanding about where all the money went. Cash flows are somewhat unpredictable, with the degree of predictability varying among firms and industries. Unexpected cash needs at a short notice may also be the result of following: Uncontrollable circumstances such as strike and natural calamities. Unexpected delay in collection of trade dues. Cancellation of some order for goods due unsatisfactory quality. Increase in cost of raw material, rise in wages, etc.

The higher the predictability of firms cash flows; the lower will be the necessity of holding this balance and vice versa. The need for holding the precautionary cash balance is also influenced by the firms capacity to have short term borrowed funds and also to convert short term marketable securities into cash.

Cash does not enter in to the profit and loss account of an enterprise, hence cash is neither profit nor losses but without cash, profit remains meaningless for an enterprise owner. A sufficient amount of cash can keep an unsuccessful firm going despite losses. An efficient cash management through a relevant and timely cash budget may enable a firm to obtain optimum working capital and ease the strains of cash shortage, fascinating temporary investment of cash and providing funds normal growth. Cash management involves balance sheet changes and other cash flow that do not appear in the profit and loss account such as capital expenditure.

Cash Management in PSUs PSUs have come of age and have function like other business systems. They must ensure that they have an effective bottom line. Globalization of Indian economy necessitates these enterprises to be sound in terms of profitability and EPS. The management of working capital is a vital element in PSUs. The board of directors in the case of each PSU is expected to
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determine the reasonable level of working capital, and reviewing the position from time to time to ensure that the total investment in working capital is kept as low as possible. PSUs can approach SBI or any other nationalized bank to finance their working capital requirement. The requirement can be met by one bank or through consortium of banks. To hedge risk, generally a single bank alone doesnt provide the whole required working capital. Whenever the total requirement of working capital cannot be met by banks alone, the PSUs may approach the government for short term loans.

Cash Management in NFL In NFL sales are made through zonal offices and cheques collected from regional offices are deposited in their accounts. From these accounts at the end of the day, a sweep is done and the funds from all the zonal offices are moved to the sweep account at the corporate office bank account. From the sweep account the funds are transpired to the principal account or the cash credit account on a daily basis. This cash credit account is used to make payments. Similarly every plant has its own cash credit account with a limit of 2 crores. Daily funds for their daily expenses are sent everyday from the corporate cash credit account. Another thing to be noted is that, the corporate office tries to keep a minimum balance of only 2 lacs. This is mainly for the corporate office expenses. If excess cash is available with the company, the finance department tries to determine if the excess cash will be needed in the near future. If not, its used to create a fixed deposit for a minimum of 7 days. This is done after a tradeoff calculation is done. This means that if the excess cash that the company has should be kept idle or a FD should be created is decided by looking at the rates. Say for example that the company has Rs. 100 crore surpluse. The company has an option to create a FD with it. But before that decision can be made, futuristic need of money is analyzed, which is any expense that will occur within 7 days period. If a FD is created and then an expense payment date comes up then the only option for the company is to take money from the cash credit account, which has high interest rate (11-14 percent), but on the other hand FDs have low interest rate (6 7 percent). So the cash department has to make sure that opening an FD will not cause the company any losses. So cash department do calculations to check what decision to make.

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Another important part of the cash management to find funds for its daily operation. The most common method is to take it from the cash credit account at the time of need. But the main issue with cash credit account is its high interest rate. So in order to counter it, company has an option to take WCDL. This WCDL comes at lesser interest rate and is given by the consortium banks based on the limit they had fixed for the cash credit account.

When NFL has to procure working capital, a board resolution has to be passes to resolve the cash credit limit of the company to meet the working capital required. The board also decides upon the following issues of, how much fund to be procured, who will be signed authority and how power has to be delegated. After resolution is passed, the finance dept will decide upon the consortium of banks and meet the bank officials. All banks in the consortium have to sign the agreement shown bellow. Working Capital Consortium Agreement (CF1) Its an agreement between NFL and banks in which working capital facilities given to meet the working capital needs of borrower is mentioned. Joint Deed of Hypothecation (CF2) It is a deed between NFL and banks in which borrower agrees with the terms and conditions given in the consortium agreement. The borrower agrees to repay each of banks their principal amount as well as the interest and commission per annum as mentioned in their consortium agreement. Inter se Agreement among Consortium Banks Its an agreement between consortium banks. In this they choose their lead and second lead bank. The members agree to abide by the directions given by the lead bank with the second lead in the matters if cash credit accounts opened by borrower. Letter regarding the grant of individual limits within the overall limit (CF5) It is the letter in which the amount given to the borrower is written along with its overall loan limit, rate of int. and nature of the facility given. Table 5.17 Size of Cash Year Cash and Bank Balance 2004-05 133.48 2005-06 11.83 2006-07 13.39 2007-08 161.37 2008-09 107.6 2009-10 690.81
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(Rs. Crores) Cash Index (Base 2005) 100 8.86 10.03 120.89 80.61 517.54

