2974-analysis of working capital

7/28/2019 2974-analysis of working capital

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A STUDY ON WORKING CAPITAL

WITH REFERENCE TO

LARSEN &TOUBRO- CHENNAI

BY

V.AARTHI

(Reg No: 35104001)PROJECT REPORT SUBMITTED

In Partial fulfilment of the requirements

For the award of the degree

OF

MASTER OF BUSINESS ADMINISTRATION

SRM SCHOOL OF MANAGEMENT

SRM ENGINEERING COLLEGE

SRM INSTITUTE OF SCIENCE AND TECHNOLOGY

(DEEMED UNIVERSITY)

KATTANKULATHUR.

MAY 2006


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DECLARATION

I, V.Aarthi, student of S.R.M School of Management, S.R.M Institute of Science& Technology, Kattankulathur, and here by declare that this project report titled A

STUDY ON WORKING CAPITAL MANAGEMENT IN LARSEN &TOUBRO is

an original work done by me and submitted to the S.R.M Deemed University, for the

award of Master Degree in Business Administration. I further declare that any part this

project itself has not been submitted elsewhere for award of any degree.

PLACE: KATTANKULATHUR

DATE:

V.AARTHI

(35104001)


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BONAFIDE

CERTIFICATE

Certified that this project report titled A STUDY ON WORKING CAPITAL

MANAGEMENT IN LARSEN & TOUBRO is an original work done by Miss.

V.AARTHI (Reg.No 35104001) of Fourth Semester, SRM School of Management, SRM

Institute of Science and Technology, (Deemed University) Kattankulathur during the

academic year 2006, who carried out the research under my supervision. Certified

further, that to the best of my knowledge the work reported herein does not form part of

any other project report or dissertation on the basis of which a degree or award was

conferred on an earlier occasion on this or any other certificate.

Faculty Guide HOD/Dean

Internal Examiner External Examiner

PLACE: KATTANKULATHUR

DATE:


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ABSTRACT

L & T

Larsen & Toubro Limited - an engineering and construction major - is among the

largest and most reputed companies in India's private sector.

ECC

ECC - The Construction division of Larsen & Toubro Limited - is India's largest

construction organization. Many of the country's prized landmarks - its exquisite

buildings, tallest structures, largest industrial projects, longest flyover, and highest

viaducts - have been built by ECC. Leading-edge capabilities cover every discipline of

construction: civil, mechanical, electrical and instrumentation.

As a division of L&T, ECC has the resources to execute projects of large magnitude and

technological complexity in any part of the world.

The business of ECC Division is organized in four business sectors which


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will primarily be responsible for Technology Development, Business Development,

International Tendering and work as Investment Centres.

Business Sector

Buildings and Factories Sector

Transportation Infrastructure Sector

Industrial Projects & Utilities Sector

Hydrocarbon & Power Sector

Electrical & Instrumentation Sector

Hydel & Nuclear Sector

To give support and enhance business both in domestic and focused international

markets, the Global Operations will be operating through four Zones for seamless flow of

resources across the Division.

The four Zones are:

West Zone consisting of Mumbai Region, Middle East and Africa

North Zone consisting of Ahmedabad Region, Delhi, Afghanistan, Central Asia,

Uzbekistan, Kazakhstan and Russian Federation

East Zone consisting of Kolkata Region, Nepal, Bhutan, Bangladesh, Myanmar,

Laos, Cambodia and Philippines

South Zone consisting of Chennai Region, Hyderabad Region, Bangalore

Region, Sri Lanka, Male, Malaysia and Indonesia


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Locations - ECC Division

ECC Division's head quarters in Chennai, India. In India, the Division has 4 Zonal

Offices, 7 Regional Offices and over 250 project sites. In Overseas the division has

offices in 11 countries.

Awards for outstanding construction projects

ICI-Mc Bauchemie award for Most Outstanding Concrete Structure for ECC's

center (EDRC building) from Indian Concrete Institute

Most Outstanding Bridge National award for a Chennai Flyover from Indian

Institution of Bridge Engineers

ACCE-Billimoria award for excellence in construction of High rise buildings for

Corporate HQ building of ICICI from Association of Consulting Engineers

Export Award for the year 1995-1996 in recognition of second best performance

in the category of maximum turnover in overseas construction projects from

Overseas Construction Council of India.

"Federation Internationale de la Precontrainte (FIP), UK Award for outstanding

structure-1994" for the Administrative Office Building of ECC at Chennai and

special mention of the multi-purpose auditorium at Hyderabad, both constructed

by ECC. This was presented during the 12th Quadrennial congress of FIP at

Washington DC USA on June 2, 1994


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ICI-MC Bauchemie Award for the "Most Outstanding Concrete Structure" for the

year 1995-96 for the Sree Kanteerava Indoor Stadium, Bangalore from the Indian

Concrete Institute.

The Panvel Nadi viaduct near Ratnagiri in Maharashtra and the Jawaharlal Nehru

Stadium at Chennai constructed by ECC has been adjudged the "Most

Outstanding Concrete Structures in India for 1994".

The open sea ethylene jetty at Ratnagiri and Sri Sathya Sai Institute of Higher

Medical Sciences at Puttaparthi won "Certificates of Merit".

A study on this topic in L&T Ltd is necessary and it is very important in Working

Capital Ratios which helps in knowing liquidity, profitability and turnover position of the

company. Analysis of composition of current assets and current liabilities helps in

framing control measures of items under it.

A study is confirmed to the detailed study about the organization and identifies the

companys position in the industry and to suggest means or improvement in existing

system.

To study this various tools of analysis have been used on last five years,

1. The position of working capital has been analyzed through various working

capital ratios.


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2. Analysis of various items of current asset and current liabilities for the past

five years.

3. Funds Flow Statement analysis has been analyzed

4. Finally, with the help of analysis, Future trends were calculated & free

hand/graphic method was used to show the measured trend.

