1

CHAPTER -01

2

1.1 Research Methodology

RESEARCH PROBLEM

Analyze the Working Capital of ITI Ltd. in Last 5 Years to measure the working capital

performance of company with respect to other firms and overall industry.

SITUTATION ANALYSIS

MODEL DEVELOPMENT

VARIABLES involved in the Research:

1) Name of company involved in Research-

ITI NAINI, ITI CORPORATION

2) FINANCIAL VARIABLES:

Current Assets, Current Liabilities, Net Working Capital, Sales, Working Capital Turnover

Ratio, Current Ratio, Quick Ratio, Debtors turnover days Ratio, Creditors Turnover Days

Ratio, Inventory turnover days Ratio, Cash to Current Assets Ratio.

3

RESEARCH TYPE

Exploratory Research- The research is concerned with discovering the general nature of

Working Capital and the various variables related to it.

OBJECTIVE OF THE RESEARCH

To Study and analyze the working capital of the ITI Ltd

To determine the efficiency of working capital used in the organization through various ratios.

To apply analytical tools and techniques to financial statements to obtain useful information to

aid decision making.

DATA COLLECTION APPROACH

1) Secondary Data –

A) Internal Secondary Data- Annual Reports, Files and office documents.

B) External Secondary Data- Various books, Reports and Internet.

2) Primary Data- Interview and discussion with concerned persons.

TOOLS & TECHNIQUES

Time-Trend Analysis- Used to see how the firm’s performance is changing through time

Benchmark Analysis.

Financial Ratio Analysis

Financial Statements

4

1.2 Relationship Among Variables

Working Capital Analysis

Net Working Capital Ratio Analysis

Current Assets Current Liabilities Other relevant liquidity and

Activity Ratio

Sales Working Capital Turnover

Ratio

5

1.3

POPULATION

Selected Telecommunication Companies of India.

SAMPLE FRMAE

Research Company- ITI Ltd.

SAMPLING UNIT

The Research included 1 national company with its other units

SAMPLING METHOD

Judge mental Sampling

SAMPLE SIZE

One company

ETHICS OF RESEARCH

The research includes only those data and information which are either non- confidential in

nature or used by taking prior information to respective organization.

No malpractices and incorrect use of any tool and techniques have been done by the researcher.

6

LIMITATION OF RESEARCH

1) The Data has been restricted to available data from secondary data (annual reports, various

journals, Data Sheets, publications etc.)

2) The authenticity of data is subject to errors and omissions.

3) The number of telecommunication companies involved is among top companies of the world,

which might not be a fair indicator of the total sector as a whole.

4) The Results are not on a standalone basis as it includes the various subsidiaries which the

company has.

Limitation of Ratio Analysis:

Do Not Resolve Problems Only Indicate That There May Be a Problem.

“Window dressing” techniques can make statements and ratios look better.

Different operating and accounting practices can distort comparisons.

There is no underlying theory, so there is no way to know which ratios are most relevant.

Globalization and international competition makes comparison more difficult because of

differences in accounting regulations.

Sometimes it is difficult to tell if a ratio value is “good” or “bad.”

Often, different ratios give different signals, so it is difficult to tell, on balance, whether a

company is in a strong or weak financial condition.

7

CHAPTER-02

8

2.1 INDIAN TELEPHONE INDUSTRY

India’s first Public Sector Unit (PSU) - ITI Ltd was established in 1948. Ever since, as a

pioneering venture in the field of telecommunications, it has contributed to 50% of the present

national telecom network. With state-of-the-art manufacturing facilities spread across six

locations and a countrywide network of marketing/service outlets, the company offers a

complete range of telecom products and total solutions covering the whole spectrum of

Switching, Transmission, Access and Subscriber Premise equipment.

ITI joined the league of world class vendors of Global System for Mobile (GSM) technology

with the inauguration of mobile equipment manufacturing facilities at its Mankapur and Rae

Bareli Plants in 2005-06. This ushered in a new era of indigenous mobile equipment

productionin the country. These two facilities supply more than nine million lines per annum to

both domestic as well as export markets.

The company is consolidating its diversification into Information and Communication

Technology (ICT) to hone its competitive edge in the convergence market by deploying its rich

telecom expertise and vast infrastructure. Network Management Systems, Encryption and

Networking Solutions for Internet Connectivity are some of the major initiatives taken by the

company.

Secure communications is the company's forte with a proven record of engineering strategic

communication networks for India's Defence forces. Extensive in-house R&D work is devoted

towards specialized areas of Encryption, NMS, IT and Access products to provide complete

customized solutions to various customers.

