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WORKING CAPITAL MANAGEMENT OF ESSAR

STEEL PLANT

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CONTENTS

CHAPTER TITLE

CHAPTER-I GROWTH AND DEVELOPMENT OF

STEEL INDUSTRY IN INDIA

CHAPTER-II WORKING CAPITAL MANAGEMENT-

A CONCEPTUAL VIEW

CHAPTER-III METHODOLOGY

CHAPTER-IV ORGANIZATIONAL FRAME WORK OF

ESSAR STEEL PLANT

CHAPTER-V WORKING CAPITAL MANAGEMENT OF

ESSAR STEEL PLANT-AN ANALYSIS

CHAPTER-VI SUMMARY OF THE FINDINGS

& CONCLUSION

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Chapter-1

GROWTH AND DEVELOPMENT OF STEEL INDUSTRY IN INDIA

1.1 INTRODUCTION

Iron, in the beginning was smelted by charcoal made from wood. Later coal was discovered as a great source of heat and subsequently, it was converted into coke, which was found to be ideal for smelting of iron. Iron kept its dominant place for 200 or more years after the Saugus works was founded. With the advance of Industrial Revolution, iron formed the rails for the newly invented railroad. With the advance of Industrial Revolution, iron formed the rails for the newly invented railroad trains. It was also used to armor the sides of the fighting ships. About the mid-19th century the new age of steel began with the invention of Bessemer processes (1856) making steel available in large quantities at reasonable cost. The growth and development of iron and steel industry in the world until the Second World War was comparatively slower. But the industry has grown very rapidly after the Second World War. World production of steel which was only 25.3 million tones in 1900, rose to 695 MT by 1992. The oil crises of the seventies affected the entire economy of the world including the steel industry. The position started improving after 1983 and peaked at

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780 MT in 1989. It started declining till 194 (723 MT), picked up again to 755.8 in 1995. The World production was around 900 MT in 2002.1 In the year 2006-07 the iron and steel was produced in India 543 lakh tones and in the year 2011-12 it was produced 682 lakh tones.

1.2 IMPORTANCE OF STEEL INDUSTRIES “Steel is the basic frame work which has build nations, and it is on this strength that nations stand apart. This man-made metal has an extraordinary quality of contributing to every aspect of life. While keeps the wheels of industry turning, it also lends everlasting quality to turning, it also lends everlasting quality to all kinds of structures and infrastructure”. The economy planning in the post-independence era gives it a new role to develop an economy which could function for the welfare of the masses. The steel industry is now being increasingly used as the main instrument towards achieving the broad objectives of our economic policy such as self-reliance, equitable distribution of wealth , land , income, eradication of poverty and balanced regional growth. The industrial policy resolution of 1956 further placed on it the arduous task of developing a strong, broad based industrial economy. The per capita consumption of steel can be considered as an Index for the industrial prosperity of a nation. Iron and steel industry is one of

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the basic industries steel is required for the production of different kinds of machinery in transport industries and for defence equipment, it is key material for the industrial development of a country. Steel plants account for nearly 1/3rd (33%) of the total investment. Here, the importance of the study arises in order to ascertain the profitability of a single unit that is Rourkela Steel Plant, the first public sector steel plant of India, which was set up in collaboration with West Germany and started production 1958-59 with a rated capacity of 1 million tone ingot steel. The iron pillar near the Kutab Minar in Delhi, and the Howrah Bridge at Kolkata, which are centuries old, proves the existence of iron and steel from olden times.

1.3 THE STEEL INDUSTRIES IN INDIA

Iron and Steel Industries is the most important of all manufacturing industries and is considered as basic or key industry of any nation. For the development of an iron and steel industry the basic requirements are the availability of raw materials like iron ore, lime stone, dolomite and manganese, the availability of fuel, i.e., cooking coal, a large supply of water for tempering of steel, availability of capital and a big market to absorb the products of the industry. The iron and steel industry is generally described as material oriented industry. Its best location is one where both coal and iron ore are found in close proximity. If coal and iron ore are not found together then the plant is more suitably located near coal mines, iron-ore mines or at intermediary location or even near the market.

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The iron and steel industry in modern lines was started in India in the year 1907, when the Tata Iron and Steel Works was established due to the pioneering efforts of Jamsedji Tata. In the next year, the second steel company was established Heerapur in West Bengal. The third steel factory was started at Bhadravati in Karnataka in 1923. This industry did not receive the help it deserved at the hands of foreign government, then in our country. The first and second world wars created scarcity of steel in the country and the government was compelled to help indigenous industry to expand its output. After independence Government gave great importance for this industry and makes an all out efforts to rapidly expand the steel production in the country. It was decided to set up steel plants to rapidly expand the steel production in the country. It was decided to set up steel plants in the public sector and provide facilities for the private companies to increase their output. It was during the second plan period, that three public sectors steel plants were established. The Hindustan Steel Limited was started to operate these plants. Our Government entered into an agreement with the German concern. “Krupp demag” in 1954 to erect a steel plant at Rourkela with 1 MT capacity. The second agreement was entered into in 1956 with the Russian Government to set up another steel plant at Bhilai in Madhya Pradesh. The third agreement was entered into with the British consortium to set up one more plant is constructed with technical help of Russia at Bokaro in Bihar.

