PROJECT REPORT

ON

“WORKING CAPITAL PERFORMANCE OF

CENTRAL ELECTRONICS LTD. SAHIBABAD (U.P.)”

Submitted in partial fulfillment of the requirement For the MBA Degree Programmed under

2007-2009

SUBMITTED BY: SUPERVISED BY:SIDDHARTH TALWAR MR.K.K.EAPEN

(CHIEF MANAGER) (FINANCE & ACCOUNTS DEPTT.)

INDEX

ACKNOWLEDGEMENT

PREFACE

INTRODUCTION TO THE STUDY

COMPANY PROFILE

OBJECTIVE OF THE STUDY

RESEARCH METHODOLOGY

WORKING CAPITAL MANAGEMENT

TOOLS AND TECHNIQUES OF WORKING CAPITAL ANALYSIS

SUGGESITIONS

BIBLOGRAPHY

ACKNOWLEDGEMENT

COMPLETION OF THE PROJECT IS NOT A ONE HANDED AFFAIR. IT NEEDS TIMELY GUIDANCE, CO-OPERATION FROM THE WORKING MEMBERS AND THE FREEDOM TO WORK.

I WOULD LIKE TO EXPRESS MY SINCERE GRATITUDE TO SHRI V.K.SALUJA, ED (F) CEL SAHIBABAD FOR PROOVIDING ME THE GOLDEN OPPORTUNITY TO UNDERGO SUMMER TRAINING IN THIS ESTEEM ORGANISATION.

WITH WARM REGARDS, I WOULD LIKE TO THANK SHRI K.K.EAPEN, CHIEF MANAGER, (FAD) AND, SHRI PRAVIN K. ARORA, MANGER (FAD) CEL SAHIBABAD FOR EXPLANING AND DISCUSSING VARIOUS ASPECTS OF WORKING CAPITAL ANALYSIS OF THE COMPANY.

PREFACE

EVERY STUDENT OF MASTER OF BUSINESS ADMINISTRATION (MBA) IS REQUIRED TO CARRY OUT A PROJECT TRAINING IN AN AN ORGNISATION. THIS STUDY WILL HELP THE STUDENT TO HAVE A CLEAR KNOWLEDGE OF THE WORKING OF AN ORGANISATION AND A FEEL OF REAL WORKING ENVOIRMENT.

THE STUDY WILL REINFORCE THE THEORETICAL KNOWLEDGE ACQUIRED IN TERMS OF APPLICATION.

Central Electronics Limited is a Public Sector Enterprise under the Department of Scientific and Industrial Research (DSIR), Ministry of Science & Technology, Government of India. It was established in 1974 with an objective to commercially exploit the indigenous technologies developed by National Laboratories and R&D Institutions in the country. CEL is one of the rare companies, which utilized the homegrown technologies during all these years of its existence.

CEL has developed a number of products for the first time in the country through its own R&D efforts and in close association with the premier National & International Laboratories including Defense Laboratories. In recognition of all these efforts, CEL has been awarded a number of times with prestigious awards including “National Award dR&D by DSIR”.

CEL is pioneer in the country in the field of Solar Photovoltaic (SPV) and it has developed state-of-the-art technology with its own R&D efforts. Its solar products have been qualified to International

Standards EC503/IEC1215 by the European Commission, Joint Research Centre, and ISPRA, ITALY.

CEL, pioneer in the field of Railways Safety & Signaling, has been identified as a major indigenous agency for design and development of modern electronic Signaling and Safety equipment by Indian Railways. The equipment manufactured in CEL finds extreme usage in Railways in the form of Axle Counter, Axle Counter Block System and Train Approach Warning Devices. CEL’s Digital Axle Counter is approved as per European CENELEC safety level SIL-4 by RDSO (Research, Design and Standard Organization of Indian Railways) as an approved source in Part-I (i.e. approved for bulk production) for various Railway Safety and Signaling Equipments for more than 25 years.

CEL has developed a number of critical components for strategic applications and is supplying these items to Defence.

Mission

To achieve excellence in the technology and manufacture and be market leader in solar energy system and strategic electronics.

To streamline the operations and processes the company is divided into three basic business units.

Solar photovoltaic groupThe function of this business unit is to manufacture and market solar voltaic cell, modules and complete system in India & abroad.

