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Chapter-4
RESEARCH METHODOLOGY
4.1 Introduction
4.2 Statement of the Problem
4.3 Review of Existing Literature
4.4 Objectives of the Study
4.5 Hypothesis of the Study
4.6 Period of the Study
4.7 Sample Selection
4.8 Nature of data Required
4.9 Sources of Data
4.10 Tools and Techniques of Analysis of Data
4.11 Scope of the Study
4.12 Limitation of the Study
4.13 Chapter Plan
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Chapter-4
PROFILE OF INDIAN IRON AND STEEL INDUSTR
4.1 INTRODUCTION
This chapter focuses the step wise procedure adopted to carry out this research
work. It is felt that the procedure adopted here is well sufficient, effective and most
accurate in the light of research and various limitation.
4.2 STATEMENT OF THE PROBLEM
The present study is intended to analyze the working capital management in
Indian Iron & Steel Industry. The management of both current assets and current
liabilities has been critically analyzed. The current segment of total capital has drawn
little attention in India. Of course working capital management has acquired
important position and great significance in the recent past. However, the research
work on his topic is still in its infancy. Many a time in the event of a failure of an
enterprise the shortage of working capital is given out as its main cause. But in the
ultimate analysis it may be the mismanagement of working capital. Working capital
management which is related with short-term financial decisions appears to be
relatively neglected by financial experts.
Thus, after going through existing literature in the library, considering the
availability of time, information, tools and techniques of and other related sources
and after deep discussion with guide, researcher has selected this topic. The title of
the study is as under;
“A STUDY OF WORKING CAPITAL MANAGEMENT IN INDIAN IR ON & STEEL
INDUSTRY”
4.3 REVIEW OF EXISTING LITERATURE
The purpose of this topic is to present a review of literature relating to the
working capital management. Although working capital is an important ingredient in
the smooth working of business entities, it has not attracted much attention of
scholars.
RESEARCH METHODOLOGY
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In India, working capital segment of total capital employed has drawn little
attention. In 1966, National Council of Applied Economic Research (NCAER)
conducted a study entitled “Structure of Working Capital”. The said study covered
the fertilizer, cement and sugar industries for the period 1959 to 1963 and analyzed
the working capital composition. The major findings were;
i. Inventory constitutes 74.06%, 63.10% and 59.58% in sugar, cement and
fertilizer respectively.
ii. Cement and Fertilizer industries had a more efficient utilization of working
capital while in the sugar industry the trend was opposite and
iii. Inventory control and not received proper attention.
A study entitled “Problems of Working Capital” by R.K. Mishra, with
special reference to public undertakings in India, deals with the problems of only six
central public enterprises for the period 1960-61 to 1667-68. The major findings
were;
i. The selected units were not able to utilize working capital efficiently.
ii. The inventory was noticed in excess in all the units.
iii. The lack of inventory control resulted in the accumulation of inventories and
iv. The selected units were keeping enough cash and near cash assets.
A study on “Management of Working Capital” was conducted by N.K.
Agrawal for the period 1966-67 to 1976-77, in which 34 selected large
manufacturing and trading public limited companies in private sector had been
considered. Cash management, accounts receivables management, inventory
management and financing of working capital facets had been discussed. The main
findings of the said study were as under;
i. Industries have failed to plan their working capital requirements properly.
ii. Wide variations prevail in the size of working capital in relation to sales in
different industries.
iii. The majority of the industries have not been able to control liquid resources
effectively.
iv. Cash was not utilized in a profitable manner and
v. Receivables management was not satisfactory.
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It was suggested by the researcher that Indian industries should realize the
importance of proper planning of working capital, effectively control of cash flow,
recovery of the debts in time and reduction of investment in inventories. Dr. N. K.
Agrawal tried to draw general conclusions for all categories of industries which do
not seem feasible.
An another study on “Management of Working Capital in Public
Enterprises” by Ashim K. Mukherjee covered twenty manufacturing public sector
undertakings owned wholly or partly by the Central Government. The study was
limited to five years period only i.e., from 1974-75 to 1978-79. The researcher
studied the relative merits of internal and external sources of finance, the extent of
use of available working capital finance adequacy, liquidity, structure and structural
determinants of working capital. The major findings were;
i. There was a very significant negative correlation between liquidity and owners
profitability.
ii. The overall size of receivables had been largely affected by the overall sales
volume.
Ravi K. Jain also studied “Working Capital Management of State
Enterprises in India” looking into the various aspects of working capital
management. Inventory management and control, management of receivables, cash
management financing of working capital had been discussed separately. The period
covered under the study was 1979 to 1984. Ten selected manufacturing, trading,
financing and service motive enterprises had been included in the study. The
suggestions of the said study were;
i. The state enterprises should try to match their working capital with the sales
trends.
ii. Suitable Performa indicating the position of various components of inventory
at periodical intervals should be introduced in order to exercise an effective
control on the overall inventory.
iii. They should regularize their cash flows and determinate the optimum cash
balance to be kept.
iv. The enterprises should tighten their debt collection efforts and should reduce
the funds tied up in receivables.
