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1) INTRODUCTION

A bicycle or cycle is pedal- driven, human powered vehicle with two wheels attached to a frame, one behind the other. First introduced in 19th century Europe, bicycle now numbers over one billion worldwide, providing the principle means of transportation in many regions, notably China & the Netherlands. It is also a popular form of recreation and has been adapted for use in many other fields of human activity, including childrens toys, adult fitness, military and police applSications, courier services and cycle sports. The basic shape and configuration of a typical bicycle has hardly changed since first chain driven model was introduced and developed around 1885, although many important details have been improved ,especially since the advent of modern materials and computer-aided design . These have allowed for a proliferation of specialized designs for individuals who pursue a particular type of cycling. The bicycle has affected history considerably, in both the cultural and industrial realms. Bicycle was seen in INDIA in year 1890. Import of cycles, however, started in 1905 and continued for more than 50 years. The Government in July 1953 announced complete ban on imports, but cycle kept on simmering in the country till 1961. In 1890 , selling price of an imported bicycle was around Rs. 45/-; in 1917, during the First World War the price jumped to Rs. 500/- but dropped considerably, month by month and came down to Rs. 35/- or so (U. K. makes) and Rs.15/- or so (Japanese models). It would be interesting to mention that in 1919, five persons in Punjab imported cycles and used them on The Mall, Shimla. These included one Bishop, two military men and two contractors including S. Pala Singh Bhogal (Grand Father of Mr. M.S. Bhogal of Ludhiana). Under special permission of the Governor, they were allowed to use cycles on 'The Mall' only for one hour in a day. They imported B.S.A. Cross Bar Cycle from U.K. and it used to be a kind of fair at that particular hour on the Mall in Shimla, the scene watched by hundreds of people every day. Later, a firm was formed under the name of Singh & Co. with shops on Railway Road, Jalandhar and Bazaar Vakillan, Hoshiarpur, which imported bicycles in the year 1930 onwards.

(1.2) MAINSTREAM TRENDS IN THE INDIAN BICYCLE INDUSTRY India is the second largest manufacturer of bicycles in the world with the annual production of 9-10 million bicycles. Bicycle Industry in India is largely organized, but the presence of the small players in the unorganized sector is also increasing. The standard bicycles are used commonly for the transportation of the light weight material. But in the past few years the organized sector of bicycle industry has faced a declined in the demand. The major cause of this is the non- availability of road-space for the bicycles. But now the bicycle manufacturing units are taking the help of advertisements and packaging in order to increase the demand.

(1.3) CHALLENGES FACED BY THE BICYCLE INDUSTRY IN INDIA Intense competition at the global level by the Chinese Bicycle Industry. Decreasing demand due to non-availability of road space for the bicycles. Easy availability of loans for the motor-bikes. More urbanization Increase in the standard of living of the people. Increase in the prices of iron and steel.

(1.4) MAJOR PLAYERS IN INDIA


HERO CYCLES ATLAS AVON TI

(1.5) LOCAL PLAYERS


NEELAM S.K BYKES RAJA CYCLE SUN CROSS SENDENCER OSTER EVERBEST TOP TRACK

THE HERO GROUP

(1.6) VISION AND MISSION


The Vision "We, at the Hero Group are continuously striving for synergy between technology, systems and human resources to provide products and services that meet the quality, performance, and price aspirations of the customers. While doing so, we maintain the highest standards of ethics and societal responsibilities, constantly innovate products and processes, and develop teams that keep the momentum going to take the group to excellence in everything we do." The Mission Statement "Its our mission to strive for synergy between technology, systems and human resources, to produce products and services that meet the quality, performance and price aspirations of our customers. While doing so, we maintain the highest standards of ethics and societal responsibilities. " This mission is what drives us to new heights in excellence and helps us forge a unique and mutually beneficial relationship with all our stakeholders. We are committed to move ahead resolutely on this path, shown to us by visionaries like Mr. Satyanand Munjal, Mr. Om Prakash Munjal, the late Mr. Dayanand Munjal and late Mr. Raman Kant Munjal. Mr. Brijmohan Lall Munjal, Chairman & MD - THE HERO GROUP.

(1.7) THE HERO GROUP COMPANIES

Hero Honda Motors Ltd. Hero Cycles Ltd. Munjal Showa Ltd. Sunbeam Auto Ltd. Majestic Auto Ltd. Hero Exports Munjal Auto Industries Ltd Rockman Industries Ltd. Highway Industries Ltd. Hero Honda Finlease Ltd. Hero Motors Ltd. Munjal Castings Satyam Auto Components Ltd. Hero Financial Services Ltd. Hero Corporate Service Ltd. Munjal Sales Corporation Hero Global Design Ltd. Easy Bill Ltd. Hero Management Service Ltd. Shivam Autotech

- Motorcycles Cycles, CR Steel Shock Absorbers Aluminium Castings Mopeds, Scooterette - International T.Arm - Auto Components Cycle Components Machine Tools Financial Services Two-Wheelers - Aluminium Castings Sheet Metals Financial Services - IT, Insurance, Training - Distribution Product Designing Payment Services IT Enabled Services - Auto Components

(1.8)

MAJOR PRODUCTS-

The hero cycle limited manufactures cycles & cycle parts; auto rims cold rolled strips as a main product. Co. has long portfolio of different range of cycles. Co. has 132 models in the list; cover all the 3 sections- gents, ladies & kids. It also manufactures cycle parts for its own requirement. After fulfilling the requirements of co. it can exports its remaining quantity. The main products are:i) ii) iii) iv) v) Cycles & Cycles parts Auto Rims Cold rolled strips E-bikes Auto components
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(1.9) MILESTONES
Heros success saga contains the element of courage, great, determination, enterprises and perseverance coupled with vision and meticulous planning: 1956 Hero Cycles Ltd. is established. 1961 Rockman Cycle Industries Ltd. established which is today the largest manufacturer of bicycle chains & hubs in the world. 1963 Bicycles exports take off from India a foray into the international market. 1971 Highway Cycles was set up. It is today the largest manufacturer of single speed & multispeed freewheels in the country. 1975 Hero Cycles Limited became the largest manufacturer of bicycles in India. 1978 Majestic Auto Limited was formed and Hero Majestic Moped was introduced. 1981 Munjal Casting established. 1984 Hero Honda Motors Limited established in joint venture with Honda Motors, Japan to manufacture Motorcycles. It is now the worlds largest producer of two-wheelers. 1985 Munjal Showa Ltd. established to manufacture shock absorbers and struts and is today one of the topmost shock absorber manufacturer companies in this country.

1985 100 cc Hero Honda Motorcycle was launched, which, later on in 1988, became No.1 among all motorcycles in India. 1986 Hero Cycles Limited entered the Guinness Books of World Records as the largest bicycle manufacturer in the world. 1987 Hero Motors, a division of Majestic Auto Limited set up in collaboration with Steyr Diamler Puch of Austria. 1987 Gujarat Cycles Limited, now known as Munjal Auto Centre Ltd. was established to manufacture and export state-of-the-art bicycles and light products in its full automated plant at Wagodia. 1987 Sunbeam Auto Limited, earlier a unit of Highway Cycle Ind.Ltd., established as an ancillary to Hero Honda. It has the largest die casting plant in India. 1988 Hero Puch was introduced by Hero Motors Ltd. which was a revolutionary machine to set new records of petrol efficiency in 50 to 65 cc engines. 1989 Ranger bicycles (a generic name for Mountain Bikes today) was introduced by Hero Cycles Limited. 1990 Hero Cold Rolling Division established which is one of the most modern steel cold rolling plants in India. 1991 Hero Honda received National Productivity Council Award and also the Economic Times Harvard Business School Association Award against 200 contenders.
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1991 Hero Cycles introduced Kidd the first branded bike in childrens segment. 1992 Hero Cycles introduces Impact, the first citibike in India. 1992 Munjal Showa Ltd. received national safety award. 1993 Hero Exports was established as International Trading Division for group & non-group products. 1995 Hero Corporate Services Ltd. was established. 1995 The first exerbike from Hero Group was introduced with the name Allegro.

1996 Hero Winner, a large wheeled scooter with a choice of 50 cc & 75 cc engines was launched by Hero Motors Ltd. 1996 Munjal Showa Ltd. received British Councils National Safety Award. 1998 Hero Briggs & Stratton Auto (P) Ltd. was set up to produce 4-stroke two wheeler engines in various cubic capacities. Munjal Auto Components established to manufacture gear shaft & gear blanks for motorcycles. 2000 The first fully automated bicycles by the name POWERBIKE was introduced by Hero Cycles Limited.

Hero Corporate diversified into I.T. and I.T. Enabled Services through its services segment Hero Corporate Services Limited. 2001 Hero Honda emerges as the market leader in motorcycles with the sales of over a million motorcycles and a market share of 47%. Hero Global Design established to offer engineering services in CAD/CAM/CAE related to new product development design, engineering, manufacturing. 2002 Hero Cycles Limited ties up with National Bicycle Industries, a part of Matsushita Group, Japan, to manufacture high end bicycles. Fastener World established. Easy Bills Limited established to offer utility bill collection and retail services. 2003 Super Starter Series launched by Hero Cycles Limited. Tie-up with Live Bridge Inc., U.S.A., Aprilia Scooters, Haly & Bombardier Rotax GmbH of Germany. Hero Honda continues to be the worlds largest manufacturer of two-wheelers with the market of more than 48%. 2004 Hero Retail Insurance Business established. Super Smart Series introduced by Hero Cycles Limited.

