CONTENT

1. Introduction1-9 Manufacturing Sector Working Capital Management Format of Working Capital Importance of Working Capital Management Effect of Working Capital Management on profitability Indian Cement Industry ACC Limited Ultratech Cement JK Cement JP Cement

2. Details of Companies......10-17

1. Literature Review...18-22 2. Rationale of Study..23-24 3. Objective of Study..25-26 4. Methodology...27-41 The Study The Sample The Tools Tools for Data Collection Tools and techniques Data Analysis Method Correlation Analysis and Ratio Analysis

1. Findings42-43 2. Recommendations44-45 3. Conclusion46-47 4. References48-49 1

INTRODUCTION

INTRODUCTION
MANUFACTURING SECTOR Witnessing a wave of growth, the Indian manufacturing sector is thought to be much more promising in the future. The sector is poised to get more skill-intensive according to industry leaders who foresee India map new heights of progress in every aspect. The country is increasingly getting recognized for high value goods requiring a fair amount of engineering precision and quality. The sector is diversifying due to conditions on the ground that global players are using to their advantage. India ranked second in terms of manufacturing competence, according to report '2010 Global Manufacturing Competitiveness Index', by Deloitte Touche Tohmatsu and the US Council on Competitiveness. The report states that the country's talent pool of scientists, researchers, and engineers, together with its English-speaking workforce and democratic regime make it an attractive destination for manufacturers. Growth of the Indian manufacturing sector during the quarter ended March 31, 2011 was 5.1 per cent, according to the report on "World Manufacturing Production Quarter I, 2011" by the United Nations Industrial Development Organization (UNIDO). The manufacturing sector, which accounts for almost 80 per cent of the index, saw its annual growth at 8.1 per cent in 2010-11. Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale. Such finished goods may be used for manufacturing other, more complex products, such as aircraft, household appliances or automobiles, or sold to wholesalers, who in turn sell them to retailers, who then sell them to end users the "consumers". Manufacturing Sector is a sector which is involved in process of manufacturing. The manufacturing sector is closely connected with engineering and industrial design. The growth rate of manufacturing sector in a country truly reflects its economic potentiality. Both 3

Government as well as the private sectors has come forward for the development of the manufacturing sector of the country. More investments are being proposed in the sector particularly in the growth rate of capital goods, consumer durables, and some non-durable goods. WORKING CAPITAL MANAGEMENT Assets in commercial firm consist of two kinds: fixed assets and current assets. Fixed assets include land, building, plant, furniture, etc. Investment in these assets represents that of part of firms capital, which is permanently blocked on a permanent or fixed basis and is also called fixed capital that generates productive capacity. The form of these assets does not change, in the normal course. In the contrast, current assets consist of raw materials, work-in-progress, finished goods, bills receivables, cash, bank balance, etc. These assets are bought for the purpose of production and sales, like raw material into semi-finished products, semi- finished products into finished products, finished products into debtors and debtors turned over cash or bills receivables. The fixed assets are used in increasing production of an organization and the current assets are utilized in using the fixed assets for day to day working. Therefore, the current assets, called working capital, may be regarded as the lifeblood of a business enterprise. It refers to that part of the firms capital, which is required for financing short-term. The management of this working capital is known as working capital management. The basis objective of working capital management is to manage firms current assets and current liabilities, in such a way, that working capital are maintained, at a satisfactory level. The working capital should be neither more nor less, but just adequate. Working capital management plays an important role in a firms profitability and risk as well as its value. There are a lot of reasons for the importance of working capital management. For a typical manufacturing firm, the current assets account for over half of its total assets. For a distribution company, they account for even more. Excessive levels of current assets can easily result in a firms realizing a substandard return on investment. 4

Efficient management of working capital plays an important role of overall corporate strategy in order to create shareholder value. Working capital is regarded as the result of the time lag between the expenditure for the purchase of raw material and the collection for the sale of the finished good. The way of working capital management can have a significant impact on both the liquidity and profitability of the company. The main purpose of any firm is maximum the profit Working capital management involves planning and controlling current assets and current liabilities in a manner that eliminates the risk of inability to meet due short term obligations on the one hand and avoid excessive investment in these assets on the other hand. Working capital management has become one of the most important issues in organization, where many financial managers are finding it difficult to identify the important drivers of working capital and the optimum level of working capital. As a result, companies can minimize risk and improve their overall performance if they can understand the role and determinants of working capital. A firm may choose an aggressive working capital management policy with a low level of current assets as percentage of total assets, or it may also be used for the financing decisions of the firm in the form of high level of current liabilities as percentage of total liabilities. Keeping an optimal balance among each of the working capital components is the main objective of working capital management. Working capital management is important because maintaining a balance of income to debt can be difficult and owners must be diligent to assure that it is kept. Sometimes it takes a little assistance to maintain levels of fluidity or make major purchases. If working capital dips too low, a business risks running out of cash. Even very profitable businesses can run into trouble if they lose the ability to meet their short-term obligations. 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. Lastly, working capital management plays an important role in managerial enterprise, it may impact to success or failure of firm in business because working capital management affect to the profitability of the firm. The thesis is expected to contribute to better understanding of relationship between working capital management and profitability in order to help managers take a lot of solutions to create value for their shareholders. WORKING CAPITAL Working capital may be regarded as the life blood of a business. It is closely related with day-today operations of the business and so it is important for external as well as internal analysis. Every business needs funds for two purposes. Long-term funds are required to create production facilities through purchase of fixed assets e.g. plants, machinery, etc. Funds are also needed for short-term purposes for the purpose of raw material, payment of wages and other day-to-day expenses. These funds are also known as working capital. In other words, working capital refers to that part of a firms capital which is required for financing short-term or current assets e.g. cash, debtors, inventories, etc. Working capital is absolutely vital for any business. Working capital is especially necessary for those businesses with higher day-to-day expenditures and outflow of money. So what is Working Capital? Simply we can say working capital is the money any business has on hand in order to address everyday expenditures and future expansion that is vital to the growth of their business. Working capital is the money most of the business use to pay things like additional new space, advertising, & marketing, renovations, new equipment, paying bills and many more. Many businesses have assets that they can generate cash for working capital. The assets that typically are used to generate working capital are usually currently owned existing equipment. Business like restaurants and hotels however can have a difficult time generating working capital from