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The researchers Kamtha Prasad Singh, Anillkumar Sinha and Subhas
Chandra Singh are examined “Various Aspects of Working Capital
Management in India” during the period 1978-79 to 1982-83. Sample included
public sector unit, Fertilizer Corporation of India Ltd. (FCI) and its daughter units
namely Hindustan Fertilizer Corporation Ltd., the National Fertilizer Ltd., Rashtriya
Chemicals and Fertilizers Ltd., and Fertilizers (Projects and Development) India
Ltd., and comparing their working capital management results with Gujarat State
Fertilizers Company Ltd., in joint sector. On the basis of ratio-analysis and responses
to a questionnaire, study revealed that inefficient management of working capital
was to a great extent responsible for the losses incurred by the FCI and its daughter
units, as turnover of its current assets had been low. FCI and its daughter units had
high overstocking of inventory in respect of each of its components particularly
stores and spares. Similarly, quantum of receivables had been excessive and their
turnover very low. However, cash and liquid resources held by FCI and its daughter
units had been much lower in relation to operation requirements. So far as financing
of working capital was concerned, long-term funds had been financing a low
proportion of current assets due to rapid increase of current liabilities. The
profitability providing an internal base for financing of working capital had been
very low in these undertakings.
Verma in 1989 evaluated “Working Capital Management in Iron and Steel
Industry” by taking a sample of selected units in both private and public sectors
over the period 1978-79 to 1985-86. Sample included Tata Iron and Steel Company
Ltd. (TISCO) in private sector and Steel Authority of India Ltd. (SAIL) and Indian
Iron and Steel Company (IISCO), a wholly owned subsidiary of SAIL in public
sector. By using the techniques of ratio analysis, growth rates and simple linear
regression analysis, the study revealed that private sector had certainly an edge over
public sector in respect of working capital management. Simple regression results
revealed that working capital and sales were functionally related concepts. The study
further showed that all the firms in the industry had made excessive use of bank
borrowings to meet their working capital requirements vis-à-vis the norms suggested
by Tondon Committee.
Dr. Bhairav H. Desai and Ramesh B. Darjee had made a study on
“Working Capital Financing by Public Sector Banks” (The Management
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Accontant, May 1986) of cotton textile mills managed by N.T.C. for the period of
1979-80 to 1983-84. The analyses of working capital gap and bank financing have
been based on method I, II and III of bank financing suggested by the Tundon
Committee. The conclusions were; the management of N.T.C. ltd. could have
checked the large under financing by banks. It could have obtained substantial
additional finance from banks even with the help of inventory. The management
must make immediate attempts to reduce inventory, particularly finished goods
inventory and the amount of working capital locked up in debts.
Garg studied “Working Capital Trend and Liquidity of 8 Haryana
Government Owned Industrial Enterprises in Haryana” during the period from
1978-79 to 1987-88 with the help of accounting tools and statistical techniques. The
study reveals that due to high investments in current assets most of the enterprises
had experienced shortage of funds for buying raw material and paying other
liabilities. Blockage of fund in current assets has also adversely affected the
operating efficiency of the enterprise under study.
Majumdar in order to know the “Pattern of Financing the Corporate
Working Capital in India” has analyzed balance sheets of 20 companies. 10 from
private sectors and 10 from public sectors for the periods from the year 1981 to
1990. For the purpose of analysis researcher has used statistical techniques and
financial tools. Study indicates that major share of working capital finance is from
borrowings and effect of cost on the selection of source of working capital is not at
all significant.
Dr. J.M.Naik covered the period of 1981-82 to 1987-88. The said study
focuses whether the cooperative sugar factories have managed their working capital
effectively and efficiently or not.
Jafar and Sur studied the “Efficiency in Management of Working Capital
in National Thermal Power Corporation Ltd.” during the period from 1982-83 to
2002-03. The researcher have applied financial tools and statistical techniques and
revealed that the company has managed its working capital efficiently during the
post-liberalization era by adapting itself to the new environment resulting from
liberalization, globalization and competitiveness.
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Vijaykumar and Venkatachalam have studied the “Impact of Working
Capital on Profitability in Sugar Industry in Tamil Nadu” by selecting a sample
of 13 companies, 6 companies in co-operative sector and 7 companies in private
sector over the period 1982-83 to 1991-92. They applied simple correlation and
multiple regression analysis on working capital and profitability ratios. They
concluded through correlation and regression analysis that liquid ratio, inventory
turnover ratio, receivables turnover ratio and cash turnover ratio influenced the
profitability of sugar industry in Tamil Nadu. They also estimated the demand
function of working capital and its components i.e. cash, receivables, inventories,
gross working capital and net working capital by applying regression analysis. They
showed the impact of sales and interest rate on working capital and its components.
When only sales were taken as independent variable, coefficient of sales was more
than unity in all the equations of working capital and its components of scale. When
sales and interest rate were taken as independent variable, sales elasticity was again
more than unity in demand functions of working capital and its components except
cash. So far as capital costs were concerned, these had negative signs in all the
equations but significant only in inventory, gross working capital and net working
capital showing negative impact of interest rates on investments in working capital
and its components. Thus, study showed that demand for working capital and its
components was a function of both sales and carrying costs.
Bansal has studied “Working Capital Management in Himachal Pradesh
Agro Industries Corporation Limited” for the period from 1985-86 to 1994-95
with the help of financial tools. The study reveals that the corporation under study
has adopted conservative policy of financing current assets which resulted in
inadequate working capital. Cash, Inventory, Receivables and Production Capacity
have not been managed properly by the company under study.
Batra and Sharma have studied “Working Capital Management Practices
in Goetz India Limited” for the period from 1989-90 to 1993-94 with the help of
financial tools. The study revels that overall position of working capital management
was satisfactory but there were some gaps in management of inventory, receivables
and payable which require some improvements.
