ACF Project _Group 7_Sec A

“Working Capital Analysis of Companies in FMCG sector”

Written assignment as per the requirements for the PGDM Program

Submitted By:

SL NO. ROLL NO. NAMES1 2013033 ANINDITA AUDDY2 2013037 ANKIT SHAH4 2013041 ANKITA SHARMA5 2013042 ANKUR MATHUR

Section: A

…..Subject: Advanced Corporate FinanceSubject Professor: Dr. VipulK. Singh

Institute of Management Technology, NagpurBatch: 2013-15

I. ABSTRACT

In working capital management, liquidity and profitability are the two important aspects as it involves a trade-off between liquidity and profitability. Management of adequate working capital is essential as it has a direct impact on profitability and liquidity.

Capital required for a business can be classified under two main categories via,

1) Fixed Capital2) Working Capital

Every business needs funds for two purposes for its establishment and to carry out its day- to-day operations. Long terms funds are required to create production facilities through purchase of fixed assets such as plant ‘&’ machinery, land, building, furniture, etc. Investments in these assets represent that part of firm’s capital which is blocked on permanent or fixed basis and is called fixed capital.

Funds are also needed for short-term purposes for the purchase of raw material, payment of wages and other day -to- day expenses etc. These funds are known as working capital.

In simple words, working capital refers to that part of the firm’s capital which is required for financing short- term or current assets such as cash, marketable securities, debtors & inventories. Funds, thus, invested in current assets keep revolving fast and are being constantly converted in to cash and this cash flow out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short term capital.

II. INTRODUCTION

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According to Bhattacharya (2006), the concept of working capital was perhaps first evolved by Karl Marx, though in a somewhat different form, and the term he used was “variable capital”. Guthmann and Dougall (1948) defined working capital as current assets minus current liabilities and their view was elaborated by Park and Gladson (1963). This definition is also known as “net working capital”. Current assets are sometimes called as “gross working capital”. The current assets can be divided to four primary components:-

(1) cash and cash equivalents;(2) marketable securities;(3) accounts receivable; and(4) inventory The three major items of current liabilities are:- (1) accounts payable;(2) expenses payable, including accrued wages and taxes; and(3) notes payable.

Narrower definition for working capital is:-Inventory + accounts receivable – accounts payable.This definition emphasizes operating efficiency of a firm.Making decisions that affect to working capital is called working capital management.

USES AND APPLICATIONS OF WCM

In present day due to increase in competition, working capital is becoming necessary for the organization. It is that part of capital which is necessary to undertake day to day business expenditure of the organization. Whatever may be the organization, working capital plays an important role, as the company needs capital for its day to day expenditure. Thousands of companies fail each due to poor working capital management practices. Entrepreneurs often don’t account for short term disruptions to cash flow and are forced to close their operations. Working capital is the fund investedby a firm in current assets. Now in a cut throat competitive era where each firm competes with each other to increase their production and sales, holding of sufficient current assets have become mandatory as current assets include inventories and raw materials which are required foe smooth production runs. Holding of sufficient current assets will ensure smooth and uninterrupted production but at the same time, it will consume a lot of working capital. Here creeps in the need and importance of efficient working capital management.

CONCEPT OF WORKING CAPITAL

There are two concepts of working capital:1) Gross Working Capital;2) Net Working Capital.

Gross Working Capital The gross working capital is the capital invested in the total current assets of the enterprises current assets are those assets which can convert in to cash within a short period normally one accounting year.Constituents of current assets:-

1) Cash in hand and cash at bank.2) Bills receivables.

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3) Sundry debtors.4) Short term loans and advances.5) Inventories of stock as:

a) Raw material;b) Work in process;c) Stores and spares;d) Finished goods.

6) Temporary investment of surplus funds.7) Prepaid expenses.8) Accrued incomes.9) Marketable securities.

Net Working Capital In a narrow sense, the term working capital refers to the net working. Net working capital is the excess of current assets over current liability, i.e.-

NET WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES.Net working capital can be positive or negative. When the current assets exceeds the current liabilities are more than the current assets. Current liabilities are those liabilities, which are intended to be paid in the ordinary course of business within a short period of normally one accounting year out of the current assts or the income business.Constituents of current liabilities:-

1) Accrued or outstanding expenses.2) Short term loans, advances and deposits.3) Dividends payable.4) Bank overdraft.5) Provision for taxation, if it does not amount to appropriation of profit.6) Bills payable.7) Sundry creditors.