these traditional sources. In addition to it they may require greater working capital than other industries.

Meaning of Working Capital Working capital is also known as current capital or circulating capital. One of the most difficult problems faced is determination of the amount of working capital requirement at a particular level of production. Hence, working capital management is an important function. The term working capital is used in two different ways: Gross Working Capital (or Total Working Capital) - The term refers to the firms investment in all the current assets taken together. In other words the total investment in all current assets is called gross working capital. Current Assets are those which are required to meet day-to-day operations of the organization and they are convertible into cash within a period of one year or within an operation cycle. Current Assets includes cash, bank, debtor, B/R, stock and short-term securities. Net Working Capital - It refers to the difference between current assets and current liabilities. Current Liabilities are those claims which are expected to mature for payment within an accounting year, like creditors, B/P, and outstanding expenses.

Definition of Working Capital Working Capital can be simply defined as difference between Current Assets & Current Liability. Net working Capital= Current Assets Current Liabilities Equity Working Capital = Current Assets- Current Liabilities- Long term debt 7

Format of Computation of Working Capital Particulars

A] CURRENT ASSETS. 1. Raw material. 2. Work-in-progress. 3. Finished Goods. 4. Debtors. 5. Cash. 6.0ther current assets. Total current assets B] CURRENT LIABILITIES. 1. Trade Creditors. 2.0utsandings expenses. 3. Other current liabilities. Total current liabilities WORKING CAPITAL (A-B)

Amount xxxx xxxx xxxx xxxx xxxx xxxx

Amount

xxxx xxxx xxxx xxxx xxxx xxxx

IMPORTANCE OF WORKING CAPITAL MANAGEMENT Every firm is required to maintain a sound working capital position. The investment in working capital should be balanced. Therefore, it is necessary that the firm should manage working capital properly. It is the responsibility of financial manager to determine the level and composition of current assets. Following are the important aspects of working capital management: Working capital management requires much of the financial managers time. Working capital represents a large portion of the total investment in assets. Working capital management has greater significance for small firms. The need for working capital is directly related to sales growth.

EFFECT OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY Working capital management is important part in firm financial management decision. An optimal working capital management is expected to contribute positively to the creation of firm value. To reach optimal working capital management firm manager should control the trade off between profitability and liquidity accurately. The purpose of this study is to investigate the relationship between working capital management and firm profitability. Cash conversion cycle is used as measure of working capital management. This reveals that reducing cash conversion period results to profitability increase. Thus, in purpose to create shareholder value, firm manager should concern on shorten of cash conversion cycle till accomplish optimal level. The crucial part in managing working capital is required maintaining its liquidity in day-to-day operation to ensure its smooth running and meets its obligation. Yet, this is not a simple task since managers must make sure that business operation is running in efficient and profitable manner. There are the possibilities of mismatch of current asset and current liability during this process. If this happens and firms manager cannot manage it properly then it will affect firms growth and profitability. This will further lead to financial distress and finally firms can go bankrupt. Dilemma in working capital management is to achieve desired tradeoff between liquidity and profitability. Referring to theory of risk and return, investment with more risk will result to more return. Thus, firms with high liquidity of working capital may have low risk then low profitability. Conversely, firm that has low liquidity of working capital, facing high risk results

10

to high profitability. The issue here is in managing working capital, firm must take into consideration all the items in both accounts and try to balance the risk and return.

DETAILS OF THE COMPANIES

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Here we are considering 5 Cement manufacturing companies for our study. These are ACC Limited, JP Cements, JK Lakshmi Cements, Ultratech and Ambuja Cements. INDIAN CEMENT INDUSTRY Indias cement industry has witnessed tremendous growth on the back of continuously rising demand from the housing sector, increased activity in infrastructure, and construction boom, according to RNCOS latest research report titled, Indian Cement Industry Forecast to 2012. The countrys cement production is projected to grow at a compound annual growth rate (CAGR) of around 12 per cent during 2011-12 - 2013-14 to reach 303 million metric tonnes (MMT), as per the RNCOS research report. India is the second largest cement producing country with 137 large and 365 mini cement plants. The large plants employ 120,000 people, according to a recent report on the Indian cement industry published by Cement Manufacturers Association (CMA). Cement production in the country is expected to increase to 315-320 million tonnes (MT) by end of this financial year from the current 300 MT. The cement production touched 14.50 MT, while the cement dispatches quantity was registered at 14.28 MT during April 2011, as per provisional data released by Cement Manufacturers Association (CMA). ACC LIMITED: Company Profile 12