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Pathania studied “Working Capital Management in Himachal Pradesh
State Co-operative Agricultural and Rural Development Bank” for the period
stating from 1990-91 to 1994-95 with the help of ratio analysis. The study revels that
the bank under study has not used cash efficiently and effectively which resulted in
decrease in profitability.
Bhunia made an assessment of “Management of Working Capital of Steel
Authority of India Ltd and Indian Iron and Steel Co mpany Limited” from
1991-92 to 2002-03 with the help of financial tools and statistical techniques.
Finding reveals that both the companies have maintained inadequate working capital,
poor liquidity and managed inventory and receivables inefficiently during the period
of study.
Ghosh and Maji attempted to examine the “Efficiency of Working Capital
Management of the Indian Cement Companies” during the period from 1992-93
to 2001-02. They calculated three index values-performance index, utilization index
and overall efficiency index to measure the efficiency of working capital
management, instead of using working capital management ratios. By using
regression analysis and industry norms as a target efficiency level of individual
firms, they tested the speed of achieving target level of efficiency by individual firms
during the period of study and found that some of the sample firms successfully
improved efficiency during these years.
Mathuva examined the “Influence of Working Capital Management
Components on Corporate Profitability” by using a sample of 30 firms listed on
Nairobi Stock Exchange for the periods 1993-2008. He used Pearson and
Spearman’s Correlation, the pooled ordinary least squares and the fixed effects
regression models to conduct data analysis. The key findings of his study were that
there exists a highly significant negative relationship between the time it takes for
firms to collect cash from their customers and profitability, there exists a highly
significant positive relationship between the period taken to convert inventories to
sales and profitability and there exists a highly significant positive relationship
between the time it takes for firms to pay its creditors and profitability.
EIILM School of Business, Kolkata EIILM University) , have undertaken
the project to examine the “Process of Working Capital Management” of the firm
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for last 10 years w.e.f. 1993-94 to 2002-03. Following were fundamental objective of
the study;
i. To examine the effectiveness of working capital management practices of the
firm.
ii. To assess short-term liquidity and solvency of firm.
iii. To find out how adequacy of otherwise of working capital affects commercial
operations of the company.
iv. To prescribe remedial measures to encounter the problems faced by the firm.
An empirical analysis entitled “Inventory and Working Capital
Management in IIFCO & NFL” done by Pradeep Singh covers the period from
the period of 1994-95 to 2005-06. The researcher uses the tools & techniques for
analysis of data ratio analysis, mean value, G.R. Regression analysis etc.. The
researcher concludes that over all position of the working capital of IIFCO and NFL
is satisfactory, but there is a need for improvement in inventory in case of IIFCO.
However, inventory was not properly utilized and maintained by IIFCO during the
study period. In both the companies, a major portion of the current assets are in the
form of inventory, whereas other current assets are properly utilized and maintained.
The liquidity position mainly depends upon the size of inventory, but other
components like debtors, loans and advances, cash and bank balances and bills
receivables etc., are also responsible. However, this study found that there is a need
for an immediate improvement in inventory. The management of NFL must try to
utilize the inventory and try to maintain the inventory as per the requirements, so that
liquidity will not interrupt.
Garcia – Terual ET all collected a panel of 8872 small to medium- sized
enterprises from Spain covering the period 1996-2002. They tested the “Effect of
Working Capital Management on SME Profitability” using the panel data
methodology. The results, which are robust to the presence of endogeneity
demonstrated that managers could create value by reducing their inventories and the
number of days fro which their accounts are outstanding. Moreover, shortening the
cash conversion cycle also improves the firm’s profitability.
Virendra C. Jani analyses the “Working Capital Management of Fertilizer
Industry of Gujarat” covers the data from 1996-97 to 2004-05 by using various
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technique like ratio analysis, index number, Chi-square test and one way ANOVA
etc. The researcher finding out that through out study period, there is significant
differences between current ratio, quick ratio, stock turnover ratio, cash position ratio
and creditor turnover ratio of the fertilizer companies.
Dalbir Singh Lecturer in Commerce, Govt. PG College, Bhiwani, Studied
“Working Capital Management of Aluminum Industry” in Indian. It is not
possible for researcher to cover all the Aluminum industries. Hence the main focus
of the study would be on Primary Aluminum Producing industry which includes
National Aluminum Co. Ltd. (NALCO), Bharat Aluminum Co. Ltd. (BALCO),
Hindalco Industries Ltd. (HINDALCO), Indian Aluminum Co. Ltd. (INDAL) and
Madras Aluminum Co. Ltd. (MALCO). The study concerns itself with the period of
seven years i.e. from 1997-98 to 2003-04.
The researcher used working capital requirements as an index of working
capital needs. The study would perform a comparison of the working capital policies
operative in primary aluminum producing industry. The study also attempted to have
a look into relationship between liquidity and profitability.
“A study of Liquidity Trends on Private Sector Steel Companies in India”
examined by Amalendu Bhunia. The researcher selects two private sector steel
companies operating in India which is Tata Steel Ltd. and Lloyds Steel Industries
Ltd. the study relates to a period of 9 years, from the year 1997-98 to 2005-06. The
study is based on the secondary data. Various accounting and statistical techniques
like ratio analysis, chi-square test, trend indices, time series analysis were used.
Major findings were;
i. There is a problem of raw materials inventory in case of all selected
companies under the study except TSL and LSIL.
ii. Overall inventory management is required to be progressed in case of all the
selected steel companies
iii. Proper composition of net current assets should be sustained.
iv. On the whole, receivable management is not good enough in case of the entire
selected companies under the study.