Electronic system groupThis unit of the company is a pioneer in the design and manufacture of railway signaling and safety equipment and other electronic product.

Components groupThis unit which is a strategic electronic group looks after production of professional ferrites, electronic ceramics and microware electronics.

Central Electronics Limited (CEL) is the pioneer and the largest manufacturers of Solar-Photovoltaic (SPV) Cells, Modules and Systems in India. Through sustained in-house development and constant R&D efforts, spread over a decade of continuous

efforts, the company has converted a laboratory concept into an industrial technology.

CEL with its commitment to harness the solar energy has opened up new vistas in the field of solar photovoltaic. Backed by an integrated production facility to manufacture Mono-Crystalline Silicon Solar Cells and Modules with the state-of-the-art screen-printing technology, the company has supplied more than 1.5 Lakhs SPV Systems in India and abroad, covering both rural and industrial applications

CEL products conform to stringent National & International Standards. The PV modules are tested to JPL Block V.1981 and European Solar Test Installation (ESTI) Standards. Our modules have been successfully tested by Solar Energy Centre (SEC) of the Ministry of Non-conventional Energy Sources (MNES), Govt. of India and JRC-EC, Ispra, Italy. CEL's Solar Photovoltaic modules are the only ones from India certified both for design and quality by the European Commission - Joint Research Centre at Ispra, Italy

CEL's Solar Photovoltaic modules are the first from India to be certified both for design and quality by the European Commission - Joint Research Centre at Ispra, Italy.

Microwave Electronics

Phase shifters are critical elements for electronically scanned phased array antennas that allow the antenna beam to be steered in the desired direction without physically re-positioning the antenna.

Electronic phase shifters assumed special significance because of their potential utility and volume requirement in phased array antenna systems for inertia less scanning. CEL is one of the very few companies, worldwide, that have pioneered the production of the ferrite phase shifters for C- and X- bands. The ferrite phase shifter supplied by CEL is an indigenously developed product and CEL is totally self reliant for various materials/components used in the design.

CEL has developed various production facilities for meeting the bulk demand of the phase shifters. The measurement of the phase shifter is fully automated using customized software.

Railway Electronics

Central Electronics Limited, a Technology & Production Enterprise of the Department of Scientific & Industrial Research (DSIR), Ministry of Science & Technology, and Govt. of India was established in June, 1974 to develop core competence in the areas of renewable energy systems and new generation electronic equipment. The Company is a pioneer in the design and manufacture of Railway signaling and Safety equipment.

With more than 5000 successful installations in Indian Railways, CEL is all set and prepared to meet the signaling requirements of railways from other part of the world with a greater thrust by producing state -of- the- art electronic signaling systems by meeting stringent European standards (CENELEC) for railway safety.

Strengths

1. Pioneer in India in Photovoltaic, Railway Signaling & safety equipments, C-Band & X-Band phase shifters & Electronic Ceramics

2. Capability to meet competition in India and abroad 3. State-of-the-art solar cell process technology 4. Latest infrastructure & equipment for processing silicon

solar cells & modules 5. First in India to undertake turnkey village electrification

projects

Future Endeavors

Be a global player and a major domestic player in the area of Solar Photovoltaic. (SPV)

Expand SPV marketing operations particularly Export by giving due thrust to utilize full enhanced production capacity (12 MWp per annum) and look forward for further capacity enhancement.

Develop Building Integrated Photovoltaic Module (BIPV) considering its enormous commercial potential for roof top (as a building material) and economic at medium size SPV power plant applications in near future in domestic and also export markets

Identify an appropriate technology from among a number of PV technologies currently being pursued, taking into account prevailing SPV production technology trends, availability of production worthy technology, cost effectiveness and investment, for commercial production on long term basis and pursue for technology tie-up and other related activities for its induction.

Retain leadership position, expanded portfolio of signaling and Safety equipment to meet Railways’ emerging requirements for modernization of their signaling and telecom network.

Built linkages with SSPL and other DRDO Labs, working on future technologies for Phased Array Radars, keeping in view long term business plan in this area.

S&T Programme To develop new SPV applications particularly in the areas of lighting and signaling exploiting White LED technology.

To develop and identify process technology for the production of higher efficient silicon solar cells and modules. Keeping in line with current technology trends globally and also with a view to adopt this technology for commercial production. Special emphasis will be given to adopt nano material technology.