ACC Limited is Indias foremost cement manufacturer with a countrywide network of factories and marketing offices. Established in 1936, ACC has been a pioneer and trend-setter in cement and concrete technology. Among the first companies in India to include commitment to environment protection as a corporate objective, ACC has won accolades for environment friendly measures taken at its plants and mines, and has also been felicitated for its acts of good corporate citizenship. ACC is the most preferred cement brand name in India. ACC's operations are spread throughout the country with 16 modern cement factories, more than 40 Ready mix concrete plants, 21 sales offices, and several zonal offices. It has a workforce of about 9,000 persons and a countrywide distribution network of over 9,000 dealers. Contribution ACC has made significant contributions to the nation building process by way of quality products, services and sharing expertise. Its commitment to sustainable development, its high ethical standards in business dealings and its on-going efforts in community welfare programs have won it acclaim as a responsible corporate citizen. ACCs brand name is synonymous with cement and enjoys a high level of equity in the Indian market. It is the only cement company that figures in the list of Consumer Super Brands of India. Vision To be one of the most respected companies in India; recognized for challenging conventions and delivering on our promises. Products ACC manufactures the following types of cement, in addition to which, it provides Bulk Cement and Ready Mix Concrete. I. Ordinary Portland Cements 43 Grade Cement(OPC 43 Grade) 53 Grade Cement Fly-ash Portland Pozzolana Cements 13

I. Blended Cements

Portland Slag Cement

AMBUJA CEMENTS Company Profile Ambuja Cements Ltd. (ACL) is one of the leading cement manufacturing companies in India. The Company, initially called Gujarat Ambuja Cements Ltd., was founded by Narotam Sekhsaria in 1983 with a partner, Suresh Neotia. Sekhsarias business acumen and leadership skills put the company on a fast track to growth. The Company commenced cement production in 1986. The global cement major Holcim acquired management control of ACL in 2006. Holcim today holds little over 46% equity in ACL. The Company is currently known as Ambuja Cements Ltd. ACL has grown dynamically over the past decade. Its current cement capacity is about 25 million tonnes. The Company has five integrated cement manufacturing plants and eight cement grinding units across the country. ACL has always met tough challenges and seized the opportunities that have come its way. It has nurtured the same spirit of enterprise and search for cutting-edge technology with which it started. It thus continues to be the driving force and in many ways a benchmark for the cement industry in India. Contribution ACL enjoys a reputation of being one of the most efficient cement manufacturers in the world. Its environment protection measures are on par with the finest in the country. It is one of the most profitable and innovative cement companies in India. ACL is the first Indian cement manufacturers to build a captive port with three terminals along the countrys western coastline to facilitate timely, cost effective and environmentally cleaner shipments of bulk cement to its 14

customers. The Company has its own fleet of ships. ACL has also pioneered the development of the multiple bio-mass co-fired technology for generating greener power in its captive plants. Mission Delighted Customers Inspired Employees Enlightened partners Energised Society Cleaner Environment- Pollution control Cleaner Environment natural resources Safety Ordinary Portland Cement Portland Pozzalana Cement

Products

ULTRATECH CEMENT Company Detail UltraTech is India's largest exporter of cement clinker. The company's production facilities are spread across eleven integrated plants, one white cement plant, one clinkerisation plant in UAE, fifteen grinding units, and five terminals four in India and one in Sri Lanka. Most of the plants have ISO 9001, ISO 14001 and OHSAS 18001 certification. In addition, two plants have received ISO 27001 certification and four have received SA 8000 certification. The process is currently underway for the remaining plants. The company exports over 2.5 million tonnes per annum, which is about 30 per cent of the country's total exports. The export market comprises of countries around the Indian Ocean, Africa, Europe and the Middle East. Export is a thrust area in the company's strategy for growth. UltraTech Cement is the countrys largest exporter of cement clinker. The export markets span countries around the Indian Ocean, Africa, Europe and the Middle East. 15

UltraTech's subsidiaries are Dakshin Cements Limited, Harish Cements Limited, UltraTech Ceylinco (P) Limited and UltraTech Cement Middle East Investments Limited. UltraTech Cement Limited has an annual capacity of 52 million tonnes. Products Ordinary Portland cement. Portland Blast Furnace Slag Cement. Portland Pozzalana Cement. Ready Mix Concrete (RMC).

JK LAKSHMI CEMENT Company Profile JK Lakshmi Cement manufacturing facility has been rated amongst Greenest Cement Plant of India by CSE GRP 2005 thus highlighting our commitment to the environment even while ensuring the highest standards of quality for our products. We have also won the Productivity Excellence Award 2007-08, Energy Conservation Award 2008, NCB award 2007, Building Leadership Award 2007, National Award for Environmental Excellence & Energy Management 2007, Golden Peacock Award for Corporate Social Responsibility 2007, ICWAI National Award 2007 for Excellence in Cost Management, The Pinnacle Cement 2006 award by Mitch Zee TV, Green Tech Safety Award and a place of pride amongst the top ten companies in India in HR practices. Its wide network of 70 cement dumps and over 2200 dealers spread across the states of Rajasthan, Gujarat, Delhi, Haryana, U.P., Uttaranchal, Punjab, J&K, Mumbai & Pune and the vast pool of highly trained & dedicated marketing and technical service team helps the Company to service its customers at their doorstep. Contribution The First Cement Manufacturer in Northern India to introduce coloured bags, JK Lakshmi Cements Technical Service Cell provides construction solutions to its customers & carries out regular & innovative contact programmes with Individual House Builders, Masons and Business Associates to keep in tune with their needs and requirements. 16

An integral part of major projects like IGNP, Sardar Sarovar Dam, Golden Quadrilateral and major corporations like L&T, Reliance, NTPC, Essar and Airport Authority of India, JK Lakshmi Cement has become the preferred choice among the customers because of its consistency, high level of quality and impeccable customer service. Mission To be recognized as an Efficient Competitive & Premium Cement Brand.