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Sayaduzzaman investigates the “Efficiency in Management of Working
Capital in British American Tobacco Bangladesh Company Limited.” The study
covers a five year period from 1999-2000 to 2003-04. The researcher has analyzed
the case with the help of financial tools and statistical techniques and has found that
working capital management of British American Tobacco Bangladesh Company
Limited is highly effective.
Pandey and Upadhyay had undertaken the study to “Evaluate the Efficiency
of Management of Working Capital in Bokaro Steel Plant” during the period
from 1999 to 2005. Results show that position of payment of liquidity was
satisfactory but the management of inventory and receivables was good.
The study entitled “Working Capital Management of the Surat People’s
Cooperative Bank Ltd” by Hemedri I. Tikavala covered the period from 1999-00
to 2003-04 said study focuses on the working capital management faced by the Surat
Peoples Co-operative Bank Ltd.
Lazaridis and Tryfonidis conducted a cross sectional study by using a
sample of 131 firms listed on the Athens Stock Exchange for the period of 2001 to
2004 and found statistically significant relationship between profitability,
measured through gross operating profit and cash conversion cycle and its
components. Based on the results analysis of annual data by using correlation and
regression tests, they suggest that managers can create profits for their companies by
correctly handling the cash conversion cycle and by keeping each component of the
conversion cycle at an optimum level.
Paul undertook a comprehensive “A Study of Working Capital
Management in Motor Industries Company Limited” during the period from
2001 to 2005 by applying ratio analysis. Results show that working capital of the
company under study has not been managed efficiently and effectively.
Ganesan has tried to analyze the “Working Capital Management Efficiency
of Firms from Telecommunication Equipment Industry.” Researcher has
examined the efficiency of working capital management with the help of correlation,
regression analysis and ANOVA analysis. For the study purpose, data of a sample of
349 firms from telecommunication equipment industry were collected fro the period
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2001 to 2007. The study found that even though “day’s working capital” is
negatively related to the profitability, it is not significantly impacting the profitability
of firms in telecommunication equipment industry.
Menon studied the “Working Capital Management” during the period from
the year 2001-02 to 2005-06 in “Kirloskar Pneumatics Co. Limited, Hadapsar.”
Results shows that company did not keep components of working capital at optimal
level and working capital turnover ratio shows a continuously decreasing trend
during the period of study.
Jayeshkumar Pravinchandra Vora also studied “Working Capital
Management of trading houses In India”. The period covered under the study was
2001-02 to 2005-06. The area of study consists of all the manufacturing trading
houses and trading houses engaged in merchant activities in India. The collected data
were duly edited, classified and analyzed using all type of relevant statistical
techniques and employing the most appropriate parametric test. The data were
presented through simple classification and with the help of percentage; average
dispersion; ANOVA, the data were analyzed and the hypothesis were tested at 5%
level of significance by employing mean; standard deviation; co-efficient etc. The
major findings were;
i. Companies held very high degree of current assets and current claims.
ii. Sample trading houses carried small amount of cash and its equivalent to
current liabilities.
iii. Some trading houses have excessively long collection period and long
collection period implies a very liberal and inefficient credit and collection
performance. The chances for bed debt losses were increased.
iv. Sample trading houses reflected higher cost of goods sold and suffer lack of
liquidity.
v. Most of trading houses unable to produce a large volume of sales for a given
amount of current assets.
vi. Some of trading houses have higher operating expenses ratio.
Vedavinayagam Ganesan studied the “The Working Capital Management
of Firms from Telecommunication Equipment Industry.” The relationship
between working capital management efficiency and profitability is examined using
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correlation and regression analysis. ANOVA analysis is done to study the impact of
working capital management on profitability. Using a sample of 443 annual financial
statements of 349 telecommunication equipment companies covering the period 2001
to 2007, this study found evidence that even though “days working capital” is
negatively related to the profitability, it is not significantly impacting the profitability
of firms in telecommunication equipment industry.
Dr. Amalendu Bhunia conducted a case study on “Liquidity Management
Efficiency of Indian Steel Companies.” The paper analyses the association
between the liquidity from CMIE database. Liquidity management indicators and
profitability indicators over the period from 2002 to 2010 are modeled as a linear
regression system in multiple correlation and regression analysis. a descriptive
statistics discloses that liquidity and solvency position in terms of debt is very
satisfactory and relatively efficient liquidity management is found but liquidity
position has no impact on profitability. Multiple regression tests confirm a lower
degree of association between the working capital management and profitability.
Thus, company manager should concern on liquidity management, especially
unexplained variable in purpose of creation shareholders wealth.
A study on “Working Capital Management of Paper Mills” done by the
Researcher K. Madhavi Assistant Professor, Maharani’s Arts, Commerce and
Management College for Women, Bangalore , Karnataka for the period of 2001-02
to 2010-11. In the analysis of data standard statistical techniques like percentages
and averages have been used. The study found out that the management of APPML
must initiate necessary steps to utilize its idle cash and bank balances in attractive
investments or to pay back in short term liabilities (current ratio). The low quick ratio
may also have liquidity position, if it has fast moving inventories and is more
satisfactory in SSPBL with APPML. Cash ratio is not satisfactory in APPML as
compared to SSPBL and it needs the attention of the management to include
effective utilization of cash and bank balance.