From this analysis if found that working capital ratios are better as a whole. Liquidity

position is satisfactory as there are sufficient creditors it pay its liability. Operating profit

shows the decreasing trends even through the sales have been increasing. Due to increase

in expenses and in consistent utilization of assets invested.


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ACKNOWLEDGEMENT

First of all, I thankAlmighty for his enlightening presence throughout my projectwork and helping me to complete my project successfully.

I express my gratitude to my beloved Dean Dr. Jayashree Suresh for her

invaluable support .I also wish my gratitude to her contribution towards successful

completion of the project.

I am extremely thankful to Prof.T.P.NAGESH Senior Professor and my Internal

Faculty, for being the source of encouragement through out the project. I extend my

profound gratitude and heartfelt thanks for his valuable guidance, timely help, wonderful

suggestions and constructive criticism offered to me for the project. I am indebted to him

for his contribution in helping me with the information for accomplishing my task. I also

express my sincere gratitude to him for his valuable guidance and advices in all stages of

the project work.

I extend my gratitude to Mr.T.S.Venkatesh Joint General Manager (Finance&

Accounts ) & my external guide Mr.S.Sridhar(Accounts Manager) and Mrs.

M.Lakshmi without them this project would have been just a dream .I sincerely thank

them for their valuable advises throughout the course of the project work.

I express my heartfelt thanks to my wonderful Parents for their moral support

and wholehearted encouragement. My sincere thanks to all those friends and well

wishers who had helped me during the course of the project work.


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CONTENTS

CHAPTER DESCRIPTION PAGE: NO

LIST OF TABLES

LIST OF FIGURES

1. INTRODUTION OF THE STUDY

1.1 INTRODUCTION 2

1.2 STATEMENT OF THE OBJECTIVE 4

1.3 SCOPE OF THE STUDY 51.4 LIMITATION OF THE STUDY 6

2. INDUSTRY PROFILE 8

3. COMPANY PROFILE

3.1 COMPANY PROFILE 16

3.2 VISION 173.3 CORPORATE 18

3.4 PRODUCTS/ SERVICES 20

3.5 HISTORY 21

3.6 RESOURCE PLANNING 30

4. RESEARCH METHODOLOGY

4.1 NATURE OF STUDY 324.2 PERIOD OF STUDY 32

4.3 METHODOLOGY 33

4.4 TOOLS APPLIED 34

5. DATA ANALYSIS AND INTERPRETATION 45


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6 FINDINGS 69

7. SUGGESTIONS 72

8. CONCLUSION 76

APPENDIX 78

EXCEL PROFIT& LOSS ACCOUNT

& BALANCE SHEET.

BIBLIOGRAPHY 80

BOOKS

LIST OF TABLES

Table No Particulars Page no

Table 5.1 Current Ratio 45

Table 5.2 Quick ratio 47

Table 5.3 Absolute Liquid Ratio 49

Table 5.4 Interest Coverage Ratio 51

Table 5.5 Asset Turnover Ratio 53

Table 5.6 Inventory Turnover Ratio 55

Table 5.7 Working Capital Turnover Ratio 57


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Table 5.8 Changes in Working Capital for the year 2001-02 59

Table 5.9 Funds Flow Statement for the year 2001-02 60








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LIST OF FIGURES

Chart No Particulars Page No

Fig 5.1 Current ratio 46

Fig 5.2 Quick Ratio 48

Fig 5.3 Absolute Liquid Ratio 50

Fig 5.4 Interest Coverage Ratio 52

Fig 5.5 Asset Turnover Ratio 54

Fig 5.6 Inventory Turnover Ratio 56

Fig 5.7 Working Capital Turnover Ratio 58

Fig 5.16b Trend Analysis 67


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Chapter I

Introduction of the Study

CHAPTER - I

1.1 Introduction

General

ECC

ECC - The Construction division of Larsen & Toubro Limited - is India's largest


buildings, tallest structures, largest industrial projects, longest flyover, and highest

viaducts - have been built by ECC. Leading-edge capabilities cover every discipline of

construction: civil, mechanical, electrical and instrumentation.

As a division of L&T, ECC has the resources to execute projects of large magnitude and

technological complexity in any part of the world.

The business of ECC Division is organized in four business sectors which will primarily

be responsible for Technology Development, Business Development, International

Tendering and work as Investment Centers.


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Working Capital management research is made at L&T Ltd for International Services at

ECC division for detailed analysis of the short term funds. This is done to check whether

the company is below standard or above standard. This study also helps to find their

operating efficiency and credit management of the company.

This research Working Capital management helps to understand the utilization of

the stock, work in progress (wip), finished goods. It also gives check on receivables and

inventory management. If company utilizes the working capital efficiently and effectively

it would become marked leader in the world.

1.2 STATEMENT OF OBJECTIVE

Objective of the study is to analyze Working Capital and Ratio analysis of the

Company for the year 2001 to 2005. This is being attempted to through the detail study

following tools of analysis.

Comparison of various Working Capital ratios for the past five years 2001 to

2005.

Analysis of Current Asset and Current Liabilities

To estimate Working Capital requirements


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1.3 SCOPE OF THE STUDY

The scope of the study is confined to the detailed study, about the organization and

identifies the companys position in the industry and to suggest means of improvements

in the existing system.

1.4 LIMITATIONS OF THE STUDY

This analysis is based on secondary data like published annual reports and

companys income statement and Balance Sheet. This scope of the study is

limited to that extent.

Chapter II

Industry Profile

CHAPTER II

INDUSTRY PROFILE

The Rupees 2, 40,000 crore construction industry could well see a faster growth driven

by the buoyancy in the economy and increased investments in major infrastructure

projects, including roads, ports and other sectors.


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Indian construction industry was worth about $70 billion (Rs. 2, 40,000 crore) and by

the year 2005-2006, this could grow considerably driven by major projects across the

country. It was estimated that about three crores of people were engaged in the

construction market caught up.

