Mba-working Capital Management

7/30/2019 Mba-working Capital Management

1/95

WORKING CAPITAL MANAGEMENT&

RATIO ANALYSIS

With reference to

M/S. RAIN CII CARBON (INDIA) LIMITED

(Formerly M/S. RAIN CALCINING LIMITED)

VISAKHAPATNAM

A project report submitted toAndhra University,

in partial fulfillment for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted by

M. SRINIVASA RAOEnrollment No: 2055555023

Under the guidance of

Professor R. Satya RajuHead of the Department

Commerce and Management StudiesAndhra University

VISAKAHAPATNAM


2/95

ANDHRA UNIVERSITYDEPARTMENT OF COMMERCE AND MANAGEMENT STUDIES

VISAKHAPATNAM

CERTIFICATE

This is to certify that Mr. M. Srinivasa Rao Enrollment

No.2055555023, a student of M.B.A., ofANDHRA UNIVERSITY,

has prepared this project report entitled "WORKING CAPITAL

MANAGEMENT & RATIO ANALYSIS" with reference to M/s. RAIN

CII CARBON (INDIA) LIMITED (formerly Rain Calcining

Limited), VISAKHAPATNAM. This report is submitted in partial

fulfillment of the requirement for the award of "Master Of

Business Administration" degree from ANDHRA

UNIVERSITY,VISAKHAPATNAM. It is a record of bonafide work

carried out by him under my guidance and supervision and his study

has been quite impressive and good.

I wish him all success in his future endeavours.

R. SATYA RAJUHEAD OF THE DEPARTMENT

COMMERCE & MANAGEMENTSTUDIES

Place: Visakhapatnam

Date :


3/95

TO WHOM SO EVER IT MAY CONCERN

This is to certify that M. Srinivasa Rao, a student of M.B.A., of

ANDHRA UNIVERSITY, has successfully completed his Project Work

on "WORKING CAPITAL MANAGEMENT & RATIO ANALYSIS "

at our factory for the period from 01.10.2007 to 25.03.2008 as a

part of MBA studying from Andhra University , Visakhapatnam

M.S. Krishna MohanReddyAssistant General Manager

(Personnel & HRD)

Place: Visakhapatnam

Date : 31.03.2008


4/95

DECLARATION

I do hereby declare that this project entitled "WORKING CAPITAL

MANAGEMENT & Ratio Analysis with reference to M/s.RAIN

CII CARBON (INDIA) LIMITED (formerly RAIN CALCINING

LIMITED, Visakhapatnam, has been written and submitted by me in

the partial fulfillment for the award of "MASTER OF BUSINESS

ADMINISTRATION" toANDHRA UNIVERSITY. This work has not

been previously submitted by anyone for award of any other degree

or diploma in any other institute or university and purely of my own.

M. Srinivasa RaoEnrollment

Number:2055555023

Place: VisakhapatnamDate: 31.03.2008


5/95

ACKNOWLEDGEMENT

This Project Report is an our come bearing the imprint of many

persons who directly and indirectly encouraged and inspired in this

completion. I would like to thank one and all.

I would like to extend my profound sense of gratitude to Sri R.SATYA RAJU, Project Guide and Head of the Department Commerce& Management Studies of our University for giving his guidance andvaluable suggestions in bringing our this Project.

It is my privilege to thank all the Professors of Andhra Universityfor their continuous support.

I intend to provide my gratitude to Sri P. Madhava Rao, ManagerFinance & Sri V.V.N. Murty, Assistant Manager Accounts forassisting me and providing information whenever necessary andhelping me to complete the Project successfully.

My special thanks to all my well wishers who hand cooperated with

me while doing Project work and M.B.A. Programme successfully.

M.Srinivasa Rao

Enrollement No.

2055555023


6/95

CONTENTS

CHAPTER NO. DESCRIPTION

I INTRODUCTION

IIAN OVERVIEW OBJECTIVE OF THE STUDY( WORKING CAPITAL MANAGEMENT & RATIOANALYSIS)

III PROFILE OF THE ORGANISATION

IV

ANALYSIS OF DATA

WORKING CAPITAL MANAGEMENT & RATIOANALYSIS

V SUMMARY AND SUGGESTIONS


7/95

Chapter No.I

INTRODUCTION

Working capital management is crucial for any firm, because

investment in current assets represents a substantial portion of total

investment and investment in current assets and liabilities have to be

geared quickly to the changes in sales. So a lot of financial managers

time is devoted in current assets and current liabilities management.

Working capital management can be mainly divided into 4 parts.

1. Operating cycle

2. Receivables management

3. Inventory management

4. Cash management

The application of these four core areas of working capital management

forms the crux of the project. In operating cycle, for the past three years,

the net operating cycle is calculated. In receivables management the

credit standards, credit period, and collection efforts in RAIN CII CARBON

are studied, in inventory Management, and their re-order points are

determined, In cash management the cash requirements for the coming

financial year 2007-2008 are estimated and a cash budget of receipts and

payments type is prepared.


8/95

Ratio Analysis :

Ratio Analysis is a widely used tool of financial analysis. It is defined as

the systematic use of ratio to interpret the financial statements so that

the strengths and weaknesses of a firm, as well as its historical

performance and current financial conditions, can be determined.

Financial Ratio Analysis:

Financial ratio analysis is the calculation and comparison of ratios which

are derived from the information in a company's financial statements. The

level and historical trends of these ratios can be used to make inferences

about a company's financial condition, its operations and attractiveness as

an investment.

Financial ratios are calculated from one or more pieces of information

from a company's financial statements. For example, the "gross margin" is

the gross profit from operations divided by the total sales or revenues of a

company, expressed in percentage terms. In isolation, a financial ratio is a

useless piece of information. In context, however, a financial ratio can

give a financial analyst an excellent picture of a company's situation and

the trends that are developing.

A ratio gains utility by comparison to other data and standards. Taking our

example, a gross profit margin for a company of 25% is meaningless byitself. If we know that this company's competitors have profit margins of

10%, we know that it is more profitable than its industry peers which is

quite favourable. If we also know that the historical trend is upwards, for

example has been increasing steadily for the last few years, this would

also be a favourable sign that management is implementing effective

business policies and strategies.


9/95

Financial ratio analysis groups the ratios into categories which tell us

about different facets of a company's finances and operations. An

overview of some of the categories of ratios is given below.

Leverage Ratios which show the extent that debt is used in acompany's capital structure.

Liquidity Ratios which give a picture of a company's short term

financial situation or solvency.

Operational Ratios which use turnover measures to show how

efficient a company is in its operations and use of assets.

Profitability Ratios which use margin analysis and show the

return on sales and capital employed.

Solvency Ratios which give a picture of a company's ability to

generate cash flow and pay it financial obligations.

It is imperative to note the importance of the proper context for ratio

analysis. Like computer programming, financial ratio is governed by the

GIGO law of"Garbage In...Garbage Out!"A cross industry comparison

of the leverage of stable utility companies and cyclical mining companies

would be worse than useless. Examining a cyclical company's profitability

ratios over less than a full commodity or business cycle would fail to give

an accurate long-term measure of profitability. Using historical data

independent of fundamental changes in a company's situation or

prospects would predict very little about future trends. For example, the

historical ratios of a company that has undergone a merger or had a


10/95

substantive change in its technology or market position would tell very

little about the prospects for this company.

Credit analysts, those interpreting the financial ratios from the prospects

of a lender, focus on the "downside" risk since they gain none of the

upside from an improvement in operations. They pay great attention to

liquidity and leverage ratios to ascertain a company's financial risk. Equity

analysts look more to the operational and profitability ratios, to determine

the future profits that will accrue to the shareholder.

Although financial ratio analysis is well-developed and the actual ratios

are well-known, practicing financial analysts often develop their own

measures for particular industries and even individual companies.

Analysts will often differ drastically in their conclusions from the same

ratio analysis.

As in all things financial, beauty is often in the eye of

the beholder. It pays to do your own work!


11/95

Importance of Ratios:

Ratio Analysis is concerned to be one of the important financial

tools for appraisal to financial conditions, efficiency and

profitability of business. Hence Ratio Analysis is useful from

following objects.

1) Short term and long term planning.

2) Measurement and evaluation of financial performance.

3) Study of financial trends.

4) Decision making for investment and operations.

5) Diagnosis of financial ills.

6) Helps in communicating.

7) Helps in co-ordination.

8) Helps in financial forecasting and planning.