The study entitled “Working Capital Management in Selected Small Scale
Industries of Gujarat State” by Solanki Ashvinkumar H. covered the period from
2002-03 to 2006-07. Said study including the sample of 6 (six) industries namely
engineering industries, plastics industries, chemical industries, textile industries,
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furniture industries and miscellaneous industries. Management of cash, Management
of accounts receivables, inventory management practices and comparative
performance analysis of selected small scale industries of Gujarat state had been
discussed separately. The suggestions of the said study were;
i. Textile industries should improve utilization of gross fixed assets to generate
cost efficiency in the production unit.
ii. Engineering and plastic industries should regain their efficiency of better
utilization of net fixed assets.
iii. Chemical industries should find out the reason that why current asset
utilization has decreased over the period of study.
iv. Each company should try to maintain the liquidity level. Thus they should
revise their liquidity policy.
v. Furniture industries are having very high debt so it should decrease its debt
level.
vi. Miscellaneous industries should increase their debt so that owners of the unit
get the benefits.
vii. Plastic, chemical and textile industries are enjoying a long credit period. But it
may harm them in future. So, it should reduce availing of credit period.
Suraj Narain Mathur studied the “Working Capital Management of
Cement Industry in India- A Comparative Analysis of Selected Units” covered
the companies like ACC, Gujarat Ambuja, Shree Cement, Indian Cement and
mangalam Cement. Data covered from the year 2003-04 to 2007-08 by using various
tools and techniques like ratio, mean, chi-square, trend indices etc. and finding out
that cash management is very faulty and optimize production and sales with
minimize risk and cost had not been achieved by cement industry.
Prof. J. R. Patel evaluated “Working Capital Management in Cement
Industries in India” by taking a sample of selected units over the period 2003-04 to
2008-09. The said study covers 19 units as sample. The major findings were;
i. During the course of investigations it has been found that 8 companies are
giving more attentions to the only liquidity aspects of working capital
management and taking more conservative decisions leading to the decline in
profitability of the company.
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ii. Many of the companies do not have proper computer program for the handling
of inventory resulting in lack of co-ordinations.
iii. Ultratech Cement Ltd. has very poor performance compare to other private
companies.
iv. Madras Cement Ltd. has shown good performance in very short span as it has
been able to maintain its aggressive approach towards the working capital
management.
v. ACC Ltd., India Cement Ltd., and Ultratech Cement Ltd., are having very
huge funds blocked in inventory and receivables.
Study entitled “A Study on Working Capital Management and its Impact
on Profitability of Selected Fertilizer Units of Gujarat State” by Pravin H. Popat
and covered the period from 2003-04 to 2007-08 by using the tools and techniques
like ratio analysis and t-test etc. Major findings are given below;
i. Current Ratio is UPS and Down trends in both the units GPSC and GNFC.
ii. Quick Ratio of both the companies is same through out the study period.
iii. There is a no significance difference in current assets to total assets ratio,
ITOR and DTOR of GSFC and GNFC.
iv. The working capital to sales ratio Up and Down to GSFC and GNFC this ratio
shows a mixed trend during the study period and
v. Creditor’s turnover ratio in GSFC and GNFC showed mixed trend during the
study period.
“A study of Working Capital Management of Cement Industries in India”
conducted by Asst. Prof. Acharekar Sachin Vilas Vijaya, Prof. Shingare Vishal
Sundar Rama. The study covers five years period from the years 2003-04 to 2008-
09. This study based on secondary data and data analyzed by the tools like ratio
analysis, correlation and ANOVA. The major findings were;
i. The mean values of current ratio and quick ratio are not much high in the
cement industry as its average current ratio is 1.28 and its average quick ratio
is 0.54. Ranking of liquidity among the companies indicate that Birla
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Corporation Ltd, Heidelberg Cement India Ltd, and J.K. Lakshmi Ltd are
leading and they are at the top in terms of current and quick ratio.
ii. Andhra Cement Ltd. a public sector enterprise has shown very poor
performance in working capital management in comparison to other private
companies. It has very low level of current ratio and it also has negligible and
that shows the high level of accumulation of inventories. Andhra Cements Ltd
is very poor in management their liquidity position.
A study entitled “Measuring Efficiency and Performance of Selected
Indian Steel Companies in the Context of Working Capital Management” by
Dr. Monika Maheshwari, assistant Professor, Shri Vaishnav Institute of
Management, Indore spanning the year from 2008-09 to 2012-13. For the purpose of
study SAIL, TSL, JSW and ESL have been selected. For the analysis of data tools
uses like ratio analysis, mean, S.D. and ANOVA test. The major findings were;
i. Over all performance of all selected steel companies has been quite
satisfactory during the study period with certain variation like in spite of all
adverse economic conditions and competition Tata Steel Ltd is able to show
impressive profits and posting good EBIT margin while SAIL is fetching
highest average return on capital employed.
ii. The SAIL a public sector undertaking is better off than private sector
companies as regard liquidity.
iii. Cash Conversion Cycle (CCC) of Tata Steel Ltd is negative in fact it is shorter
also which reflects very working capital management of company.
iv. But lowest average assets turnover ratio of Tata Steel Ltd also shows the
company is likely to be operating below its full capacity. At the same time
increasing total assets turnover ratio of JSW Steel Ltd. indicates that the
company is growing into its capacity which is a good sign for company’s
growth.
The study on “Working Capital Management in Kansai Nerolac Paints
Ltd.” made by Sagarkumar Ashoklal Bora to analyze the working capital position
and working capital management polices of the company. Moreover, working capital
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position analyze by using the tool of ratio analysis through annual report 2008-09 to
2012-13. The researcher found out that the current and quick ratio of the company is
good but there is some need to increase in that. The inventory turnover ratio has
decrease in every year. The company’s liquidity position is very good. Whole, the
company is moving forward with excellent management.