Shares distribution

Government of India-92.7%

Public-7.3%

9

Corporate Office

ITI DOORWANI BHAWAN NAGAR

BANGLORE-560016

INDIA

PH: 080-25614466

FAX: 080-25617525

QUALITY SYSTEM

ISO 9001:2000

ISO 14001:2004

10

Manufacturing Units

Bangalore (Karnataka)

Naini (UP)

Rae Bareli (UP)

Mankapur (UP)

Palakkad (Kerala)

Srinagar (J&K)

Regional Offices

New Delhi

Bangalore

Kolkata

Lucknow

Mumbai

Chennai

Hyderabad

Bhubaneswar

Bhopal

Ahmadabad

Kochi

11

2.2 ORGANIGATION CHART

12

2.3 Collaboration

TECHNICAL COLLABORATIONS/ STRATEGIC ALLIANCES

In order to meet the emerging needs of the customers as well as to develop cutting

edge capabilities . ITI Limited has select strategic alliance with leading companies

from around the world.

Alcatel Lucent, France GSM Infrastructure

ZTE, China CDM Infrastructure,

Alphion, USA G-PON

SemIndia, India ADSL-CPEs

Huawei, China NGN (IP TAX)

Tekelec Inc, USA SSTP

Midas Communications, India EDWASEqpt

Arasor Technologies Pvt Ltd , India IFWT

Tejas Networks India SDH Optical

Xalted, India STM-64

Mobi, China Antenna for GSM

13

2.4 MAIN COMPETITORS

Ericson

Modi-alcatel

Lucent Technologies

Punwire

BPL

ZTE

FIBCOM

Seimens Nokia

Tezas

BEL

PUNCOM

XALTED

ICOM

14

2.5 DIVISION IN ITI LIMITED NAINI

Transmission Equipment Division (TED)

Multiplexing Equipment: 60 CHL Composite Bay

Digital Mux equipment: PCM skip, Mux& DDF

Radio Equipment : Multi Access Rural Radio ,

Single CHL, VHF/UHF

Optical Equipment OLTU, Oreg 2GHz, Microwave

2/140 OPTI Mux SDH System

STM-1/4 ,/16/64&DWDM

TERMINAL INSTRUMENT DEVISION (TID)

Telephone Instrument

EPBT, NAVODAYA, SLEEK, CLIP

Solar Power System

RESEARCH & DEVELOPMENT

The division continuously works for the development of new product and technical approvals

of the products and components. The main objectives of R&D department are;

Assimilation of latest technology

Evaluation of new technology for the benefit of the nation

Undertaking indigenous development works at appropriate technological level

Progress towards the ultimate goal of self –reliance

15

CHAPTER -03

Working capital management is the functional area of finance that is

concerned with the administration of all the current assets and current liabilities . it is the

process of planning and controlling the level and mix of the current assets of the firm as well

as financing these assets.

3.1 WORKING CAPITAL:

Working capital refers to the funds invested in current assets i.e., investment in stocks, sundry

debtors, cash and other current assets.

GROSS WORKING CAPITAL:

It refers to the firm’s investment in current assets. Current assets are the assets which can be

converted into cash within one accounting year and include cash, short term securities ,

debtors , bills receivables and stocks.

NET WORKING CAPITAL:

The term networking capital refers to excess of total current assets over total

liabilities.

NETWORKING CAPITAL= TOTAL CURRENT ASSETS – TOTAL

LIABILITIES

16

PERMANENT WORKING CAPITAL:

It is the minimum level of investment in the current assets that is carried by the business at all

time to carry out minimum level of its activities.

TEMPORARY WORKING CAPITAL:

It refers to the total working capital which to required by a business

over the above permanent working capital. It keeps on fluctuating from time to time. It may be

financed from short term sources.

Factors Affecting the Requirement of working capital:

Nature of business

Production policy

Credit Policy

Inventories Policy

Market Condition

Policy of supply

17

3.2 Characteristics of Current Assets

CORPORATE ASSET MANAGEMENT

CURRENT ASSETS

CAPITAL ASSETS

CASH

ACCOUNTS

RECEIVABLE

INVENTORY

WORKING CAPITAL

MANAGEMENT

PLANT, PROPERTY &

EQUIPMENT

CAPIATL BUDGETING

18

In the Management of Working Capital, two characteristics of Current Assets must be

borne in mind-

1) Short Life Span- Current Assets have a short life span. Cash balance may be held idle for a

week or two, Accounts Receivable may have a life span of 30 to 60 days, and inventories may

be held for 30 to 100 days. The life span of current assets depends upon the time required in

the activities of procurement, production, sales, and collection and the degree of

synchronization among them.

2) Swift Transformation into other Assets- Each current asset is swiftly transformed into other

asset forms: Cash is used for acquiring raw materials, Raw Materials are transformed into

finished goods, Finished goods generally sold on credit, are converted into Accounts

Receivable and finally accounts on realization generate cash.