12/95

Advantages of Ratio Analysis:-

The following are the main advantages derived out of Ratio

Analysis, which are obtained from the financial statements viz.,

Profit and Loss Account and Balance Sheet.

a) The analysis helps to grasp the relationship between various

items in the financial statements.

b) They are useful in pointing out the trends in important items

and thus helps the management to forecast.

c) With the help of ratios inter-firm comparisons are made to

evolve future market strategies.

d) The communication of what has happened between

accounting dates revealed effectively by ratios.


13/95

Limitations of Ratio Analysis:-

a) Limited use of Singe Ratio :- A single ratio, usually, does

not convey much of sense. To make a better interpretation a

number of ratios have to be calculated which is likely to

confuse the analyst than help him in making any meaningful

conclusion

b) Lack of Adequate Standards :- There are no well-accepted

standards or rules of thumb for all ratios, which cab be

accepted as norms. It renders interpretation of the ratios

difficult.

c) Windows Dressing :- Statements can easily be window

dressed to present a better picture of its financial and

profitability poison to outsiders.

d) Personnel Bias :- Ratio are only means of financial analysis

and not an end it itself. Ratios have to be interpreted and

different people may interpret the same ratio in different

ways.


14/95

Objective of the Study:-

The main objective of the study is analyzing the financial position

of the Company. In the study, I had collected the date from the

financial statements via, Balance Sheet and Profit and Loss

Account and other related sources provided by the Finance

Department RCL.

The following were the Objective of the study:-

To study the Industry and identify the problems and prospects

and future requirements of RCL.

To present in profile of the RCL where investigator carried out

his Project work. This part includes the utilities of Financial

Analysis.

To review the optical frame work if financial analysis with special

reference to different tools and techniques.

To offer suitable suggestion on the basis of finding at the study.


15/95

CHAPTER III

ORGANIZATIONAL PROFILE

Rain CII CARBON (INDIA) LIMITED (formerly Rain Calcining Limited) was

incorporated as a public limited company under the companies Act, 1956

on November 8th, 1989 for implementing the project to manufacture

Calcined Petroleum Coke (CPC) with Cogeneration facility of 49.5 MW

power. The development of the project included carrying out a feasibility

study for the project, identification of Raw material sources and markets

for the product and tying up the sources or finance.

The company has set up a 100% Export Oriented Unit for the

manufacture of 500,000TPA of CPC with a power generation facility

capable of generating an annual averaged of 49.5MW of surplus power

from the flue gases evolved during processing, calcination and

combustion of green petroleum coke ( GPC), the surplus power from the

co-generation facility will be sold to industrial consumers or transmission

corporation of Andhra Pradesh (AP TRANSCO) under a power wheeling and

purchase agreement between the company and APTRANSCO.

The revenue generated from the sale of surplus power will make the

companys cost of CPC production one of the lowest in the world.


16/95

The project was successfully tested and commissioned and commercial

production commenced in July 1998.


17/95

Location:

The project is strategically located in the Visakhapatnam port area,

Kapparada Viallage, Naval Base (PO), Visakahapatnam - 530 0014 in

Andhra Pradesh. The company has been allotted 42.5 acres of land on a

lease basis by Visakhapatnam Port Trust (VPT) for a period of 30 years

from august 28, 1992. That has also allotted to the company an additional

40 acres of VPT land, free of cost, for the development of a green belt

around the plant. The location in Visakhapatnam Port Area will facilitate

the import of 700,000 to 8,00,000 dry tonnes of GPC and export of

500,000 tones of CPC per annum. Visakhapatnam Harbor is one of the

well-equipped major ports in the country with good bulk cargo handling

facilities. National Aluminum Company Limited (NALCO), Bharat Aluminum

Compnay Limited (BALCO) which owns the biggest aluminum smelters in

India, is the main consumers in India of CPC and is located 500 700 kms

from Visakhapatnam.


18/95

Promoters:

The Company has been promoted by Mr. N. Jagan Mohan Reedy and

Associates, Reliant Energy-Rain, inc. and APPLIED INDUSTRIAL

MATERIAL CORPORATION INC., Mr. Jagan Mohan Reedy (42 Years) has

a Bachelors degree in Industrial Engineering from Purdue University, U.S.A.

He received initial training in the cement industry, which utilizes technology

similar to a Calcination plant and worked with companies and consultants

experienced in the Calcining industry to develop the project. He conceived

the project and obtained a grant of US $ 500,000 from the United States

Trade and Development Agency (USTDA) for conducting the feasibility study

for the project, which was conducted by Pace consultants inc. (Pace) U.S.A.

Reliant Energy-Rain, inc., Mauritius, is a Wholly owned subsidiary

of Reliant Energy International, inc. (REI), based in Houston, Texas,

USA. REI is an international energy services company with $ 11.5 billion in

annual revenue and assets totaling, more than $ 19 billion., Reliant

Energys Retail Group consists of three natural gas utilities and one

electric utility, as well as a retail marketing group, which provides

unregulated retail energy products and services. Reliant Energys

Wholesale Group invests in power generation projects and provides

wholesale trading and marketing services as well as natural gas supply,

gathering, transportation and storage. Reliant Energy international is a


19/95

significant player in the international energy market with operations in

Argentina, Brazil Colombia, EI Salvador, Mexico and India.

RAIN CII has entered into a technical assistance agreement with REI in

terms of which REI will provide technical ad managerial advice to RAIN CII

with respect to the design, engineering, construction, operation and

maintenance of power generation facility.

Applied Industrial Materials Corporation (AIMCOR) a privately

owned U.S company incorporated in Delaware, U.S.A. in 1986 is a major

international supplier of Industrial Carbon Products, a manufacture and

marketer of Ferro Alloys, and producer of products for Aluminum,

chemical and consumer markets. The main business of AIMCORs Carbon

Products Division is marketing and distributing GPC and CPC which

involves buying from petroleum refineries on a long term basis and

supplying to end users, including utilities and calciners.

AIMCOR is the worlds largest marketer and distributor of petroleum coke.

AIMCOR handles 35% of all exports of petroleum come from the U.S. With

an extensive distribution network and marketing offices in North and

South America, Europe and Japan, AIMCOR has established itself as a

global supplier of CPC to Aluminum, titanium pigment and steel industries.

It also owns a processing facility for specialized CPC in Mannheim,

Germany.


20/95

AIMCOR has established customer relationships with the major Aluminum

producers in Latin America, Western Europe, the Middle East and India. It

is also a major supplier of CPC to Russia and other CIS countries.

RCL has entered into an agreement with AIMCOR for the supply of GPC

and marketing of CPC in the international and Indian markets. Under the

agreement.

AIMCOR guarantees that RCL shall receive not less than a defined industry

price for all quantities of CPC placed in the international market up to a

maximum of 100,0000 tap.

Board of Directors:

The Company is managed by a Board Comprised of the following:

Mr. Dipankar Basu ChairmanRobber S. Hanna Director

Mr. Gerard M. Sweeney Director

Mr. T. L. Sankar Director

Mr. G. Udayan Dravid Director (Nominee of IDBI)

Mr. N. Balakrishna Iyer Director (Nominee of SBI)

Mr. N. Jagan Mohan Reedy Managing Director

Mr. Y. Santosh Kumar Reedy Executive Director


21/95

PROFILE OF RAIN CALCINING LIMITED

Promoted by N Jagan Mohan Reddy

and associates, and AIMCOR, RCL was incorporated in Nov.'89. RCL

has Asia's largest facility for manufacture of 480,000 MTPA of

Calcined Petroleum Coke (CPC), which is 3% of the world's total

requirement, and generation of 53.5 MW of surplus Electricity for sale

to various industries in Andhra Pradesh State. RCL, an ISO 9001

Company, uses state of the art technology and sophisticated control

systems to ensure reliable and customized quality products.

CPC, produced by calcining Green

Petroleum Coke ( GPC ), is a critical raw material used in the

manufacture of aluminum. It is also used in the manufacture of

titanium dioxide and in steel produced by the Electric-Arc-Furnace

( EAF ) route. The plant is located at the Indian Port City of

Visakhapatnam ( located halfway along India's eastern coast ).

Visakhapatnam Port is one of the best-equipped major ports in the

country with excellent bulk cargo handling facilities, enabling swift

loading/unloading of cargos. The strategic location of the project gives

RCL a distinctive logistical advantage due to its proximity to both

vendors and customers.


22/95

RCL has entered into definitive

revised agreements with Oxbow Carbon & Minerals, LLC, USA

( OXBOW ) for the marketing of calcined petroleum coke ( CPC ) and

also for supply of raw material viz. green petroleum coke ( GPC ).

CPC is basically a high purity carbon used primarily in electrolytic

smelting of aluminum. For every ton of aluminum, approximately 400

Kgs. of CPC is required and there are no known substitutes for CPC.