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CHAPTER-3 METHODOLOGY

3.1 INTRODUCTION

This chapter deals with the methodology adopted in the collection and analysis of the data. Elaborated discussions are being made here with regard to the objective & scope of the study, nature, & source of the data required for the study, collection, and classification of the same data, and the process of analysis. This chapter deals the financial and statistical tools used for analysis and interpretation of the secondary data limitations of the study have also been covered in this chapter.

3.2 OBJECTIVES OF THE STUDY

In any research programme, whether professional or educational, objective occupies an important place. No research will be fruitful without any objective. So, the present study was undertaken by the researcher with the following objectives in below;

1. To ascertain the amount of working capital (both Gross & Net) and its correlation with the ‘sales’ of the Essar Steel Plant.

2. To analyse the pattern of investment in the components of gross working capital of the Essar Steel Plant.

3. To evaluate the working capital performance of the sample company through the use of various financial ratios.

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3.3 SCOPE OF THE STUDY

The scope of the present study is very wide and broad based. This study pursued into four parts, is concerned with the working capital management of the Essar Steel Plant. The first part includes the Growth and Development of Steel Industry in India. The second part of this study is covers the Working Capital Management- A conceptual view. This part makes elaborate discussions on the Nature, concept, types of working capital, source of working capital. Further, the various factors influencing the need of working capital are also discussed in this part. The third part deals with Organizational Frame Work of Essar Steel Plant. The fourth part concerned with Working Capital Management of Essar Steel Plant-An Analysis. This part of Gross working capital, net working capital and ratio analysis with statistical value.

3.4 NATURE OF DATA

The data required for the purpose of the study are of the following nature:

1. Information pertaining to the literature of working capital management.

2. Information relating to the brief history of the Essar Steel Plant taken for the study.

3. Information regarding the financial statements of the Essar Steel Plant for the period from

3.5 SOURCES OF DATA

The data for the study have been collected from the secondary sources i.e. from the Annual Reports of Essar Steel Plant starting from In other words they are secondary in nature. In addition, the data relating to the growth &

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development of steel industry and other theoretical portion have been collected from different books, journals, internet and government reports etc.

3.6 THE STUDY PERIOD

The present study covers a period of five years commencing from the year2006-07 to 2011-12, which has come to an end in the year

3.7 LIMITATIONS OF THE STUDY

The study is made depending largely on the secondary data collected from the official financial statements of Essar Steel Plant. Therefore the limitation of secondary data and the financial statements cannot rule out in this study. The interpretations made in this study have been based on the own limitations. Above all the study covers a period of ten years, starting from 2007 to 2012. Taking these limitations into consideration we firmly believe that the findings of the study will throw adequate light on working capital management of the industrial unit in Orissa, as seminal and a long neglected problem that the state is facing today.

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CHAPTER-6 SUMMARY OF THE FINDINGS & CONCLUSION

6.1 INTRODUCTION

The present study on “Working Capital Management of ESSAR Steel Plant” has been broadly divided into four parts. The first of the study is Growth and Development of Steel Industry in India. It covers the importance and growth & development of steel industries in India. The second part of the study is Working Capital management – A conceptual view. The third part embodied the Organizational Frame work of Essar Steel Plant. In this part discuss detail view of Steel Plant. The Fourth part of the study is working capital management of Steel Plant-An Analysis. The fourth part concerned with trend Analysis of Gross Working Capital and Net Working Capital and various ratio analysis with statistical value.

6.2 GROWTH AND DEVELOPMENT OF STEEL INDUSTRY

Iron and steel Industries is the most important of all manufacturing industries and is considered as basic or key industry of any nation. For the development of an iron and steel industry the basic requirements are the availability of raw materials like iron ore, lime stone, dolomite and manganese, the availability of fuel, availability of capital and a big market to absorve the products of the industry. The economic planning gives it a new role to develop an economy which could function for the welfare of the masses. The steel

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industry is now being increasingly used as the main instrument towards achieving the broad objectives of our economic policy such as self-reliance, equitable distribution of wealth and income, eradication of poverty and balance regional growth.

6.3 WORKING CAPITAL MANAGEMENT- A CONCEPTUAL VIEW

The management of working capital plays a pivotal role in maximizing the value of a business unit. Its effective management can lead not only to material savings in the economic use of capital but can also assert the further ultimate goal of an enterprise. Therefore, efficient management of working capital is highly essential to maintain liquidity and enhance the profitability of the unit.

