1.

INTRODUCTION:-

INDIAN STEEL INDUSTRY

Steel is one such material that has played an important role in the
development of mankind in the last century. Today, it is difficult to imagine a
world without steel. Steel has become vital to our everyday life. It is at the
root of the quality of life that each of us enjoys today, helping to shelter us, to
feed us and to facilitate both our working day and leisure activities. We
depend on steel for almost everything from our houses and buildings, the cars
we drive, roads, bridges, agricultural equipment, machines, the list is endless.

Steel is a versatile, constantly developing material that underpins all

manufacturing activity. Even if a product is not made entirely from steel, it
will undoubtedly have steel as a component at some point in the
manufacturing process. There are currently more than 3,500 different grades
of steel with many different properties - physical, chemical, environmental,
75% of which have been developed in the last 20 years. Steel is also an
environment friendly material and has the distinction of being the most
recycled material in the world today.

Today, consumption of steel is also regarded as an indicator of development

of a nation. Per capita steel consumption is now universally accepted as an
index of economic development of a nation. Given its role, steel has
established itself as the backbone of any economy
 The Indian Steel industry is almost 100 years old now. Till 1990, the
Indian steel industry operated under a regulated environment with insulated
markets and large-scale capacities reserved for the public sector. Production
and prices were determined and regulated by the Government, while SAIL
and Tata Steel were the main producers, the latter being the only private
player. In 1990, the Indian steel Industry had a production capacity of 23 MT.
1992 saw the onset of liberalization and the Indian economy was opened to
the world. Indian steel sector also witnessed the entry of several domestic
private players and large private investments flowed into the sector to add
fresh capacities.

With capital investments of over Rs 100,000 crores, the Indian steel industry
currently provides direct/indirect employment to over 2 million people. As
India moves ahead in the new millennium, the steel industry will play a
critical role in transforming India into an economic superpower. INDIAN
steel industry is one of the least protected one in the world. There is no
restriction on cheap imports from competive nation where as there are
numerous tariff and non-tariff barriers in developed countries. the industries is
witnessing various merger & acquisition (M&A) and the Indian steel industry
is not lagging behind. The Tata’s take over of Corus steel and the recent Essar
steel acquisition of Canadian firm Algoma, Tisco take over of a Singapore
based 2.5 million tone steel company natsteel and jindal steel stainless take
over f an Indonesian cold roller called mapsian stainless steel .in addition to
global acquisition Indian player are consolidating their position in the
domestic market JISCO & JVSL have merged to form JISCO.
MAJOR STEEL PLAYER

 Steel authority of India limited.

 Tata steel
 Steel authority of India limited.
 Rashtriya Ispat Nigam Limited.
 JSW
 Jindal Steel & Power Limited.
 Essar steel
 Ispat Industries Tata steel
Working Capital:

“Working Capital includes the current assets and current liabilities areas of
the balance sheet. Working Capital can be called by its alternative name -
"Net Current Assets”.

Working Capital Management is the process of planning and controlling the

level and mix of current assets of the firm as well as financing these assets. It
may be regarded as a life blood of a business; its effective provision can do
much to ensure the success of a business, while its efficient management may
lead not only to loss of profits but loss to ultimate downfall in a going
concern. Analysis of working capital is of major importance to internal and
external analysis because it is closely related to the current day-to-day
operations.

Working Capital is the name given to the "short-term" area of the balance
sheet. Working Capital includes four balance sheet items:
Stock - stocks of raw materials, partly completed production and
finished goods awaiting sale.
Debtors - amounts owed TO the company, mainly from customers
in respect of sales made on credit.
Creditors - amounts owed BY the company, mainly to suppliers of
raw materials, services (electricity, water, telephone, rent, etc.) but
also, possibly, unpaid tax demands, unpaid dividends and other
items.
Cash - bank balances, cash holdings and short-term investments.
Some of the decisions taken in working capital management are:
An adequate supply of raw materials.
Cash to meet the operational payments.
The ability to grant credit to customers.
Investment in various current assets.
Appropriate sources of fund to finance current assets.
Proportion of long term and short term funds to finance current
assets.
Cash Cycle:
As working capital moves from one process to another, it changes from one
asset to another i.e., from cash to inventories and then to receivables and then
back to cash. This movement is represented by cash cycle as below:
Figure 1: Cash Cycle

Objective of Working Capital Management:

Two fold objective of working capital management
 a) Maintenance of working capital, and
b) Availability of ample funds at the times of need.