It is also used in titanium di-oxide, ferrous metals and applications inthe graphite industry. RCL has a long-term contract with Oxbow

Carbon and Minerals for marketing of CPC and for supply of Green

Petroleum Coke ( GPC ).

Under the Agreements, OXBOW will

continue to act as the marketing representative of Rain Calcinings

CPC in all countries of the world, except India, and source, procure

and deliver GPC, from worldwide refineries to Rain Calcining's plant

at Visakhapatnam. The combination of Rain Calcining's ability to

deliver a reliable and custom tailored quality product and OXBOW

marketing prowess enable the company to be one of the global leaders

in the calcining industry.

RCLs revenues and earnings are

estimated to grow 28.5% and 187.2% CAGR over FY05-07. Also in

FY 08, its revenue will increase by Rs 50 mn after implementation of

the Kuwait Calciner Project.


23/95

Product and its Application:

Calcining of Green Petroleum

Coke(GPC) is used as a source of high purity carbon. Depending on

certain physical and chemical properties, GPC can be upgraded by

calcination. The raw material, GPC is a high molecular weight

polymetric hydrocarbon which thermally decomposes on calcining to

form carbon, light hydrocarbon gases and hydrogen. Calcining is the

heat treating process of removing moisture and volatile matter in a

reduction atmosphere thereby changing the crystal structure and

increasing the bulk density and electrical conductivity of the coke.

After calcination, the CPC is used as

the main carbon source for anodes in aluminum smelting. Other uses

of CPC are in the production of titanium di-oxide and steel using

electric arc furnace ( EAF ) route.


24/95

CALCINED PETROLIUM COKE (CPC) INDUSTRY

Calcination Process at RCL:

GPC is a high molecular weight

polymetric hydrocarbon, which is decomposed by calcining process to

form carbon, light hydrocarbon and hydrogen gases. Calcining is the

heat-treating process of removing moisture and volatile matter in a

reduction atmosphere, thereby changing the crystal structure and

increasing the bulk density and electrical conductivity of coke.

Calcined GPC is used as a source of high purity carbon, used as the

main carbon source for anodes in aluminum smelting, in production of

titanium di-oxide and steel using electric arc furnace manufacturing.

GPC is calcined in a gas-fired rotary kiln to remove moisture, drive

off volatile matter and increase the density of the coke structure,

physical strength and electrical conductivity of the material. CPC is

calcined GPC, which is hard, dense, low hydrogen content and possess

good electrical conductivity. Apart from these properties, it has low

metal and ash contents that make CPC the best material available for

making carbon anodes.


25/95

Detailed process:

Green Petroleum Coke (GPC) is

stocked on 80,000 ton storage pad using a modern belt conveyor

system and high capacity stacker/reclaimer. GPC is retrieved by the

reclaimer and fed into the crushing and screening station. The coke is

fed into the rotary kiln on a controlled weight basis in the requiredblend to achieve a wide variety of product qualities ( sulfur varying

from 0.5% to 3.5%) as specified by aluminum smelter customers. The

rotary coke calciner has the capacity to produce over 480,000 tons of

CPC per annum. The calciner tube is equipped with rotating kiln-

mounted tertiary air blowers and refractory lifters, which improve

production rates and CPC, vibrated bulk density.

To remove the volatiles and moisture

in GPC, the feedstock is heated to a temperature of 1300C in the kiln.

After calcination, the CPC goes into a cooler where water is sprayed

to cool the material. The CPC from rotary cooler is transferred to one

of six CPC storage silos, where different qualities of CPCs are

segregated. The storage silo outlets are specially designed to enable

custom blending of desirable grades of CPC.


26/95

Uses of CPC:

The primary use of calcined

petroleum coke ( CPC ) is in making carbon anodes for the aluminum

industry. CPC is also used in making graphite electrodes for arc

furnaces, titanium di-oxide ( used ultimately in the paints industry ),

polycarbonate plastics, steel ( to increase carbon levels ), carbon

refractory bricks for blast furnaces and material for cathodicprotection of pipelines.

End use of CPC by Industry:

Aluminium - 70%

Graphite Electrode - 10%

TiO & Others - 20%

Production - 10 Mn TPY


27/95

Global Producers and Consumers of CPC:

In searching out uses for petroleum

coke, it was found that certain industries required a material having

the highest value of fixed carbon. The largest such market was for

making carbon anodes for the aluminum industry, which were using

calcined coal as the carbon source at that time.

The use of calcined petroleum coke in

making carbon anodes for the aluminum industry escalated the

demand for calcined coke. Refiners, aluminum smelters, and other

independent calciners began to build calcining plants to enter the

anode grade calcined petroleum coke market in the 1950s.

Today, the global CPC industry

comprises of around 30 producers including refiners, smelters,

independent calciners, graphite electrode manufacturers, and steel

producers. The industry has establishment of calcining operations in

Canada, Argentina, Brazil, United Kingdom, Germany, Norway,

Spain, South Africa, the Middle East, India, Indonesia, Japan, China,

and Russia.

The total world CPC production is

~10 Million Metric Tons annually (MM TPA). The major producers

are GLC, US ( 2.4 MM TPA ), CII Carbon,US ( 1.8 MM TPA ) and

Conoco, US ( 0.8 MM TPA ).


28/95

Aluminum smelting uses ~7 Mn TPA;

roughly 1 Mn TPA of calcined needle coke are used for graphite

electrode manufacturing; and ~2 Mn TPA are used for other uses such

as for making titanium dioxide, steel ( to increase carbon levels ), and

carbon monoxide for polycarbonate plastics.

Global Calcined Coke Demand :

Ferrous Metals - 7%

Titanium Dioxide - 8%

Aluminum - 75%

Others - 10%

Key Producers of CPC:

CII Carbon, US - 10%

Zhenjiang, China - 2%

GLC, US - 24%

Conoco, US - 16%

Rain Calcining, India - 3%

Goa Carbon, India - 2%

Others - 43%


29/95

Key Consumers of CPC:

Alba - 6%

Alcan - 20%

BHP Hilton - 14%

Kaiser Alu. -8%

Norsk Hydro - 9%

Pechiney - 15%Alcoa - 15%

Others - 13%

Global Calcining Capacity:

Asia - 15%

Middle East/Africa - 7%

Canada - 4%

South America - 6%

Europe - 14%

United States - 54%

RCL globally ranks 4th

Current global production capacity at 11.8 MTPA

Current global demand for CPC 10 MTPA


30/95

Company revenue to grow from capacity expansion:

Rain calcining Limited has completed

capacity expansion of its CPC plant from 3.0 lac ton to 4.8 lac ton and

has started commercial production since May'05. This capacity

expansion has come at very opportunity time when aluminium

smelting capacity is on rise and also CPC prices have increased by

15% to $200. Rain Calcining has commenced the commercial

production of the expanded calcination plant effective 23rd May 2005

and, accordingly, the capacity of the CPC plant has increased from

300,000 MTPA to 480,000 MTPA. The company has become one of

the top five global calcining companies. Oxbow Carbon & Minerals,

USA, which is the world's largest marketer and distributor of

petroleum coke will continue to supply the raw material ( anode green

petroleum coke ) and market the finished product (calcined petroleum

coke).

With this expansion, the annual sales

revenue is expected to improve by about 38% in 2005-06 compared tothe previous financial year.


31/95

Strong demand ahead for CPC:

The demand for CPC between 2002 to

2004 increased about 2%, and from 2005 to 2008, the demand is

expected to increase about 4% per annum. The increased demand is

primarily related to the growth in aluminium production emanating

from brownfield smelter expansions and capacity creeps. The

aluminium smelter expansions are occurring mainly in Africa, MiddleEast, and Europe. It is also expected that some US Pacific Northwest

smelters will restart, based on better power tariff rates from the

electricity authorities. In addition, going into 2007-2010, there will be

at least 2 greenfield aluminium smelters coming online in the middle

east, resulting in increased demand for CPC.

The above developments bode well

for the calciners, as the increased demand for CPC means that

calciners world wide will be running at near rated capacities and it is

estimated that, in 2007 at least one additional calciner will be required

to cater to the demand for CPC.

Strong demand of CPC comes on the

back of growth in aluminum consumption globally, fuelled by

developing Countries. RCL has chalked out a programme to enhance

its capacity for production, aimed at cashing in on several brownfield

aluminum smelter expansions taking place across Africa, West Asia,

Europe and India in the next couple of years.


32/95

Oxbow to market Rain Calcining's CPC:

Rain Calcining has renewed its

association with Oxbow Carbon & Minerals, LLC, USA ( OXBOW )

by entering into definitive revised agreements for the marketing of

calcined petroleum coke ( CPC ) and also for supply of raw material

viz. green petroleum coke (GPC ).