(1.10) BOARD OF DIRECTORS

SH. BRIJMOHAN LAL MUNJAL SH. SATYANAND MUNJAL SH. OM PARKASH MUNJAL SH. VIJAY KUMAR MUNJAL SH. SURESH CHANDRA MUNJAL ASHISH KUMAR MUNJAL SH. SUNIL KANT MUNJAL SH. PANKAJ MUNJAL SH. S.K RAI DR. M.A ZAHIR DR. D.R SINGH

(CHAIRMAN) (CO-CHAIRMAN CUM M.D WORKS) (CHAIRMAN CUM M.D MKTG. & ADM.) (M.D INTNL MARKETING) (M.D DOMESTIC MKTG.) (M.D UNIT TO SAHIBABAD) (M.D C.R DIVISION) (M.D NEW HERO AUTO RIM DIV.) (M.D WORKS) ( DIRECTOR) ( DIRECTOR)

(1.11) SOCIAL RESPONSIBILITIES


In this way, the company has fulfilled its social obligation. Charged with their mission nationalistic fervors, the Hero Group has always been actively involved in Social and Medicare activities, such as providing medical facilities for the under privileged, Hospitals, Heart Research Foundation and Mobile Medical Vans. Hero also runs schools and colleges, maintains parks and public facilities.

(1.12) THE ACHIEVEMENTS


The Group and its management have acquired a number of accolades and achievements over the years: Hero Group Management style has been acclaimed internationally by World Bank and BBC, UK.Hero Group is discussed as a case study at London Business School, UK and INSEAD, France. World Bank has acclaimed Hero Cycles as a role model in vendor development based on a world-wide study. The London Business School, UK, has done a case study on the Group as model of entrepreneurship. Boston Consulting Group has ranked Hero Group as one of the top ten Business Houses on Economic value, in India. The Hero Group is recognized as a long term partner and an ideal employer. Hero Group's partnership with Honda Motors, Japan is over 21 years old Hero Group's Partnership with Showa Manufacturing Corporation, Japan is over 19 years old. Group Chairman, Mr. Brijmohan Lall Munjal received the coveted "Ernst & Young Entrepreneur of the Year" award for 2001. Hero Honda Motors was ranked 3rd amongst top Indian companies Review 2000 Asia's leading companies award (2004) by Far Eastern Economic Review. Hero Cycles Limited is a Guinness Book Record holder since 1986 as the world's largest manufacturer of bicycles, with annual sales volume of 5 million bicycles in FY 2006. Engineering Exports Promotion Council has awarded Hero Cycles with the Best Exporter Award for the last 28 years in succession.

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(1.13)

HERO CYCLES-THE BEGINNING

We look over our shoulders, we see the past. We use it to make a better present and a beautiful tomorrow, as tomorrow isnt just another day; its another chance for us to better ourselves and to excel. Hero Cycles is a product of this philosophy. The philosophy that instils commitment, team work and foresight. Heros colossal journey started before Independence. The four Munjal brothers, hailing from a small town called Kamalia, now in Pakistan, are the men who are behind the mission. Brotherhood apart, what knit the men together was the wealth of will, integrity, ambition & determination. In the year 1944, they decided to start a business of bicycle spare parts in Amritsar. It is modest beginning and the next 3 years saw the business grow rapidly. But the dark clouds of partition eclipsed their plans of the future. With renewed vigour and optimism, the operational base was shifted to Ludhiana. By 1956, the brothers had began manufacturing key components of bicycles and as a logical way forward, began to assemble the entire cycle at their manufacturing plant in Ludhiana. In the early days, the plant had a capacity for 25 cycles per day. Over the next few years, the Bicycle Unit started growing in stature and size, attracting skilled engineers, technocrats, administrators and entrepreneurs. From a modest beginning of mere 639 bicycles in the year 1956, Hero Cycles products over 18500 cycles a day today, the highest in global reckoning. With the 48% share of the Indian market, this volume has catapulted Hero in the Guinness Books of World Records in 1986 and edge over global players is being maintained since then. From cycle to two - wheeler was a natural step, and the Hero Group came into being. The Hero Group, today, is a vast conglomerate of companies, either in the form of collaborations, joint ventures or fully owned subsidiaries, with more than Rs. 10000 Crore turnover annually. Hero Group, besides being the worlds largest manufacturers of bicycles, motorcycles and chains to this date, has diversified into newer segments like Information Technology, IT Enabled Services and Financial Services. The Hero Group has done business differently right from the inception and that is what has helped us to achieve break-through in whatever product category we have ventured in. The Group's low key, but focused, style of management has earned the plaudits amidst investors, employees, vendors and dealers, as also worldwide recognition. The growth of the Group through the years has been influenced by the number of factors: The Hero Group through the Hero Cycles Division was the first to introduce the concept of just-in-time inventory. The Group boasts of superb operational efficiencies. Every assembly line worker operates two machines simultaneously to save time and improve productivity. The fact that most of the machines are either developed or fabricated in-house, has resulted in low inventory levels.

In Hero Cycles Limited, the just-in-time inventory principle has been working since the beginning of production in the unit and is functional even till date. The vendors bring in the raw material and by the end of the day the finished product is rolled out of the factory. This is the Japanese style of production and in India; Hero is the first company to have mastered the art of the just-in-time inventory principle.
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(1.14) QUALITY THE DRIVING FORCE


At Hero Cycles, quality is a tradition, be it in the form of well trained labour, technically superb machines or world class quality. The conformance to quality at Hero begins on shop floor, with every worker ensuring at each stage manufacturing, that only perfect product passes through his hands. Heros production department too believes in following the zerodefect approach and continuous up gradation of its manufacturing systems. The marketing and operations teams are also constantly creating new and effective strategies using modern management techniques. And finally, every Hero cycle goes through a series of rigorous quality checks before it leaves the factory. No wonder, Hero is in proud possession of ISO9001, ISO-9002 & BVQI certifications and also ISO 14001, environmental compliance endorsementfromtheMinistryofEnvironment.

Constant quality up gradation ensures that the company stays in the global mainstream and maintains its edge, through excellence. A technology tie-up with National Bicycle Industries of Japan led to the launch of the World 1 series of cycles, besides introduction of new frame designing and features like- A-frame, D-frame, Y-frame, and Swan shaped frame, speedometers & indicators among others.

(1.15) QUALITY POLICY


Hero cycle limited shall have to stay in Global mainstream by continually innovating products and services and instutionilizing its efforts for Quality and Productivity improvement Through Effective leadership, Human Excellence, Technological up gradation, Appropriate work environment and ensuring compliance to applicable regulatory requirements Thereby Enhancing the Customer confidence.

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(1.16) ENVIRONMENTAL POLICY


Hero Cycles Limited, shall strive to study in Global mainstream By Providing world class quality bicycles and services Through Total compliance to applicable legal of other requirements and proactively incorporating Cleaner technologies / techniques There by Conserving resources, preventing pollutants at sources and demonstrate continual improvement in our environmental performance.

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(1.17) INNOVATIONS

Born out of Passion


The ore goes into fire only to shed off its impurities. Similar is the man whose virtues shine when he is tried by the fire of life. Taking upon Novelty itself as a competitor, the Hero Cycles, has been always striving for perfection and innovation in every aspect of their dealings. The pursuit to innovate is endless at Hero, so much so that innovation has become a buzz word in Hero premises. Hero Cycles has been able to use changes and new trends to its advantage by identifying emerging need gaps and expanding its product portfolio to appeal to different kinds of customers. In its endeavour to keep a step-ahead of times, Heros most advanced & modern R & D department continuously creates innovative products having functional attributes & aesthetics, meeting the aspirational needs of its proud customers around the globe. As a result, Hero Cycles was able to launch several new concepts and models in bicycles like the Mountain Bikes, Racer Bikes, Dirt Terrain Bikes & D-frame bikes besides creating a variety of cycles for different user segments and sub-segments including women and children, students, adventure seekers, laborers, city customers and fitness conscious. Rolling out nineteen new models in just one year, itself speaks volume for Heros emphasis on innovations & designs.

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(1.18) PROMOTIONS

Until 1986, the company had no need for mass communication. But as competition started growing, Hero Cycles begun to feel the need for creating lasting impression on the customers mind. In the mid 1980s Hero was perceived to be the manufacturer of the basic black bicycles. The company required an image change. It needed to communicate to customers the vast portfolio of products that it had, particularly in the recreational segment. The launch of innovative products and their use as image builders happened simultaneously. Since 1986, the communication strategy has been to build each product separately and create a unique positioning for them. In this way the Ranger was positioned as the bike for outdoor fun, Impact was the preferred choice among city riders and Jet was projected as the lightest running roadster while Hawk was the racers edge. Each of these launches and their promotion gave the Hero brand a new meaning. The brand has also used celebrities including film stars Sanjay Dutt, Rani Mukherjee, Hrithik Roshan and Ameesha Patel. The latest is Indias new bowling sensation, Irfan Pathan who has also been a real life Hero cycle user.

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(1.19)4 PS

TABLE-1.1

PRODUCT

PRICE

1. CYCLES 2. RIMS 3. HUBS & CHAINS 4. COLD ROLLED STRIPS 5. E BIKES


SKIMING ADIDAS HERO (47000Rs/-)

PLACE

PROMOTION

DEALERS SUB - DEALERS DIRECT COMPANY

WALL PAINTINGS TELEVISION JOINT PUBLICITY SCHEME

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(1.20) NATIONAL MAIN STREAM


Hero Group's humane approach is manifested in all aspects of commercial production. The Group undertakes various projects and activities of socio-humanitarian nature to contribute to the National Mainstream. Group Companies, Hero Cycles Limited and Hero Honda Motors Limited have been pioneers within the Group, in undertaking socially productive work of myriad nature. Healthcare Raman Munjal Memorial Hospital is a 100-bed hospital with a well-equipped laboratory, a fully functional operation theatre, an outpatient department as well as a casualty section. The medical centre on the factory premises of the Group Companies is open for the sub-urban and rural communities of the surrounding areas. The medical centre is also equipped to provide First Aid and ambulance facility for road accident victims. Other efforts, under the auspices of Hero Cycles Limited include: Eye Camps: With over 15,000 patients examined and about 1700 cataract operations performed so far, these Eye Camps have also aided patients with free accommodation, food and medicines. Family Planning Camps: Held since 1993 at the Civil Hospital, Rewari and Bawal, these camps offer monetary incentives to the masses to adopt family planning measures.