The demand for domestic housing was yet to be tapped and as per projections, there

was a shortage of about 40 million homes. According to experts We need to look at

these areas and bring in new technologies that would help to speed up projects due to new

technologies and equipment.

The country was the second largest producer of cement having an estimated 140

million tones (mt) of cement manufacturing capability and this, would go up significantly

over the next few years. This expectation stem from the fact that India and China are

amongst the two major nations where the construction activity is poised for much rapid

growth when compared to the developed world. The need for cement production capacity

would be about 300 mt by 2006 and possibly 800 mt by the year 20010. Out of the Rs.2,

40,000 crore construction industry, the infrastructure component

Accounts for about 50 percent. With major projects such as the Golden Quadrilateral, and

other corridors, this could go up much more, according to experts.

A company in the construction industry 2003 has been an encouraging year. Their

stock prices rose sharply and out performed the broad market indices comfortably; a


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portfolio of five key stock from this sector saw a 100 per cent jump in value this year

against an increase of a 46.8 per cent in the S&P CNX.

INTERNATIONAL SERVICES

MANAGEMENTS DISCUSSION & ANALYSIS

L&T is globalizing its operations with increasing focus on international business

opportunities. Today, the activities of construction division extend beyond the

subcontinent.

TEAM International presents the analysis of performance of the International

Services (IS) for the year 2004-05 and the outlook for the future

IS manages the accounting, financial and administrative functions of the

following areas:

A. Project exports representing turnkey construction activities in the Middle East

region, Mauritius, Africa, South America and SAARC nations.

B. Physical exports representing supply of materials, equipments, etc

C. Overseas branch offices like Kazakhstan, Abu Dhabi, and Dubai & Dhaka

set-up for business promotion & liaisons for the on-going projects in that region.

PERFORMANCE HIGHLIGHTS

The steady commitment to the pursuit of growth and progress enabled the company

to deliver a realistic performance for yet another year.


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The following are the highlights of significant achievements, as also the forward-looking

measures taken by our team during the year:

Gross Assets of the IS rose to Rs.633.38 croress from Rs.450.55 crores in the

previous year

Turnover rose to Rs.694.50 crores from Rs.485.48 crores in the previous year.

Working Capital

Financing for the execution of projects abroad is governed by the guidelines of Project

Export Manual (PEM) of Reserve Bank of India which restricts the borrowings to the

maximum of 25% of Contract value. The approval for financing of each project is

obtained at the time of award of the contract from the concerned approving authorities as

applicable.

ONGOING PROJECTS AND EXPANSION AND DIVERSIFICATION

The International Services operates as two zones for operational convenience

namely North West and South East Zone. North West Zone operates from L&T -

Mumbai (Powai) and South East Zone operates through ECC Headquarters,

Chennai.

Major Jobs undertaken in the above mentioned countries:-

Qatar - Construction of two outdoor multi sports stadium.


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UAE -

Engineering, design, procurement, manufacture, construction,

testing and commissioning of double circuit 400 kV Overhead

Transmission line from Fujairah Water and Power plant to Dhaid

Main 132/33 kV substation (69 Kms) and two bay extensions at

132/33 kV GIS Dhaid Main substation.

Turnkey construction of 220 kV Overhead transmissline from Liwa

Grid Station to 220/33 kV Mobile substation to be located at Liwa.

Construction of middle trunk bridge at Palm Jumeirah, UA

Expansion of 220/33 kV Network in Musaffah Dhabiya Area (74

Kms) for interconnection with ADCO 220 kV Overhead lines.

4 nos 33/11 KV primary substation-Alain, UAE.

Turnkey construction of 220 kV double circuit transmission line

between Sahama sub-station and Samha sub-station Construction of

'Al Murooj Complex' - a multi-storied residential complex at Dubai.

Power supply to Sweihan pumping station via 33KVOHL

33KV submarine cable (2 Runs x 9.8Kmtrs) with integrated fibre optic

cable and 3 Route kmtrs of 33KV UG cable from Jebel Dhana to Sir

Baniyas Island located West of Abu Dhabi.

Kuwait -Construction of Administration, Training blocks and associated

facilities for Electricity & Water training Institute in New University Campus,

Shuwaikh, Kuwait.


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Nepal -Construction of headrace tunnel, penstock, surge tank, powerhouse and

transformer cavern, tail race tunnel for Chilime hydro electric project.

Mauritius - Ebene Cybercity Project - construction of 70 m high, 12 storied

Cyber Tower, utility buildings and site development works for Business Parks

of Mauritius Limited

Suriname - Construction of 161kV / 33kV / 11kV gas insulated substation and

stringing of 27km long 161kV transmission line towers with Optical Ground

Wire (OPGW) for N.V. Energies Bedrijven Suriname in the North East tip of

the South American continent.

Bangladesh - Engineering, Procurement and Construction of 1.2 mtpa cement

plant for Lafarge Surma Cement Limited

Saudi Arabia - Construction of three 100 bed hospital project Rafha, Domat

and Khafji

Chapter III

Company Profile

Chapter III

3.1 COMPANY PROFILE

Larsen & Toubro Limited (L&T) is a technology-driven engineering and

construction organization, and one of the largest companies in India's private sector. It

has additional interests in manufacturing, services and Information Technology.

A strong, customer-focused approach and the constant quest for top-class quality

have enabled the Company to attain and sustain leadership in its major lines of business

across seven decades.


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L&T has an international presence, with a global spread of offices. A thrust on

international business over the last few years has seen overseas earnings growing to 18

per cent of total revenue. With factories and offices located around the country, further

supplemented by a wide marketing and distribution network, L&T's image and equity

extends to virtually every district of India.

L&T believes that progress must necessarily be achieved in harmony with the

environment. A commitment to community welfare and environmental protection

constitute an integral part of the corporate vision.

3.2 Vision

L&T shall be a professionally-managed Indian multinational, committed to total

customer satisfaction and enhancing shareholder value

L&T-ites shall be an innovative, entrepreneurial and empowered team

constantly creating value and attaining global benchmarks.