Under the Agreements, OXBOW will

continue to act as the marketing representative of Rain Calcinings

CPC in all countries of the world, except India, and source, procure

and deliver GPC, from worldwide refineries to the Rain Calcining's

plant at Visakhapatnam. OXBOW will market the expanded capacity

of 480,000 MT of CPC. OXBOW will also supply the additional

quantity of GPC required by the company consequent to the

expansion. The above marketing and supply agreements will continue

till December 31, 2007, unless terminated earlier by mutual

agreement.

The company's initial supply and

marketing agreement was with Applied Industrial Materials

Corporation ( AIMCOR ), USA. AIMCOR was acquired by OXBOW

in December 2003. The combined entities have formed the largest

marketer/distributor of petroleum coke in the world with volumes

reaching approximately 12 million MT. OXBOW markets petroleum

coke to customers throughout the US and more than 35 countries.


33/95

Investment in Kuwait calciner project:

RCL has invested in a new green field

calciner project in Kuwait in consortium with a group of leading

Kuwait companies and the company's foreign collaborator, Oxbow

Carbon & Minerals, LLC, USA. The construction rights for the

Kuwait calciner have been awarded to this consortium through a bid

process administered by Kuwait Petroleum Corporation ( KPC ). Thedesign & project engineering work has commenced and the

construction will begin in the first quarter of 2006. The company has

11.5% equity stake in the Kuwaiti company. It is contemplated that

RCL along with Oxbow will have the exclusive operating and

maintenance contract and CPC marketing contract. Company will get

consulting fee of Rs 50 mn per annum from the project once it get

completed i.e from FY 08.

The cost of the expansion ( CPC

Capacity ) cum modernization and investment in Kuwait is estimated

at US$ 29 million and is funded by the three leading multilateral

financial institutions, namely :

International Finance Corporation (IFC), Washington, DC US $ 10

million.

Nederlandse Financierings NV (FMO), Netherlands US $ 12 million.

Nordic Investment Bank (NIB), Finalnd US$ 7 million.


34/95

Rising freight costs not a threat in future:

RCL has been able to enter into new

CPC sales contracts which are either on Free on Board ( FOB ) basis

or on the back of Contract of Afrightment ( COA ), where the

shipping freight is booked/ locked into in advance of the contract

period. Therefore, the risk on account of fluctuation in freight cost will

be to the account of the buyers under these new contracts, therebyreducing the risks of adverse movement of ocean freight rates on the

company's profit margin.

Outlook and Recommendation:

On the back of strong demand from

rising aluminium smelter's capacity, outlook for the CPC producers

worldwide looks promising for next 2-3 yrs. RCL management

expects that due to tight supply situation in 2007, prices of CPC will

further go up by 10-15% in FY07. We estimate RCL to report PAT of

Rs 498 mn in FY06 and Rs 988 mn in FY07. The capacity utilisation

is estimated to stand at 104% in FY06 and 115% in FY07. Further, in

FY08, it will benefit significantly from start of Kuwait Calciner

Project.


35/95

Financials and Valuation:

Based on the robust growth in the

overall sector and higher realizations, we feel that RCL is well set to

take advantage of the situation.

Strategic Location:

RCL plant is located at the Indian port

city of Vishakapatnam, which is one of the best-equipped major ports

in the country with excellent bulk cargo handling facilities enabling

easy loading/unloading of cargos. Due to its proximity to the port,

RCL has a strategic logistical advantage from both, its customers and

vendors.


36/95

Training :

RCL staunchly subscribes to the

theory that human resources are the foremost pillars for any entity to

have sustained existence. It is training and upgrading the skills of its

manpower to operate the facility with ease. In the first phase, RCL

has sent a team of technical staff led by the key operation personnel to

undergo training at the largest calcination plant in USA. This team isalso visiting some of the major aluminium smelters abroad to have a

deeper understanding of smelters operations and their requirements.

In the second phase, RCL has sent a team of technical staff led by the

key operation personnel to undergo training at American Shacks

Boiler supplied plant at Alexandria, Cairo. In the IIIrd Phase, a team

of technical staff undergo training at various process plants in India

and Abroad also.

Quality :

A total Quality system is an integral

part of every world-class facility and RCL is committed to this goal. A

stage of the art laboratory was designed and implemented under the

direction of A.J.Edmond Company and Kaiser Aluminium &

Chemical Corporation, U.S.A using equipment from R + D Carbon,

Switzerland.


37/95

One of the major componenets of the

ISO Procedures is to guarantee a consistent product quality. At the

RCL Calciner, custom designed samplers have bee placed at five key

locations to monitor the quality of in-process GPC / CPC flows and

the samples are test analyzed in the on-site laboratory. The laboratory

analysis results from these samples are automatically fed into a

database. This database will generate the statistical information for the

Distributed Control System ( DCS ), which will implement statisticalprocess control techniques, in conjunction with specifically designed

algorithms to consistently meet the quality standards of each

customer.

The GPC to be used at the RCL

facility is sourced from the most reputable anode quality coke

producers in the world. Each coke has been tested by Kaiser

Aluminiums Technical Research Centre for GPC / CPC quality and

must pass a 22 point analysis ( including VBD, Air & Co 2 reactivity)

to qualify as a raw material for RCL.


38/95

Environment :

RCL is doing more than its share in

promoting a healthy environment. While the project will maintain the

best of emission levels and environment friendly measures, thousands

of saplings have been planted on 40 acres green belt land donated by

the VPT which will help in creating a congenial atmosphere in theimmediate neighborhood. About 25,000 saplings have already been

planted and are being well taken care of. Another 5,000 saplings will

be planted in the coming few months to create a serene surrounding.

The last and the most important are

the team of technical and administrative manpower who all have

combined their efforts to make RCL a Global Calcining and

Cogeneration Facility that the shareholders and the nation can be

proud of.


39/95

Concept :

Personnel Management is one of our

most complex and challenging fields of endeavour. Not only most of

the firms requirements for an effective work force be met, the modern

personnel manager must be greatly concerned with the expectations of

both employers and society in general society at large has proclaimed

its human resources to have vital needs that more beyond aworkforce status. The employee is simultaneously an instrument of

business firm, a human being and a citizen of the society. In as much

as the business system is a subsystem of organised society, the firm

must be concerned with societal, the firm must be concerned with

societal expectations. The business organisation draw its work force

( Human Resource ) from the society. Just as it strives to harness the

physical resources for successful running of the firm, it should also

strives for protection and enhancement of human resources and

returning them back to the society, in as good a shape as possible. In

keeping with this new role, the concept of Personnel Management has

changed from Management Personnel to Management of HR.

Strong Order Book:

Majority of the CPC produced by

RCL is earmarked for the aluminum smelters and due to the robust

demand from the same, RCL has confirmed order book for the next

two years.


40/95

Higher Realisations of CPC:

The growth in aluminum demand, in

turn leads to growth in consumption of CPC, which will enhance

realisations of CPC. The present realisation of CPC stands at US$ 220

per MT, which is expected to rise to US$ 250-270 per MT in FY06E

and further to US$ 285-295 in FY07E.

Insulation from Commodity Cycle:

CPC is one of the commodities, which

remains insulated from commodity cycles as demand for CPC is

directly related to the demand for aluminum, which rises with growth

in infrastructure across the world.

Discontinuance of trading in CPC :

Going ahead RCL would discontinue

trading in calcined petroleum coke and other allied products for the

Aluminium, steel and titanium dioxide industries, with no significant

impact on sales revenues, as it contributes marginally to the total

revenues. This will help RCL to concentrate on its core activities


41/95

PROCESS DESCRIPTION

Calcination Process:

Calcining is a high temperature process, which removes the moisture and

volatile matter present in Green Petroleum Coke (Anode Grade Coke),

increases the real density and converts coke to a more electricity

conductive carbon. This is most often accomplished in a rotary kiln.

Power Generation:

The combustion of the flue gases and GPC particles for the calcination

process takes place in the incinerator. The resulting flue gases are let into

the Waste Heat Boiler (WHB) to generate steam. Steam is also generated

in the Circulating Fluidized Bed Boiler (CFBB) through the combustion of

GPC. The steam from the WHB and CFB is let into a steam header, and

then flows into an extraction-condensing steam Turbine. The steam

turbine generator nominal output is 54 MW with an 8% reserve margin

and electricity will be generated at the steam turbine generator terminals

at 11 KV and stepped up to 132 KV for supply to APTRANSCO grid.