Index = 100 * (Index Year Amount / Base Year Amount) Chart 5.11 Cash Index

As seen we can easily deduce that the cash and bank balance of NFL has increased drastically in the year 2010. This is good signs for NFL as it plans for up-gradation and the company will be in a better position in the times to come. It also shows the companys effectiveness in able to collect the money from its customers.

Cash Conversion Cycle The cash conversion cycle is simply the duration of time it takes a firm to convert its activities requiring cash back into cash returns. The cycle is composed of the three main working capital components: Accounts Receivable Outstanding in days (ARO), Accounts Payable Outstanding in days (APO) and Inventory in Days (IOD). The Cash Conversion Cycle (CCC) is equal to the time is takes to sell inventory and collect receivables less the time it takes to pay your payables. Cash Conversion Cycle = IOD + ARO APO

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Cash Cycle is very important, because it represents the number of days a firm's cash remains tied up within the operations of the business. It is also a powerful tool for assessing how well a company is managing its working capital. The lower the cash conversion cycle, the more healthy a company generally is. If you compare the results of the cycle over time and see a rising trend it is often a warning sign that the business may be facing a cash flow crunch.

When evaluating cash flow, factors directly affecting profit, revenue and expenses, are easy to understand and their effect on cash is straight forward; decreases in costs or increases in profit margin results in less cash going out or more cash coming in, and increased profits. However, the working capital components of the CCC are a little more complex. In simple terms, an increase in the amount of time accounts receivables are outstanding uses up cash, a decrease provides cash; an increase in the amount of inventory uses cash, a decrease provides cash; an increase in the amount of time it takes you to pay your payables provides cash, a decrease uses cash.

The Operating Cycle consists of 3 phases: In phase 1, Cash gets converted into inventory. This includes purchase of raw material, 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. In the case of trading companies, this

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phase is shorter as there would be no manufacturing activity and cash is directly converted into inventory. This phase is of course totally absent in the case of service organizations.

In phase 2 of the cycle, the inventory is converted into receivables as credit sales are made to customers. Firms which do not sell on credit obviously don't have the phase 2 of the operating cycle.

The last phase i.e. phase 3 of the operating cycle, represents the stage when receivables are collected. This phase completes the operating cycle. Thus, the firm has moved from cash to inventory, to receivables and to cash again. Table 5.18 Cash Cycle (days) Year Inventory Period Account Receivables Period Account Payables Period Cash Cycle 2005-06 34.33 64.02 42.97 55.37 2006-07 31.76 96.45 42.25 85.95 2007-08 32.14 88.49 47.03 73.60 2008-09 25.97 61.65 42.14 45.49 2009-10 24.94 67.23 39.56 52.61

5.8.WORKING CAPITAL FINANCE AND ESTIMATION

Corporate finance is an area of finance dealing with financial decisions business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize corporate value while managing the firm's financial risks. Although it is in principle, different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms.

The discipline can be divided into long term and short term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to
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shareholders. On the other hand, the short term decisions can be grouped under the heading working capital management. This subject deals with the short term balance of current assets and current liabilities. The focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers).

After determine the level of working capital, a firm has to consider how it will finance. Following are sources of working capital finance:

Trade Credit Trade credit is an arrangement between businesses to buy goods or services on account, that is, without making immediate cash payment. The supplier typically provides the customer with an agreement to bill them later, stipulating a fixed number of days or other date by which the customer should pay. It can be viewed as an essential element of capitalization in an operating business because it can reduce the required capital investment required to operate the business if it is managed properly. Trade credit is the largest use of capital for a majority of business to business (B2B) sellers in most of the countries, and is a critical source of capital for a majority of all businesses.