CURRENT ASSETS CYCLE

ACCOUNTS

RECEIVABLE

CASH

WORK IN PROCESS

RAW MATERIAL

FINISHED GOODS

19

The short life span of working capital components and their swift transformation from one

form into another has certain implications:

Decision regarding to working Capital management are repetitive and frequent.

The difference between profit and present value is insignificant.

The close interaction among working capital components implies that efficient management of

one component cannot be undertaken without simultaneous consideration of other component.

For example, if the firm has a large accumulation of finished goods inventory, it may have to

provide more liberal credit terms or show laxity in credit collection.

3.3 OBJECTIVE OF WORKING CAPITAL

MANAGEMENT

The firm’s policies for managing its working capital should be designed to achieve

three goals.

1) ADEQUATE LIQUIDITY- If a firm lacks sufficient cash to pay its bill when due, it will

experience continuous problem. The most important goal is to achieve adequate liquidity for

conducting day-to-day operations.

2) MINIMIZATION OF RISK- In selecting its sources of finance, payable and other short term

liabilities may involve relatively low costs. The firm must ensure that these near term

obligations do not become excessive compared to the current assets on the hand to pay them.

The matching of assets and liabilities among current accounts is a task of minimizing the risk

of being unable to pay bills and other obligations.

3) CONTRIBUTION IN MAXIMIZING FIRM’S VALUE- The firm holds working capital for the

same purpose as it holds any other assets, that is to maximize its present value of common

stock and value of the firm. The investment of excess cash, minimization of inventories,

speedy collection of receivables, and elimination of unnecessary and costly short term

financing all contribute to maximization of the value of the firm.

20

3.4 FACTORS INFLUENCING WORKING CAPITAL

REQUIREMENT

1) NATURE OF BUSINESS:

The working capital requirement of a firm is closely related to the nature of its business. A

service firm like an electricity undertaking or a transport corporation, which has a short

operating cycle and which sells predominantly on cash basis, has a modest working capital

requirement. On the other hand, a manufacturing concerns like a Steel producing company,

which has a long operating cycle and which sells largely on credit, has a very substantial

working capital requirement.

2) SEASONILITY OF OPERATIONS:

Firms which have marked seasonality in their operations usually have highly fluctuating

working capital requirements. For example, consider a firm manufacturing ceiling fans. The

sale of ceiling fans reaches a peak during the summer months and drops sharply during the

winter period. The working capital need of such a firm is likely to increase considerably in

summer months and decrease significantly during the winter period. On the other hand firm

manufacturing a product like lamps, which have fairly even sale round the year, tends to have

stable working capital requirements.

3) MARTKET CONDITIONS

The degree of competition prevailing in the market place has an important bearing on working

capital needs. When competition is high, a large inventory of finished goods is required to

promptly serve customers who may not be inclined to wait because other manufacturer are

ready to meet their needs.

21

4) PRODUCTION POLICY

A Firm marked by pronounced by seasonal fluctuation in its sales may pursue a production

policy which may reduce the sharp variation in working capital requirements. For example a

manufacturer of ceiling fans may maintain a steady production throughout the year rather than

intensify the production activity during the peak business season. Such a policy may dampen

the fluctuation in working capital requirements.

5) CONDITIONS OF SUPPLY

The inventory of Raw materials, spares, and stores depends on the conditions of supply. If the

supply is prompt and adequate, the firm can manage with small inventory. However, if the

supply is unpredictable and scant then the firm to ensure continuity of production, would have

to acquire stocks as and when they are available and carry larger inventory on an average.

22

CHAPTER -04

23

4.1 SECTION-1

WORKING CAPITAL, CURRENT ASSETS & CURRENT

LIABILITIES, WITH ANALYSIS (All the data are in Rs. Crore)

WORKING CAPITAL

Working capital refers to the excess of current assets over current liabilities .Working capital

also known as fluctuating capital because it is used for meeting the day to day expenses of the

business .Inadequacy of working capital lead to temporary insolvency.

Working capital =Current Assets –Current liabilities

Current Assets includes following items

Cash

Inventories

Sundry Debtors

Banks & receivables

24

Working Capital Rs.(in crore)

Table 1.1

Figure 1.1

-200

0

200

400

600

800

1000

2003-042004-05

2005-062006-07

2007-08

ITI NAINI

ITI Ltd.

Years ITI NAINI ITI Ltd.

2003-04 738 97

2004-05 840 122

2005-06 750 118

2006-07 106 44

2007-08 -44 145

25

Observation:

From the above table and graph it has been found that the working capital of the company

decreases year by year .

In the year 2004-05 working capital was maximum for ITI Naini.

The main reason of decreasing working capital was the terms and conditions imposed by the

top management to regulate the company.