Solid State Interlocking, Solid State MUX, Universal Fail Safe Block Interfacing (UFSB), Auxiliary Warning System (AWS), EVM and LED Based Signals.

Rotating Field Phase Shifter, Development of Piezo based materials, products and fuses for defence applications.

I&M Programmed

The solar PV market has been growing at a rate of 40% since last 3-4 years, and is likely to grow at a rate of 25% per annum for next 5-10 years. With this rate the global market is likely to exceed the annual production mark of 12 GW during the year 2012. Likewise, the Indian market demand is expected to reach 200MW by the year 2012. CEL will target the production of Solar Cells and Modules up to 25 MW per annum by the year 2012. The main emphasis will be to establish/state of the art process technology, to enhance the productivity and conversion efficiency and to use thinner wafer (around 200 micron). CEL is in the process of establishing in-line manufacturing/testing facilities by year 2012.

Safety being the highest priority in Indian Railways, large-scale deployment of modern signaling & safety equipment is envisaged.

The present infrastructure will be upgraded so that the stringent specifications and requirements not only of Indian Railways but also international level to generate export are met. CEL will acquire sophisticated latest production equipment (CAM) for the Systems Production with an objective of minimizing failure rate and improving MTBF of the products. The design of the products will be continuously improved, keeping in pace with trends in the components and technology.

Defence is likely to induct Weapon Locating Radar and Akash Missile in large number during XI Five Year Plan. To meet the projected demand, the manufacturing/testing facilities of Phase Control Modules (PCM) etc. are needed to be augmented to manufacture 30,000 to 40,000 Nos. PCM annually.

QUALITY POLICY

CENTRAL ELECTRONICS LIMITED is committed to continuous improvement in the quality of its products & services and meeting the customer needs in time and every time.

Quality is our basic business principle.

QUALITY OBJECTIVES

On-time delivery of defect free products Providing effective customer support Continual improvement of processes Improvement of infrastructure Development of human resources

ACCREDITIONS

CEL's SPV modules conform to International Specifications - JPL block V and European Solar Test Installation (ESTI) specification number CEI/ IEC 1215. Solar Energy Centre (SEC) of the Ministry of Non-Conventional Energy Sources (MNES), Govt. of India and JRC-EC Ispra, Italy has successfully tested our modules.

R&D Center Cadmium Zinc Telluride (CZT) single crystal substrates for night vision devices (focal plane array)

Phase I

Established the manufacturing facilities to produce CZT substrates with a funding of rs 414 lakhs from Defence Research & Development Organization (DRDO).

To convert laboratory scale technology developed at SSPL to commercial scale.

Produced and delivered 300 substrates to SSPL in three years as scheduled. Phase II

Upgrade the process to improved specifications in collaboration with SSPL.

To produce 75 substrates first year with old specifications and 300 per year for next four years with total funding of rs.1400 lakhs from DRDO (2006-2011).

Organization Structure

Central Electronics Limited (CEL), established in June 1974, is a Technology and Production Enterprise of the Department of Scientific & Industrial Research, Ministry of Science & Technology, Government of India.

CEL's mission is to achieve excellence in the technology and manufacture and be market leader in Solar Energy Systems and Strategic Electronics. 

Central Electronics Limited (CEL) holds a unique position among the family of Public Sector Enterprises in Electronics, with its emphasis on indigenous technology inducted both from its in-house developments and from the National Laboratories, for its production programmer in diverse high-technology areas of national importance. The activities of CEL are sharply focused in three thrust areas:

Solar photovoltaic cells, modules and systems for a variety of applications. Selected Electronic Systems-Equipment for Railway Signaling and Safety, Cathodic

Protedtion Equipment for Oil Pipelines, Switching Systems and Very Small Aperture Terminals (VSATs).

Selected Electronic components-professional (Soft) Ferrites, Electronic Ceramics, Piezo Electric Elements and Microwave Components.

CEL has been the pioneer in the country in the areas of solar photovoltaics, ferrites and piezo ceramics. Today, it enjoys the international status of being among the top producers of single crystalline silicon solar cells in the world.

Working capital

Working capital (also known as net working capital) is a financial metric which represents the amount of day-by-day operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. It is calculated as current assets minus current liabilities. A company can be endowed with assets and profitability, but short of liquidity, if these assets cannot readily be converted into cash.