L&T shall foster a culture of caring, trust and continuous learning while meeting

expectations of employees, stakeholders and society.

3.3 Corporate

Larsen & Toubro Limited is one of Asia's largest vertically integrated, technology-driven

Engineering & Construction conglomerate with additional interests in manufacturing,

services and Information Technology. Its reputation is based on a strong customer


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orientation, the technological sophistication that characterizes its products and projects

and an impressive record of achievements across seven decades.

The Engineering core comprises Engineering & Construction Projects, Construction,

Heavy Engineering, and Electrical & Electronics. In IT, L&T has a fully-owned

subsidiary - Larsen & Toubro InfoTech Limited.

The company undertook the following major initiatives to enhance its value proposition:

Business Restructuring - The cement business of the Company was demerged into

UltraTech CemCo Limited with effect from April 1, 2003.

Thrust on Exports - Export revenues account for 14% of the Company's total

revenues. Further initiatives were taken to enhance international focus.

Talent Retention & Acquisition

Value creation by alliances with technology partners, quality improvement,

portfolio review of businesses and thrust on engineering & design services

through e-Engineering Solutions

Strengthening the organizational structure

Management review and clearances for developing business in select markets.

Recruitment of people including foreign nationals with international experience in

specific domains.


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Proactive certifications from international customers, EPC contractors and

process licensors

Increased speed in introduction of new products with contemporary features.

3.4 PRODUCTS / SERVICES

L&T products/services catalogue

Aerospace Equipment

Bulk Material Handling

Cement & Allied Machinery Chemical Plants

Cogeneration and Captive Power

Construction Equipment

Construction Services

Control & Automation Systems

Cutting Tools

Defense

Fertilizer Projects

Fertilizer, Petrochemical & Heat Transfer Equipment

Hydrocarbon & Related Projects

Hydraulic Equipment

Industrial Valves & Allied Products

Information Technology

Iron & Steel Castings

Medical Equipment

Minerals & Metals

Nuclear Power Plant Equipment

Oil & Gas & Special Projects

Petrol Pumps

Plastics Processing Machinery

Power Rubber Processing Machinery


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3.5 HISTORY

The evolution of L&T into the country's largest engineering and construction

organizations is among the more remarkable success stories in Indian industry. The

company was founded in Bombay (Mumbai) in 1938 by two Danish engineers, Henning

Holck-Larsen and Soren Kristian Toubro - both of whom were strongly committed to

developing India's engineering talent and enabling it to meet the demands of industry.

Beginning with the import of machinery from Europe, L&T rapidly took on engineering

and construction assignments of increasing sophistication. Today, the company sets

engineering benchmarks in terms of scale and complexity.

Record of Achievements

L&T's signature of excellence is evident on:

India's first indigenous hydro cracker reactor

Oil and gas platform projects executed to global benchmarks

The world's largest continuous catalyst regeneration reactor

The simultaneous execution of clean fuel projects at eight refineries around India

The world's biggest fluid catalytic cracking regenerator

The world's longest product splitter

Asia's highest viaduct - built for the Konkan Railway

The world's longest LPG pipeline


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The world's longest cross country conveyor Building an international class

football stadium in 260 days

Engineering & Construction Projects

L&T's engineering & construction track record consists of successful implementation

of turnkey projects in major core and infrastructure sectors of Indian industry. L&T has

integrated its strengths in process technology, basic and detailed engineering, equipment

fabrication, procurement, project management, erection, construction and commissioning,

to offer single-point responsibility against stringent delivery schedules. Strategic alliances

with world leaders enable L&T to access technical know-how and execute process-

intensive large-scale turnkey projects to maintain its leadership position.

L&T's core competencies in engineering include highly qualified and experienced

personnel from various disciplines, state-of-the-art 2-D and 3-D CAD facilities with

sophisticated plant design systems and basic engineering capabilities. L&T is the only

Indian EPC company pre-qualified for executing large, process-intensive projects for oil

& gas, refinery, petrochemical and fertilizer sectors.

Heavy Engineering

L&T is acknowledged as one of the top five fabrication companies in the world, with

engineering and manufacturing capabilities that are among the most sought after in

industry. Operating at the high end of the technological spectrum, L&T has led Indian

industry in introducing new processes, products and materials in manufacturing. L&T

also has the logistics capabilities of fabricating and supplying over-dimensional


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equipment to tight delivery schedules. L&T's globally-benchmarked workshops are

located in Mumbai, Hazira, Baroda and Kansbahal.

Construction

ECC - the Engineering Construction & Contracts Division of L&T is India's largest


buildings, tallest structures, largest industrial projects, longest flyovers, highest viaducts,

longest pipelines have all been built by L&T. L&T's leading edge capabilities cover

every discipline of construction - civil, mechanical, electrical and instrumentation.

L&T has also expanded its focus to the Middle East, South East Asia, Russia, CIS,

Mauritius, African and SAARC countries. L&T is also developing markets for its

construction services in the Indian Ocean rim countries, Africa and Latin America.

Electrical & Electronics

L&T is a major international manufacturer of a wide range of electrical and electronic

products and systems. In the electrical segment, the Company is India's largest

manufacturer of low tension switchgear, and is rapidly establishing itself in international

markets.

Its products are widely sold in markets in Europe and Australia. Recently, L&T set

up a new manufacturing base for high-end air circuit breakers in China. L&T also

manufactures custom-engineered switchboards for industrial sectors like power,

refineries, petrochemical, cement, etc. In the electronic segment, L&T offers a wide

range of meters and provides complete control and automation systems for diverse


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industries. Medical equipment and systems manufactured by L&T include advanced

ultrasound scanners and patient monitoring systems.

Information Technology

Larsen & Toubro Infotech Limited, a 100 per cent subsidiary of L&T, offers

comprehensive, end to end software solutions and services with a focus on

Manufacturing, BFSI and Communications & Embedded Systems. It provides a cost

cutting partnership in the realm of offshore outsourcing, application integration and

package implementation.