ITI is a govt. organization this was the main reason in the low working capital.

In the year 2007-08 working capital was in (-ve ) value because all the sundry debtors has been

revaluated and its account has been closed in the balance sheet of this year.

26

CURRENT ASSETS

Current assets is balance sheet account that represents the value of assets that are personally

expected to be converted in to cash within one year in the normal course of business and other

liquid assets that can be readily converted into cash.

In current assets we have taken only the three points they are as follows.

Inventory

Debtors

Cash, bank & others

27

SALES, CURRENT ASSETS, INVENTORY, DEBTORS AND CASH &BANK OF

ITI Ltd, Naini (in Rs.crore)

Table 1.2

Years Sales Current

Assets

Inventories Debtors Cash Bank

2003-04 116 222 92 128 1.3

2004-05 73 186 77 108 .92

2005-06 139 195 43 150 1.90

2006-07 91 169 44 125 .38

2007-08 117 108 34 45 0.30

SALES, CURRENT ASSETS, INVENTORY, DEBTORS AND CASH & BANK OF

ITI Ltd, Ltd. (in Rs.crore)

Table 1.3

Years Sales Current

Assets

Inventories Debtors Cash Bank

2003-04 1257 2094 638 1189 267

2004-05 1389 2421 553 1420 448

2005-06 1749 2596 412 1662 219

2006-07 1818 2531 425 1708 37

2007-08 1039 2550 370 1825 14

28

INVENTORY

We can see the trend of inventory by the help of the financial data. With the help of inventory

we can analyze the working of the organization.

Table 1. 4

Figure1. 2

0%

10%

20%

30%

40%

50%

2003-04 2004-05 2005-062006-07

2007-08

CONTRIBUTION OFINVENTORY IN THE CURRENT ASSETS OF ITI NAINI

CONTRIBUTION OFINVENTORY IN THE CURRENT ASSETS OF ITI Ltd.

YEARS CONTRIBUTION

OFINVENTORY IN THE

CURRENT ASSETS OF

ITI NAINI

CONTRIBUTION

OFINVENTORY IN THE

CURRENT ASSETS OF

ITI Ltd.

2003-0 41% 13%

2004-05 40% 19%

2005-06 22% 20%

2006-07 19.8% 19.6%

2007-08 31.5% 14.50%

29

Observation:

If we look at the contribution of inventory in the current assets then it is not satisfactory. It is

very high than idle conditions. There are basic reasons which are responsible for this position

of inventory in ITI Ltd., they are as follows.

Unwanted and excessive purchase of raw materials

Storage of raw materials which are obsolete now

Inventory of work in progress which is for next financial year

30

CONTRIBUTION OF DEBTORS IN CURRENT ASSETS

Table 1. 5

YEARS CONTRIBUTION OF

DEBTORS IN THE

CURRENT ASSETS OF

ITI NAINI

CONTRIBUTION OF

DEBTORS IN THE

CURRENT ASSETS OF

ITI Ltd.

2003-04 58% 57%

2004-05 59% 59%

2005-06 77% 73%

2006-07 73.5% 79%

2007-08 41.6% 71.5%

Figure1. 3

Observation:

As it has said that ITI is a govt. organization and its main customer is B.S.N.L.& MTNL and

both are also public sectors due to which there is not any hard and fast rule for the payment of

the money, that’s why the contribution of debtors is high in the current assets.

0%

20%

40%

60%

80%

2003-04 2004-05 2005-062006-07

2007-08

CONTRIBUTION OF DEBTORS IN THE CURRENT ASSETS OF ITI NAINI

CONTRIBUTION OF DEBTORS IN THE CURRENT ASSETS OF ITI Ltd.

31

CONTRIBUTION OF CASH & BANKAND OTHER ASSETS IN THE

CURRENT ASSETS

Table 1.6

YEARS CONTRIBUTION OF

CASH & BANKAND

OTHER ASSETS IN THE

CURRENT ASSETS OF

ITI NAINI

CONTRIBUTION OF

CASH &BANK AND

OTHER ASSETS IN THE

CURRENT ASSETS OF

ITI Ltd.

2003-04 1% 30%

2004-05 1% 22%

2005-06 0.97% 10%

2006-07 0.22% 1.7%

2007-08 1% 0.55%

32

CURRENT LIABILITIES

Current liabilities are company debts or obligation that are due within one year .Current

liabilities appear on the company’s balance sheet and include short term , account payable ,

accrued liabilities and other debts.

Essentially, these are bills that are due to creditors and suppliers within a short period of time.

Normally, companies withdraw or cash current assets in order to pay their liabilities.