Bank Financing Banks are main institutional source of working capital finance in India. After trade credit, bank credit is the most important source of financing working capital in India. A bank considers a firms sales and production plane and desirable levels of current assets in determining its working capital requirements. The amount approved by bank for the firms working capital is called credit limit. Credit limit is the maximum funds which a firm can obtain from the banking system. In practice banks do not lend 100% credit limit, they deduct margin money.

Forms of Bank Financing: Overdraft An overdraft occurs when withdrawals from a bank account exceed the available balance. In this situation a person is said to be overdrawn. If there is a prior agreement with the
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account provider for an overdraft protection plan, and the amount overdrawn is within this authorized overdraft limit, then interest is normally charged at the agreed rate. If the balance exceeds the agreed terms, then fees may be charged and higher interest rate might apply. Term Loan While the four prior debt instruments address cyclical working capital needs, term loans can finance medium/long term no cyclical working capital. A term loan is a form of medium/long term debt in which principal is repaid over several years, typically in 3 to 7 years. Since lenders prefer not to bear interest rate risk, term loans usually have a floating interest rate set between the prime rate and prime plus 300 basis points, depending on the borrowers credit risk. Sometimes, a bank will agree to an interest rate cap or fixed rate loan, but it usually charges a fee or higher interest rate for these features. Term loans have a fixed repayment schedule that can take several forms. Level principal payments over the loan term are most common. In this case, the company pays the same principal amount each month plus interest on the outstanding loan balance. Cash Credit In practice, the operations in cash credit facility are similar to those of those of overdraft facility except the fact that the company need not have a formal current account. Here also a fixed limit is stipulated beyond which the company is not able to withdraw the amount.

Under this arrangement a business is authorized to draw cash subject to the limit prefixed by the bank. Under term loan where full amount is available to the borrower but in case of a cash credit a credit limit is put at the companies disposal. This gives the borrower a lot more flexibility. The business can avail funds to the extent it desires. The interest is charged only for the amount against the limit. This borrowed money can be returned back at the borrower convenience. At times cash credit and overdraft are taken to be identical, but a bank extends cash credit facility to its valued customers on a regular basis for a long tenure. On the contrary overdraft facility is provided occasionally and for shorter duration.

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Cash credit approved by board of NFL is Rs. 450 crores, which can be procured from the consortium of banks. NFL also avails working capital demand loan (WCDL) which is part of the cash credit limit, but it is provided at a lower interest rate by the banks. NFL has fund based cash credit limit of Rs. 450 crores for working capital requirement, which is availed by the company through consortium of several banks. Further with a view to meet temporary additional shortfalls in the working capital, company is given a padding of Rs. 100 crores which can be raised through short term loans from banks. Table 5.19 Cash Credit Banks State Bank of India Oriental Bank of Commerce Bank of India State Bank of Hyderabad Punjab National Bank State Bank of Patiala Union Bank of India Bank of India, Noida Branch Percent Share 30% 14% 23.33% 11.33% 1.11% 1.11% 18.89% 0.22%

Letter of Credit A standard, commercial letter of credit is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking. The letter of credit can also be source of payment for a transaction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. They are also used in the land development process to ensure that approved public facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client.

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Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. In executing transaction, letters of credit incorporate functions common to General Interbank Recurring Order and Traveler's cheques. Typically, the documents a beneficiary has to present in order to receive payment include a commercial invoice, bill of lading, and documents proving the shipment were insured against loss or damage in transit. However, the list and form of documents is open to imagination and negotiation and might contain requirements to present documents issued by a neutral third party evidencing the quality of the goods shipped, or their place of origin.

VI.

SUMMARY

6.1.FINDINGS

Working capital of the company was increasing and showing positive working capital each year. It shows good liquidity position. Positive working capital indicates that company has the ability of payments of short terms liabilities Working capital increased because of increment in the cash and bank balance and reduction is sundry creditors. Current assets components shows sundry debtors were the major part in current assets it shows that the efficient receivables collection management. Inventory period has been continuously going down, which shows better inventory management by the company. Study of the cash management of the company shows that company have a good control on cash management in the year 2010, where cash came from higher profits, and return of investments.

Cash credit interest is quiet high; as a result money from it is taken as the last resort. Company has repaid most of its debt and is trying to become a zero debt company. But in the future because of investments in up-gradation of plants, this will not be a reality.