Leveraging the heritage and domain expertise of the parent company, its services

encompass a broad technology spectrum, catering to leading international companies

across the globe. It leverages the L&T parentage to also provide services in the embedded

intelligence and e-Engineering

space.

Machinery & Industrial Products

L&T manufactures markets and provides service support for critical construction and

mining machinery - surface miners, hydraulic excavators, aggregate crushers, loader

backhoes and vibratory compactors.

Corporate Social Responsibility

Beyond the corporate objectives of achieving growth and profitability, L&T is

conscious of its larger social obligations. The Company's efforts have been widely

recognized.


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Safety, Health and Environment

At ECC, safety is given the highest priority. The Occupational Safety, Health

and Environment Policy enunciated by the Corporate Management lays emphasis on

Safety, Health and Environment through a structured approach and a well defined

organization. Systems and procedures have been established for implementing the

requisites of safety at all stages of construction and in respect of plants, machinery and

materials. The Head of the Safety Engineering Department operates from the

Headquarters. He is assisted by the Regional Safety coordinators who in turn monitor

implementation of Safety, Health & Environment measures through Safety coordinators

located at job sites.

Besides the enforcement of engineering measures and management controls, Personal

Protective Equipment (PPE), as per needs of the operations, are provided to the

employees free of cost. PPE conforming to relevant Indian Standards / International

Standards are procured to ensure the quality of the appliances. Inspection and safety

audits are conducted periodically. Awareness among employees is sustained through

regular training programmes

Quality Assurance

The E&C Division of L&T has integrated the requirements of timely delivery

within-cost completion and supply of plant and equipment to the highest standards of

quality in line with contractual requirements by implementing Quality Assurance (QA).

The QA system is based on ISO 9000 international standards. The Strategic Business


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Units (SBUs) and Service Units (SUs) of E&C Division have been certified to ISO 9001

standards. The division has also secured ISO 14001 certification.

A major part of the activities of E&C Division is carried out at project sites where

plant and equipment is fabricated, constructed, erected and finally commissioned under

meticulous quality control standards. These are carried out in line with OHSAS 18001,

the global occupational health and safety management benchmark.

The QA system has been modeled on the CII-EFQM Model for Business

Excellence - a model jointly developed by the Confederation of Indian Industries and the

European Foundation for Quality Management. L&T's corporate policy is a reflection of

an Integrated Management System for Quality, Environment, Occupational Health &

Safety, IT Security and Personnel & Human Resources, whilst implementing globally

recognized standards such as ISO 9001, ISO 14001, OHSAS 18001 and BS 7799.

3.6 Resource Planning

Centralized Resources dept at HQ takes care of allocation, distribution and movement

of Staff and Plant & Machinery to meet the requirements for deployment in various

regions and overseas across the company. Resources dept in the Regional Offices takes

care of this function within the regions and also acts as a resource centre with data on

subcontractors available for various types of works. Resources department as a focal

point helps the Operational Units to optimize the productivity by maintaining a balance


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between the availability and the requirement of resources (Staff and Plant & Machinery).

It also facilitates the process of decision and deployment of equipment from external

agencies as needed. This department plays the vital role in effective distribution and

deployment of resources in co-ordination with all Sectors, BUs, Zones, and Regions etc.

Chapter IV

Research Methodology

Chapter IV

RESEARCH METHODOLOGY

4.1 Nature of the study

A study in this topic in L&T is necessary and it is very important in Working Capital

ratios of the company which helps in knowing liquidity, solvency, profitability and

turnover position of the company.

It also helps in studying the composition of various items of Current Asset and

Current Liability. This helps in framing control measures of items of Current Asset and

Current Liability.

4.2 Period of Study

The period of study was limited to three months during February to May of 2006.

During this period all the required data was collected through secondary sources and

analyzed with the help of financial tools of analysis.


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4.3 Methodology

The objective of the study is to analyze the Working Capital position of the

company for the past five years 2001 to 2005.

The major sources of data were secondary data (i.e.) published annual reports and

financial reports etc. Discussion with the officials of the company.

Firstly, the position of the Working Capital has been analyzed through various

Working Capital ratios with the help of data available in the financial statement of

the past five years.

Secondly, an analysis of the various items of Current Asset and Current

Liabilities for past five years has been done.

Thirdly, the funds flow statement is prepared for the past five years of the

company,

Finally, the future trend analysis of the companies working capital is done.

4.4 Tools applied in the study

The various tools applied in the study to analyze the Working Capital position of the

company are as follows:

Ratio Analysis

Funds Flow Statement

Trend Analysis


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LITERATURE REVIEW

ANALYSIS OF WORKING CAPITAL RATIOS

Working Capital in simple terms is the amount funds, which a company must have to

carry out its day-to-day operations. It can also be regarded as that proportion of a

companys total capital, which is employed in short-term operations. Working Capital

can take the form of cash and near-cash assets or even a little further from cash but yet in

the process. Such items are stocks of raw materials and supplies needed for manufacture,

stocks of finished goods awaiting sale, semi-processed items or components that will

soon emerge as final-products, sundry debtors representing pending collections against

credit sales and short-term investments if any. Working Capital is required because of the

time gap between the sales and their actual realizing in cash. This time gap is technically

termed as operating cycle of the business.

Importance of Working Capital Management

Business activity is dynamic in character and subject to wide fluctuations. The

movement from working capital to income and profits and back to working capital is one

of the most vital characteristics of business administration. This operation is concerned

with the expenditure of funds with the hope that they will return with an additional

amount called profit. If the operations of an enterprise are to run smoothly, a proper

relationship between fixed capital and current capital must be maintained. Sufficient


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liquidity must be achieved and maintained to provide the funds to pay off obligations as

they arise or mature. The adequacy of cash and other current assets together with their

efficient handling virtually determine the survival or diminish of the enterprise.