Blood Donations Camps: These camps are being organised on a regular basis since 1992. 464 units have been donated to Indian Red Cross Society in the last camps. ENT Check up Camps: Conducted by specialists from AIIMS, these camps have been organized since November 1997 Heart Check-up Camps: Since July 1988, free camps are being organized in collaboration with Escorts Heart Institute and Research Centre, where specialised diagnosis methods like Echocardiography and ECG are used

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(1.21) PRODUCTS

SLRs City Bikes Ranger MTB /ATB Roadsters

Maxim Fun Series Special kids bike Super start series

F-1 Series Roadsters City Bikes Racers

Gents Ladies

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(1.22) ORGANIZATION STRUCTURE Finance DepartmentChairman Cum Managing Director (Sh.O.P. Munjal)

Sr. Vice- President ( Finance) ( Sh. Bharat Goel)

Associate V-P Finance ( Sh. Ashok Khanna)

Assistant Manager ( Sh. Hardeep Kumar)

Marketing Department-

President ( Mr. G.D Kapoor)

Senior Manager ( Mr. T.L Verma)

Assistant Manager ( Mr. Ashok Arora)

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(1.23) PHYSICAL LAYOUT OF THE PREMISES OF HCL

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

SECURITY ADMN BLOCK AND SYSTEMS LAWN TABULAR GENARATOR ROOM SCRAP YARD EXPORT STORE EXPORT PACKING CANTEEN RANGER E-BIKE UNIT

12. SCRAP YARD 13. RIM PLANT 14. BOILER HOUSE 15. PAINT SHOP 16.MAIN STORE 17.POLISH ROOM 18. EFFLUENT TREATMENT PLANT 19. E- BIKE MANUFACTURING UNIT 20. E- BIKE MANUFACTURING UNIT 21.RECEIPT AND DESPATCH STORE

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(1.24) GROWTH CHART OF HERO CYCLES LIMITED

Year 2002 2003 2004 2005 2006 2007 2008 2009

Sales (In Crores) 959.44 895.87 971.53 1094.48 1136.93 1330.87 1285.00 1490.19

Profit before tax (In Crores) 91.56 67.90 94.17 73.58 63.62 121.13 77.23 102.89

(Table-1.2)

GROWTH CHART
1600 1400

Sales & Profit

1200 1000 800 600 400 200 0 2002 2003 2004 2005 2006 2007 2008 2009 Sales (In Crores) PBT (In Crores)

Year

(Figure-1.1)

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(1.24) TREND ANALYSIS

The financial statement may be analyzed by computing trend series of information. The method determines the direction upwards or downwards and involves the computation of the percentage relationship that each statement item bears to the same in base year. The information for a number of years is taken up and one year generally first year is taken as base year. The figures of base year are taken as 100 and trend ratios for other years are calculated on the basis of the base year. Through the analysis we are able to see the trend of figures either upwards or downwards. 1. Trend Analysis of SalesYears 2004-05 2005-06 2006-07 2007-08 2008-09

Sales (in Crores) 1094.48 1136.93 1330.87 1285 1490.19 (Table-1.3)

Trend 100 103.8786 117.0582 96.55338 115.9681

Trend Of Sales
140 120 100 80 60 40 20 0 2005 2006 2007 2008 2009 Trend Of Sales 100 103.8786 117.0582 96.55338 115.9681

(Figure-1.2) InterpretationIt can be interpreted from the graph that the trend of the net sales has been fluctuating within a specific range. 2005 has been taken as the base year, so its trend has been assumed as 100, the sales increased in 2006 and 2007 but a dip was seen in the sales in 2008, this was due to varied reasons but most important was the because of the impact of recession in 2008, but the company revived its previous value of sales which grew in the year 2009.

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2.Trend Analysis of EPSYears 2004-05 2005-06 2006-07 2007-08 2008-09 EPS (in Rs.) 13.85 18.03 25.39 17.03 14.55 (Table-1.4) Trend 100 130.1805 140.8209 67.07365 85.43746

Trend(%)
160 140 130.1805 120 100 80 60 40 20 0 2005 2006 2007 2008 2009 67.07365 100 85.43746 Trend(%) 140.8209

(Figure-1.3) Interpretation From the above graph it is easily interpreted that the trend in EPS has been fluctuating in huge ranges since 2005. In the years 2005, 2006 and 2007 it was ever rising but then there was a sudden dip in it in years 2008 due to less sales and less profit earned by the company as it could not give more money as dividend to the shareholders, but it again revived in year 2009.

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3.Trend Analysis of Net Profit

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

Net Profit (in Crores) 549,202,556 714,869,605 1,006,668,276 675,309,685 576,997,771 (Table-1.5)

Trend 100 130.1639 140.8192 67.08323 85.44203

Trend(%)
160 140 120 100 80 60 40 20 0 2005 2006 2007 2008 2009 67.08323 100 103.1639 85.44203 Trend(%) 140.8192

(Figure-1.4) InterpretationIt is analysed from the above graph that the company has been earning good amount of net profit in the years 2005, 2006 and 2007. But because of recession and due to less sales in the year 2008, the net profit also decreased but again it rose in the year 2009.

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(1.25) SWOT Analysis STRENGTHS


Strong and enduring customer brand loyalty around the world. Upgrading the technology both in domestic and exports. Maintenance of high market share since a long time.

WEAKNESS
Packaging material not of the required standards Damages during transportations Process of inventory is not according to the JIT system. Advertisement is not done regularly.

OPPORTUNITIES
Bihar. Its R&D department is being recognized by the Government. Company can increase its market share further by catering to the markets in UP and

THREATS
Local / non branded manufacturers of cycle parts. Chinese cycles entering the world market. Motor bike industry damaging cycle industry on big way.

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(1.26) RATIO ANALYSIS

Meaning of Ratio
A ratio is a simple arithmetical expression of the relationship of one number to another. According to Accountants Handbook by Wixon, Kell and Bedford, a ratio is an expression of quantitative relationship between two numbers. According to Kohler, a ratio is the relation, of the amount a, to another, b, expressed as the ratio of a to b, a: b (a is to b); or as a simple fraction, integer, decimal, fraction or percentage. A financial ratio is the relationship between two accounting figures expressed mathematically. A ratio can be expressed as percentage by simply multiplying the ratio by 100. Ratios provide clues to the financial strength, soundness position or weakness of an enterprise. One can draw conclusions about the exact financial position of a concern with the help of ratios.

Meaning and Concept of Ratio Analysis


Ratio Analysis is a technique of analysis and interpretation of financial statements. It is the process of establishing and interpreting various ratios for helping in making certain decisions. However, ratio analysis is not an end itself. It is the only means of better understanding of financial strength and weakness of a firm. Calculation of ratios does not serve any purpose, unless several appropriate ratios are analyzed and interpreted. There are number of ratios which can be calculated from the information given in the financial statements, but the analyst has to select the appropriate data and calculate only a few appropriate ratios from the same keeping in mind the objective of analysis. The following are four steps involved in the ratio analysis: Selection of relevant data from financial statement depending upon objective of analysis. Calculation of the appropriate ratios from the above data. Comparison of the calculated ratios with the ratio of the same firm in the past, or the ratios developed from projected financial statements or the ratios of some other firms or the comparisons with ratios of the industry to which the firm belongs.

Interpretation of the Ratios


Ratio Analysis is one of the most powerful tools of financial analysis. It is used as a device to analyze and interpret the financial health of an enterprise. It is with the help of ratios that the financial statements can be analyzed more clearly and decisions made from such analysis. The use of ratios is not confined to the financial managers only. There are different parties interested in the ratio analysis for knowing the financial position of a firm for different purposes. The supplier of goods on credit, banks, financial institutions, investors,
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shareholders and management all make use of ratio analysis as a tool in evaluating the financial position and performance of a firm for granting credit, providing loans or making investments in the firm. With the use of ratio analysis, one can measure the performance of the firm is improving or deteriorating. Thus, ratios have wide applications and are if immense use of today.

Guidelines or precaution for use of ratios:

1. Accuracy of financial statements: The ratios are calculated from the data available in financial statements. Before calculating ratios one should see whether proper concepts and conventions have been used for preparing financial statements or not. These statements should also be properly audited by competent auditors. The precautions will establish the reliability of data given in financial statements. 2. Objective or purpose of analysis: The type of ratios to be calculated will depend on the purpose for which these are required. The purpose or object for which ratios are required to be studied should always be kept in mind for studying various ratios. Different objects may require the study of different ratios. 3. Selection of ratios: Another precaution in ratios analysis is the proper selection of appropriate ratios. The ratios should match the purpose for which these are required. Only those ratios should be selected which can throw proper light on the matter to be discussed. 4. Use of standards: The ratios will give on indications of financial position only when discussed with reference to certain standard. These standards may be rule of thumb as in case of current ratio {2:1} and acid test ratio {1:1} may be industry standards, may budget or projected ratios etc. 5. Calibre of the analyst: The ratios are the only tools of analysis and their interpretation will depend upon the calibre and competence of the analyst. 6. He should be familiar with various financial statements and the significance of changes etc. 7. Ratios provide only a base: The ratios are only guidelines for the analyst he should not base his decisions entirely on them. He should study any other relevant information, situation in the concern, general economic environment etc. before reaching final conclusions. 8.