42/95

CHAPTER II

AN OVERVIEW OBJECTIVE OF THE STUDY

The prime objective of the study is to apply the theoretical concepts to the

practical situation to RAIN CII CARBION (INDIA) LIMITED (formerly RAIN

CALCINING LIMITED). Preparation of detailed reports on actual

achievements correlating them with the theoretical conclusions.

1. Study of the operating cycle for the different products in the M/S

RAIN CII CARBON (INDIA) LIMITED

2. Study of the Receivable management system of M/S RAIN CII

CARBON (INDIA) LIMITED and applying the theoretical conclusions.

3. Study of the Inventory management system of M/S RAIN CII CARBON

and applying the theoretical conclusions.

4. Study of the Cash management system of M/S RAIN CII CARBON and

applying the theoretical conclusions.


43/95

Introduction:

Working capital management is a significant facet of Financial

Management. Its importance stems from two reasons:

Investment in current assets represents a substantial part of total

investment.Investment in current assets and the level of current liabilities

have to be geared quickly to changes in sallies.


44/95

Characteristics of Current Assets:

In the management of working capital two characteristics of working

capital must be born in mind

a) short life span and

b) swift transformation into other asset forms.

CYCLE OF THE ORGANISATION FLOW:

Finished

Work in

Raw

SuppliersCash

Wages and salariesand overheads

Accounts


45/95

Cash flows in a cycle into, around and out of a business. It is the

businesss lifeblood and every managers primary task is to help keep it

flowing and to use the cash flow to generate profits. If a business is

operating profitably, then it should, in theory, generate cash surpluses. If

it doesnt generate surpluses, the business will eventually run out of cash

and expire. The faster a business expands the more cash it will need for

working capital and investment. The cheapest and best sources of cash

exist as working capital right within business. Good management of

working capital will generate cash, will help improve profits ands reduce

risk. Bear in mind tat the cost of providing credit to customers and holding

stokes can represent a substantial proportion of a firms total profits.

There are two elements in the business cycle that absorb cash-inventory

(stocks and work-in-progress) and Receivables (debtors owing you

money). The main sources of cash are payables (your creditors) and

Equity and Loans.

Each component of working capital (namely inventory, receivables and

payables) has two dimensions TIME and MONEY. When it comes to

Managing Working Capital TIME IS MONEY. If you can get money to

move faster around the cycle (e.g. collect money due from debtors more

quickly), or reduce the amount of money tied up (e.g reduce inventory

levels relative to sales), the business will generate more cash or it will


46/95

need to borrow less money to fund working capital. As a consequence,

you could reduce the cost of bank interest or youll have additional free

money available to support additional sales growth or investment.

Similarly if you can negotiate improved terms with supplier e.g. get longer

credit of an increased credit limit, you effectively create free finance to

help fund future sales.

IF YOU THEN YOU CAN

Collect receivables (debtors) faster You release cash from the cycle

Collect receivables (debtors) slower Your receivables soak up cashGet better credit (in terms ofduration or amount) from suppliers

You increase your cash resources

Shift inventory (stocks) faster You free up cash

Move inventory (stocks) slower You consume more cash

It can be tempting to pay cash, if available, for fixed assets e.g.

Computers, plant, vehicles etc. if you do pay cash remember that this is

no longer available for working capital. Therefore, if cash is tight, consider

other ways of financing capital investment loans, equity, leasing etc.

Similarly, if you pay dividends of increase drawings, these are cash

outflows and, like water flowing down a plughole, they remove liquidity

from the business.

The short span of working capital components and their swift

transformation from one form to another has certain implications.

Decisions regarding working capital are repetitive and frequent.

The difference between profit and present value is insignificant.


47/95

The close interaction among working capital components implies that

efficient management of one component cannot be undertaken

without simultaneous consideration of other components.

Factors influencing the wounding capital requirements

Nature of business

Seasonality of operation

Production policy

Market conditions

Conditions of supply

Technology and manufacturing policy

Credit policy

Operating cycle:

Availability of credit


48/95

Operating Cycle

Operating cycle is the time duration required to convert sales, after the

conversion of resources into inventories, into cash. Investment in

current assets is realized during the firms operating cycle, which is

usually less than one year. The operating cycle of a manufacturing

company involves three phases:

Acquisitions of resources such as Raw Materials, Labour, Power and

Fuel.

Manufacturing of the product, which involves conversion of raw

materials into Work In Process and then to Finished Goods.

Sale of the Product either for cash or on credit. Credit sales create

accounts receivables for collections.

These three phases affect the cash flows, which most of the time are

neither synchronized nor certain. They are not synchronized because cash

outflows usually occur before


49/95

It may be divided into four stages,

1. Raw materials and stores storage stage (R)

2. Work in process stage (W)

3. Finished goods inventory stage (F)

4. Debtors collection stage (d)

The duration of operating cycle is equal to sum of each of these stages,

less the credit period allowed by the suppliers of the firm (C)

O = R+F+W+D-C


50/95

Calculation of Operating Cycle:

Data for Rain CII Carbon (India) Limited

(Rs. in Crores)

Year2003-

042004-

052005-06 2006-

072007

1) Opening Stocks:(Dec07)

Raw material and

stores68.73 124.54

135.82 138.70191.17

Work in progress 0.02 0.02 0.02 0.04 0.06Finished goods 15.97 23.38 29.91 17.42 33.19Book debts 22.12 20.62 13.44 33.94 24.89Trade creditors 81.67 134.42 133.72 160.39 113.67

2) Closing Stocks:Raw material and

stores124.54 135.82

138.70 191.17122.79

Work in progress 0.02 0.02 0.04 0.06 0.06Finished goods 23.38 29.91 17.42 33.19 49.41

Book debts 20.62 13.44 33.94 24.89 61.67Trade creditors 134.42 133.72 160.39 113.67 121.823) Manufacturingexpenses

( Consumption of RawMaterials & Stores

andSpares & Repairs

&maint.)

225.30 288.54 431.46 543.69 429.94

4) Depreciation 19.64 19.47 25.96 27.84 20.705) Excise duty 13.42 10.52 15.28 24.06 23.67

6) Selling Administrative &Financial Costs

20.76 24.26 42.23 39.98 29.14

7) Sales 322.83 353.73 570.93 695.55 505.87

* The Plant expanded Double the capacity i.e. from 3Lakh MTPAto

6Lakh MTPA w.e.f. June 2005.

* The Financial year 2007 Values for the period of 9Months

only


51/95

(April 2007 to December 2007)


52/95

Operating cycle calculations for RCL

(Rs. In

crores)

Year 2003-042004-

052005-06 2006-

072007

Component1). Raw material cycle ( R) 277.76 293.90 425.94 586.10 354.582).WIP Cycle (W) 0.02 0.02 0.04 0.06 0.063). Finished goods cycle ( F) 23.38 29.91 17.42 33.19 49.41

4). Debtors cycle (D) 20.62 13.44 33.94 24.89 61.675). Creditors cycle ( C ) 134.42 133.72 160.39 113.67 121.82

6).Operating cycle(O = R+W+F+D-C)

187.36 203.55 316.95 530.57 343.90

(* for the year 2007 : 9months transactions only (April to Dec07)

The operating cycles came down. The main reason for this is the increase

in the creditors period.

Cost of goods sold for RCL

Year 2003-04 2004-052005-06 2006-

072007

1). Raw material cost 277.76 293.90 425.94 586.10 354.582). Manufacturing expenses 225.30 288.54 431.46 543.69 429.943). Selling Admin & FinancialExp

20.76 24.26 42.23 39.98 29.14

4). Sales 322.83 353.73 570.93 695.55 505.87


53/95

RECEIVABLES MANAGEMENT

Business firms generally sell goods on credit, which is granted to facilitate

sales. It is valuable to customers as it augments their resources. When

goods are sold on credit finished goods get converted into receivables,

receivables when released generate cash. Since receivables often

account for a significant portion of the total assets it behooves on a firm

to manage its receivables well. The important dimensions of a firm credit

policy are

Credit standards

Credit period

Cash discount

Collection effort

These variables are related and have a bearing on the level of sales bad

debt loss, discounts taken by customers and collection expenses.


54/95

Credit Standards:

The important question in the credit policy of the firm is what standard

should be applied in accepting or rejecting an account for credit granting.

At one end of the spectrum it may decide not to extend credit to any

customer however strong his credit rating may be. At the other end it

may decide to grant credit to all customers irrespective of their credit

ratings. Between these two extreme positions lie several possibilities.

Liberal credit standards tend to push sales by attracting more customers.

This is however accompanied by a higher incidence of bad debt loss, a

larger investment in receivables and higher cost of collection. The effect

of relaxing the credit standards on profit may be estimated by using the

formula.