Working capital management policies have a great effect on firms profitability,

liquidity and its structural health. The maintenance of a sound working capital position is

a constant problem for the finance manager. It involves control of the everyday ebb and

flow of financial resources circulating in the enterprise in one of the other, which

represents a substantial portion of total investment.

Working Capital Ratios

Ratios are relationships expressed in mathematical terms between figures, which are

connected with each other in some manner. Obviously, no purpose will be served by

comparing two sets of figures, which are not at all connected with each other. Moreover,

absolute figures are also unfit for comparison.

Current Ratio

This ratio is an indicator of the firms commitment to meet its short-term liabilities.

Current ratio = Current Assets / Current Liabilities

Current Assets means that will wither be used up or converted into cash within a years

time or normal operating cycle of the business, whichever is longer.


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Current Liabilities mean liabilities payable within a year or during operating cycle of the

business, whichever is longer. Out of the existing current assets or by creation of other

current liabilities.

Quick Ratio

This ratio is also termed as a acid test ratio or liquidity ratio. This ratio is ascertained

by comparing the liquid assets to current liabilities. Prepaid expenses and stock are not

taken as liquidity assets.

Quick Ratio = Liquid Assets / Current Liabilities

Absolute Liquid Ratio

This ratio is calculated when liquidity is highly restricted in terms of cash and cash

equivalents. This ratio is calculated when liquidity is highly restricted in terms of cash &

cash equivalents. this ratio measures liquidity in terms of cash and near cash items &

short-term current liabilities.

Absolute Liquid Ratio = Cash & Bank balances + Marketable

Securities / Current Liabilities


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Interest Coverage Ratio

This ratio measures the margin of safety the firm enjoys with respect to its interest

burden. A high interest coverage ratio means that the firm can easily meet its interest

burden even if earnings before interest and taxes suffer a considerable decline. A low

interest coverage ratio may result in financial embarrassment when earning before

interest and taxes decline.

Interest Coverage Ratio = EBIT/ Interest

Assets Turnover Ratio

This ratio measures how efficiently assets are employed. It is a kind to the output

capital ratio used in economic analysis.

Assets Turnover Ratio = Net Sales / Total Assets

Inventory Turnover Ratio

This ratio is calculated to ascertain the efficiency of inventory management in terms

of capital investment. It shows the relationship between the cost of goods sold/cost of

sales and the amount of average inventory. This ratio helpful in evaluating and review of

inventory policy.

Inventory Turnover Ratio = Net Sales / Average Inventory


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Importance or uses or Benefits of Funds Flow Statement.

Funds flow statement is an important tool in the armory of the finance manager. It

helps in the planning, deployment and controlling of funds year after year. The following

benefits or uses of funds flow statement:

It provides a detailed analysis and understanding of changes in the distribution

of financial resources between two balance sheet data.

It shows how the funds were obtained and used during a period.

The sources from which funds were obtained are useful in computation of cost

of capital of the business.

A detailed analysis of sources of funds in the past acts as a guide for obtaining

funds for future requirements.

A study of the applications of the funds provides an understanding about the

utilization of resources in the past. It can form the basis for selection of

investment proposals or future capital expenditure decisions.

It gives indications of any weakness or strength in the general financial of a

firm.

It throws light on the financial consequences of business operations.

It can be compared with the relevant budgets to assess the usage of funds as

per plans.


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Re arrangement of capital structure, formulating long term financial plans, and

policies, etc; are facilitated by funds flow analysis.

Working capital and the causes for changes in working capital are highlighted.

This can help in the formulation of sound policy for liquidity and short term

solvency of the firm.

Chapter V

Data Analysis &

Interpretation

CHAPTER V

DATA ANALYSIS

Ratios Analysis5.1 Current Ratio

Current Assets means that will wither be used up or converted into cash within a

years time or normal operating cycle of the business, whichever is longer.

Current Liabilities mean liabilities payable within a year or during operating cycle

of the business, whichever is longer. Out of the existing current assets or by creation of

other current liabilities

Current Ratio = Current Assets / Current Liabilities

Table 5.1

Current Ratio for the Period 2001-2005


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Particulars 2001-2002 2002-2003 2003-2004 2004-2005

Current Asset 5544.37 6278.05 6799.72 8838.23

CurrentLiabilities

3059.67 3977.64 4615.42 5599.39

Ratio 1.81 1.58 1.47 1.58

*Source: Secondary data

Fig 5.1

Current ratio

1.81

1.581.47

1.58

0

0.5

1

1.5

2

Ratio

1 2 3 4

Years

Current Ratio

*Base: Table 5.1

Inference

The current ratio of L&T satisfies the conventional rule of current ratio that is 2:1

it test the quantity and not quality from 2001-02, 2002-03,2003 -04,2004-05. There is a

sudden hike in price of raw material. There is a slow of moving stock of goods.


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5.2 Quick Ratio

This ratio is also termed as a acid test ratio or liquidity ratio. This ratio is

ascertained by comparing the liquid assets to current liabilities. Prepaid expenses and

stock are not taken as liquidity assets.

Quick ratio = Liquid Asset / Current Liabilities

Table 5.2

Quick Ratio for the Period 2001-2005

Particulars 2001-2002 2002-2003 2003-2004 2004-2005

Liquid Asset 2943.99 4762.23 4987.42 6527.39

Current

Liabilities

3059.67 3977.64 4615.42 5599.39

Ratio 0.96 1.2 1.08 1.17

: *Source: Secondary data


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Fig 5.2

Quick Ratio

0.96

1.201.08

1.17

0

0.2

0.4

0.6

0.8

1

1.2

Ratio

1 2 3 4

Years

Quick Ratio

*Base: Table 5.2

Inference

The ideal ratio is 1:1. During the year 2002-03 the companys overall

performance and production is high by this the share price will get increased. Hence the

ratio for that year is high compared to the next consecutive years.