Functional classification or classification according to tests


In view of financial management or according to tests satisfied, various ratios have been classified as below: 1. Liquidity ratios: These are the ratios, which measure the short term solvency or financial position of the firm and are calculated to comment upon the short term paying capacity of concern or firms ability to meet its current obligations. The various liquidity ratios are: Current ratio Liquid ratio Absolute liquid ratio

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2. Long term solvency and leverage ratios: Long term solvency ratios convey firms ability to meet the interest cost and repayment schedule of its long term obligations, example debt equity ratio and interest coverage ratio. Leverage ratio shows the proportions of debt and equity in financing of the firm. 3. Activity ratios: Activity ratios are calculated to measure the efficiency with which the resources of a firm have been employed. These ratios are also called Turnover ratios because it indicates the speed with which assets are being turned over in to sales example debtor turnover ratio.

Classification according to significance or importance


The ratios have also been classified according to their significance or importance. Some ratios are more important than others and the firm may classify them as primary and secondary ratios. The British Institute of Management has recommended the classification of ratios according to importance for inter firm comparisons. For inter firm comparisons, the ratios may be classified as primary or secondary ratios. The primary ratio is one which is one of prime importance to a concern, thus return on capital employed is named as primary ratio. The other ratios which support or explain the primary ratio are called secondary ratio, e.g. the relationship of operating profit to sales or the relationship of sales to total assets of the firm.

Analysis of Short Term Financial Position


The short term obligation of a firm can be met only when there are sufficient liquid assets. If a firm fails to meet such current obligations, its goodwill in the market is likely to be affected beyond repair. Moreover a very high degree of liquidity will tie funds in current assets. Therefore it is necessary to have a proper balance in regard to liquidity of the firm. Two types of ratio are calculated to measure short-term solvency of a firm. 1) LIQUIDITY RATIO: It refers to the ability of a concern to meet its obligations as and when these become due. The short-term obligations are met by realizing amounts into cash for paying obligations of shortterm nature. The sufficiency or insufficiency of current assets should be assessed by comparing them with short- term liabilities. If current assets can pay-off current liabilities, the liquidity position is satisfactory. On the other hand, if current liabilities may not easily met out of current assets then the liquidity position will be bad. To measure liquidity of a firm, the following ratios can be calculated: Current ratio Quick ratio or Liquid ratio Absolute quick ratio

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Current RatioCurrent Ratio is the relationship between the current assets and current liabilities. This ratio is also known as working capital ratio or 2:1 ratio. It is measure of general liquidity and is most widely used to make the analysis of a short- term financial position. Current Ratios- Current Assets Current Liabilities Year Current Assets Current Liabilities Current Ratio 2008-09 2007-08 4,500,174,202 4,078,120,805 1,897,907,454 2,117,280,044 2.37 1.92 (Table- 1.6) 2006-07 3,514,169,012 2,174,339,220 1.61

Current Ratio
Current Ratio 2.37 1.92 1.61

2007

2008

2009

(Figure-1.5) Interpretation- From the above table it is clear that the company has been investing more in the current assets than the current liabilities. An insight in to the balance sheet of the company shows that major portion of current assets consists of sundry debtors and loans and advances. Current Ratio has increased in year 2008-09 as compared to year 2007-08 which has further increased as compared to the year 2006-07. The ratio of year 2008-09 is near to the thumb rule of 2:1, this indicates that liquidity position is good and companys commitment to meet its short-term obligation in time is there.

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Liquid Ratio/ Quick Ratio/ Acid Test RatioIt is a more rigorous test of liquidity then current ratio. The term liquidity refers to the ability of a firm to pay its short-term obligations as and when they become due. It is between the liquid assets and current liabilities. Liquid Ratio - Liquid Assets Current Liabilities

Year Liquid Assets Current Liabilities Liquid Ratio

2008-09 3,722,592,925 1,897,907,454 1.96

2007-08 2,971,184,464 2,117,280,044 1.40 (Table-1.7)

2006-07 2,078,507,978 2,174,339,220 1.24

liquid ratio
1.96

1.4 1.24

2007

2008 liquid ratio

2009

(Figure-1.6)

Interpretation- The quick ratio of the company is exceeding the rule of thumb of 1:1, indicating that the company is highly liquid so as to fulfil current liabilities well in time.

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Cash/ Absolute Liquid RatioCash ratio is the relationship between the absolute liquid assets and current liabilities. Debtors and bills receivables are more liquid than inventories. But cash ratio involves only absolute liquid assets. Absolute liquid assets involve only cash and short-term securities. Cash Ratio- Absolute Liquid Assets Current Liabilities

Year Absolute Liquid Assets Current Liabilities Cash Ratios

2008-09 1,52,820,715 1,897,907,454 0.0805

2007-08 151,600,603 2,117,280,044 0.0716 (Table1.9)

2006-07 22,134,657 2,174,339,220 0.0101

Absolute Liquid Ratio


0.09 0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0 2007 2008 2009 absolute Liquid Ratio

(Figure- 1.7) InterpretationIt is interpreted from the above graph and table that the company has enough cash to meet its short-term liabilities as in the year 2008-09 the amount of liquid cash is far more than the 50% of the net worth of liabilities, this means that the company is quite liquid.

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2) EFFICIENCY/ ACTIVITY RATIO:Activity ratio measures the efficiency and the effectiveness with which a firm can manage its resources. These are known as the Turnover ratios, because they indicate the speed with which assets are converted into cash. Major ratios are given as underInventory Turnover RatioThis ratio establishes the relationship between Cost of Goods Sold and Average Inventory. This ratio shows how frequently stock is converted into sales. A high Inventory turnover ratio indicates the efficient management of inventory because more frequently the stocks are sold; the lesser amount is required to finance the inventory. On the other hand lower this ratio indicates inefficient management of inventory. Inventory Turnover ratio= Cost of Goods Sold Average Inventory Years Cost of Goods Sold Average Inventory Inv.Turnover Ratio (in times) (Table-1.10) 2008-09 12,486,741,211 942,258,809 13.25 2007-08 11,244,610,812 956,298,688 11.75 2006-07 11,564,424,474 786,091,088 14.71

Inventory Turnover Ratio


16 14 12 10 8 6 4 2 0 2007 2008 2009 Inventory Turnover Ratio

(Figure-1.8)

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InterpretationThe ratio indicates how fast inventory is sold. A high ratio is good from the point of view of liquidity. A low ratio signifies that inventory does sell fast and stays on the shelf for a long time. The ratio is such due to high level of inventory. As it can be seen that inventory turnover ratio has increased in the year 2008-09 as compared to 2007-08. This is a favourable position. It implies that there have been some improvements in efficient management of inventory in the concern.

Inventory Conversion Period-

Days in the year

Inventory Turnover Ratio

Years Days in the year Inv. Turnover Ratio Inv. Conversion Period

2008-09 365 13.25 28 days

2007-08 365 11.75 31 days

20006-07 365 14.71 25 days

(Table-1.11) InterpretationThe companys inventory conversion period is 27 days in the year 2008-09. It has decreased from 31 days in the year 2007-08. This simply means that the company takes around 27 days to convert the raw material into sales and this decrease is actually good for company as now there is less fear for the obsolesce of the material.

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Debtors Turnover RatioDebtors Turnover Ratio indicates the velocity of debt collection of firm. In simple words, it indicates the number of times average debtors are turned over during a year. Debtors Turnover Ratio- Annual Net Sales Average Debtors Years Annual Net Sales Average Debtors Debtors Turnover Ratio (in times) 2008-09 14,901,978,247 2,187,476,224 6.81 2007-08 12,850,038,969 2,098,441,580 6.12 (Table-1.12) 2006-07 13,308,705,116 2,044,552,471 6.51

Debtor's Turnover Ratio


7 6.8 6.6 6.4 6.2 6 5.8 5.6 2007 2008 2009 Debtor's Turnover Ratio

(Figure- 1.9) InterpretationGenerally higher the value of the debtor turnover, more efficient the management would be. From the data it is clear that the debtors turnover ratio has increased to 6.81 in the year 2008-09, this indicates that there is efficient management of debtors. This indicates speedy and effective collection.

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Average Collection Period of Debts-

No. of days in the Year Average Debtors

Years No. of Days in the Year Debtors Turnover Ratio Average Collection Period of Debts

2008-09 365 6.81 54 days

2007-08 365 6.12 59 days (Table-1.13)

2006-07 365 6.51 56 days

Average collection Period of Debt


60 59 58 57 56 55 54 53 52 51 2007 2008 2009 Average collection Period of Debt

(Figure- 1.10) InterpretationCompanys average collection period is approximately 54 days. The company has decreased the time period from 59 days i.e approx. two months to 54 days. This indicates that the company has decreased the time allowed to the debtors to return the debt. This is a positive step for the company as the time should not be increasing in the long run.

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Creditors Turnover RatioThis ratio indicates the velocity with which the creditors are turned over in relation to purchases. Generally higher the ratio better it is or otherwise lower the creditor velocity, less favourable are the results. Creditors Turnover Ratio- Annual Purchases Average Creditors

Years Annual Purchases Average Creditors Creditors Turnover Ratio

2008-09 11,165,961,043 1,392,306,720 8.02

2007-08 10,295577808 1,591,501,478 6.46 (Table-1.14)

2006-07 10382131472 1,499,180,491 6.93

Creditor's Turnover Ratio


9 8 7 6 5 4 3 2 1 0 2007 2008 2009 Creditor's Turnover Ratio

(Figure-1.11) InterpretationThis is indicated from the above table that the creditors turnover ratio has increased in the year 2009 then from the year 2008. This implies that now the creditor velocity is more and the results are more favourable.