CURRENT LIABILITES AND PROVISION OF ITI Ltd., NAINI

(in Rs.crore)

Table1. 7

YEARS CURRENT

LIABILITIES

PROVISION TOTAL

2003-04 162 11 173

2004-05 99 14 113

2005-06 82 43 125

2006-07 128 53 181

2007-08 120 32 152

0

50

100

150

200

2003-042004-05 2005-06 2006-072007-08

Total Liabilityof ITI NAINI

33

Figure 1. 4

CURRENT LIABILITIES OF ITI Ltd. (In Rs.Crore)

Table 1.8

Years Liabilities

2003-04 1356

2004-05 1581

2005-06 1846

2006-07 2425

2007-08 2305

Figure1.5

0

500

1000

1500

2000

2500

2003-04 2004-05 2005-06 2006-07 2007-08

Current Liabilities Of ITI Ltd.

Current Liabilities Of ITI Ltd.

34

4.2

RATIO ANALYSIS

35

RATIO ANALYSIS

In this summer project all the ratios are not calculated because ITI not a profit making

company. Due to which the calculation of some ratios is not reasonable.

By the calculation of the entire ratio we can analyze the present financial situation of any

company. That’s why the ratios are major tool in the determination of financial analysis of any

company.

2.1) CURRENT RATIO

Current ratio is a liquidity ratio that measures a company’s ability to pay short term obligations

calculated by dividing current assets by current liabilities. This also helps to give an idea as to

the efficiency of the company’s operating cycle. Also known as “Liquidity ratio” and “Cash

ratio”.

The ratio is mainly used to give an idea about the company’s ability to pay back their short

term liabilities (debts &payable) with their short term assets (cash, inventories receivables).

The higher the current ratio higher the capability to discharging its obligations.

A ratio below 1 suggests that the company is unable to discharge its obligation at the particular

point if time. Which shows the weakness of the company?

CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES

36

CURRENT RATIO OF ITI Ltd. NAINI

Table 2.1

Figure 2.1

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2003-04 2004-05 2005-06 2006-07 2007-08

CURRENT RATIO

CURRENT RATIO

YEARS CURRENT

ASSETS

CURRENT

LIABILITIES

CURRENT RATIO

2003-04 222 173 1.28

2004-05 186 113 1.65

2005-06 195 125 1.56

2006-07 169 181 0.53

2007-08 108 152 0.71

37

CURRENT RATIO OF ITI Ltd.( in Rs. crore)

Table 2.2

Figure 2.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2003-04 2004-05 2005-06 2006-07 2007-08

CURRENT RATIO

CURRENT RATIO

YEARS CURRENT

ASSETS

CURRENT

LIABILITIES

CURRENT

RATIO

2003-04 2094 1356 1.55

2004-05 2421 1581 1.53

2005-06 2596 1846 1.41

2006-07 2531 2425 1.04

2007-08 2550 2304 0.97

38

Observation of current ratio:

It is clear from the above graph and data that the Naini unit as well as ITI Ltd has not get the

idle current ratio i.e. 2:1 since last five years.

It indicates that the company’s current assets are not enough to meet current liabilities

And it affects the financial health of the business

39

2.QUICK RATIO OR ACID TEST RATIO

Quick ratio is a stringent test that indicates whether a firm has enough short term assets to

cover its immediate liabilities without selling inventories. The acid test ratio is far more

strenuous than the working capital ratio, primarily because the working capital allows for the

inclusion of inventory and other assets.

Quick ratio = (cash + receivable +short term investments)/current liabilities

The companies with ratio less than 1 can’t pay their current liabilities and should be looked at

with extreme caution. Furthermore if the quick ratio is much lower than working capital ratio

then it means there is large amount of inventories in the working capital of the company as in

the case of retail stores.

40

QUICK RATIO OF ITI Ltd. NAINI

(figures in crore)

Table 2.3

Years Debtors Cash &

Bank

Quick

Assets

Current

Liabilities

QUICK

RATIO

2003-04 128 1.3 129 173 0.75

2004-05 108 0.92 109 113 0.965

2005-06 150 1.91 152 125 1.2

2006-07 125 0.31 125.38 181 0.69

2007-08 45 0.30 75 152 0.50

QUICK RATIO OF ITI Ltd

Figure2.3

0

0.2

0.4

0.6

0.8

1

1.2

2003-04 2004-05 2005-06 2006-07 2007-08

QUICK RATIO

41

QUICK RATIO OF ITI Ltd. NAINI .( in crore)

Table 2.4

Years Debtors Cash &

Bank

Quick

Assets

Current

Liabilities

Quick

Ratio

2003-04 1189 267 1456 1356 1.07

2004-05 1420 448 1868 1581 1.18

2005-06 1662 522 2184 1846 1.18

2006-07 1708 37 1745 2425 0.72

2007-08 1825 14 0.48

Figure2.4

0

0.2

0.4

0.6

0.8

1

1.2

2003-04 2004-05 2005-06 2006-07

Quick Ratio

Quick Ratio

42

Observation of Quick Ratio:

In ideal situation quick ratio should be equal to 1 . But in the case of ITI, Naini it has been only

thrice since last five years that the quick ratio was equal to one.