Current assets and current liabilities include three accounts which are of special importance. These accounts represent the areas of the business where managers have the most direct impact:

accounts receivable (current asset) inventory (current assets), and accounts payable (current liability)

In a situation where a company carries more cash than the minimum amount needed to maintain operations, the excess portion is usually excluded from working capital.

In addition, the current (payable within 12 months) portion of debt is critical, because it represents a short-term claim to current assets. Common types of short-term debt are bank loans and lines of credit.

An increase in working capital indicates that the business has either increased current assets (that is received cash, or other current assets) or has decreased current liabilities, for example has paid off some short-term creditors.

Implications on M&A: The common commercial definition of working capital for the purpose of a working capital adjustment in an M&A transaction (i.e. for a working capital adjustment mechanism in a sale and purchase agreement) is equal to:

Current Assets - Current Liabilities excluding deferred tax assets/liabilities, excess cash, surplus assets and/or deposit balances .Cash balance items often attract a one-for-one purchase price adjustment.

Working capital management

Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of Working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.

Decision criteria

By definition, Working capital management entails short term decisions - generally, relating to the next one year periods - which are "reversible". These decisions are therefore not taken on the same basis as Capital Investment Decisions (NPV or related, as above) rather they will be based on cash flows and / or profitability.

One measure of cash flow is provided by the cash conversion cycle - the net number of days from the outlay of cash for raw material to receiving payment from the customer. As a management tool, this metric makes explicit the inter-relatedness of decisions relating to inventories, accounts receivable and payable, and cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count.

In this context, the most useful measure of profitability is Return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; Return on equity (ROE) shows this result for the firm's shareholders. Firm value is enhanced when, and if, the return on capital, which results from working capital management, exceeds the cost of capital, which results from capital investment decisions as above. ROC measures are therefore useful as a management tool, in that they link short-term policy with long-term decision making. See Economic value added (EVA).

Techniques of working capital management

1. Cash management . Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.

2. Inventory management . Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow; see Supply chain management; Just in Time (JIT); Economic order quantity (EOQ); Economic production quantity (EPQ).

3. Debtor’s management . Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances.

4. Short term financing . Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".

RATIO ANALYSIS

Mere statistics/data presented in the different financial statements do notReveal the true picture of a financial position of a firm. Properly analyzed andInterpreted financial statements can provide valuable insights into a firm’sPerformance. To extract the information from the financial statements, aNumbers of tools are used to analyse such statements. The most popular toolIs the Ratio Analysis.Financial ratios can be broadly classified into three groups: (I) LiquidityRatios, (II) Leverage/Capital structure ratio, and (III) Profitability ratios.(I) Liquidity ratios:Liquidity refers to the ability of a firm to meet its financial obligations in theShort-term which is less than a year. Certain ratios, which indicate theLiquidity of a firm, are (i) Current Ratio, (ii) Acid Test Ratio, (iii) TurnoverRatios. It is based upon the relationship between current assets and currentLiabilities. Current ratio = Current Liabilities Current Assets

The current ratio measures the ability of the firm to meet its currentLiabilities from the current assets. Higher the current ratio, greater theShort-term solvency (i.e. larger is the amount of rupees available per rupeeOf liability).(ii) Acid-test Ratio =Current Liabilities Quick Assets

Quick assets are defined as current assets excluding inventories and prepaidexpenses. The acid-test ratio is a measurement of firm’s ability to convertIts current assets quickly into cash in order to meet its current liabilities.Generally speaking 1:1 ratio is considered to be satisfactory.86

Turnover Ratios:

Turnover ratios measure how quickly certain current assets are convertedInto cash or how efficiently the assets are employed by a firm. TheImportant turnover ratios are:Inventory Turnover Ratio, Debtors Turnover Ratio, Average CollectionPeriod, Fixed Assets Turnover and Total Assets Turnover

Inventory Turnover Ratio =Average Inventory Cost of Goods Sold

Where, the cost of goods sold means sales minus gross profit. ‘AverageInventory’ refers to simple average of opening and closing inventory. Theinventory turnover ratio tells the efficiency of inventory management.Higher the ratio, more the efficient of inventory management.

Debtors’ Turnover Ratio =AverageAccounts Re ceivable ( Debtors ) NetCreditSalesThe ratio shows how many times accounts receivables (debtors) turn overDuring the year. If the figure for net credit sales is not available, then netSales figure is to be used. Higher the debtors turnover, the greater theEfficiency of credit management.