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Average Collection Period for Creditors- No. of days in a year Creditors Turnover Ratio

Year No. of days in a year Creditors Turnover Ratio Avg. Collection Period for Creditors

2008-09 365 8.02 46 days

2007-08 365 6.46 56 days

2006-07 365 6.93 53 days

(Table-1.15)

Average Collection Period Of Creditors


60 50 40 30 20 10 0 2007 2008 2009 Average Collection Period Of Creditors

(Figure-1.12) InterpretationThe payment to the creditors is being done in 46 days but the payment is collected from the debtors within 54 days, this indicates that

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Working Capital Turnover RatioWorking capital is directly related with the sales of the firm. Working capital turnover ratio indicates the velocity of the utilization of the net working capital. This ratio indicates the number of time the working capital is turned over in the course of the year. Working Capital Turnover Ratio= COGS Average Net Working Capital

Years COGS Net Working Capital Working Capital Turnover Ratio

2008-09 12,486,741,211 2,602,266,748 4.79

2007-08 11,244,610,812 1,960,840,761 5.73

2006-07 11,564,424,474 1,339,829,792 8.63

(Table-1.16)

Working Capital Turnover Ratio


10 9 8 7 6 5 4 3 2 1 0 2007 2008 2009 Working Capital Turnover Ratio

(Figure-1.13) InterpretationThe table indicates that the WCTR is decreasing in the year 2008-09, this indicates that the company is not using its working capital effectively.

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Profitability RatiosThe following ratios are generally termed as profitability ratios-

Gross Profit RatioGross profit ratio measures the relationship of gross profit to net sales and is usually represented as a percentage. Gross Profit Ratio- Gross Profit *100 Net Sales

Year Gross Profit Net Sales Gross Profit Ratio(%)

2008-09 2,415,237,036 14,901,978,247 16.21

2007-08 1,605,428,157 12,850,038,969 12.49 (Table-1.17)

2006-07 1,744,280,642 13,308,705,116 13.10

Gross- Profit Ratio


18 16 14 12 10 8 6 4 2 0 2007 2008 2009 Gross- Profit Ratio

(Figure-1.14) InterpretationThere has been decrease in the Gross Profit because the rate of increase in the sales is less than the rate of increase in cost of goods sold.
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Net-Profit RatioNet profit ratio established a relationship between net profit and sales. This ratio is the overall measure of firms profitability. Net Profit Ratio= Net Profit after Tax Net Sales *100

Years Net Profit after Tax Net Sales Net Profit Ratio

2008-09 576,997,711 13,308,705,116 3.89

2007-08 675,309,685 12,850,038,969 5.25 (Table- 1.18)

2006-07 1,006,668,276 14,901,978,247 7.56

Net Profit Ratio


8 7 6 5 4 3 2 1 0 2007 2008 2009 Net Profit Ratio

(Figure-1.15) InterpretationIt is clear from the table that the net profitability ratio has decreased in the year 2008-09 that simply means that the expenditure of the company on the material consumed and other company expenses has increased which has decreased the net profit of the company.

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Operating ratioCOGS+ Operating Expenses*100 Net Sales Year COGS Operating Expenses Net Sales Operating Ratio 2008-09 12,486,741,211 980,771,960 14,801,978,247 90.98 2007-08 11,244,610,812 943,965,030 12,850,038,969 94.85 (Table-1.20) 2006-07 11,564,424,474 872,792,384 13,308,705,116 93.45

Operating Ratio
96 95 94 93 92 91 90 89 2007 2008 2009 Operating Ratio

(Figure-1.16) InterpretationThe table indicates that the operating ratio has decreased in comparison with the previous year, but as a matter of fact; it is still very high, which is not good for the company as it shows the inefficiency of the company to manage its business operations. And there are small margins of profit available for the purpose of the payment of dividend and creation of the reserves.

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Solvency RatiosDebt-Equity RatioIt shows the relationship between external and internal equities & it is calculated to measure the claim of outsiders and owners against companys assets. The outsiders funds include all debts / liabilities to outsiders, whether in form of debentures, bonds, mortgage or bills. The shareholders funds include equity + preference share capital included capital reserve, revenue reserve and reserves representing accumulated profits and surpluses. Debt Equity Ratio = Long term Debts / Shareholders Funds * 100 Years Long Term Debts Shareholders Funds Debt Equity Ratio 2008-09 2,415,142,595 6,526,360,604 37.006 2007-08 2,538,217,041 5,992,951,800 42.35 (Table-1.21) 2006-07 1,732,223,697 5,364,231,022 32.29

Debt Equity Ratio


45 40 35 30 25 20 15 10 5 0 2007 2008 2009 Debt Equity Ratio

(Figure-1.17) InterpretationThere has been a slight decrease in this ratio due to the fact that now the company is relying more on own funds then on outsiders funds.

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Equity RatioEstablishing the relationship between shareholders funds and total assets of the company, the components of this ratio are Equity ratio = Shareholders funds / Total assets * 100

Years Shareholders Funds Total Assets Equity Ratio(in times)

2008-09 6,526,360,604 8,401,185,362 77.68

2007-08 5,992,951,800 10,590,652,424 56.58

2006-07 5,367,231,022 6,088,196,173 88.16

(Table-1.22)

Equity Ratio
59 58.5 58 57.5 57 56.5 56 55.5 55 2007 2008 2009 Equity Ratio

(Figure- 1.18) InterpretationThe Company is relying more on shareholders funds than on loan funds. The equity ratio in 2008 is 56.28% and in 2009 is 58.44%. This means that the company is getting more of the owners capital for its operation rather than on getting the loans from various sources.

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Solvency RatioThis ratio indicates the relationship between total liabilities to total assets of the company. Solvency Ratio- 100-Equity Ratio Years 2008-09 2007-08 2006-07 Solvency Ratios 22.32 44 11.85 (Table-1.23)

Solvency Ratio
44.5 44 43.5 43 42.5 42 41.5 41 Category 1 Category 2 Category 3 Solvency Ratio

(Figure-1.19) InterpretationThe ratio in 2008 is 44% and in 2009 is 42%, so it implies lower the ratio of total liabilities to total assets, more satisfactory is the long term solvency position of the firm.

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Chapter-1 (1.1) Introduction To the Concept of Working Capital ManagementWorking capital management is concerned with the problems arise in attempting to manage the current assets, the current liabilities and the inter relationship that exist between them. The term current assets refers to those assets which in ordinary course of business can be, or, will be, turned in to cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. The major current assets are cash, marketable securities, account receivable and inventory. Current liabilities ware those liabilities which intended at their inception to be paid in ordinary course of business, within a year, out of the current assets or earnings of the concern. The basic current liabilities are account payable, bill payable, bank over-draft, and outstanding expenses. The goal of working capital management is to manage the firms current assets and current liabilities in such way that the satisfactory level of working capital is mentioned. The current should be large enough to cover its current liabilities in order to ensure a reasonable margin of the safety.

Definitions According to Guttmann & DougallExcess of current assets over current liabilities. According to Park & GladsonThe 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).

(1.2) Need of working capital managementThe 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 can be earned will naturally 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 refers to operating or cash cycle. If the company has certain amount of cash, it will be required for purchasing the raw material may be available on credit basis. Then the company has to spend some amount for labour and factory overhead to convert the raw material in work in progress, and ultimately finished goods. These finished goods convert in to sales on credit basis in the form of sundry debtors. Sundry debtors are converting into cash after expiry of credit period. Thus some amount of cash is blocked in raw materials, WIP, finished goods, and sundry debtors and day to day cash requirements. However some part of current assets may be financed by the current liabilities also. The amount required to be invested in this current assets is always higher than the funds available from current liabilities. This is the precise reason why the needs for working capital arise.

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(1.3) Gross working capital and Net working capitalThere are two concepts of working capital management

1) Gross working capitalGross working capital refers to the firms investment I current assets. Current assets are the assets which can be convert in to cash within year includes cash, short term securities, debtors, bills receivable and inventory.

2) Net working capitalNet 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. Efficient working capital management requires that firms should operate with some amount of net working capital, the exact amount varying from firm to firm and depending, among other things; on the nature of industries.Net working capital is necessary because the cash outflows and inflows do not coincide. The cash outflows resulting from payment of current liabilities are relatively predictable. The cash inflow are however difficult to predict. The more predictable the cash inflows are, the less net working capital will be required. The concept of working capital was, first evolved by Karl Marx. Marx used the term variable capital means outlays for payrolls advanced to workers before the completion of work. He compared this with constant capital which according to him is nothing but dead labour. This variable capital is nothing wage fund which remains blocked in terms of financial management, in working-process along with other operating expenses until it is released through sale of finished goods. Although Marx did not mentioned that workers also gave credit to the firm by accepting periodical payment of wages which funded a portioned of W.I.P, the concept of working capital, as we understand today was embedded in his variable capital.

(1.4) Types of working capitalThe operating cycle creates the need for current assets (working capital). However the need does not come to an end after the cycle is completed to explain this continuing need of current assets a destination should be drawn between permanent and temporary working capital. 1) Permanent working capital The need for current assets arises, as already observed, because of the cash cycle. To carry on business certain minimum level of working capital is necessary on continues and uninterrupted basis. For all practical purpose, this requirement will have to be met permanent as with other fixed assets. This requirement refers to as permanent or fixed working capital

2) Temporary working capital Any amount over and above the permanent level of working capital is temporary, fluctuating or variable, working capital. This portion of the required working capital is needed to meet fluctuation in demand consequent upon changes in production and sales as result of seasonal changes
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Temporary Amount of Working Capital Permanent

Time (Figure-1.1) Graph shows that the permanent level is fairly constant; while temporary working capital is fluctuating in the case of an expanding firm the permanent working capital line may not be horizontal. This may be because of changes in demand for permanent current assets might be increasing to support a rising level of activity.

(1.5) Determinants of working capitalThe amount of working capital depends upon following factors1) Nature of business Some businesses are such, due to their very nature, that their requirement of fixed capital is more rather than working capital. These businesses sell services and not the commodities and that too on cash basis. As such, no founds are blocked in piling inventories and also no funds are blocked in receivables. e.g. public utility services like railways, infrastructure oriented project etc. There requirement of working capital is less. On the other hand, there are some businesses like trading activity, where requirement of fixed capital is less but more money is blocked in inventories and debtors. 2) Length of production cycle In some businesses like machine tools industry, the time gap between the acquisition of raw material till the end of final production of finished products itself is quite high. As such amount may be blocked either in raw material or work in progress or finished goods or even in debtors. Naturally there need of working capital is high.