Products Ready Mix Concrete (RMC) - JK Lakshmi Power Mix. Plaster of Paris (POP) - JK Lakshmiplast.

JP CEMENTS Company Profile Jaypee group is the 3rd largest cement producer in the country. The groups cement facilities are located in the Satna Cluster (U.P), which has one of the highest cement production growth rates in India. The group produces special blend of Portland Pozzolana Cement under the brand name Jaypee Cement (PPC). Its cement division currently operates modern, computerized process control cement plants with an aggregate installed capacity of 26.20 MnTPA. The company is in the midst of capacity expansion of its cement business in Northern, Southern, Central, Eastern and Western parts of the country and is slated to be a 35.90 MnTPA by FY12 (expected) with Captive Thermal Power plants totaling 672 MW. Keeping pace with the advancements in the IT industry, all the 260 cement dumps are networked using TDM/TDMA VSATs along with a dedicated hub to provide 24/7 connectivity between the plants and all the 120 points of cement distribution in order to ensure track the truck initiative and provide seamless integration. This initiative is the first of its kind in the cement 17

industry in India. In the near future, the group plans to expand its cement capacities via acquisition and greenfield additions to maximize economies of scale and build on vision to focus on large size plants from inception. The Group is committed towards the safety and health of employees and the public. Mission Work For Safe, Healthy, Clean & Green Environment '.

Products Portland Pozzalana Cement. Ordinary Portland cement.

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LITERATURE REVIEW

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LITERATURE REVIEW
Shin & Soenen, 1998:-In intention to discover the relationship between efficient working capital management and firms profitability used net-trade cycle (NTC) as a measure of working capital management. NTC is basically equal to the CCC whereby all three components are expressed as a percentage of sales. The reason by using NTC because it can be an easy device to estimate for additional financing needs with regard to working capital expressed as a function of the projected sales growth. This relationship is examined using correlation and regression analysis, by industry and working capital intensity. Using a Compustat sample of 58,985 firm years covering the period 1975-1994, in all cases, they found, a strong negative relation between the length of the firm's net-trade cycle and its profitability. In addition, shorter NTC are associated with higher risk-adjusted stock returns. In other word, (Shin & Soenen, 1998) suggest that one possible way the firm to create shareholder value is by reducing firms NTC. Lyroudi & Lazaridis, 2000:- Use food industry Greek to examine the cash conversion cycle (CCC) as a liquidity indicator of the firms and tries to determine its relationship with the current and the quick ratios, with its component variables, and investigates the implications of the CCC in terms of profitability, indebtness and firm size. The results of their study indicate that there is a significant positive relationship between the cash conversion cycle and the traditional liquidity measures of current and quick ratios. The cash conversion cycle also positively related to the return on assets and the net profit margin but had no linear relationship with the leverage ratios. Conversely, the current and quick ratios had negative relationship with the debt to equity ratio, and a positive one with the times interest earned ratio. Finally, there is no difference between the liquidity ratios of large and small firms. Nazir and Afza (2008):- Used external and internal factors to explore the determinants of working capital requirements of a firm. Internal factors were operating cycle, operating cash 20

flows, leverage, size, ROA, Tobin's q and growth while industry dummy and level of economic activity as external macroeconomic factors. They found that operating cycle, leverage, ROA and q had an influence on the working capital requirements significantly. The study further revealed that working capital management practices are also related to industry and different industries are following different working capital requirements. While Rehman (2006):- Studied the impact of the different variables of working capital management including Average Collection Period, Inventory Turnover in Days, Average Payment Period and Cash Conversion Cycle on the Net Operating Profitability of firms and concluded that there was a strong negative relationship between above working capital ratios and profitability of firms. Furthermore the study stated that managers can create a positive value for the shareholders by reducing the cash conversion cycle up to an optimal level. Ramachandran and Janakiraman (2009):- Found negative relationship between EBIT and the cash conversion cycle (CCC). The study revealed that operational EBIT dictates how to manage the working capital of the firm. Further, it was found that lower gross EBIT was associated with an increase in the accounts payable days. Thus the study concluded that less profitable firms wait longer to pay their bills, taking advantage of credit period granted by their suppliers. While the positive relationship between average receivable days and firms EBIT suggested that less profitable firms will pursue a decrease of their accounts receivable days in an attempt to reduce their cash gap in the CCC. Ganesan (2007):- He depicted that the working capital management efficiency was negatively associated to the profitability and liquidity. The study revealed that when the working capital management efficiency was improved by decreasing days of working capital, there was improvement in profitability of the firms in telecommunication firms in terms of profit margin. Padachi (2006): Examined the trend in working capital needs and profitability of firms to identify the causes for any significant differences between the industries. The results showed that high investment in inventories and receivables was associated with lower profitability. The findings also revealed that an increasing trend in the short-term component of trend in the shortterm component of working capital financing. In the study of Raheman and Nasr (2007) they studied the effect of Working Capital Management on liquidity as well on profitability of the 21