5.3 Absolute Liquid Ratio


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This ratio is calculated when liquidity is highly restricted in terms of cash and cash

equivalents. This ratio is calculated when liquidity is highly restricted in terms of cash &

cash equivalents. This ratio measures liquidity in terms of cash and near cash items &

short-term current liabilities.

Absolute Liquid Ratio = Cash & Bank balances + Marketable

Securities / Current Liabilities

Table 5.3

Absolute Liquid Ratio for the Period 2001-2005

Particulars 2001-2002 2002-2003 2003-2004 2004-2005

Cash & Bank

balances

237.14 320.53 375.27 828.02

Current

Liabilities

3059.67 3977.64 4615.42 5599.39

Ratio 0.08 0.08 0.08 0.15


Fig 5.3

Absolute Liquid Ratio


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0.08 0.08 0.08

0.15

0

0.02

0.04

0.06

0.08

0.10.12

0.14

0.16

Ratio

1 2 3 4

Year

Abso lute liquid ratio

*Base: Table 5.3

Inference

By this the absolute liquid ratio is high during the year 2004-05. This is due to

the delay in getting payments from its clients so by this the liability is high.

5.4 Interest Coverage Ratio

This ratio measures the margin of safety the firm enjoys with respect to its interest

burden. A high interest coverage ratio means that the firm can easily meet its interest

burden even if earnings before interest and taxes suffer a considerable decline. A low

interest coverage ratio may result in financial embarrassment when earning before

interest and taxes decline.


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Interest Coverage Ratio = EBIT / Interest

Table 5.4

Interest Coverage Ratio for the Period 2001-2005

Particulars 2001-2002 2002-2003 2003-2004 2004-2005

EBIT 8137.58 9614.46 9959.35 13788.32

Interest 7738.67 9129 9232.11 12522.82

Ratio 1.05 1.05 1.08 1.1


Fig 5.4

Interest Coverage Ratio


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1.05 1.05

1.08

1.10

1.02

1.04

1.06

1.08

1.1

1.12

Ratio

1 2 3 4

Year

Interest coverage ratio

*Base: Table 5.4

Inference

The interest coverage ratio is high during the year 2004-05 .This is due to the

depreciation made in the asset of the company. The company gains income from the

same asset.

5.5 Asset Turnover Ratio

This ratio measures how efficiently assets are employed. It is a kind to the output

capital ratio used in economic analysis.


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Asset Turnover Ratio = Net Sales / Total Assets

Table 5.5

Asset Turnover Ratio for the Period 2001-2005

Particulars 2001-2002 2002-2003 2003-2004 2004-2005

Net Sales 7917.90 9360.12 9561.33 13091.82

Total Assets 10,735.3 11,377.84 8,732.37 10,859.1

Ratio 0.74 0.82 1.09 1.21


Fig 5.5

Asset Turnover Ratio


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0.74

0.82

1.09

1.21

0 0.2 0.4 0.6 0.8 1 1.2 1.4

Ratio

1

2

3

4

Years

Asset turnover ratio

*Base: Table 5.5

Inference

The asset turnover ratio is of increasing in trend. During the year 2004-05 the

ratio is high by this the fixed assets remains the same. The company generates income

from the sale of fixed asset hence the ratios are of increasing in trend.

5.6 Inventory Turnover Ratio

This ratio is calculated to ascertain the efficiency of inventory management in

terms of capital investment. It shows the relationship between the cost of goods sold/cost

of sales and the amount of average inventory. This ratio helpful in evaluating and review

of inventory policy.


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Inventory Turnover Ratio = Net Sales / Average Inventory

Table 5.6

Inventory Turnover Ratio for the Period 2001-2005

Particulars 2001-2002 2002-2003 2003-2004 2004-2005

Net Sales 7917.90 9360.12 9561.33 13091.82

Average

Inventory

2513.8 3358.29 2421.97 2967.7

Ratio 3.15 2.79 3.95 4.41


Fig 5.6

Inventory Turnover Ratio


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3.15

2.79

3.95

4.41

0 1 2 3 4 5

Ratio

1

2

3

4

Years

Inventory turnover ratio

*Base: Table 5.6

Inference

This ratio is of increasing in trend. It is high during the year 2004-05. In the

manufacturing company the inventory of finished goods is also to convert into inventory

turnover ratio. The inventory is being properly utilised by which the company gains

income out of inventory which is used for production.

5.7 Working Capital Turnover Ratio


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This ratio measures the effective utilization of working capital. It also measures

the smooth running of business. The ratio establishes the relationship between cost of

sales and working capital.

Working Capital Turnover Ratio = Net Sales / Net Working Capital

Table 5.7

Working Capital Turnover Ratio for the Period 2001-2005

Particulars 2001-2002 2002-2003 2003-2004 2004-2005

Net Sales 7917.90 9360.12 9561.33 13091.82

Net Working

Capital

8358.85 9869.83 9806.76 13268.66

Ratio 0.95 0.95 0.97 0.99


Fig 5.7

Working Capital Turnover Ratio


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0.95

0.95

0.97

0.99

0.92 0.93 0.94 0.95 0.96 0.97 0.98 0.99

Ratio

1

2

3

4

Years

Working capital ratio

*Base: Table 5.7

Inference

The working capital turnover ratio is of increasing in trend. This is being

increased during the year 2004-05. This is due to the company maintaining current asset

and current liability properly. But this helps in avoiding Bank borrowing and long term

source of funds.