P = S (1-V) K. l bn S

Where

P = change in profit

S = increase in sales

V = ratio of variable cost to sales

K = Cost of Capital

l = Increase in Receivables investments

bn = bad debt loss ratio on new sales

On the right hand side of the equation the first term measures the

increase in gross profit. The second term measures the opportunity cost


55/95

of additional funds locked in receivables. The third term represents

increase in bad debts.


56/95

Credit Period:

The credit period refers to length of time customers are allowed to pay for

their purchases. Lengthening of credit period pushes sales by inducing

existing customers to purchase more and attract the additional customer.

This is however by a large investment in receivables and higher incident

of bad debt loss.

Shortening of credit period would have opposite influences. Since the

effect of lengthening the credit period are similar to that of relaxing the

credit standards they can estimate the effect on profit of change in credit

period by using the same formula.

P = S (1-V) K. l bn. S

Where

P = Change in profit

S = Increase in sales

V = Ratio of variable cost to sales

K = Cost of capital

l = Increase in receivables investments

bn= Bad debt loss ratio on new sales

I can be calculated by using the formula

I =( ACPn ACPo ).So/ 360+V( ACPn ) S/360

ACP = average collection period

On the RHS of the equation the first term represents the incremental

investments in receivable associated with existing sales and the second


57/95

term represents the investment in receivables arising from incremental

sales


58/95

Cash Discount:

The firms generally offer cash discount to induce customers to make

prompt payments. The percentage discount and the period during which it

is available are reflected in the credit terms. For example credit terms of

2/10 net 30 mean that a discount of 2% is offered if the payments is made

on the 10th day other wise the full payment is due by the thirtieth day.

Liberalizing the cash discount policy may mean that the discount

percentage is increased and/or the discount period is lengthened. Such an

action tends to enhance sales, reduce the average collection period and

increase the cost of discount. The effect of such an action on the gross

profit may be estimated using the formula

P=S (1-V)-K. I- DIS




K = Cost of capital

I = Increase in receivables investments

DIS = Increase in discount cost


59/95

Collection Effort:

The collection program of the firm, aimed at timely collection of

receivables may consist of the following:

Monitoring the state of receivables

Dispatch of letters to customer whose due date is approaching

Threat of legal action to overdue accounts

Legal action against overdue accounts

A rigorous collection program tends to decrease sales, shorten the

average collection period, reduce bad debt percentage and increase the

collection expense. A tax collection program would have the reverse

effects. The effect of decreasing the rigour of the collection program on

profit may be estimated as follows:

P = S (1-V)-K. I- BD




K = Cost of capital

I= Increase in receivables investments

BD = Increase in bad debt cost


60/95

Receivables Management In RCL

Calcinated petroleum coke (for the year 2005- 2006):

Sales (in Crores) = Rs.12777.29

Sales (in Mt) = 223218.8

Capacity utilisation = 74.4%

Anode green coke (inlakhs) = rs.10203.56

Dedusting oil (in lakhs) = rs.166.86

Fuel oil (in lakhs) = rs.860.78

Lime stone (in lakhs) = rs.11587.58

Total raw materials (in lakhs) = rs.11587.58

Average collection period (acp) = 30 days

Cost of capital (k) = 18.1%

Variable cost (V)= Total Raw Materials

Sales

=11587.58/12777.29

=0.91


61/95

Credit Standards:

P=S (1-V)-K. I-bn. S

I=(S/360) * ACP * V

P= S (1-0.91)-0.181 * 0.91 * 30 * (S/360)

=0.0763 * S

The bad debt losses of the company are nil. So from the above result it

shows that as long as the sales keep increasing the company can extend

its credit to all its customers. By doing so the profitability of the firm

increases. If it decision to extend credit doesnt increase sales even then

the profitability of the company wouldnt decrease. But the point to be

born in mind here is that the bad debt losses shouldnt creep in with the

increasing sales


62/95

Collection Period And Collection Effort:

The Collection period refers to the length of time customers are allowed to

pay for their purchases. A rigorous collection program decreases the

collection period. So both collection period and collection effort are inter

related and can be determined using the same formula:

P = S (1-V)-K. I-bn S

I= ( ACPn -ACPo) [So/360]+V( ACPn )( S/360)

P=S (1-0.91)-0.181[(12777.29/360)*(ACPn-30)+0.91*ACPn*(S/360)

Maximum S can be 4395.04 lakhs. This figure is calculated assuming

that due to increase in sales the firm can produce up to its full capacity.

So substituting this S in the above equation we arrive at a conclusion

that ACP can be extended from 30 to 70 days if there is maximum

increase in sales. Relaxing the collection effort wouldnt affect the

profitability of the firm. Any decrease in ACP from 70 at this instance

would increase the profitability. The following table shows the increase in

sales regarding the decrease in collection effort or increase in collection

period.

Increase in sales Acceptable acp895.97


63/95

INVENTORY MANAGEMENT

Inventories consist of Raw materials, work in process and finished goods.

They represent a significant portion of total assets. Given substantial

investment in inventories, the importance of inventory management

cannot be over emphasized.

Inventories are maintained to widen the latitude in planning and

scheduling successive operations. Raw material inventory enables the

firm to decouple its purchasing and production activities to some extent. It

provides flexibility in purchasing and production. The firm can wait for an

opportune buying moment without affecting its production schedule.

Likewise the production schedule need not be influenced by immediate

purchasing activity.

In process inventory provides flexibility in production so that an efficient

scheduling and high utilization of capacity maybe attained.

Finished goods inventory enables a firm to decouple its production and

marketing activities so that desirable results can be achieved on both the

fronts. If adequate finished goods inventory is available the marketing

department can meet the needs of customers promptly irrespective of the

quantity and consumption of goods flowing out of the production line.


64/95

Economic Order Quantity (EOQ):

The two basic questions relating to inventory management are

What should be the size of the order?

At what level should the order be repeated?

To answer the first question EOQ is helpful. The EOQ model involves three

types of costs viz. ordering cost, carrying cost, shortage cost.

Ordering cost:

Ordering cost relating to purchase items would include expenses on

requisitioning, preparation of purchase order, expediting, transport, and

receiving and placing in storage.

Carrying cost:

Carrying cost include expenses on interest on capital locked up in

inventory, storage, insurance, obsolescence and taxes. Carrying costs are

generally 25% of the value of inventory held.

Shortage cost:

Shortage cost arises when inventories are short of requirement for

meeting the needs of production or the demand of customers.

Inventory shortage may result in one or more of the following:

less efficient and uneconomic production schedules, customer

dissatisfaction and loss of sales.


65/95

Assumptions of EOQ Model:

1. The forecast usage /demand for a given period usually one year is

known.

2. The usage is even through out the period.

3. Inventory orders can be replenished immediately.

4. There are two distinguished costs associated with inventories: cost of

ordering and cost of carrying.

5. The cost/order is constant regardless of the size of the order.

6. The cost of carrying is fixed percentage of the average value of

inventory.

EOQ Formula:

Q= 2FU/PC

U= Annual usage/Demand

Q= Quantity Ordered

F= Cost per Order

C= % Carrying Cost

P= Price per unit.

The above formula is a useful tool for inventory management. It tells us

what should be the order size for purchase items and what should be the

size of production run for manufacture items.


66/95

Order Point:

This tells us when to put up an order

Reorder point =S(L)+FSR(L)

S= Usage

L= Lead time needed to obtain additional inventory when order is

placed.

F= stock out acceptance factor.

The value F depends on the stock out percentage rate applicable to the

firm.