firm. The results showed that there was a negative relationship between variables of the working capital management and profitability of the firm. Further the study also found that there was a negative relationship between liquidity and profitability and a positive relationship between size of the firm and its profitability and negative relationship between debt used by the firm and its profitability. Afza and Nazir (2007a):- Found the negative relationship between working capital policies and profitability. In line with the study Afza and Nazir (2007b) further investigated the relationship between the aggressive/conservative working capital policies profitability as well as risk of public limited companies. They found a negative relationship between the profitability measures of firms and degree of aggressiveness of working capital investment and financing policies. The firms yield negative returns if they follow an aggressive working capital policy. Deloof (2003):- Investigated the relationship between working capital management and corporate profitability for a sample of 1,009 large Belgian non-financial firms for the 1992-1996 periods. The result from analysis showed that there was a negative between profitability that was measured by gross operating income and cash conversion cycle as well number of days accounts receivable and inventories. He suggested that managers can increase corporate profitability by reducing the number of days accounts receivable and inventories. Less profitable firms waited longer to pay their bills. Singh and Pandey (2008):- Had an attempt to study the working capital components and the impact of working capital management on profitability of Hindalco Industries Limited for period from1990 to 2007. Results of the study showed that current ratio, liquid ratio, receivables turnover ratio and working capital to total assets ratio had statistically significant impact on the profitability of Hindalco Industries Limited. Lazaridis and Tryfonidis (2006):- Have investigated relationship between working capital management and corporate profitability of listed company in the Athens Stock Exchange. A sample of 131 listed companies for period of 2001-2004 was used to examine this relationship. The result from regression analysis indicated that there was a statistical significance between profitability, measured through gross operating profit, and the cash conversion cycle. From those 22

results, they claimed that the managers could create value for shareholders by handling correctly the cash conversion cycle and keeping each different component to an optimum level. Raheman and Nasr (2007):- Have selected a sample of 94 Pakistani firms listed on Karachi Stock Exchange for a period of 6 years from 1999-2004 to study the effect of different variables of working capital management on the net operating profitability. From result of study, they showed that there was a negative relationship between variables of working capital management including the average collection period, inventory turnover in days, average collection period, cash conversion cycle and profitability. Besides, they also indicated that size of the firm, measured by natural logarithm of sales, and profitability had a positive relationship. Filbeck and Krueger (2005):- Highlighted the importance of efficient working capital management by analyzing the working capital management policies of 32 non-financial industries in the US. According to their findings, significant differences exist among industries in working capital practices overtime. Moreover, these working capital practices, themselves, change significantly within industries overtime. Similar studies were conducted by Gombola and Ketz (1983), Soenen (1993) and Maxwell et al. (1998). Weinraub and Visscher (1998):- Discussed the issue of aggressive and conservative working capital management policies by using quarterly data for the period 1984-93 of the US firms. Their study considered 10 diverse industry groups to examine the relative relationship between their aggressive/conservative working capital policies. Their study concluded that the industries had distinctive and significantly different working capital management policies. Moreover, the relative nature of the working capital management policies exhibited remarkable stability over the 10-year study period. The study also showed a high and significant negative correlation between industry asset and liability policies and found that when relatively aggressive working capital asset policies are followed, they are balanced by relatively conservative working capital financial policies.

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RATIONALE OF STUDY

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RATIONALE OF STUDY
The purpose of this study is hopefully to contribute towards a crucial element in financial management which working capital management. Working capital management and its effects on profitability is focused in this study. Specific objectives are to examine a relationship between working capital management and profitability, to establish a relationship between the two objectives of liquidity and profitability of the firms and to investigate the relationship between debt used by the a firm and its profitability Thus investigating this issue could provide additional insights and perhaps different evidence on the working capital management in emerging capital market. Additionally, the results of this study would provide firm managers better insights on how to create efficient working capital management that have ability to maximize firms value. As a result, it will build up confidence in investor to invest in that firm.

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OBJECTIVE OF STUDY

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OBJECTIVE OF STUDY
To study the impact of Working Capital Management on profitability in manufacturing sector.

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METHODOLOGY

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METHODOLOGY
Research methodology is a way to systematically solve the research problems it may be understood as a science of studying how research is done scientifically. In it, the various steps which are generally adopted by a research in studying this research problem along with the logic behind them are studied. The need is therefore for those concerned with research to pay due attention designing adhering to the appropriate methodology throughout for improving the quality of research. The methodology may differ from problem to problem yet the basic approach towards research remains the same. THE STUDY This is an Exploratory Research is done to gain familiarity with a phenomenon or to achieve insight into it. The research is to explore the effect of working capital management on profit and the trend of manufacturing companies working capital management practices. The results will show that there might be a positive or negative linear relationship between working capital and profitability. THE SAMPLE UNITS In the research impact of union budget is bounded to Cement Manufacturing Sector only in last 5 years. Companies undertaken in analysis are:29

1. ACC Limited 2. Ambuja Cements 3. Ultratech Cements 4. JK Lakshmi 5. JP Cements Sources and Method of Data Collection: Collection of data is a very important activity and utmost care must be taken while collecting the data because it constitutes the foundation on which the decisions are taken. Hence if the data is inaccurate and inadequate the whole analysis and the decisions taken based on the inaccurate data may be wrong. Therefore to avoid this, data must be collected accurately. While deciding about the method of data collection to be used for the study, the researcher should keep in mind the following two types of data. a) Secondary data: Secondary data means data that is already available, i.e., already been collected and analyzed by someone else. When the researcher utilizes secondary data, then he has to look into various sources from where he can obtain them. In this case he is certainly not confronted with the problems that bare usually associated with the collection of original data. Secondary data may either be published data or unpublished data. Researcher must be very careful in using secondary data. He must make a minute scrutiny because it is just possible that the secondary data may be unsuitable in the context of the problem which the researcher wants to study. The researcher before using the secondary data must check the reliability of the data and also the suitability of the data. The data that is suitable for one enquiry may not be suitable in other. Therefore the already available data should be used by the researcher only when he finds them reliable, suitable and adequate. The different methods for secondary data collection are bibliography database, abstract database, full text database, online database, unpublished database.