3) Size and growth 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.
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4) Business/ Trade cycle If the company is the operating in the time of boom, the working capital requirement may be more as the company may like to buy more raw material, may increase the production and sales to take the benefit of favourable market, due to increase in the sales, there may more and more amount of funds blocked in stock and debtors etc. similarly in the case of depressions also, working capital may be high as the sales terms of value and quantity may be reducing, there may be unnecessary piling up of stack without getting sold, the receivable may not be recovered in time etc.

5) Terms of purchase and sales 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. 6) 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.

7) Operating efficiency 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.

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Chapter-2 (2.1) Review of Literature


Noreen, Khan and Abbas (2009) in their article, International Working Capital Practices in Pakistan have analysed the Practices of working capital management in different Pakistani firms. This study has helped the policy makers and decision makers in better decision making. Ramachandran and Janakiraman (2009) in their article, The Relationship between Working Capital Management Efficiency and EBIT have analysed the relationship between working capital management efficiency and earnings before interest and tax of paper industry in India. The Paper Industry in India performs remarkably well during the period, however, less profitable firms wait longer to pay their bills. Appuhami (2008) in his article, The Impact of Firms Capital Expenditure on Working Capital Management: An Empirical Study across Industries in Thailand has concluded that firms capital expenditure has a significant impact on working capital management. The study also found that the firms operating cash flow, which was recognized as a control variable, has a significant relationship with working capital management. Huo and Sofat (2008) in their study, A Study of Working Capital in Selected Units of Hosiery Industry in Ludhiana: A Comparative Study of Oswal Woollen Mills and Nagesh Knitwear Pvt. Ltd. have stated that organizations cash flow prospects can very well be judged from its working capital management. The management of working capital plays an important role in maintaining the financial health of the organization during the normal course of business. Mian Sajid and Talat (2008) in their research paper, On the Factor Determining Working Requirements have examined investments, capital structure, dividends or company valuation decisions, among other topics. However, short-term assets and liabilities are important components of total assets and needs to be carefully analyzed. Management of these shortterm assets and liabilities warrants a careful investigation since the working capital management plays an important role for the firms profitability and risk as well as its value. Grewal and Gill (2007) in their research paper, Measuring Statistical Process Control (SPC) Implementation in Indian Bicycle Industry: Some Key Findings have explored the SPC implementation in Indian bicycle manufacturing firms and the main motives behind its implementation. Raheman and Nasr (2007) in their article, Working Capital Management and Profitability- A Case of Pakistani Firms have concluded that Working Capital Management has its effect on liquidity as well on profitability of the firm. as the cash conversion cycle increases it will lead to decreasing profitability of the firm, and managers can create a positive value for the shareholders by reducing the cash conversion cycle to a possible minimum level. There is also a significant negative relationship between debt used by the firm and its profitability.

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Moussawi, LaPlante, Kiechnick and Baranchuk (2006) in their study, Corporate Working Capital Management- Determinants and Consequences have concluded that firms overinvest in working capital. Industry practices, firm size, future firm sales growth, the proportion of outside directors on a board, executive compensation (current portion), and CEO share ownership significantly influence the efficiency of a companys working capital management. Padachii (2006) in his study, Trends in Working Capital Management and its Impact on Firms Performance: An Analysis of Mauritian Small Manufacturing Firms has analysed the trend in working capital needs and profitability of firms are examined to identify the causes for any significant differences between the industries. The dependent variable, return on total assets is used as a measure of profitability and the relation between working capital management and corporate profitability is investigated for a sample of 58 small manufacturing firms. Zinn (2004) in his article, Thirty Years of Titanium Bicycles- The short history of bicyclings wonder material has presented the history of the bicycle as per different parts of the world. Mikkola (2002) in her study, Industry Structure and Modular Product Architectures: An Interpretation of Cycle Industry has concluded that different types of networks exist as ways of coping with the dynamics of industry demands that are based on modular product architectures. Luh and Wu (2001) in their research paper, A Study of Innovative Ideas Screening Model Applied to Bicycle Industry have concluded that Product innovation is a key factor for organizations sustainability. Idea screening largely determines the fate of a new product. If the probability of successful ideas can be enhanced effectively, enterprises would be more willing to invest in new products. Innovative Ideas Screening Model (IISM) can measure success potential of new products, objectively and effectively. Green products are trendy and bicycle is one with great potential. Bicycle industry contributes considerable revenue to Taiwan and the innovation of which is vital. Weinraub and Visscher (1998) in their article, Industry Practice Relating To Aggressive Conservative Working Capital Policies have looked at ten diverse industry groups over an extended time period to examine the relative relationship between aggressive and conservative working capital practices. Results strongly show that the industries had significantly different current asset management policies. Ulrich, Randall,Fisher,Reibstein (1997) in their article, Managing Product Variety : A Study of the Bicycle Industry have analysed the reasons of the difference between the practices, marketing strategies, distribution channel and varieties introduced in the market by six different bicycle manufacturing companies.

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Bianchi (1995) in his research paper, An Educational Dynamic Model for Net Working Capital Management in a Trading Wholesale Firm has sketched a dynamic model which might be useful in improving net working capital.

(2.2)- Need for StudyThe prime objective of the company is to obtain maximum profit thought the business. The amount of profit largely depends upon the magnitude of sales. However the sale does not convert into cash instantaneously. There is always a time gap between sale of goods and receipt of cash. The time gap between the sales and their actual realization in cash is technically termed as operating cycle. Additional capital required to have uninterrupted business operations, and the amount will be locked up in the current assets. Regular availability of adequate working capital is inevitable for sustained biasness orpations. If the proper fund is not provided for the purpose, the business operations will be effected; and hence this part of finance to be managed well.

(2.3) Objectives of the Study1. To study the working capital components such as receivables account, Payable account and inventory position of HCL. 2. To study the Gross and Net Operating Cycle of HCL. 3. To study the reasons for the changes in the working capital.

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Chapter- 3 Research Methodology IntroductionIt is a way to systematically solve the research problem; it may be understood as a science of study how research is done scientifically. Thus research methodology is not only concerned with research methods but also consider the methods used in conduct of research study and explain why particular methods or technique and others are not, so that research result are capable of being evaluated either by researcher himself or by others.
Scope of the study The study is based in Ludhiana only. The years of study comprises of 2004-05 to 2008-09. The study has been carries out for the manufacturing unit of HCL. Research Design-This study will be descriptive. This study is mainly concerned about

an existing problem and its basic nature cause and effect. It is concerned with discovering and testing certain variables with respect to their services. The study will focus on the working capital management of Hero Cycles Limited. And also the ways in which that can be justified. Moreover, this study was pre- planned and based majorly on the secondary data.
Data Collection and SourcesThe data has been collected by both Primary and Secondary sources-

Primary Sources: During the project work the primary data was collected with the help of
a unstructured interview of Mr. Bharat Goel, (Sr.VP Finance), Mr. Hardeep Kumar and Mr. Davinder (Assistant Managers, Finance).
Secondary

Sources: As per the Project the secondary data has been collected from-

Annual report of HCL 2004-05 Annual report of HCL 2006-07


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Annual report of HCL 2007-08 Annual report of HCL 2008-09 Besides, many research papers, journals

and net have also acted as the source of secondary

data. Tools for Data Analysis- The data has been analysed with the help of tables and graphs. Even statistical techniques like ratios and trend analysis have also been used. sss Limitations of the study- Following limitations were encountered while preparing this project: 1) Limited data:This project has completed with annual reports; it just constitutes one part of data collection i.e. secondary. There were limitations for primary data collection because of confidentiality. 2) Limited period:This project is based on five year annual reports. Conclusions and recommendations are based on such limited data. The trend of last five year may or may not reflect the real working capital position of the company.

3) Limited area:Also it was difficult to collect the data regarding the competitors and their financial information. Industry figures were also difficult to get.

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Chapter-4 Working Capital Level and Analysis Working capital levelThe consideration of the level investment in current assets should avoid two danger points, excessive and inadequate investment in current assets. Investment in current assets should be just adequate, not more or less, to the need of the business firms. Excessive investment in current assets should be avoided because it impairs the firms profitability, as idle investment earns nothing. On the other hand inadequate amount of working capital can threaten the solvency of the firm because of its inability to meet its current obligation. It should be realized that the working capital needs of the firm may be fluctuating with changing business activity. This may cause excess or shortage of working capital frequently. The management should be prompt to initiate an action and correct imbalance.