Inventory Management In RCL

There are five important Raw Material is required in this process for

manufacture of calcined petroleum coke with power generation plant

(RCL). For these five Raw Materials economic order quantity and re Orded

point are determined. The calculation are shown below:

For The Year 2006-2007:

Per unit price(P)

1. CPC Rs. / Mt = 7,518.

2. Anode green cock Rs. /Mt = 6,279

3. Dedusting oil Rs./Mt= 40,000

4. Fuel oil Rs./Mt =19,950

5. Burnt Lime Rs./Mt=2700


67/95

Cost per Order (F)

1. Anode green coke = Rs.6 Lakhs

2. De-dusting oil = Rs.345.6

3. Fuel oil = Rs. 0.46 Lakhs

4. Burnt Lime = Rs.0.838 Lakhs.

Lead to obtain additional inventory (L)

1. Anode green coke =30 days

2. De-dusting oil =15 days

3. Fuel oil =7-10 days

4. Burnt Lime=7-10 days

Annual usage (U)

1. Anode green coke (in mt)=7,91,344

2. Dedusting oil (in mt)=707

3. Fuel oil (in mt)=9784

4. Burnt Lime (in Mt) = 19373


68/95

Economic Order Quantity:

Q=22FU/PC

1. Anode green coke:

U=791344

F= Rs. 6 lakhs

P= Rs. 6279

C=25%

Q=2*791344*600000/(6279*0.25)

=60000 Mt

2. Dedusting oil:

U=707

F= Rs. 345.6

P= Rs.40000

C=25%

Q=2*707*346.5/(40000*0.5)

=20mt


69/95

3. Fuel oil:

U=9784

F= Rs.0.46lakhs

P= Rs.19950

C=25%

Q=2*9784*46000/(19950*0.25)

=550mt

4. Burnt Lime:

U=19373

F= Rs.0.838lakhs

P= Rs.2700

C=25%

Q=2*1937*83800/(2700*0.25)

=1000mt


70/95

Reorder Point:

Reorder point = S (L)+FSR (L)

1. Anode green coke:

S = 2100 Mt/day

L=30 days

R= 20000 Mt

F=1.5

Reorder Point = 2100*30+1.5868*20000*30

=60272 Mt

mt

2. De-dusting oil:

S = 2.158Mt/day

L = 15 days

R = 10 Mt

F = 1.5

Reorder point = 2.158*15+1.52.158*10*15

= 41Mt


71/95

3. Fuel oil:

S = 23.213 Mt/day

L = 5days

R = 500 Mt

F = 1.5

Reorder Point = 23.213*5+1.523.213*500*5

= 477 Mt

4. Lime stone:

S = 125 Mt/day

L = 10 days

R = 400 Mt

F = 1.5

Reorder Point = 125*10+1.5125*400*10

= 2311Mt

Economic Order Quantity

Rawmaterial

Annualusage

Ordercost

PriceperUnit

%carrying

costEOC Adjuste

d EOC

U(Mt) F(Rs) P(Rs) C % Mt Mt

GPC312506.

360000

03809.2

525

19844.05

20000

SGC 69141.660000

02311 25

11983.68

12000

De-dustingoil

776.8 345.6 21480 259.99929

410

Fuel oil 7661 46000 11236 25

500.911

2 500


72/95

Lime stone 41247 41893 864 253999.95

44000

Reorder Point

Raw materialUsage

per dayLeadtime

Averagequantityordered

Stock outacceptance

factor

Reorderpoint

S(Mt) L(days) R(Mt) F RP (Mt)

GPC 868 30 20000 1.5 60271.56

SGC 209.52 30 22000 1.5 23924.68De-dusting oil 2.158 15 10 1.5 59.3575

Fuel oil 23.213 5 500 1.5 477.414

Lime stone 125 10 4000 1.5 4604.102


73/95

CASH MANAGEMENT

Cash the most liquid asset is of vital importance to the daily operations of business firms. While the proportion of

corporate assets held in the form of cash is very small it is efficient management is crucial to the solvency of the

business because in a very important scene cash is a focal point of fund flows in business. The two primary reasons

for a firm to hold cash are

1) To meet the need of a day-to-day transactions and,

2) To protect the firm against uncertainty characterizing its cash flows.

Cash budgeting or short term cash forecasting is the principal tool of cash management. Cash budgets routinely

prepared by business farmers are helpful in

1. Estimating cash requirement

2. Planning short term financing

3. Scheduling payment is in connection with working capital expenditure projects

4. Planning purchases of materials.

5. Developing credit policies

6. Checking the accuracy of long term forecasting.


74/95

Firms use multiple short-term forecasts of varying length and details suited to meet varying needs. The commonly

used designs for short term forecasting are

1. One ear a divided in to quarters or months.

2. One a quarter divided in to months

3. One month divided in to weeks.

A firm hard pressed with liquidity crunch may even prepare weekly cash forecast divided into days.

The principal method of short-term cash forecasting is the receipts and payments method.

Receipts and Payments Method:

The cash budget shown under this method shows the timing and a magnitude of expected cash receipts and

payments over the forecast period. It includes all expected receipts and payments irrespective of how they are

classified in accounting.

Expressed as it is in numbers the cash budget often coveys a picture of precision. Hence a great deal of faith is

usually put on it. A moments reflection however would reveal that the figure found in the cash budget merely


75/95

represent estimates of future cash flows. The actual cash flows are likely to deviate from the estimates provided in

the cash budget. The extent of deviation depends mainly on how volatile are the cash flows of the business.

Given the uncertainties characterizing business operations estimating the cash flows on the basis of a single set of

assumptions often results inadequate prospective on the future. Hence it is advisable to prepare additional cash

budgets based on different set of assumptions. The least that a firm could do is to look at cash forecasts under

three possible scenarios. Such as analysis provides a better perspective on future cash flows and facilitate the

formulation of contingency plans.


76/95

CONCLUSION & RECOMMENDATIONS

Operating Cycle:

The operating cycle data of M/s Rain calcining Ltd is improved by

increasing the creditor cycle from 72.5 days to 116.56 and to 142.04 days

in the year 2000-2001 there by the operation cycle has been improved

from 72.8 days to 30.75 days and to 8.52 in the year 2000-2001.It is a

good improvement but one should able to check the costs associated with

the increase of the credit cycle. It also seen from the data that the debtors

cycle have increased from the 18.57 days to 23.85. This shows that more

efforts to put on the debt collection now a small improvement of this cycle

will improve the operation cycle. In turn will reduce the working capital

requirement. Raw material cycle of the company is increasing to be

checked and reduced to 90days. This also shows the capability of the

company to get the credit.


77/95

Receivables management:

It seen from the records the company is not having any bad debit as on

date. The company can extend credit to its customers as along as the

sales are rising. It also shows that the credit period can be varied from 30

to 70 days this will not effect the Profitability of the company.

The credit cycle is maintained at less than 30 days even the sales were

almost doubled period. This is very good condition. This shows that

company is having good Market demand and the customers are of good

category.


78/95

CHAPTER IV

ANALYSIS OF DATA

Statement of working capital

Fig. in Rs. inCrores

Particulars 2003-04 2004-05 2005-062006-07 2007

Current Assets:

Inventory 147.93 165.83 156.17 224.41 172.26

Sundry debtors 20.62 13.44 33.94 24.89 61.67

Cash & Bank Balances 27.10 74.73 34.39 24.93 11.57

Other Current Assets 0.00 0.10 0.06 .21 0.37

Loans And Advances 9.03 11.82 12.30 10.16 40.08

Total 204.68 265.92 236.86 284.60 285.95

Current Liabilities

Creditors for stores 132.53 130.57 145.67 153.46 116.44Accrued expenses 0.45 2.84 2.43 1.75 0.00

Provisions and other Liabilities 1.43 0.31 12.29 15.72 5.38

TOTAL 134.41 133.72 160.39 170.93 121.82

Net Working Capital (CA CL)

70.27 132.2076.47 109.67

164.13

* for the year 2007 contains 9months figures only from April07 toDec07


79/95

Liquidity Ratios:-

Current Ratio:

Current Ratio = Current Assets/Current Liabilities

It represents the ratio between the Current Assets & Current Liabilities

(Rs. in Crores)

2003-04 2004-05 2005-062006-07 2007

Current assets 204.68 265.92 236.86 284.60 285.95Current liabilities 134.41 133.72 160.39 170.93 121.82

Ratio 1.52 1.99 1.48 1.67 2.35

As a conventional rule the current ratio of 2: 1 or more is considered

satisfactory. The RCL has current ratio ranging from 1.48 to 2.35 It may be

interpreted to be Insufficiently liquid. This represents the margin of safety

for the creditors. The higher the current ratio the greater the margin of

safety: the larger the amount of current assets in relation to current

liabilities, the more the firms ability to meet its current obligations. The

companies with less the ratio are also doing well thus we can say that this

is the test of quantity not the quality. Thus too much reliance should not

be placed on the current ratio, further investigation about the quality of

the items of current assets is necessary.


80/95

Cash Ratio/Super Quick Ratio:

Cash Ratio = cash + Marketable securities / Current Liabilities

Rs. in Crores

2003-04 2004-05 2005-062006-07 2007Cash + Marketable securities 27.10 74.73 34.39 24.93 11.57Current liabilities 134.41 133.72 160.39 170.93 121.82Ratio 0.20 0.56 0.21 0.15 0.10

The cash ratio of 0.10 to 0.21 (except in the year 2004-05, on that year

the Company has expansion works for increasing the capacity 3Lakh

Tonnes to 5Lakh Tonnes ) is very small. Thus we can say that company is

carrying little cash. If the company is having reserve borrowing power it

need not worry about the lack of cash. If clear from our study that RCL is

having more borrowing power. But the company needs to improve it cash

availability position.