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Advantages: Secondary data can be very effectively used for the comparison of two statistics and then drawing inferences based on these comparisons. Secondary data is the best method of getting information regarding a particular area where the direct collection of data is impossible. Secondary data is the most easily accessible data and saves the researcher the trouble of going through the tiresome process of collecting data personally. Secondary data is readily available at cheap rates and is usually quite inexpensive. Collecting secondary data and analyzing it saves time and effort.

TOOLS FOR DATA COLLECTION This project is related to the impact of working capital management on profitability in manufacturing sector. Correlation analysis and Ratio analysis is used to analyse the study. The elements in these statements are properly studied to make proper interpretations.

Secondary data
The study undertaken is based on secondary data. The data used in the study has been collected from various sources like Websites of companies. Books. Journals.

TOOLS AND TECHNIQUES FOR DATA ANALYSIS Balance Sheet, Trading and Profit & Loss A/c of manufacturing sector. Ratio and Correlation Analysis. 31

METHOD: Correlation Analysis The method used to find out correlation coefficient in this study is Karl Pearsons Deviation of Actual Mean Method. Here, correlation is calculated between working capital and net profit. Steps of Calculation Calculate the mean of the two given series, i.e., X and Y. Take deviations of the two series from their respective mean, it is denoted as dx for x series and dy for y series. Get the product of the deviations and obtain the sum of the respective squares of deviations, i.e., dx2dy2. Get the product of deviations, and sum-up them i.e., dxdy Substitute the respective in the formula of correlation coefficient.

Ratio Analysis Ratios are calculated by using fixed formulae of Current Ratio, Net Profit Ratio, Gross Profit Ratio and Operating Profit Ratio. Finally, interpreting the results of correlation and ratio analysis.

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CORRELATION ANALYSIS AND RATIO ANALYSIS

1. ACC LIMITED: Crores Profit dx=(x (dx 2 (Y) -x') ) 99 138 18 -6 -858 -609 5 -121.8 815 -0.822 967.4 1147 200 378 1439 1213 1607 4837 220.8 259.8 139.8 115.8 -736.2 48752. 6 67496 19544 13409. 6 51499 0 66419 2.2

Year 2003 2004 2007 2008 2009 Sum Number of Years Averages( X')(Y') Standard Deviation Correlation Coefficient

Working Capital(X)

dy=(y -y') -767.4 -589.4 471.6 245.6 639.6

(dy)
2

dxdy 169441. 92 222793. 2 65929.7

588902. 7 34792.4 222406. 6 60319.4

28440.5 470873. 409088 5 131550 768738. 9.1 42

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Table 1.1 AVERAGE:

A = average (or arithmetic mean) N = the number of terms (e.g., the number of items or numbers being averaged) S = the sum of the numbers in the set of interest (e.g., the sum of the numbers being averaged) STANDARD DEVIATION: S.D = (X- X)2n-1 CORRELATION (r) : dxdyxy RATIOS GPR (%) 7.7 11.4 27.6 23.9 28.6

NPR Yea CR (%) r 1.1 2003 1 6.09 1.1 2004 3 9.7 0.9 2007 9 20.6 2008 1 16.7 0.7 2009 2 20.02

OPR (%) 15 18 29 26 33

Table 1.2 Current Ratio = Current Assets/ Current Liabilities Net Profit Ratio (NPR) = Net Profit/ Net Sales* 100 Gross Profit Ratio (GPR) = Gross Profit/ Net Sales* 100 Operating Profit Ratio (OPR) = Operating Profit/ Net Sales* 100 Interpretation: From Table 1.1

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As Correlation Coefficient lies between (-.75 to -1) so there exist high degree of negative correlation.

From Table 1.2 As the current ratio of the company is near to ideal current ratio (i.e. 2:1) in 2003 and 2004 this means all the assets do not have same liquidity, hence in a worst situation some of the current asset can be converted into cash to meet its obligations. But ratio is gradually decreasing from 2007- 2009 which shows that the liquidity position of the company is not good. As NPR is increasing every year it shows firms sound profitability and also good capacity to face adverse condition such as competition and low demand. Continuous increasing GPR indicates better producing capacity and profitability of company.

1. AMBUJA CEMENTS: Crores Working Profit dx=(x (d dy=(y (dy dx Year Capital(X) (Y) -x') x)2 -y') )2 dy 5198 47886 1577 2003 144 362 -228 4 -692 4 76 3240 28729 9648 2004 192 518 -180 0 -536 6 0 51122 3289 2007 418 1769 46 2116 715 5 0 2440 12110 1719 2008 866 1402 494 36 348 4 12 1795 2197 2009 238 1218 -134 6 164 26896 6 3484 14253 4370 Sum 1858 5269 92 85 82 Number 5 35

of Years Averages( X')(Y') Standard Deviation Correlation Coefficient

372 590 0.62

1054 1194

Table 2.1 AVERAGE:

A = average (or arithmetic mean) N = the number of terms (e.g., the number of items or numbers being averaged) S = the sum of the numbers in the set of interest (e.g., the sum of the numbers being averaged) STANDARD DEVIATION: S.D = (X- X)2n-1 CORRELATION (r) : dxdyxy