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NFL is trying to convert non gas plants at Bhatinda, Panipat and Nangal to gas based plant for which they require loan term loan. Daily cash report are prepared with the help of which balance funds are analyzed. It gives the details of funds collected from different sources i.e. marketing FICC, Cash credit and other short term loans from different consortium banks. It also contains details of funds transferred to the units and other payment details to IOC, GAIL, Railways, freight, dividends etc.

Subsidy forms the major part of NFLs turnover. The subsidy bill is submitted to the FICC which issues NFL with their authorized amount. Since its a government agency, special attention is paid while dealing with it, which needs documents with meticulous precision.

The profitability of the company has a positive relation with the accounts receivable of the company. This shows that in the Indian fertilizer industry in which most of the customers are farmers, who are poor, will be happy to see themselves get credit sales. This brings in more customers and higher sales.

Liquidity of the company is seen to be stable and good. It was also found that liquidity also has a positive impact on the profitability of the company. The analysis shows us that with increase in the liquidity of the company the profitability also gets a good lift. It has to be noted that, high liquidity can also have a bad effect on the company. So the balance has to be maintained.

Subsidy from government is received from government on an average of 3 months delay, which can be considered to be very good when compared to the industry standard. It was also found that the ratios Working Capital Ratio, Acid Test Ratio, Current Assets to Total Assets Ratio, Inventory Turnover Ratio, Debtors Turnover Ratio and Cash Turnover Ratio contributed 70 percent of the variations in the profitability of the company.

Net sales of the company have only 31.6 percent impact on the change of working capital. The company tries to save interest on its borrowing by substituting its cash credit loan by working capital demand loan.

6.2.RECOMMENDATIONS
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Better credit policies and collection policies can help the company is reducing the average collection period and also expand on the number of people who can go for credit purchase and in turn increase the receivables and the customer reach. Company can use legal ways or through collection agencies to keep a strict check on the defaulters.

NFL has a high inventory holding period, considering that the production is done with gas and coal. With the conversion of all plants to gas based plant, the company should strive for a minimum inventory concept, as pipelines are used to provide these plants with gas continuously.

The D/E ratio of the company is low and it wants to be a zero debt company. But with the low supply of fertilizer in the Indian market, NFL can use this opportunity to expand its production and market share in the Indian market, which is the mission of the company. With a low D/E ratio, company is in a good position to get loans at low interest rate, which can be a good opportunity of NFL.

Liquidity of the company is good, but can be considered on a little higher side. So company should try to make use of every opportunity to make use of the available liquid money for some investments.

Since petroleum products form part of the raw materials, company can use hedging methods to counter the variation in its prices. The amount of sundry debtors forms 44 percent of the current assets. Company should find ways to reduce it and make use of this money for expansion plans which will bring NFL more sales.

There are various global challenges that are faced by every company n the present competitive environment and NFL is not any exemption. To face the present global challenges the human resources department should be develop to improve various skills among the employees specially the motivational skills and having the regular training for the employees about various developments in the market.

NFL right now has only three zonal offices Chandigarh, Lucknow and Bhopal. Company should try to expand its zones to the south too, as they are also one of the most farming intensive states.

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Limitations of the Study Whenever there is a task to be completed, it cannot be perfect because of a lot of constraints behind its completion. There are lot of areas which are not covered in the project. However I have tried my best to collect relevant information, yet there are some limitations which are enumerated below: It takes a lot of time to understand the working capital of a company but the time frame of the training was just eight weeks. Still I have tried my best to know much more about the company. It was not possible to see the data of the company because of its sensitivity. Estimates are based upon predictions only.

6.3.REFERENCES

1. Annual report of National Fertilizers Limited. (From 2000-01 to 2009-10) 2. National Fertilizers Limited, About Us, Retrieved April 16, 2011 from www.nationalfertilizers.com/about.htm 3. National Fertilizers Limited, Industrial Products, Retrieved April 16, 2011 from www.nationalfertilizers.com/indlprod.htm 4. National Fertilizers Limited, Financial Performance, Retrieved April 16, 2011 from www.nationalfertilizers.com/production.htm 5. National Fertilizers Limited, Major Awards and Recognitions, Retrieved April 16, 2011 from www.nationalfertilizers.com/awards.htm 6. A. Vijay Kumar & Dr. A. Venkata Chalam (1995), "Working Capital & Profitability -an empirical analysis", The Management Accountant, October 95, Vol. 30 No.10, pp 74850 7. A.Vijay Kumar (2001), Working Capital Management, Northern Book Centre, New Delhi

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