81/95

Acid Test /Quick Ratio:

Quick ratio = (Current Assets Inventories)/ Current Liabilities

(Rs. in Crores)

2003-04 2004-05 2005-062006-07 2007Current Assets Inventory 56.75 100.09 80.69 60.19 113.69Current liabilities 134.41 133.72 160.39 170.93 121.82Ratio 0.42 0.75 0.50 0.35 0.93

The quick ratio of 1 : 1 is considered to be satisfactory current financial

condition. Although quick ratio is is a more pertraing test of liquidity than

the current ratio. The ratio of 0.35 to 0.93 is considering improve the

Ratio and the organization also improved the Ratio 1:1 (in the year

2007 the ratio is almost 1:1 (0.93)) is good.


82/95

Inventory Turnover Ratio:

Inventory Turnover Ratio = Sales /Inventory

Rs. in Crores

2003-04 2004-05 2005-062006-07 2007

Sales 322.83 353.73 570.93 695.56 505.87

Inventory 147.93 165.83 156.17 224.41 172.26Ratio 2.18 2.13 3.66 3.09 2.94

(The year 2007 contains 9months figures only April07 to

Dec07)

The efficiency in turning its inventories is continuously improving the

yearly holding of inventory is high. The ratios need to be improved further

if the ratio is around to be considered is good.


83/95

Leverage /Capital Structure Ratios:

The long term solvency of a firm can be examined by using Leverage or

Capital Structure Ratios.

It may be defined as financial ratios which throw light on the long term

solvency of a firm reflected in its ability to assure the Long term creditors.

1) Periodic payment of Interest during the period of Loan.

2) Repayment of principal on maturity or in predetermined installments

at due date

a) Debt Equity Ratio = Long term Debt / Share holders Equity

b) Interest Coverage Ratio = EBIT / Interest

(EBIT : Earning Before Interest and Taxes)

c) Dividend Coverage Ratios = EAT /Preference dividend

(EAT = Earning After Taxes)

(The company present Preference shares ---- Nil )


84/95

Debt Equity Ratios:

D/E Ratio = Long term Debt / Share holders Equity

The ratio claims relationship is shown by the debt equity ratios. This

ratio reflects the relative claims of creditors and share holders against the

assets of the firm. Alternatively, this ratio indicated the relative

proportion of debt and equity in financing the assets of firm

Rs. in Crores

2003-04 2004-05 2005-062006-07 2007

Long term Debt 156.67 286.07 246.58 209.04 567.66

Permanent Capital 165.65 177.66 207.12 262.02 282.91Ratio 0.95 1.61 1.19 0.80 2.00

The Ratio 1: 2 is considered to be good now the organization

has achieved the figure in the year 2007.


85/95

b) Interest Coverage Ratio = EBIT / Interest

(EBIT : Earning Before Interest and Taxes

Rs. in Crores

2003-04 2004-05 2005-062006-07 2007

Earning before Interest Taxes 59.48 27.07 64.26 94.59 93.50Interest 18.15 15.92 25.88 26.09 35.47Ratio 3.28 1.70 2.48 3.63 2.64

The over all ability of a firm to service outside liabilities is truly reflected in

the toltal cash flow coverage ratio: the higher the overage the better the

ability.


86/95

Profitability Ratios:

These ratios are based on the premise that a firm should earn sufficient

profit on each rupee of sales. If adequate profits are not earned on sales,

here will be difficulty in meeting the operating expenses and no returns

will be available to the owners. As observed already, these ratios consist

of

1) Profit Margin Ratios:

This measures the relationship between the profit and sales of a firm.

Gross Profit Margin = Gross Profits / Sales x 100

Net Proft Margin Ratios

i) Operating Profit Ratio = Earnings before Interest and taxes /

Sales

ii) Net Proft Ratio = Earnings after Interest and Taxes(EAT) /

Sales

2) Expenses Ratios:

Assets to Expenses ratio

Cost of Goods sold ratio = Costs of goods sold / net Sales

Operating Expenses Ratio = Administrative Expenses + Selling

Expenses


87/95

Net Sales

Administrative expenses Ratio = Administrative Expenses

Net Sales

Selling Expenses Ratio = Selling expenses /Net Sales x 100

Operating Ratio = Cost of goods sold + operating expenses x 100

Net Sales

Financial Expenses Ratio = Financial Expenses x 100

Net Sales

Sales Related Ratios:

Gross profit Ratio = Gross profit ( Sales - Cost of Goods

sold)

Net Sales

Operating profit Ratio = E B IT (Earning before Interest & taxes)

Net Sales


88/95

Selling Expenses Ratio = Selling Expenses / Net sales

Related to total Investments:

Ret urn on total assets = EAT + Interest

Average total assets

Related to Equity Funds:

Earning per share : Net Profit available to equity shareholders

Number of Equity Shares

Rs. in Crores

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

Net Profit (crores) 33.59 12.00 41.27 70.04Number of Equity shares(crores)

12.948 12.94812.948 12.948

Earning per share 2.59 0.93 3.19 5.41


89/95

BIBLIOGRAPHY

Data Sources

Financial Reports Annual Reports of Rain

Calcining Ltd

For the financial year 2003 -04For the financial year 2004 -05

For the financial year 2005 -06

For the financial year 2006 -07

For the calendar year 2007

References:

Sri Pandey I.M. Financial Management

Sri Khan & Jain Theory and Problems of

Financial

Management


90/95

Management Account - Second

Edition

Sri Chandra Prasanna Financial Management

Principles & Practice

Sri Kotari C.R. Research Methodoly

Internet Google : Financial Ratios

Chapter No.V

SUMMARY AND

The Project study entitled Working Capital Management & Ratio

Analysis. A case study on Rain CII Carbon (India) Limited, - The Rain

Commodities Limited Group.

The Rain Commodites Ltd has divided into 2 Categories : 1. Calcining

process 2. Cement units.

An over view & Organization structure, Theoretical Back ground, Working

Capital Management , Ratio Analysis of Rain Calcining Limited and

Summary Findings, Suggestions and conclusion.


91/95

The unit wise report of this project is briefly explained here under.

In Chapter one the Introduction to Ratio Analysis, objective, need for the

study. Methodology and Limitation of this project explained. The main

objectives of the study are to analyze the financial position of the

Company. Methodology use was study by Primary and Secondary

method that is by Books, Annual Reports of the Rain Calcining Limited and

books related to Ratio Analysis.

Operating Cycle:

The operating cycle data of M/s Rain calcining Ltd is improved by

increasing the creditor cycle from 72.5 days to 116.56 and to 142.04 days

in the year 2003-2004 there by the operation cycle has been improved

from 72.8 days to 30.75 days and to 8.52 in the year 2005-2006. It is a

good improvement but one should able to check the costs associated with

the increase of the credit cycle. It also seen from the data that the debtors

cycle have increased from the 18.57 days to 23.85. This shows that more

efforts to put on the debt collection now a small improvement of this cycle

will improve the operation cycle. In turn will reduce the working capital

requirement. Raw material cycle of the company is increasing to be


92/95

checked and reduced to 90days. This also shows the capability of the

company to get the credit.


93/95

Receivables management:

It seen from the records the company is not having any bad debit as on

date. The company can extend credit to its customers as along as the

sales are rising. It also shows that the credit period can be varied from 30

to 70 days this will not effect the Profitability of the company.

The credit cycle is maintained at less than 30 days even the sales were

almost doubled period. This is very good condition. This shows that

company is having good Market demand and the customers are of good

category.

Findings:

The Company has achieving the Net profits increasing mode from the

Financial year 2003 -04 and The Earning per share from 2003-04 is

EPS Rs.2.59 to 2006 07 EPS is Rs.5.41.

Rs. in Crores

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

Net Profit (crores) 33.59 12.00 41.27 70.04Number of Equity shares(crores)

12.948 12.94812.948 12.948

Earning per share 2.59 0.93 3.19 5.41


94/95

Conclusions & Suggestions:-

The Liquidity position of Rain Calcining Limited as very good

in the year 2007 it is 2.35 times.

The Earning per Share of the Company has also increased.

The Organization merged with Rain Commodities Limited &

Acquired on 23rd

November 2007 -- CII Carbon Inc.

The Organization name also changed RAIN CII Carbon Limited.

The present Global Scenario the World largest of Producer

of Calcined Petroleum Coke.

In recently announced two more companies also

acquiring /Starting.

The Company also maintained all the books of account

IGAAP as well as US GAAP.


95/95

Mba-working Capital Management

Documents

Transcript of Mba-working Capital Management