Ye CR ar 2003 3.4 2004 1.5 2007 1.4 2008 1.6 1.1 2009 4

NPR (%)

RATIOS GPR (%) 15 18 31 22.5 17.2

26 27 53 36 30

OPR (%) 29.4 30 39.25 31.34 30

Table 2.2

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Current Ratio = Current Assets/ Current Liabilities Net Profit Ratio (NPR) = Net Profit/ Net Sales* 100 Gross Profit Ratio (GPR) = Gross Profit/ Net Sales* 100 Operating Profit Ratio (OPR) = Operating Profit/ Net Sales* 100 Interpretation: From Table 2.1 As Correlation Coefficient lies between (0.25 to 0.75) so there exist moderate degree of positive correlation. From Table 2.2 As the current ratio of the company is more than ideal current ratio (i.e. 2:1) in 2003 it indicates ideal assets which are not properly utilized. But ratio is gradually decreasing from 2004-2009 which are near to ideal ratio (2:1) which shows that all assets do not have same liquidity, hence in a worst situation some of the current asset can be converted into cash to meet its obligations. As NPR is increasing every year it shows firms sound profitability and also good capacity to face adverse condition such as competition and low demand. Continuous increasing GPR indicates better producing capacity and profitability of company.

Year

1. ULTRATECH CEMENTS: Crores Working Profit dx=(x (d dy=(y (d dx Capital(X) (Y) -x') x)2 -y') y)2 dy 1988 34222 2003 355 39 141 1 -585 5 82485 3385 38564 11426 2004 398 3 184 6 -621 1 4 3572 14745 2007 25 1008 -189 1 384 6 72576 37

2008 2009 Sum Number of Years Averages( X')(Y') Standard Deviation Correlation Coefficient Table 3.1 AVERAGE:

119 173 1070 Ye ar

977 1093 3120

NPR CR (%) 5 1.9 2003 2 1.7 214 624 2004 1.9 0.12 1.2 316.5 1104. 2007 7 5 16 1.0 -0.92 2008 2 18.3 2009 1.1 15.3

12460 -95 9025 353 9 33535 21996 -41 1681 469 1 19229 1001 RATIOS 64 12198 3220 GPR OPR 92 89 (%) (%) 11.7 9.9 28.3 32 26.4 16.8 10.11 30 33.2 28.4

A = average (or arithmetic mean) N = the number of terms (e.g., the number of items or numbers being averaged) S = the sum of the numbers in the set of interest (e.g., the sum of the numbers being averaged) STANDARD DEVIATION: S.D = (X- X)2n-1 CORRELATION (r) : dxdyxy

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Table 3.2 Current Ratio = Current Assets/ Current Liabilities Net Profit Ratio (NPR) = Net Profit/ Net Sales* 100 Gross Profit Ratio (GPR) = Gross Profit/ Net Sales* 100 Operating Profit Ratio (OPR) = Operating Profit/ Net Sales* 100 Interpretation: From Table 3.1 As Correlation Coefficient lies between (-.75 to -1) so there exist high degree of negative correlation. From Table 3.2 As the current ratio of the company is near to ideal current ratio (i.e. 2:1) in 2003 and 2004 this means all the assets do not have same liquidity, hence in a worst situation some of the current asset can be converted into cash to meet its obligations. As NPR is increasing every year it shows firms sound profitability and also good capacity to face adverse condition such as competition and low demand. Continuous increasing GPR indicates better producing capacity and profitability of company.

Year 2003

Working Capital(X)

1. JK LAKSHMI CEMENTS: Crores Profit( dx=(x(d dy=(y(d dx 2 2 Y) x') x) y') y) dy 3686 2560 3136 45 -32 -192 4 -160 0 0 39

2004 2007 2008 2009 Sum Number of Years Averages( X')(Y') Standard Deviation Correlation Coefficient

50 413 370 309 1187 5 237 354.5 0.94

26 224 179 241 638

-187 176 133 72

3496 9 3097 6 1768 9 5184 1256 82

-102 96 51 113

1040 4 9216 2601 1276 9 6059 0

1907 4 1689 6 6783 8136 8224 9

128 246.2

Table 4.1 AVERAGE:

A = average (or arithmetic mean) N = the number of terms (e.g., the number of items or numbers being averaged) S = the sum of the numbers in the set of interest (e.g., the sum of the numbers being averaged) STANDARD DEVIATION: S.D = (X- X)2n-1 CORRELATION (r) : dxdyxy

Yea r CR

NPR

RATIOS GPR

OPR 40

(%) 2003 2004 2007 2008 2009 1.7 1.9 3.3 3 2.4 1.9 -5.7 5.3 20 14.6 16.2 Table 4.2

(%) 4.3 15 30 24.2 28

(%) 11 16 32.3 26 29

Current Ratio = Current Assets/ Current Liabilities Net Profit Ratio (NPR) = Net Profit/ Net Sales* 100 Gross Profit Ratio (GPR) = Gross Profit/ Net Sales* 100 Operating Profit Ratio (OPR) = Operating Profit/ Net Sales* 100 Interpretation: From Table 4.1 As Correlation Coefficient lies between (0.75 to 1) so there exists high degree of positive correlation. From Table 4.2 As the current ratio of the company is near to ideal current ratio (i.e. 2:1) in 2003, 2004 and 2009 this means all the assets do not have same liquidity, hence in a worst situation some of the current asset can be converted into cash to meet its obligations. As the current ratio of the company is more than ideal current ratio (i.e. 2:1) in 2007 and 2008 it indicates ideal assets which are not properly utilized. As NPR is negative which indicates weak profitability in 2003 but from 2004 it is increasing every year it shows firms sound profitability and also good capacity to face adverse condition such as competition and low demand. Continuous increasing GPR indicates better producing capacity and profitability of company but in 2009 it reduces a bit which indicates down fall in producing capacity of company.