The reason is change in management policy of the company. This change is made due to

internal reason of the company. the change is that now in the entire cases the amount collected

by all the units is directly sent to corporate office. Again this amount is allocated to the units

on the basis of individual requirement of the units.

The other reason is debtors the unit is very high. Debtors are not in the form of bills

receivables . Unit has debtors older than one year . these are the reason for current and cash

ratio of ITI is being low.

43

PROFITABILITY RATIO

1. Return on Assets

The profitability ratio is measured in terms of relationship between net profits and assets

employed to earn that profit . The ratio measures the profitability of the firm in terms of assets

employed in the firm.

Net profit after taxes / Average total fixed assets

ITI Ltd. NAINI

Table 2.5

Years Profit after tax Avg.Total fixed

Assets

Return on Assets

2003-04 (13637) 162 (84)

2004-05 (11165) 172 (65)

2005-06 (12583) 137 (91.9)

2006-07 (9921) 88 (113)

2007-08 (16131) 127 (127)

44

2.NET PROFIT RATIO

It measures the overall profitability of the business.

PROFIT % ON SALES OF ITI Ltd. ,NAINI

Table 2.6

Years Profit % on sales

2003-04 (116.85)

2004-05 (152.6)

2005-06 (90.07)

2006-07 (107.56)

2007-08 (136.22)

Figure2.6

-160

-140

-120

-100

-80

-60

-40

-20

0

2003-04 2004-05 2005-06 2006-07 2007-08

Profit % on sales

Profit % on sales

45

Observation of Profit on Sales

From the profit ratio it is clear that the sales have not generated enough revenue so as to give

birth to profit.

The reason for this situation is that sometimes the company has to supply to BSNL at low or

no margins due to fixed quota.

Another reason is that the company is unable to produce enough to meet its orders due to

insufficiency and paucity of funds.

46

3.RETURN ON INVESTMENTS

RETURN ON INVESTMENTS OF ITI Ltd. NAINI

Table 2.7

Years RETURN ON INVESTMENT

2003-04 (117.38)

2004-05 (79.25)

2005-06 (44.51)

2006-07 (53.58)

2007-08 (171.53)

Figure2.7

-180

-160

-140

-120

-100

-80

-60

-40

-20

0

2003-04 2004-05 2005-06 2006-07 2007-08

RETURN ON INVESTMENT

RETURN ON INVESTMENT

47

Observation of ROI

As the company is running into losses so, it has negative return on investment.

The return on investment was increasing till the year 2003-04 and after that it started

decreasing. But still it is running

It is clearly visible that the company is unable to have income on the investments. This in a

way makes the investments a useless venture which never bears profits.

48

4. PROFIT BEFORE INTEREST AND TAXES

Table 2.8

Years PBITof ITI Ltd. Naini PBIT of ITI Ltd.

2003-04 (103.14) (684)

2004-05 (72.24) (296)

2005-06 (101.63) (426)

2006-07 (66.46) (364)

2007-08 (58.06) (296)

Figure2.8

-700

-600

-500

-400

-300

-200

-100

0

2003-04 2004-05 2005-06 2006-07 2007-08

Profit before interest and tax of ITI Ltd. Naini

Profit before interest and tax of ITI Ltd.

49

1. CAPITAL TURNOVER

This ratio measures the firm’s ability of generating sales per rupee of long term investment .

The higher the ratio , the more efficient the utilization of owner’s and long term creditor’s

funds.

Table 2.9

Years Capital Turnover

2003-04 1

2004-05 .52

2005-06 .49

2006-07 0.56

2007-08 1.26

Figure2.9

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2003-04 2004-05 2005-06 2006-07 2007-08

Capital Turnover

Capital Turnover

50

Observation:

In the initial years the capital turnover of the ITI Naini unit depicts that the company was

generating sales revenues equivalent to the amount of capital and long term borrowings

But in the latter year it is clear that ITI Naini unit is being unable to generate as much sales

revenue as is the owners and long term funds invested in the company\

And it can be said that revenue generating capacity of the ITI Naini unit is declining gradually

year by year.

51

FIXED ASSETS TURNOVER RATIO

A high fixed asset turnover ratio indicates efficient utilization of fixed assets in generating

sales . A firm whose plant and machinery are old may show a higher fixed assets turnover ratio

than the firm which has purchased them recently.