The term ‘Working Capital’ in general refers to a concern’s investment in short-term or current assets. In fact, these assets in the ordinary course of business can be converted into cash within one accounting year normally without diminution of value. The major current assets are: inventories, receivables and cash. On the other hand, current liabilities are those liabilities which are intended at their inception to be paid in the ordinary course of business normally within one accounting year, out of the current assets or earnings of the firm. The basic current liabilities are bank credit, sundry debtors, trade credit, misc. current liabilities and other short-term sources of funds.

Working capital is like the heart of a business. If it becomes weak the business can hardly prosper and survive.

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Just as the heart gets blood and circulates in the body, working capital funds are generated and are circulated in the business. Its proper circulation provides to the business the right amount of cash to maintain regular flow of its operation. As and when this circulation stops, the business becomes lifeless. Due to this reason, working capital is also known as ‘circulating capital’ as it circulates in the business just like blood in the human body.

The mode of administration of working capital determines to a very large extent the success or failure of overall operations of an enterprise. Many times in the event of the failure of a manufacturing concern, shortage of working capital is given out as its main cause. Therefore, proper management of working capital is of crucial importance for the success of an enterprise. In fact working capital management is the most important aspect of overall financial management. A concern must maintain a satisfactory level of working capital. Current assets should be large enough to cover current liabilities in order to ensure a reasonable margin of safety. The management of working capital involves all aspects of administration of current assets and current liabilities. It involves deciding upon the amount and composition of current assets and how to finance these assets. The goal of working capital management is to manage the current assets and current liabilities of a concern in such a way that an adequate level of working capital is maintained.

Basically, there are two concepts of working capital viz., gross working capital, which is quantitative in nature and net working capital, which is qualitative in nature. The first is the

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total of all current assets; whereas the second is the excess of current assets over current liabilities. Usually, the magnitude of current assets requirement is not always constant, it increases and decreases over time. However, there is always a minimum level of current assets which continuously required by a concern on its business operations. This minimum level of current assets is referred to as ‘permanent or fixed working capital’. The need for working capital over and above the permanent working capital is financed from long-term source; whereas short-term source finance to fluctuating working capital. Besides this, the fixed and fluctuating working capital is also useful for estimating working capital needs for an enterprise. A conservative approach relies more on long-term financing; whereas the heading approach mainly depends on short-term financing of working capital. Obviously, neither approach by itself may serve the purpose of efficient working capital management. However, a trade-off between the two approaches would give an acceptable financing strategy. Therefore, a concern should plan its operation in such a way that it should have neither too much nor too little working capital. Efficient management of working capital thus involves careful determination of working capital requirements and formulating plans for meeting them.

6.4. SUGGESTIONS

A few suggestions are offered basing upon the findings of the study, to achieve more efficiency economically in the field of working capital management. The problem of working

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capital management is desired to be considered in the broader context of all efficiency and profitability.

With regard to the components of current assets, inventory should be given prime importance as it holds a lion’s share. Now a day, inventory management has become a job of highly specialized field. Thus, his work is to be entrusted to the technology qualified staffs.

As the most critical component, Receivables need a careful administration to increase the profitability of the unit. As a course of action, the right proportion of current assets in form of receivables should be ascertained taking into account the market conditions, trade and industry practices etc. Then the most important aspect is the collection period debts. The need of timely recovery of receivables should be given priority. Attractive cash discount is to be allowed to encourage prompt payment. As a whole, collection policies should be reviewed from time to time in terms of collection periods and percentage of defaulters under each collection programme.

A separate budget should be prepared for loans and advances for determining the working capital needs generally a major portion of loans and advances are production oriented. So the changes of locking up the working capital for larger period always remains. Thus, this portion should be met from long term funds as a matter of financial prudence. Besides, a portion of the advances are also to be given to employees depending upon the prevailing business practice.

As a vital element of current assets, cash should be managed most efficiently and economically for this purpose,

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an efficient system of budgetary control and information system should be implemented. An effective mechanism should be established to take note of cash surplus, deficit and actual need and to meet them squarely. More over, the disputes arising for non-payment of dues should be settled across the table by a responsible officer with adequate authority for quick decision.

With regards to current liabilities – As bank loans and sundry creditors pay a strategic role in the field of working capital management, more emphasisis should be given on these two continuous efforts for the negotiation should be made with the creditors to avail of this facility for longer period and higher amount. The industry should take care of timely payment of bank loans, so that they avoid the payment of penal interest and loss of credit worthiness. The use of sundry creditors should be maximized. On the whole steps should be made to increase the credit worthiness of the industrial unit, so as to avail more funds from all the sources.

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