Uses of Working Capital:

The typical uses of working capital are as follows:
Adjusted net loss from operations
Purchase of non-current assets:
Repayment of long-term debt (debentures or bonds) and short-term
debt (bank borrowing)
Redemption of redeemable preference shares 5- Payment of cash
dividend.
Payment of cash dividend.
Advantages of adequate working capital:
Increase in debt capacity and goodwill.
Increase in production efficiency
Exploitation of favorable opportunities.
Meeting contingencies and adverse changes
Available cash discount:
Solvency and efficiency of fixed assets
Attractive Dividend to Shareholders

Disadvantage of inadequate working capital:

Loss of goodwill and creditworthiness
Firm can’t make use of favorable opportunities
Adverse effects of credit opportunities
Operational inefficiencies
 Effects on financial capacity
Non-achievement of Profit Target

Dangers of Redundant working capital:

Low rate of return on capital
Decline in Capital and Efficiency
Loss of Goodwill and Confidence
Evils of Over-Capitalization
Destruction of Turnover Ratio
Company must have adequate working capital pursuant to its requirements. It
should neither be excessive nor inadequate. Both situations are dangerous.
While inadequate working capital adversely affects the business operations
and profitability, excessive working capital remains idle and earns no profits
for the company. So company must assure its working capital is adequate for
its operations.

Theoretical Framework of Working Capital Management

Many profitable companies fail each year because their management teams
fail to manage the area of working capital. The term working capital is closely
related to the term funds and has two meaning. It is used to mean current
assets minus current liabilities. In simple words it is the investment needed for
carrying out day-to-day operations of the business smoothly. Working capital
is just like the heart of the business. If it becomes weak, the business can
hardly prosper and survive. It is an index of the solvency of a concern.
Working capital management thus throws a challenge and should be a
welcome opportunity for a financial manger that is ready to play an important
role in organization.

Sources of Working Capital:

The company can choose to finance its current assets by long-term or short-
term sources, or a combination of them.

A) Long term Permanent Working Sources of Capital: Long-term sources

of permanent working capital include equity and preference shares, retained
earnings, debentures and other long-term debts from public deposits and
financial institutions. Financing through long-term means provides stability,
reduces risk of payment, and increases liquidity of the business concern.
Various types of long-term sources of working capital are as follows:
Issue of shares
Retained Earnings
Issue of Debentures
Long term debts
Other sources

B) Short-term Temporary Working Source of Capital: Temporary

working capital is required to meet the day-to-day business expenditures. The
variable working capital would finance from short-term sources of funds, and
only for the period needed. It has the benefit of low cost and establishes closer
relationships with bankers.
Some of the sources of temporary working capital are given below:
Commercial Banks: In the form of short-term loans, cash credit, and
overdraft and through discounting the bills of exchanges.
Public Deposits
Various Credits: Trade credit, Business credit papers and customer
credit are other sources of short-term working capital. Credit from
suppliers, advances from customers, bills of exchanges, promissory
notes, etc helps to raise temporary working capital.
Reserves and other funds

Sources of Additional Working Capital:

Existing cash reserves

Profits (when you secure it as cash)
Payables (credit from suppliers)
New equity or loans from shareholders
Bank overdrafts or lines of credit
Long-term loans

Various tools to measure & analyses working capital of a firm:

Fund Flow Analysis: This technique helps to analysis the variation
in working capital contents between two balance sheet dates. Fund
flow analysis shows how much funds have been obtained from
different sources to finance working capital and how they have been
 utilized. Due to need as well as importance of fund flow analysis
finance managers of almost all the organization use it to make sound
financial decisions.