(4.1) Current AssetsTotal assets are basically classified in two parts as fixed assets and current assets. Fixed assets are in the nature of long term or life time for the organization. Current assets convert in the cash in the period of one year. It means that current assets are liquid assets or assets which can convert in to cash within a year. To manage the current assets means to have current assets in such a proportion that they become profitable for the firm. They include Cash in bank and in hand Bills Receivables Sundry Debtors Short Term Loans and Advances Inventory of Stock Prepaid Expenses (Table -4.1)- Components of the Current Assets Years 2004-05 Inventories 650,041,883 Sundry Debtors 1,828,130,505 2005-06 766,521,142 1,860,512,457 69,481,654 2006-07 805,661,034 2,228,592,486 22,134,657 2007-08 1,106,936,341 1,968,290,674 151,600,603 2008-09 777,581,277 2,406,661,773 152,820,715

Cash and 77,168,419 Bank Balance Loans and 391,097,916 Advances Current Assets 2,946,438,723

337,661,837 3,034,177,090

457,780,835 3,514,169,012

851,293,187 4,078,120,805

1,163,110,437 4,500,174,202

Indices

100

102.9778

119.2687

138.4089

152.733

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180 160 140 120 100 100 80 60 40 20 0 2004-05 2005-06 2006-07 C.A Indices 2007-08 2008-09 119.2687 102.9778 138.4089 152.733

(Figure-4.1) InterpretationThe following points can be interpreted from the above table and figure In the year 2007-08, there is sudden rise in the inventory, which is because of the recession period. There was a slump in the sales and inventory was blocked in the company only. But in the year 2008-09, the things came back to normal. The sundry debtors were also less in the year 2007-08 because of the fall in the sales but in the year 2008-09, as soon as the sales increased the number of sundry debtors also increased. It is evident from the table that in the year 2008-09, the sundry debtors compute for the majority of the current assets. Cash in hand and Bank has also increased in both the consecutive years. But an inside view of balance sheet reveals that in the year 2007-08, the cash in hand has decreased considerably, but it has again increased in the year 2008-09, which is a good sign for the liquid health of the company. Loans and advances in the year 2008-09 have increased because the loans to the employees have increased and the advances have also increased because now the sales have increased and the company has sold the things on credit as well, as the advances include recoverable in cash or in kind.

55

(4.2) Current liabilitiesCurrent liabilities mean the liabilities which have to pay in current year. It includes sundry creditors means supplier whose payment is due but not paid yet, thus creditors called as current liabilities. Current liabilities also include short term loan and provision as tax provision. Current liabilities also includes bank overdraft. For some current assets like bank overdrafts and short term loan, company has to pay interest thus the management of current liabilities has importance. Bill Payable Sundry Creditors Outstanding Expenses Short-Term Loans Dividend Payable Bank Overdraft (Table- 4.2)- Components of Current Liabilities Years 2004-05 2005-06 150,091,940 2006-07 157,411,551 2007-08 279,111,124 2008-09 355,000,124

Acceptance 102,955,677 of Bills Payable Sundry Creditors Security Deposits Advance Against Orders Interest Accrued but not due Other Liabilities Current Liabilities Other Provisions Total Liabilities Indices

1,084,407,168 1,354,212,056 1,644,148,925 1,538,854,031 1,245,759,409 33,108,985 20,905,270 33,033,817 34,797,274 33,074,813 28,065,885 28,356,723 32,385,116 28,291,870 30,372,756

7,201,337

33,978,467

68,013,967

12,261,309

52,930,939

21,625,843

34,312,313

47,873,984

51,619,677

24,283,631

1,270,204,280 1,640,425,867 1,978,589,143 1,942,587,980 1,736,638,729 164,026,142 223,706,638 195,750,077 174,692,064 161,268,726

1,424,230,422 1,864,132,505 2,174,339,220 2,117,280,044 1,897,907,454 100 130.8869 152.6671 148.6614 133.2587

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180 160 140 120 100 100 80 60 40 20 0 2004-05 2005-06 2006-07 C.L Indices 2007-08 2008-09 130.8869 152.6671 148.6614 133.2587

(Figure-4.2) InterpretationIt is indicated from the above that there has been continuous rise in the current liabilities till the year 2007-08, but then in 2008-09, the liabilities have decreased as there is more increase in the current assets as compared to the current liabilities.

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(4.3) Companys Net Working Capital Trend AnalysisIn 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 us to study the upward and downward trends in current assets and current liabilities and its effect on the working capital position. In the words of S.P. Gupta The term trend is very commonly used in day-today conversion trend, also called secular or long term need is the basic tendency of population, sales, income, current assets, and current liabilities to grow or decline over a period of time According to R.C.Galeziem The trend is defined as smooth irreversible movement in the series. It can be increasing or decreasing. Emphasizing the importance of working capital trends, Man Mohan and Goyal have pointed out that analysis of working capital trends provide as base to judge whether the practice and privilege policy of the management with regard to working capital is good enough or an important is to be made in managing the working capital funds. Years Current Assets Current Liabilities 2004-05 2,946,438,723 1,434,230,422 2005-06 3,034,177,090 1,864,132,505 2006-07 3,514,169,012 2,174,339,220 2007-08 4,078,120,805 2,117,280,044 2008-09 4,500,174,202 1,897,907,454

Net Working Capital Indices

1,512,208,301

1,170,044,589

1,339,829,792

1,960,840,761

2,602,266,748

100

77.373

88.601

129.668

172.084

(Table-4.3)- Trends in Net Working Capital

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NWC Indices
200 180 160 140 120 100 80 60 40 20 0 2004-05 2005-06 2006-07 2007-08 2008-09 NWC Indices

(Figure-4.3) InterpretationIt can be clearly observed from the above table and figure that there has been an incline in the working capital of the company in the last five years. The current assets have increased more than the increase in the current liabilities in the corresponding years so, the trend has always been positive except for the year 2005-06 because in this year the % increase in the current assets is less than the % increase in the current liabilities.

(4.4) Changes in working capitalThere are so many reasons to changes in working capital as follows1) Changes in sales and operating expenses:The changes in sales and operating expenses may be due to three reasons A) There may be long run trend of change e.g. the price of row material say oil may constantly raise necessity the holding of large inventory. B) Cyclical changes in economy dealing to ups and downs in business activity will influence the level of working capital both permanent and temporary. C) 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. The term current assets policy may be defined as the relationship between current assets and sales volume. 3) Technology changes:The third major point if changes in working capital are changes in technology because changes in technology to install that technology in our business more working capital is
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required a change in operating expenses rise or full will have similar effects on the levels of working following working capital statement is prepared on the base of balance sheet of last two year. Statement of Changes in Working CapitalParticulars Current Assets Inventories Sundry Debtors Cash and Bank Balance Loans and Advances Total (A) Current Liabilities Bills Payable Sundry Creditors Security Deposits Advances Against Orders Interest Accrued Other Liabilities Provisions Total (B) 2008-09 2007-08 Increase Decrease

777,581,277 2,406,661,773 152,820,715 1,163,110,437 4,500,174,202

1,106,936,341 1,968,290,674 151,600,603 851,293,187 4,078,120,805

329,355,064 438,371,099 1,220,112 311,817,250

355,000,124 1,245,759,409 28,291,870 30,372,756 52,930,939 24,283,631 161,268,726 1,897,907,454

279,111,124 1,538,854,031 28,356,723 32,385,116 12,261,309 51,619,677 174,692,064 2,117,280,044 1,960,840,761 641,425,987

75,889,000 293,094,622 64,853 2,012,360 40,669,630 27,336,046 13,423,338

Net Working 2,602,266,748 Capital (A-B) Net Increase in Working Capital Total 2,602,266,748

2,602,266,748

(Table-4.4)- Changes in NWC


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ObservationsWorking Capital has increased for the year 2008-09 because1. Inventory has decreased because now the company is following the concept of JIT and even the sales have increased. 2. Cash in hand has increased because now the operating cycle has reduced to 74 days from the 84 days. 3. Sundry Debtors have increased because of the increase in the sales. 4. Loans and advances have increased because the company has given more loans to the employees now. And moreover, because of the rise in the material cost i.e the steel prices, the costs have increased so the company needs more money to invest. 5. 6. Loans and advances have increased because of the increase in the material cost especially because of the increase in the steel prices.

(4.5) Operating Cycle


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. 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 outlays 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 HCL used last five year data. Operating cycle of the HCL vary year to year as changes in policy of management about credit policy and operating control.

Raw Material Storage Period- (Table-4.5)


Years 2004-05 Average of 307,279,428 Raw Material 2005-06 354,605,014 2006-07 387,846,914 2007-08 444,343,869 2008-09 405,906,029

(Opening Stock+ Closing Stock/2) (Raw Material + Traded Items)

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Years 2004-05 2005-06 2006-07 2007-08 Annual 8,395,203,214 8,466,639,105 10,371,148,825 10,193,568,544 Consumption of Raw Material (Opening Stock+ Purchase-Closing Stock) Years Daily Consumption 2004-05 23,000,557 2005-06 23,196,272 2006-07 28,414,106 2007-08 27,927,585

2008-09 11,344,847,987

2008-09 31,081,775

(Annual Consumption/365) Years 2004-05 2005-06 2006-07 2007-08 2008-09 Raw Material 13 days 15 days 14 days 15 days 13 days Storage (Average of Raw material/Daily Consumption of Raw Material)

Work-in-Progress (Table4.6)
Years Average WIP 2004-05 of 150,078,798 2005-06 160,347,144 2006-07 176,557,779 2007-08 214,324,043 2008-09 189,318,239

(Opening Stock+ Closing Stock/2) Years 2004-05 2005-06 2006-07 2007-08 2008-09 Annual Cost 9,373,267,120 9,604,384,313 11,586,302,311 11,362,216,753 12,577,620,191 of Production ARMC+ 50% P.E+ Manufacturing Expenses+ 50% Dep. + Op.St. of WIP- Closing St. Of WIP) Years 2004-05 Average Daily 25,680,183 Cost 2005-06 26,313,382 (Annual Cost/365) Years Conversion period 2004-05 6 days 2005-06 6 days 2006-07 6 days 2007-08 7 days 2008-09 5 days 2006-07 31,743,294 2007-08 31,129,361 2008-09 34,459,233

(Average of WIP / Average Daily Cost)

Finished Goods Storage Period (Table4.7)


Years 2004-05 2005-06 2006-07 Average 80,198,817 82,487,899 100,789,502 Inventory (Opening Stock+ Closing Stock/2) (Finished Goods + Scrap) 2007-08 170,531,258 2008-09 68,372,913

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Years 2004-05 Annual 9,383,414,592 Cost of Sales