A research work on the topic of “Analysis of Working Capital Management
of Shriram Pistons & Rings Ltd.” done by the Mohd Ahmad Ansari from the
year spanning from 2009-10 to 2011-12 uses various tools like ratio analysis, trend
analysis, operating cycle analysis etc. the major finds were;
i. As current ratio, inventory turnover ratio, debtor’s turnover ratio and operating
cycle is increasing trend.
ii. Current ratio (2.43:1) and quick ratio is (1.57:1) of the year 2011-12 are little
bit more than that of the ideal figures.
iii. The optimum need for working capital on an average basis.
Radhe S. Pradhan reviewed “Financing Pattern of Working Capital in
Indian Industries” (The Management Accountant, April 1986). He concentrated on
seven industries viz. cement, coal and mining paper, pulp and hardboard, electrical
equipments and cables, food products, tea plantations as well as sugar and breweries.
Radhe S. Pradhan observed that the major sources of short term financing in Indian
industries have been noticed to be loans and advances and sundry creditors.
Leslie R. Howard, rightly points out that a deeper understanding of the
importance of working capital and its satisfactory provisions can lead to not only a
material saving in the economical use of capital, but also assist in furthering the
ultimate aim of a business, namely that of maximizing financial returns on the
minimum amount of capital which need to be employed.
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4.4 OBJECTIVES OF THE STUDY
The following are the main objectives of the study;
1. To examine the liquidity position of the Indian Iron & Steel Industry.
2. To study the various components of working capital in order to
identify the component requiring more attention of management.
3. To know the trend of working capital in Indian Iron & Steel Industry.
4. To assess the relative significance of various sources of working
capital.
5. To assess the efficiency of working capital management in Indian Iron
& Steel Industry.
6. To evaluate the efficiency of inventory management in Indian Iron &
Steel Industry.
7. To evaluate the management of receivables with respect to collection
policy.
8. To analysis and evaluate the cash management in Indian Iron & Steel
Industry.
9. To analyze the financing pattern of working capital in Indian Iron &
Steel Industry.
10. To offer some suggestions for the better utilization of resources related
to working capital.
4.5 HYPOTHESIS OF THE STUDY
Thirty three hypotheses have been used in this study. This is given below;
1. Current Ratio of Indian Iron & Steel Companies does not differ
significantly among the years.
2. Current Ratio does not differ significantly among the various Indian
Iron & Steel Companies over the years.
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3. Liquid Ratio of Indian Iron & Steel Companies does not differ
significantly among the years.
4. Liquid Ratio does not differ significantly among the various Indian
Iron & Steel Companies over the years.
5. Quick Ratio of Indian Iron & Steel Companies does not differ
significantly among the years.
6. Quick Ratio does not differ significantly among the various Indian Iron
& Steel Companies over the years.
7. Working Capital Turnover Ratio of Indian Iron & Steel Companies
does not differ significantly among the years.
8. Working Capital Turnover Ratio does not differ significantly among
the various Indian Iron & Steel Companies over the years.
9. Inventory Turnover Ratio of Indian Iron & Steel Companies does not
differ significantly among the years.
10. Inventory Turnover Ratio does not differ significantly among the
various Indian Iron & Steel Companies over the years.
11. Inventory Holding Period Ratio of Indian Iron & Steel Companies does
not differ significantly among the years.
12. Inventory Holding Period Ratio does not differ significantly among the
various Indian Iron & Steel Companies over the years.
13. Debtors Turnover Ratio of Indian Iron & Steel Companies does not
differ significantly among the years.
14. Debtors Turnover Ratio does not differ significantly among the various
Indian Iron & Steel Companies over the years.
15. Average Collection Period Ratio of Indian Iron & Steel Companies
does not differ significantly among the years.
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16. Average Collection Period Ratio does not differ significantly among
the various Indian Iron & Steel Companies over the years.
17. Cash Turnover Ratio of Indian Iron & Steel Companies does not differ
significantly among the years.
18. Cash Turnover Ratio does not differ significantly among the various
Indian Iron & Steel Companies over the years.
19. Financing of Current Assets through current liabilities & provisions of
Indian Iron & Steel Companies does not differ significantly among the
years.
20. Financing of Current Assets through current liabilities & provisions
does not differ significantly among the various Indian Iron & Steel
Companies over the years.
21. Financing of Current Assets through creditors of Indian Iron & Steel
Companies does not differ significantly among the years.
22. Financing of Current Assets through creditors does not differ
significantly among the various Indian Iron & Steel Companies over
the years.
23. Financing of Current Assets through short-term bank borrowings of
Indian Iron & Steel Companies does not differ significantly among the
years.
24. Financing of Current Assets through short-term bank borrowings does
not differ significantly among the various Indian Iron & Steel
Companies over the years.
25. Financing of Current Assets through accruals and provisions of Indian
Iron & Steel Companies does not differ significantly among the years.
26. Financing of Current Assets through accruals and provisions does not
differ significantly among the various Indian Iron & Steel Companies
over the years.
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27. Creditor’s payment period of Indian Iron & Steel Companies does not
differ significantly among the years.
28. Creditor’s payment period does not differ significantly among the
various Indian Iron & Steel Companies over the years.
29. Debtor’s collection period of Indian Iron & Steel Companies does not
differ significantly among the years.
30. Debtor’s collection period does not differ significantly among the
various Indian Iron & Steel Companies over the years.