Working Capital Flows: Information regarding the financing and

investment activities of an enterprise and the changes in the
financial position for the period of time is essential for financial
statement, used by owners as well as creditors for making business
decisions.
Further, this technique can be used only by the internal
administration in its control of working capital. Moreover, some
important and significant question remains unanswered, such as
whether the capital is being used most efficiently and whether the
current financial position of the firm has improved.
Working Capital Flows

Figure 2: Working capital flows

Closing Balance of
Opening Changes in Working Capital
Balance of
Working Working
capital Capital

SOURCES OF USES OF WORKING

WORKING CAPITAL
CAPITAL
 Redemption of
 Operations of the long term debt
business  Investments
 Issue of long-term  Acquisition of
debt fixed assets
 Sale of fixed  Payment of
investments dividend
 Sale of long-term
investments
2. LITERATURE REVIEW:-

1. Padachi Kesseven’s (2006) analysis says that a well designed and

implemented working capital management is expected to contribute
positively to the creation of a firm’s value The purpose of this paper is to
examine the trends in working capital management and its impaction
firms’ performance. 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
58small manufacturing firms, using panel data analysis for the period 1998
–2003. The regression results show that high investment in inventories and
receivables is associated with lower profitability. The key variables used in
the analysis are inventories days, accounts receivables days, accounts
payable days and cash conversion cycle. A strong significant relationship
between working capital management and profitability has been found in
previous empirical work. An analysis of the liquidity, profitability and
operational efficiency of the five industries shows significant changes and
how best practices in the paper industry have contributed to performance.
The findings also reveal an increasing trend in the short-term component
of working capital financing.

2. Lazaridis Dr Ioannis, Tryfonidis Dimitrio’s (2004) analysis says that the

relationship of corporate profitability and working capital management.
We used a sample of 131 companies listed in the Athens Stock Exchange
 (ASE) for the period of 2001-2004. The purpose of this paper is to
establish a relationship that is statistical significant between profitability,
the cash conversion cycle and its components for listed firms in the ASE.
The results of our research showed that there is statistical significance
between profitability, measured through gross operating profit, and the
cash conversion cycle. Moreover managers can create profits for their
companies by handling correctly the cash conversion cycle and keeping
each different component (accounts receivables, accounts payables,
inventory) to an optimum level.

3. Shelton Fred (2002) studied that Working capital, an important liquidity

indicator, has historically been a major benchmark of the surety and credit-
granting institutions. In today’s environment, because of the tight bond
and credit markets, both institutions are scrutinizing the amount and
quality of working capital more than ever. The fewer resources that need
to be invested in working capital, after recognizing liquidity risk, the
better.

4. Weinraub Herbert, Visscher Sue (1998) studies that this study 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. Additionally, the relative
industry ranking of the aggressive/conservative asset policies exhibited
remarkable stability over time. Industry policies concerning relative
aggressive/conservative liability management were also significantly
 different. Interestingly, it is evident there is a high and significant
negative correlation between industry asset and liability policies.
Relatively aggressive working capital asset management seems balanced
by relatively conservative working capital financial management.

5. Mills Geofrey (1996) analysis that the impact of inflation on the capital
budgeting process. It has shown that it is reasonable to expect that the cost
of capital will increase at the same rate as the rate of inflation on an ex
ante basis, and that this increase will be a multiplicative relationship. In
addition, the paper has shown that the capital budgeting process is not
neutral with respect to inflation, even if output prices rise at the same rate
as costs. Of critical importance is the degree of net working capital as a
proportion of the overall financing required, the higher the net working
capital the greater being the impact of inflation on capital spending.
Finally, it would appear that corporate financial behavior is influenced by
inflation. Inflation will cause the firm to reduce its capital budget, to
attempt to reduce net working capital, and to alter the debt/asset ratio using
short term debt, thus driving up short term rates relative to long term rates.