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Year 2003 2004 2007 2008 2009 Sum Number of Years Averages( X')(Y') Standard Deviation Correlation Coefficient

1. JP CEMENTS: Crores Working Profit dx=(x (d dy=(y (d dx Capital(X) (Y) -x') x)2 -y') y)2 dy 0.5 0.17 -2.6 6.8 -0.63 0.4 1.64 1.06 1.3 0.21 -1.8 3.24 -0.59 0.35 2 2.31 0.61 -0.79 0.624 -0.19 0.04 0.15 0.10 4.125 0.9 1.03 1.061 0.1 0.01 3 7.25 1.9 4.15 17.22 1.1 1.21 4.57 28.9 7.52 15.485 3.79 45 2.01 5 5 3.1 5.4 0.98 Table 5.1 0.8 1.42

AVERAGE:

A = average (or arithmetic mean) N = the number of terms (e.g., the number of items or numbers being averaged) S = the sum of the numbers in the set of interest (e.g., the sum of the numbers being averaged) STANDARD DEVIATION: S.D = (X- X)2n-1 CORRELATION (r) : dxdyxy

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Yea r 2003 2004 2007 2008 2009

RATIOS NPR GPR OPR CR (%) (%) (%) 1.4 6.6 15.4 10.4 2.0 4 7.02 15.6 11.11 1.6 14.3 24.5 20 1.8 14.6 25.4 33.6 2.2 4 14.6 24.3 33.4 Table 5.2

Current Ratio = Current Assets/ Current Liabilities Net Profit Ratio (NPR) = Net Profit/ Net Sales* 100 Gross Profit Ratio (GPR) = Gross Profit/ Net Sales* 100 Operating Profit Ratio (OPR) = Operating Profit/ Net Sales* 100 Interpretation: From Table 5.1 As Correlation Coefficient lies between (0.75 to 1) so there exists high degree of positive correlation. From Table 5.2 As the current ratio of the company is near to ideal current ratio (i.e. 2:1) in 2003, 2007 and 2008 this means all the assets do not have same liquidity, hence in a worst situation some of the current asset can be converted into cash to meet its obligations. As the current ratio of the company is more than ideal current ratio (i.e. 2:1) in 2004 and 2009 it indicates ideal assets which are not properly utilized. As NPR increasing every year at a stable rate it shows firms sound profitability, stability and also good capacity to face adverse condition such as competition and low demand. Continuous increasing GPR indicates better producing capacity and profitability of company but in 2009 it reduces a bit which indicates down fall in producing capacity of company.

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FINDINGS

44

FINDINGS
From the above study, it has been found that I. Correlation Coefficient value for companies ACC limited is -0.822 < 1(High degree of Negative Correlation) Ambuja Cements is 0.62 < 1(Moderate degree of Positive Correlation) Ultratech Cements is -0.92 < 1(High Degree of Negative Correlation) JK Lakshmi Cements is 0.94 < 1(High Degree of Positive Correlation) JP Cements is 0.98 < 1(High Degree of Positive Correlation)

I. So, correlation said to be negative, if an increase (decrease) in value of one variable is accompanied by a decrease (increase) in value of other. II. And also the correlation is said to be positive correlation when increase (decrease) in value of two variables go simultaneously. III. It is also found that high the GPR, NPR percent more the companys profitability.

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RECOMMENDATIONS

46

RECOMMENDATIONS
As the current ratio of a company measures its ability to meet short-term obligations. So, there should be proper balance between both current assets and current liabilities at an ideal ratio of 2:1. Companies should continue to maintain high percent of NPR, GPR. Companies should regularly identify correlation between working capital and profit, as it shows dependency of one variable on other.

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CONCLUSION

48

CONCLUSION
By observation, it is pointed out that there require a huge need for management of working capital to get maximum advantage. Profitability and liquidity are the two aims of working capital management. Companies should maintain the level of current assets twice the level of current liabilities to avoid adverse impacts on profitability. If they maintain high level of investment in current assets. It will be difficult to make payment to creditors and the investment will remain idle. There will not be proper use of investment and so the profitability will suffer. Thus, all precaution should be taken for effective and efficient management of working capital. The financial manager should pay particular attention to the level of current assets and its financing.

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REFERENCE

50

REFERENCE
BOOK REFERENCES

- Khan & Jain, Financial Management (4th Edition), Tata McGraw Hill Publishing
Co., New Delhi. Prasanna Chandra, Financial Management (6th Edition), Tata Mc Graw Hill Publishing Co., New Delhi. WEB REFERENCES

- (Title: Effect of working capital management on profitability, Author: M.A., Zariyawati, Department of Accounting and Finance)list.academicjournal.org/submissions/isfa2009_submission_13.doc

(Title: Trends in Working Capital Management and its Impact on Firms Performance, Author: K. Padachi) http://www.bizresearchpapers.com/Kesseven.pdf http://www.ibef.org/economy/manufacturing.aspx www.acclimited.com www.jklakshmi.com 51

www.ambujacements.com www.ultratech.com www.jalindia.com JOURNAL (Title: Conceptual analysis of working capital and its impact on profitability Author: Sanjay Kumar Sadana) http://www.indianmba.com/Faculty_Column/FC1228/fc1228.html

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