31. Difference between APP & ACP of Indian Iron & Steel Companies
does not differ significantly among the years.
32. Difference between APP & ACP does not differ significantly among
the various Indian Iron & Steel Companies over the years.
33. Current assets financing ratios of Indian Iron & Steel Industry does not
differ significantly over the years.
4.6 PERIOD OF THE STUDY
The present study covers the period of 10 (TEN) years spanning from the year
2003-04 to 2012-13. The period of ten years is sufficient to infer the results. This
period has been selected for the study because the complete data are available for the
present study and throughout the available data true insight into the financial heath
can be obtained.
4.7 SAMPLE SELECTION
In India, there are total 19 Iron & Steel Companies in Indian Iron & Steel
Industry. In the basis of ownership, there are two types of Iron & Steel Companies;
1. Public Ltd.,
2. Private Ltd.
In Indian Iron & Steel Industry, out of 19 Companies, 9 companies are public
Ltd. and 10 Companies are private Ltd. which is given in below Table – 4.1.
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Table – 4.1
Total Companies of Indian Iron & Steel Industry
Sr. No. Public Ltd.
Sr. No. Private Ltd.
1 Steel Authority of India Ltd. (SAIL) 1 Tata Steel Ltd. (TSL)
2 Rashtriya Ispat Nigam Ltd. (RINL) 2 Jindal Steel Works Ltd. (JSW)
3 NMDC 3 Jindal Steel & Power Ltd. (JSPL)
4 MOIL Ltd. 4 Essar Steel Ltd. (ESL)
5 MSTC Ltd. 5 Inspat Industrie Ltd.
6 Hindustan Steel Works Ltd. (HSCL) 6 Bhushan Power & Steel Ltd.
7 MECON Ltd. 7 Bhushan Steel Works Ltd. (BSW)
8 KIOCL Ltd. 8 Secondary Small & Medium Steel Sector
9 ICVL 9 Electric Arc Furnance Ltd.
10 Induction Finance Industry
But out of 19 companies, for the purpose of research, the researcher selects 6
(six) companies from them by using sampling methods like convenience and
judgment sampling. The samples have selected considering following factors.
1. Installed capacity
2. Market Capitalization
3. On the product basis
4. The companies have been engaged in the production of finished steel.
5. Data for the entire study period i.e. 2003-04 to 2012-13 are available.
6. The companies have been listed on any stock exchange of India.
The following companies have been selected for the purpose of study by the
researcher which is given in below Table No. – 4.2
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Table No. – 4.2
List of Selected Six Companies of Indian Iron & Steel Industry
Sr. No. COMPANY NAME
1 BHUSHAN STEEL WORKS LTD. (BSW)
2 JINDAL STEEL WORKS LTD. (JSW)
3 JINDAL STEEL & POWER LTD. (JSPL)
4 RASHTRIYA ISPAT NIGAN LTD. (RINL)
5 STEEL AUTHORITY OF INDIA LTD. (SAIL)
6 TATA STEEL LTD. (TSL)
4.8 NATURE OF DATA REQUIRED
For the purpose of present study following types of data has been required.
a. Data pertaining to the history, growth and development of the Iron &
Steel Industry, data regarding the production of finished steel, import-
export of finished steel during the study period, installed capacity of
Indian Iron & Steel Industry, capacity utilization in Indian Iron & Steel
Industry, government policy and problems faced by the Indian Iron &
Steel Industry have been also required for the present study.
b. For the working capital purpose data regarding the company’s financial
position have been required, viz., financial statements of selected steel
companies from the year 2003-04 to 2012-13.
4.9 SOURCES OF DATA
For the present study, the required data have been collected from the
following sources;
(i) Primary Data: The methods of personal verbal discussion with the
executives, official of the financial department and different office
bearers of the selected units for the clarification of various issues on
accounts have been applied whenever it will be needed.
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(ii) Secondary Data: The present study is based on the secondary published
data.
a. The data relating to the financial statements of all the selected
companies of Indian Iron & Steel Industry have been collected from
the published annual reports and accounts are obtain directly from
the registered officers of the respective concern and used extensively.
b. The statistical information related to the Indian Iron & Steel Industry
has been collected through various journals, periodicals etc.
c. Institute like District Industry Centre (DIC) and various libraries
have been consulted to get the information.
d. Published books on Steel Industry and regarding financial
management have been used.
In short, the data related to the working capital management have been
complied from the profit & loss account and balance sheet of selected companies
while data relating to the theoretical portion have been collected from different books
and various journals, periodicals etc.
4.10 TOOLS AND TECHNIQUES OF ANALYSIS OF DATA
For the purpose of analysis of working capital position of Indian Iron & Steel
Industry and its unit’s profit and loss accounts and balance sheet of the selected Iron
& Steel Companies have been recanted and have been presented in a condensed
form. There are many tools and techniques have been used for the present research
work.
(i) Accounting Techniques: This technique have been used for deriving
inferences.
a. Ratio Analysis
b. Trend Analysis
(ii) Statistical Techniques: This technique has been applied for interpreting
the data.
a. Arithmetical Mean
b. Co-efficient of Variations (C.V.)
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c. Simple Growth Rates
d. Trend Indices
e. ANOVA (‘F’ Test)
f. Standard Deviation (S.D)
g. Rank Analysis
(iii) Diagrammatical and Graphic Presentation of Data: Whenever possible
diagram, graphs and charts have been prepared to give bird’s eye view
of the situation and also to facilitate easy interpretation of collected
data.