Funds Flow Statement

Changes in Working Capital for the year 2001-02

Table 5.8

Particulars Year(Rs)2001 Year(Rs)2002 Increase Decrease

Current Assets

Cash 138.90 237.14 173.03

Stock 2427.35 2600.38 173.03


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Debtors 1374.99 1442.31 67.32

Total (A) 3941.24 4279.45

Current Liabilities

Provisions 271.22 287.55 16.33

Total (B) 271.22 287.55

W.C (A-B) 3670.03 3991.9

Increase in W.C 322.66 322.66

Total 3991.9 3991.9 338.59 338.59


Funds Flow Statement for the year 2001-02

Table 5.9

Sources of funds Application of funds

Issue of shares 363.91 Repayment of loan 919.82

Sale of investment 71.65 Purchase of fixed assets 338.44

Sale of fixed assets 124.11 Increase in workingcapital

322.66


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Funds from operations 1021.25

Total 1580.92 1580.92



Table 5.10


Current Assets

Cash 237.14 320.53 83.39

Debtors 1442.31 3042.65 1600.34

Stock 2600.38 1515.82 1084.56

Total (A) 4,279.83 4,879

Current Liabilities

Provisions 287.55 424.75 137.2

Total (B) 287.55 424.75

W.C (A-B) 3992.28 4454.25


Total 4454.25 4454.25 1683.73 1683.73



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Table 5.11





461.97

Funds from operations 1188.86 Tax paid 925.94

Total 3356.12 3356.12



Table 5.12


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Current Assets

Cash 320.53 375.27 54.74

Stock 1515.82 1812.30 296.58

Debtors 3042.65 3314.58 271.93

Total (A) 4879 5502.15

Current Liabilities

Provisions 424.75 660.99 236.24

Total (B) 424.75 660.99

W.C (A-B) 4454.25 4841.16


Total 4841.16 4841.16 623.25 623.25



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Table - 5.13





386.91


Total 5868.18 5868.18



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Table 5.14


Current Assets

Cash 375.27 828.02 452.75

Stock 1812.30 2310.84 498.54

Debtors 3314.58 3963.60 649.02

Total (A) 5502.15 7102.46

Current Liabilities

Provisions 660.99 794.64 133.65

Total (B) 660.99 794.64

W.C (A-B) 4841.16 6307.82

Increase in W.C 1466.66 1466.66

Total 6307.82 6307.82 1600.31 1600.31



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Table 5.15





1466.66


Total 6053.74 6053.74

*Source: Primary data

5.16b TREND ANALYSES

Working Capital for the year 2001 - 2005

Years Working Capital

2001- 2002 322.66

2002- 2003 461.97

2003- 2004 386.91

2004- 2005 1466.66


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Fig 5.16 b

TREND

Inference

Here in the above figure it shows that the trend lines of the actual trend shows a

increase and decrease in working capital, but during the 2004- 05 it shows that the

working capital has been increased tremendously this is due to the increase in sales for

the year. During the year 2003- 04 the working capital has decreased due to the

economical changes which affected the sales of the company.

During the year 2004-05 the company had planned to increase profit during the year

through production. The company management planned during the year 2003 -04 to

purchase machines out of the previous year profit.


depreciation made in the asset of the company. The company gains income from the

same asset.

0

200

400

600

800

1000

1200

1400

1600

2001-

02

2002-

03

2003-

04

2004-

05

actual line


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Chapter VI

Findings

CHAPTER VI

FINDINGS

The current ratio of L&T satisfies the conventional rule of current ratio that is 2:1

it test the quantity and not quality from 2001-02, 2002-03,2003 -04,2004-05.

There is a sudden hike in price of raw material. There is a slow of moving stock

of goods.

The ideal ratio is 1:1. During the year 2002-03 the companys overall

performance and production is high by this the share price will get increased.

Hence the ratio for that year is high compared to the next consecutive years.

By this the absolute liquid ratio is high during the year 2004-05. This is due tothe delay in getting payments from its clients so by this the liability is high.

By this the absolute liquid ratio is high during the year 2004-05. This is due to

the delay in getting payments from its clients so by this the liability is high.


depreciation made in the asset of the company. The company gains income fromthe same asset.

This ratio is of increasing in trend. It is high during the year 2004-05. In the

manufacturing company the inventory of finished goods is also to convert into


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inventory turnover ratio. The inventory is being properly utilised by which the

company gains income out of inventory which is used for production.

The working capital turnover ratio is of increasing in trend. This is being

increased during the year 2004-05. This is due to the company maintaining

current asset and current liability properly. But this helps in avoiding Bank

borrowing and long term source of funds.

Chapter VII

Suggestions &

Recommendations

CHAPTER VII

SUGGESTIONS

During the year 2001-02 ,2002 -03 , 2003 -04 there was sudden hike in price of

raw materials the company cannot do anything against the economical changes .

This is due to the companys commitment to its clients with the minimum use of

the raw materials the company should work with it.

The company should keep an eye on to maximise the production so that the share

value of the company will be increased so that the company will get more

business.


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The company should able to verify that the due payments they have get at proper

time so that there will not be delay in getting payment.

The company should follow the method of getting income over the fixed asset.

The company can maintain its interest coverage ratio.

The company should not disturb its fixed asset frequently that will affect the turn

over ratio.

The company should maximise stock and it should not be dead stock this will lead

to loss of money and place.

So the company should utilise its inventory according to the production.

The working capital of the company that is the current asset and the current

liability should be maintained properly by this it helps in avoiding Bank

borrowing and long term source of funds.

Chapter VIII

Conclusion

CHAPTER VIII

CONCLUSION

Based on study being carried out at L&T ECC division, it can inferred that the

companys working capital position is good further the company has shown good growth


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this can read by their projects made around the world. The company is growing into

immense size this can understand by recent contribution to built nuclear reactor project

completion at Tarapus. The company has utilized the investment proposals and all the

ratios have mostly satisfied the standard norm in the past five years.

Over all we management & inventory and receivables of the company is found to be

better and it promises to improve in fast pace with controlled manner.

Appendix

APPENDIX

LARSEN & TOUBRO LIMITED ECC CONSTRUCTION

DIVISION

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST

March2002

project excel.xls


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References

BIBLIOGRAPHY

Management Accounting - T.S.Reddy & Y.Hari

Prasad Reddy

Management Accounting - S.N.Maheshwari

Working Capital Management - R.K.Sharma

Business Statistics & OperationResearch - Dr.S.P.Gupta

Project Export Memorandum (PEM) by Reserve Bank of India

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