6. Schwartz (2008), Studies the business of NAILD distributor through this

article. The NAILD is an organisation supporting lighting distributors in
the US with publications, training, and conferences. According to him,
recent changes and trends in the lighting market provide new
opportunities. The keys to taking advantage of the opportunities is to
understand the market, know where to get more information, provide
updates to your customers, and turn information into active marketing and
 promotional efforts. The Energy Independence and Security Act of 2007
add to the programs and efforts introduced in EPACT 2005. A key
component of the ENERGY STAR qualified light fixtures program is the
Advanced Lighting Package (ALP). As market trends and legislation move
purchasers away from inefficient technologies and towards energy-
efficient products, NAILD distributors that become ENERGY STAR
Partners have an opportunity to increase sales and profits.

7. Kumar, Khetan & Thapa (2005) highlights that India has set itself an
ambitious target of more than doubling per-capita electricity consumption
by 2011. Indian power sector, with current electricity shortages of over
11% of peak and 7% of energy, will be one of the key determinants to
future growth. The Indian government has worked steadily to liberalise the
sector and initiated reforms that culminated in the Electricity Act 2003.
The Act brought together structural and regulatory reforms designed to
foster competitive markets, encourage private participation and transform
the state’s role from service provider to regulator. The Act afforded
consumers the ability to directly source their electricity from suppliers
using existing networks and recognised trading as a separate line of
business. Despite the potential offered by the India’s power sector,
investors have long been weary of the sector’s bureaucracy and regulatory
complexity. With a critical mass of progress in regulatory reforms and
soaring economic growth, the Indian power sector is now primed for take
off. How India deals with the remaining challenges of the restructuring
process and emerging fuel shortages will dictate what happens in the years
to come.
3.PROBLEM IDENTIFICATION:-

3.1PROBLEM IDENTIFICATION:-

One of the serious problems faced by the steel industry has to do with its size.
Towards the end of 2014, the supply-demand balance was tipped by an
oversupply of steel by China. On one hand, due to over production, the export
market of China grew substantially and resulted in it dumping its excess
inventory in all other countries. On the other hand, some major producers
(such as those in Europe and the United States) halted their manufacturing
operations internally to compensate for these cheaper imports from China
because they eliminated their operational costs. One of the consequences of
Chinese oversupply was the collapse of steel prices. This led to steel industry
job losses for several thousands of employees of Luxembourg’s
ArcelorMittal, South Korea’s Posco, and US Steel, just to name a few. It is
still unclear how the industry is going to recover from these losses. Another
consequence of this excess production is the depletion of the high-quality raw
materials needed to produce steel. Using low-quality raw materials in their
stead could have detrimental effects by causing environmental pollution.
3.2OBJECTIVES OF THE STUDY:-

 To study the need and importance of working capital.

 Analysis of important Ratio for the management of the company,

 To study the various sources of working capital.

 To maintain the optimum balance of working capital components.

 To study the various techniques used in managing the working

capital effectively such as ratio analysis
RESEARCH METHODOLOGY:-
Collection of Data:
1. Primary Data:
 Data collected from financial statements of the company;
 Profit & Loss A/c,
 Balance Sheet,
 Annual Report, etc.
2. Secondary Data:
 Discussions with managers
 Referring books, journals and magazines
 Information collected from Internet.
Activity Ratio

 Inventory Turn Over

 Net Asset Turn Over

 Total Asset Turnover Ratio

 Working Capital Turnover

Inventory Turnover Ratio

Particular JSPL TATA SAIL

Net Sales(in cr.) 5410.75 19,693.28 39508.45
 Avg. Inventory(in cr.) 811.50 1937.43 6754.35
I\T Ratio 6.66 10.16 5.84
No. of Days 55 Days 36 Days 63 Days
(365/IT Ratio)