Table 2.10

Years Sales Fixed Assets Ratio

2003-04 116 54 2.15

2004-05 73 109 0.67

2005-06 139 155 0.90

2006-07 91 131 0.70

2007-08 118 131 0.90

Figure2.10

0

0.5

1

1.5

2

2.5

2003-04 2004-05 2005-06 2006-07 2007-08

Ratio

Ratio

52

Observation

In the initial three years till the year 2004 it can be said that the fixed assets were utilized as to

obtain sufficient sales revenue.

But in the later year, the fixed assets were either underutilized or they were not sufficient

enough to generate adequate sales revenue.

From the above data ITI is not increasing its fixed assets due to joint venture process between

Alcatel and ITI.

Sometimes it also tries to make profit by selling its extra fixed assets which has good scrap

values.

53

WORKING CAPITAL TURNOVER RATIO

Working capital turnover is a measurement comparing depletion of working capital to the

generation of sales over a given period. This provides some useful information as to how

effectively a company is using its working capital to generate sales.

Working Capital Turnover = Sales / Working Capital

A company uses working capital (current assets – current liabilities) to fund operations and

inventory are then converted into sales revenue for the company .The working capital ratio is

used to analyze the relationship between the money used to fund operations and the sales

generated from these operations.

W.C.Turnover Ratio

Table 2.11

Years W.C.Turnover Ratio

Of ITI Ltd. Naini

W. C. Turnover Ratio Of

ITI Ltd.

2003-04 1.1951 1.7125

2004-05 0.5966 1.6397

2005-06 1.1746 2.3562

2006-07 0.583 0.00488

2007-08 -0.373 1.208

54

Figure2.11

Observation

In the year 2003-04 the working capital turnover ratio of the plant decreased . This decrease

occurred due to the large decrease in sales and small decrease in the amount of working capital

of the plant.

In the year 2004-05 the working capital turnover ratio of the plant decreased again but

sharply..

This working capital again decreased in next years and years.

-0.5

0

0.5

1

1.5

2

2.5

2003-04 2004-05 2005-06 2006-07 2007-08

Working Capital Turnover Ratio Of ITI Ltd. Naini

Working Capital Turnover Ratio Of ITI Ltd.

55

CHAPTER-05

FINDINGS AND SUGGESTIONS

56

5.1Findings of Project

After deep analysis and observation it is concluded that considering the future prospect of ITI

Ltd., today is a market driven , customer obtain company which is maintaining its technology

leadership . The company is moving towards 21st century bracing itself to face the challenge of

the future. The company has to sustain its position in the increasingly competitive environment

. As a large telechom company aspiring to be global leader it has to stand on its own in a

market strongly influenced by WTO agreement. The national task force on IT has made path

breaking recommendation in the recent report. With this view companies new thrust areas will

be IT products/ solutions and internet products /solutions.

The ratio of the company indicates that ITI’s liquidity position is not sufficient.

According to the rule of thumb i.e. 2:1 , the currency ratio of ITI is low which reflects

their inability to pay short term liabilities which thereby affects the credibility of the company.

A continous default on its part may create hindrances in its day to day operations.

Leverage ratio of the company reflects that the loans of the company are sufficient in

terms of total assets , due to which equity is also sufficient.

Turnover ratios are reflecting lower inventory turnover , it is ratio of cost of goods

sold to average inventory . lower ratio is the indicator of inefficient inventory management. It

is suggested that efforts should be made in reducing the average collection period however the

company has a task force in respect of reducing its account recievables.

Profitability ratios give some yardsticks to measure profits in relative terms, either

with reference to sales or assets or capital employed.

The time analysis and inter unit comparison reflects that the Naini unit is undergoing

through losses, but the unit is trying to recover the losses and is taking preventive steps

through various schemes such as VRS that is voluntary retirement sheme for reducing the

excessive man power which is successful to a great extent.

57

5.2PROBLEMS IN ITI NAINI

1 .Materials

Procurement process is low

Lengthy processing

Inadequate foreign exchange management

Inadequate materials management

High inventory

2. Labors

Lack of specialization among workers

Fixed and labor cost

Absenteeism rate is very high

No proper allocation of work

Large workforce

Lack of co-ordination

58

Overheads:

Overhead absorption rate was calculated was in 1988-89 many years back and being

revised yet .

Overhead percentage is applied on single factor i.e. direct labour for computing the

overhead allocation which is in many cases imprecise, incorrect and arbitrary .

Generally overheads cost is not covered in the price quoted in the tendor .

Hefty amount of overheads.

4. Other problems

Marginal costing is not in regular practice.

Maachine hour rate is not used even though it is essential for the machines which are

expensive like CNC machine .