Average Collection Period =AverageDailyCreditSales Average DebtorsAverage Collection Period represents the number of days’ worth credit salesThat is locked in debtors (accounts receivable).Please note that the Average Collection Period and the Accounts Receivable(Debtors) Turnovers are related as follows:

Average Collection Period =DebtorsTurnover 365 Days

Fixed Assets turnover ratio measures sales per rupee of investment in fixedAssets. In other words, how efficiently fixed assets are employed. HigherRatio is preferred. It is calculated as follows:Fixed Assets turnover ratio =NetFixedAssets Net.SalesTotal Assets turnover ratio measures how efficiently all types of assets areemployed.Total Assets turnover ratio =AverageTotalAssetsNet.Sales(II) Leverage/Capital structure Ratios:Long term financial strength or soundness of a firm is measured in terms ofIts ability to pay interest regularly or repay principal on due dates or at theTime of maturity. Such long term solvency of a firm can be judged by using

Leverage or capital structure ratios. Broadly there are two sets of ratios:First, the ratios based on the relationship between borrowed funds andowner’s capital which are computed from the balance sheet. Some suchratios are: Debt to Equity and Debt to Asset ratios. The second set of ratiosWhich are calculated from Profit and Loss Account are: The interest coverageRatio and debt service coverage ratio are coverage ratio to leverage risk.(i) Debt-Equity ratio reflects relative contributions of creditors and owners toFinance the business.Debt-Equity ratio =Total EquityTotal DebtThe desirable/ideal proportion of the two components (high or low ratio)Varies from industry to industry.(ii) Debt-Asset Ratio: Total debt comprises of long term debt plus currentliabilities. The total assets comprise of permanent capital plus currentLiabilities.Debt-Asset Ratio =Total AssetsTotal Debt88The second set or the coverage ratios measure the relationship betweenProceeds from the operations of the firm and the claims of outsiders.(iii) Interest Coverage ratio =InterestEarnings before Interest and TaxesHigher the interest coverage ratio better is the firm’s ability to meet itsinterest burden. The lenders use this ratio to assess debt servicing capacityOf a firm.(iv) Debt Service Coverage Ratio (DSCR) is a more comprehensive and aptTo compute debt service capacity of a firm. Financial institutions calculateThe average DSCR for the period during which the term loan for the projectis repayable. The Debt Service Coverage Ratio is defined as follows:Interest onTerm loan payment of term loanofit after tax Depreciation OtherNoncashExpenditure Interest on term loanRePr . . . . .(III) Profitability ratios:Profitability and operating/management efficiency of a firm is judged mainlyby the following profitability ratios:(i) Gross Profit Ratio (%) =Net SalesGross Profit* 100(ii) Net Profit Ratio (%) =Net SalesNet Profit* 100Some of the profitability ratios related to investments are:(iii) Return on Total Assets =

FixedAssets Current Assetsofit Before Interest And TaxPr . . . .(iv) Return on Capital Employed =TotalCapital EmployedNet ProfitAfterTax(Here, Total Capital Employed = Total Fixed Assets + Current Assets -Current Liabilities)89(v) Return on Shareholders’ Equity=AverageTotal Shareholders Equity or NetWorthNet ofit AfterTax'Pr(Net worth includes Shareholders’ equity capital plus reserves and surplus)A common (equity) shareholder has only a residual claim on profits andassets of a firm, i.e., only after claims of creditors and preferenceshareholders are fully met, the equity shareholders receive a distribution ofprofits or assets on liquidation. A measure of his well being is reflected byreturn on equity. There are several other measures to calculate return onshareholders’ equity of which the following are the stock market relatedratios:(i) Earnings Per Share (EPS): EPS measures the profit available to the equityshareholders per share, that is, the amount that they can get on every shareHeld. It is calculated by dividing the profits available to the shareholders byNumber of outstanding shares. The profits available to the ordinaryshareholders are arrived at as net profits after taxes minus preferencedividend.It indicates the value of equity in the market.EPS =Numberof Ordinary Shares Outs dingNet ofit AvailableToThe ShareholdertanPr . . . .(ii) Price-earnings ratios = P/E Ratio =EPS

Market Pr ice per Share