2005-06 9,589,658,677

2006-07 11,564,424,474

2007-08 11,244,610,812

2008-09 12,486,741,211

Years 2004-05 Average Daily 26,027,750 Cost of Sales

2005-06 26,729,810

2006-07 33,143,500

2007-08 33,089,787

2008-09 38,008,299

(Annual Sales/365) Years Storage Period 2004-05 3 days 2005-06 3 days 2006-07 3 days 2007-08 5 days 2008-09 2 days

(Average Inventory/daily consumption)

Average Collection Period (Table-4.8)


Years Average Debtors 2004-05 1,742,763,235 2005-06 1,844,321,481 2006-07 2,044,552,471 2007-08 2,098,441,580 2008-09 2,187,476,224

(Opening Debtors+ Closing Debtors/2) Years Annual Sales 2004-05 10,944,819,048 2005-06 11,369,337,410 2006-07 13,308,705,116 2007-08 12,850,038,969 2008-09 14,901,978,247

(Sales During the Year) Years Daily Sales 2004-05 29,985,805 2005-06 31,148,870 (Annual Sales/365) 2005-06 59 days 2006-07 36,462,206 2007-08 34,823,953 2008-09 40,827,338

Years Collection Period

2004-05 58 days

2006-07 56 days

2007-08 60 days

2008-09 54 days

(Average of Debtors/Daily Sales)

Average Payment Period (Table-4.9)


Years Average Creditors 2004-05 1,089,953,298 2005-06 1,219,309,612 2006-07 1,499,180,491 2007-08 1,591,501,478 2008-09 1,392,306,720

(Opening Creditors+ Closing Creditors/2)


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Years Annual Purchases

2004-05 8,408,147,399

2005-06 8,522,140,258

2006-07 10,382,131,472

2007-08 10,295,577,808

2008-09 11,165,961,043

(Purchases During The Year) Years Daily Purchases 2004-05 23,036,020 2005-06 23,348,329 (Purchases/365) Years Payment Period 2004-05 47 days 2005-06 52 days 2006-07 53 days 2007-08 56 days 2008-09 46 days 2006-07 28,444,196 2007-08 28,207,062 2008-09 30,591,674

(Average Creditors /Purchases)

Operating Cycle= Raw Material Conversion Period + Work-in-Progress Conversion Period+ Finished Goods Conversion Period+ Debtors Collection Period.

Companys Gross Operating Cycles2004-05 = 13+6+3+58 = 80 days

2005-06

= 15+6+3+59 =83 days

2006-07

=14+6+3+56 =79 days

2007-08

= 15+7+5+60 =79 days

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2008-09

=13+5+2+54 =74 days

The Gross Operating Cycle Consists of Following Events, Which Continues Throughout the Life of Business Conversion of cash to raw material Conversion of raw material to work-in-progress Conversion of Work-in-progress into finished goods Conversion of finished goods into accounts receivable Conversion of accounts receivable into cash InterpretationIf the operating cycle is of less number of days for the company then it is considered to be good as this means that the company needs less of working capital but the profitability level is quite good. In the year 2008-09, the operating cycle has reduced by 10 days from the year 2007-08,i.e it is of 74 days in the year 2008-09 and was of 84 days in the year 2007-08. This indicates that as the sales have risen and the debtors collection period has reduced so, now the companys inventory is converted into cash rapidly. It is very good for the financial health of the company.

Net Operating Cycle= Gross Operating CycleAverage Payment Period

Table-4.10- Net Operating Cycle Cycle Years Gross Operating Cycle(Days) Average Payment period(days) Net Operating Cycle(days) 2004-05 80 2005-06 83 2006-07 79 2007-08 87 2008-09 74

47

52

75

56

46

33

31

26

31

28

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Working Capital Management Components(4.7) 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 but not receive the cash for the same immediately. 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 characteristics1) It involve element of risk which should be carefully analysed. 2) 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 3) It implies futurity. The cash payment for goods or serves received by the buyer will be made by him in a future period. Objective of receivable management 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 4.11)-Size of receivables of HCL Years Sundry Debtors Indices 2004-05 2005-6 2006-07 2007-08 2008-09 1,828,130,505 1,860,512,457 2,228,592,486 1,968,290,674 2,406,661,773 100 101.77 (Figure-4.4) 121.91 107.67 131.65

S.D Indices
140 120 100 80 60 40 20 0 2005 2006 2007 2008 2009 S.D Indices

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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 collectability of debtors and thus, the efficiency of collection efforts. 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-4.12)- Average Collection Period Years Annual Net Sales Average Debtors DTR Avg. Collection Period 2005 2006 2007 2008 2009 10,944,819,048 11,369,337,410 13,308,705,116 12,850,038,969 14,901,978,247 1,742,763,236 6.28 58 days 1,844,321,481 6.16 59 days 2,044,552,471 6.51 56 days 2,098,441,580 6.12 59 days 2,187,476,224 6.81 54 days

Average collection Period of Debt


60 59 58 57 56 55 54 53 52 51 2007 2008 2009 Average collection Period of Debt

(Figure-4.5)
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Observations The size of receivables is steadily increasing it indicates that the company was allowing more credit year to year, but it was not bad signal because as receivables were supporting to the increase in the sales. Average collection period is reducing to present situation, but as compare with the normal collection period allowed to customer by HCL, it is clear that the company requires increasing its efficiency of collection of receivables. All the above factors directly or indirectly affect the debtors turnover ratio, current ratio and working capital ratio. For effective management of credit, the firm should lay down clear cut guidelines and procedure for granting credit to individual customers and collecting individual accounts should involve following steps: (1) Credit information (2) Credit investigation (3) Credit limits (4) Collection procedure.

(4.8) Inventory Management


The term inventory is used to designate the aggregate of those items of tangible assets which are1) Finished goods (saleable) 2) Work-in-progress (convertible) 3) 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.

Objective of inventory management


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: To minimize the firms investment in inventory 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 objective as follow To have stock available as and when they are required. To utilize available storage space but prevents stock levels from exceeding space available.
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To maintain adequate accountability of inventories assets. 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. -To keep low investment in inventories carrying cost an obsolesce losses to the minimum (Table-4.13)- Size of the Inventory Particulars Raw Mat. WIP F.G Others Total Indices 2004-05 216,125,341 159,462,908 74,497,592 199,956,042 650,041,883 100 2005-06 283,285,253 161,231,380 89,027,192 232,977,316 766,521,142 117.92 2006-07 292,728,041 191,884,178 109,170,878 211,877,937 805,661,034 123.94 2007-08 388,045,813 236,763,908 228,057,660 254,068,960 1,106,936,341 170.29 2008-09 218,472,551 141,872,569 112,688,773 304,547,385 777,581,277 119.62

180 160 140 120 100 100 80 60 40 20 0 2005 2006 2007 Size of Inventory (Indices) 117.92 123.94

170.29

119.62

2008

2009

(Figure-4.6)

Inventory components The manufacturing firms inventory consist following components I) Raw material ii) Work- in-progress iii) Finished goods To analyze the level of raw material inventory and work in progress inventory held by the firm on an average it is necessary to examine the efficiency with which the firm converts raw material inventory and work in progress into finished goods.

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Inventory holding period


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). (Table-4.14)-Inventory Holding PeriodYears COGS Avg. Inv. Inv. Turnover Ratio(in times) Inv. Holding Period(in days) Raw Material Holding Period
35 30 25 20 Inv. Holding period 15 10 5 0 2004-05 2005-06 2006-07 2007-08 2008-09 Raw material holding period

2004-05 9,383,414,592 626,374,391 14.98

2005-06 9,589,658,677 708,281,513 13.54

2006-07 11,564,424,474 786,091,088 14.71

2007-08 11,244,610,812 956,298,688 11.75

2008-09 12,486,741,211 942,258,809 13.25

24

27

25

31

28

13 days

15 days

14 days

15 days

13 days

(Figure-4.7) InterpretationFrom the above table and figure it can be interpreted that in the year 2008-09, the inventory holding period has reduced, this implies that now the inventory id converted into cash quite rapidly. On the other hand, the raw material holding period has also decreased because as the sales have increased the demand for the products have increased so; the company is changing the raw material into finished goods as soon as possible.
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Chapter- 5

71

(5.1)- ConclusionWorking capital management is important aspect of financial management. The study of working capital management of Jain Irrigation system ltd. has revealed that the current ration was as per the standard industrial practice but the liquidity position of the company showed an increasing trend. The study has been conducted on working capital ratio analysis, working capital leverage, working capital components which helped the company to manage its working capital efficiency and affectively. Working capital of the company is increasing and showing positive working capital per 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 current assets is more than increase in the current liabilities. Companys current assets were always more than requirement; it has a positive effect on profitability of the company. Current assets being more than current liabilities indicate that company used long term funds for short term requirement, where long term funds are most costly then short term funds. Current assets components shows sundry debtors were the major part in current assets in the year 2008-09; it shows that there is inefficient receivables collection management. Inventory is supporting to sales, thus inventory turnover ratio was increasing, and the company decreased the raw material holding period, in order to further increase the sales. Study of the operating cycle reveals that it became unmanageable in the year 2007-08 i.e 84 days due to recession; but the company directed it right in the year 2008-09, by managing its assets in a right way.

(5.2)RecommendationsRecommendation can be use by the firm for the betterment increased of the firm after study and analysis of project report on study and analysis of working capital. I would like to recommend. Company should raise funds through short term sources for short term requirement of funds, which comparatively economical as compare to long term funds. Company should take control on debtors collection period which is major part of current assets. Company has to take control on cash balance because cash is non earning assets and increasing cost of funds. Company should reduce the inventory holding period with use of zero inventory concepts. Over all company has good liquidity position and sufficient funds to repayment of liabilities. Company has accepted conservative financial policy and thus maintaining more current assets balance. Company is increasing sales volume per year which has supported the company to sustain its market share.

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Websiteswww.herocycles.com www.google.com www.moneycontrol.com www.workingcapitalmanagement.com

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