Execessive paper work

Mismanagement

Weak co-ordination

Late response to clients

Least control over cost

Lack of dedication to organigation

Lack of customers orientation

Lack of funds

Lack of team spirit

59

Prices of products are high in comparison to products of its competitors

No fixed target for production

Lack of R&d support for cast effective products

Lack of proper delegation of authority

5. Lack of commercial approach

Being a government company it has a fixed quota for supplying material to BSNL &MTNL

and because of it , the company has to supply at lower rate than quoted by it and thereby

increasing the losses. It should opt for a pure commercial approach.

5.3 SCOPE AND AREAS TO INCREASE PROFITABILITY

The scope of cost reduction is so vast that it is wide spread among all the parts of the

organization. More precisely, cost reduction may be implemented in the following areas.

DESIGN

Design of method of production

Design of tools , equipments and machinery

Standardization of methods

Layout of building , machinery , transport equipment

60

FACTORY ORGANIZATION AND PRODUCTION METHODS

Material purchasing, inspection, receiving , storage, handling, stock etc.

Recruitment ,training , promotion , work study , method of remuneration in connection

with the labor

Overheads

Production, planning and control

Tool storage, maintenance, and control.

Use of maintainer of transport equipments.

Suitable working condition

System analysis

MARKETING

Market research

Advertising

Sales

AFTER PRODUCTION WORKS

Ware housing

Packing

Distribution

61

5.4 SUGGESTIONS

Based on the various findings that are mentioned earlier the following recommendation are

suggested.

1. Need Of Cost Reduction :

Profit is the resultant of two varying factors –viz . sales and cost . The larger the gap between

the two factors the larger is the profit .The profit can be maximized either by increasing the

sales or by reducing and cost cutting down the cost. Avenues have therefore to explored and

methods are to be devised to cut down the expenditure and therby reduce the cost of the

products.

Reduction in cost /unit may be effective in manyways

By reducing the expenditure when the volume of output remains constant

By increasing the production viz. increasing the output and maintaining the same level of

expenditure

2. ADMINISTRATION

Rearranging 2the office scrutinizing the effectiveness of the existing staff.

Reasonability of certain expenses, for ex . telephone overtime wages use of company car

travelling etc.

Checking possible misuse and corruption by appointing vigilance inspector

62

3.FINANCE

Better utilization of fixed assets employed

Disposal of fixed assets which can not be economically employed and reinvestment of the said

funds in a more profitable channel

No acquisition of fixed assets of doubtful use or where chances of obsolescence’s are high

Better inventory control through the use of techniques like ABC analysis.

Better credit control

Increase productivity employing fully existing fixed and working capital

4) COST CONTROL

CONTROL OF MATERIAL COST: Control on use of direct material is exercised by

issuing only the standard quality of material required for a production order as per the lay out

insured by the planning department.

CONTROL OF LABOUR COST: this is kept constant under control by keeping a constant

watch on the utilization efficiency of direct labour

CONTROL OF OVERHEADS: Costing system collects different items of overheads and

allocates or apportion ate them to different cost centre.

5) USE OF INTRENET & EXTRANET

Although there is facility of free intercall in all the section of ITI . But there is need of new

technolog y like intranet , extranet, Wi-Fi . so that all the information can be accessed at any

point and time. It increases the effectiveness of the workers.

63

6) PROPER CO-ORDINATION

There is very low proper co-ordination between the employees of ITI, for this there should be

proper arrangement for motivational programmed like games , cultural programme etc.

7) TRAINING & DEVELOPMENT

There is not any proper set procedure of employees training and development this is reason

they don’t get any proper guidance. So there is a strong need of proper training for the

employees of ITI.

8) PROPER ADVERTISING

Because it is an government organization that’s why it does not give weight to advertising

.Due to which customers are not more aware of its’ products. And it’s competitors get benefit

of this point .So the top management must be concerned about the advertising of ITI.

64

CHAPTER-06

Conclusion

From the analysis of working capital we have find that the working capital is not enough to

meet its daily requirement. All the ratios show a negative result. This was the reason that

Indian government has tried many times to disinvestment it. Although it is the first PSU after

independence, earlier it has given very good result but from last ten years it is not giving

satisfactory results. There are many reasons behind it. Some government policies are against

it. Employees are not so much active; due to loss making company intellectual professionals

don’t want to work there. For the regular working government of India always give grants to

the company, despite that it is not covering the loss due to its poor management. Indian

government is also thinking about the joint venture of the company with Alcatel

telecommunications which is a France based company.

Finally we can hope that it will make profit and make vital role in Indian

telecommunication industry.

65

CHAPTER-07

BIBILIOGRAPHY

Annual Report of ITI Ltd.

Balance Sheets provided by ITI

Financial Management by Khan and Jain

Financial Management by Prasanna Chandra

References

www.iti.com

www.projectparadise.com

www.google.com