After analyzing various ratios and components of working capital findings
have been drawn, suggestions have been made with the help of the finding drawn
4.11 SCOPE OF THE STUDY
The study covers a period of ten years beginning from 2003-04 to 2012-13. In
this study overall working capital its broader components and their management have
been discussed.
The Indian Iron & Steel Industry has entered into a new development stage
from 2007-08, riding high on the resurgent economy and rising demand for steel.
Rapid rise in production has resulted in India becoming the 4th largest producer of
sponge Iron or DRI in the world. Existing units have expanded their production. The
study is based only on the company engaged in production of finished steel. While
company engaged in producing crude steel are not included in the present study. The
study covers the evaluation of current efficiency, quick efficiency, collection policy,
inventory holding period, turnover of inventory, debtors, cash and percentage of
CATA. The study is limited to only working capital management covering various
ratios related to working capital. The tool for appraisal of working capital
management is ratio analysis. So the main scope of the study is to get knowledge of
various methods of working capital management. Thus, the scope of study is
restricted to working capital management as a functional scope and production of
steel as an economic scope.
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4.12 LIMITATION OF THE STUDY
(i) The study is based on the secondary data which is collected from the
annual reports, websites and various published reports and as such
findings have depend entirely on the accuracy of such data.
(ii) The present study is based on ratio analysis and it has its own
limitation that applies to this study also. In short, the tools of
investigation have their own limitation which could not be avoided.
(iii) The different views have been applied in the calculation of different
ratios.
(iv) There are different approaches to measure the working capital,
liquidity, inventory, receivables management, cash management and
financial management of working capital. In this regard expert views
differ from one other.
(v) It is not possible to cover all the companies of Indian Iron & Steel
Industry because of the time limitation of study period. Thus, the size
of sample has been restricted and the limitation of small sample applies
to this study.
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4.13 CHAPTER PLAN or OUT LINE OF THE STUDY
Broadly speaking the present study is divided into two parts which are
Theoretical Description and Analysis Part. The study consists of eight chapters,
which are as under;
Chapter No. Name of the Chapter
PART-1
Theoretical Descriptions
1 Working Capital – A Theoretical Aspect
2 Working Capital Management – An Overview
3 Profile of Indian Iron and Steel Industry
4 Research Methodology
PART-2
Analysis Part
5 Analysis of Various Ratios
6 Analysis of Various Components of Working Capital
7 Analysis of Financing of Working Capital
8 Findings and Suggestions
Bibliography
121
Thus, from the above table broadly speaking that the present research work is
divided into two parts which are Theoretical Descriptions and Analysis Part. The
study consists of eight chapters.
The 1st chapter “Working Capital- A Theoretical Aspect” discusses the
Meaning, Concept, Types, Determinations and component of working capital,
Advantages of sufficient working capital, Disadvantage of excess or inadequate
working capital, Factors affecting the working capital requirements, Sources of
working capital, Components of working capital, Working capital policy, Test of
working capital policy and Techniques for analysis of working capital.
The 2nd chapter “Working Capital Management - An Overview” introduces
the Meaning, Definition, Objectives, Principle and Importance of working capital
management and Management of Cash, Debtors and Inventories.
The 3rd chapter “Profile of Indian Iron & Steel Industry” focuses on History,
Production of finished steel, Types of steel, Export and import of finished steel,
Industry structure, Consumption of finished steel, Growth & Development of Indian
Iron & Steel Industry, Installed capacity of Indian Iron & Steel Industry, Capacity
utilization in Indian Iron & Steel Industry, Government policy and Problem faced by
the Indian Iron & Steel Industry.
The 4th chapter “Research Methodology” consist of problem statement,
Review of existing research work, Objectives of the study, Hypothesis of the study,
Period of the study, Sample selection, Nature of data required, Sources of data, Tools
and techniques of analysis of data, Scope of the study, Limitation of the study and
Out line of the study.
The 5th chapter presents the “Analysis of Various Working Capital Related
Ratios” like current ratio, liquid ratio, quick ratio, working capital turnover ratio,
inventory turnover ratio, inventory holding period ratio, debtors turnover ratio,
average collection period, cash turnover ratio and current assets to total assets ratio
etc.
The 6th chapter presents the “Analysis of Various Components of Working
Capital” which is inventory, debtors, cash and bank balances, loan and advances,
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working capital with total assets, current liabilities and provision and also analysis of
liquidity in order of ranking.
The 7th chapter “Analysis of Sources of Financing of Working Capital”
covers the various short-term sources of financing of working capital. Which include
financing of current assets through current liabilities & provisions, financing of
current assets through creditors, financing of current assets through short-term bank
borrowings, financing of current assets through accruals & provisions and also
presents advantage of the leverage provide by the gap between the creditors average
payment period (APP) and debtors’ average collection period (ACP).
The 8th and the last chapter summaries the findings and valuable suggestions
of the research work.
123
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ANALYSIS PARTANALYSIS PARTANALYSIS PARTANALYSIS PART
BSW’s Integrated Steel Complex at Meramandali, Orissa
JSW’s Steel Plant at Salem
Overview of 3 MTPA Steel Plant at Raigarh, Chhattisgarh. (JSPL)
127
Steel Authority of India Ltd, Bhilai Steel Plant & New Blast Furnace (4060 m3) – The Largest in India at Sail’s Rourkela Steel Plant
Pan view of Tata Steel Works & 2.9 MTPA Expansion at Jamshedpur and Green Field Expansion at Orissa, India