I\T Ratio
12
10
8
6
I\T Ratio
4
2
0
JSPL TATA SAIL

Net Asset Turnover Ratio

Particular JSPL TATA SAIL

Net Sales(in cr.) 5410.75 19,693.28 39508.45
Net Asset(in cr.) 8114.40 47,075.52 27677.41
Ratio 66.6% 41.83% 142.74%
 NET ASSET TURNOVER RATIO
160
140
120
100
80 NET ASSET TURNOVER
RATIO
60
40
20
0
JSPL TATA SAIL

Total Asset Turnover Ratio

Particular JSPL TATA SAIL

Net Sales(in cr.) 5410.75 19,693.28 39508.45
Total Asset(in cr.) 9735.21 53844.3 40876.16

Ratio 55.57% 36.57% 96.65%

 TOTAL ASSET TURNOVER
RATIO
150

100
TOTAL ASSET
50 TURNOVER RATIO

0
JSPL TATA SAIL

Working Capital Turnover Ratio

Particular JSPL TATA SAIL

Net Sales(in cr.) 5410.75 19,693.28 39508.45
Working Capital(in cr.) 1678.76 30,193.66 13118.87
Ratio 3.22:1 .65:1 3.01:1

WORKING CAPITAL TURNOVER

RATIO
4

2 WORKING CAPITAL
TURNOVER RATIO
1

0
JSPL TATA SAIL
FINDINGS:-
The study conducted on working capital management of Jindal Steel & Power
Limited shows the evaluation of management performance in this context.
Major findings and suggestions thereon are narrated as under:

1. Current asset of the year 2009-10 is comprised of 25% of total

investment in assets of the company. As current ratio is showing a
decreasing trend year on year, which implies that current asset, are less
compared to current liabilities.
2. High current assets turnover ratio is more judicious and shows
efficiency of management and proper utilization of the assets.

3. Current ratio (1.03:1) and quick ratio (0.73:1) of the year 2009-10 are
lesser than that of the ideal figures i.e. ideal current ratio is 2:1 while
quick ratio is 1:1.

4. Inventory turnover ratio depict the fluctuating trend which indicates the
accumulation of inventory in turn which cause loss to the company by
way of deterioration of stock, interest loss on blockage of stock etc.

5. Debtors Turnover ratio reveals an increasing trend during the period of

study and average collection period came down from 60 to 30 days
which shows that company is having specific policy for debtors’
management.

6. From regression analysis the working capital requirement for the next
year is estimated to be 515.36 Rs/Crs.
7. The operating cycle of the firm is disturbed, as it is continuously
increasing which is not good for the company.
8. The optimum need for working capital on an average basis company
roughly will require more than 455.26 Rs/Crs as its working capital.
SUGGESTION:-

Keeping in view of detailed analysis for the 4 years of study and findings
mentioned in above paragraphs, the following suggestions shall be helpful in
increasing the efficiency in working capital management.

1. In case of inventory management ABC analysis, FSN technique, VED

technique should be adopted to increase the efficiency of inventory
management. Further a inventory monitoring system should be
introduced to avoid holding of excess inventory.
 2. It is suggested to maintain a favorable current and quick ratios which
shows a lesser than ideal figures. It can be done either through
increasing current assets or decreasing liabilities.

3. With the help of proper inventory management systems, like demand-

based management, etc. the company can reduce the need for working
capital and inventories can be financed through accounts payable.

4. The company should try and maintain an optimum level of working

capital in order to improve upon the workings of the company.

LIMITATION OF THE STUDY:-

1. Availability of the financial data was very limited which is not

disclosed due to sensitive nature for the company.
2. The main component of working capital is cost of capital, which is not
described in the project because of confidential nature.
3. External environment influence was not considered while doing the
theoretical standard rather than the industrial standard because of
unavailability of any such specific standard.
 4. The scope of the study was limited to Jindal Steel & Power Limited.

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