The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital. Both the concepts have their own merits.The gross concept is sometimes preferred to the concept of working capital for the following reasons:

i. It enables the enterprise to provide correct amount of working capital at correct time.ii. Every management is more interested in total current assets with which it has to

operate than the source from where it is made available.iii. It take into consideration of the fact every increase in the funds of the enterprise

would increase its working capital.iv. This concept is also useful in determining the rate of return on investments in working

capital.The net working capital concept, however, is also important for following reasons:

i. It is qualitative concept, which indicates the firm’s ability to meet to its operating expenses and short-term liabilities.

ii. IT indicates the margin of protection available to the short term creditors.iii. It is an indicator of the financial soundness of enterprises.iv. It suggests the need of financing a part of working capital requirement out of the

permanent sources of funds.III. DATA AND METHODOLOGY

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Objectives of the study To study the various components of working capital To analyze the liquidity trend To analyze the working capital trend To suggest measures for effective management of working capital

Sources of data collection:

Secondary sources of data

The project is based on secondary data collected through financial statement analysis reports of companies from the BLOOMBERG database and annual reports.

Data of the following 5 companies in the FMCG sector has been collected for the purpose of the research:

ITC Ltd Dabur India Ltd. Nestle India Marico HUL

Tools and techniques used for research

Ratio Analysis

Ratio analysis is the powerful tool of financial statements analysis. A ratio is define as “the indicated quotient of two mathematical expressions” and as “the relationship between two or more things”. The absolute figures reported in the financial statement do not provide meaningful understanding of the performance and financial position of the firm. Ratio helps to summaries large quantities of financial data and to make qualitative judgment of the firm’s financial performance. Ratio analysis helps to appraise the firms in the term of their profitability and efficiency of performance, either individually or in relation to other firms in same industry. Ratio analysis is one of the best possible techniques available to management to impart the basic functions like planning and control. As future is closely related to the immediately past, ratio calculated on the basis historical financial data may be of good assistance to predict the future. E.g. On the basis of inventory turnover ratio or debtor’s turnover ratio in the past, the level of inventory and debtors can be easily ascertained for any given amount of sales. Similarly, the ratio analysis may be able to locate the point out the various arias which need the management attention in order to improve the situation. E.g. Current ratio which shows a constant decline trend may be indicate the need for further introduction of long term finance in order to increase the liquidity position. As the ratio analysis is concerned with all the aspect of the firm’s financial analysis liquidity, solvency, activity, profitability and overall performance, it enables the interested persons to know the financial and operational characteristics of an organization and take suitable decisions.

The most common tools used for measuring working capital size and requirement are given in the table below:Number of days inventories means how many days it takes to turn over the value of entire inventory. Number of days accounts receivable and payable tell how long in average it takes

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to get payment and pay invoices. Current ratio is ratio between short-term assets and liabilities. A value under one could mean liquidity problems. Quick ratio is similar but takes account of the fact that it may take time to convert inventory into cash.Net liquid balance measures financial decisions of a firm that are irrelevant to the operation cycle. Working capital requirement comes directly from the narrower definition of working capital and measures the needed working capital.

IV. FINDINGS

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MARICO Ltd.

Ratios 2008-09 2009-10 2010-11 2011-12 2012-13

Current Ratio 1.28 1.35 0.99 1.69 1.69Quick Ratio 1.25 1.23 1.7 1.39 1.27

Inventory Turnover Ratio 8.22 6.36 5.98 6.26 4.81Debtors Turnover Ratio 37.42 25.73 21.99 27.07 30.33Creditors Turnover Ratio 6.93 6.2 8.29 9.49 7.53

Gross Profit Ratio 13.13 15.37 13.44 12.9 14.35ROA 6.04 9.38 14.21 18.28 30.89ROI 38.8 34.07 23.87 25.37 20.36Net Profit 142.1 235.02 315.32 336.59 429.09

DSI 44.40 57.39 61.04 58.31 75.88DSO 9.75 14.19 16.60 13.48 12.03Operating Cycle 54.16 71.58 77.64 71.79 87.92DSP 52.67 58.87 44.03 38.46 48.47Cash Conversion Cycle 1.49 12.70 33.61 33.33 39.45Net Working Capital 402.11 499.54 687.27 718.48 850.58

Liquidity Ratios

Turnover Ratios

Profitabilty Ratio

Working Capital Cycle

MARICO

Investment in Inventories has increased (8.22 to 4.81); Investment in Debtors have also increased (37.42 to 30.33); and credit from Creditors have reduced (6.93 to 7.53); hence much of working capital previously available for other uses is now blocked in net WC (Net WC 402.11 to 850.58).Increase in the cash conversion cycle has led to more funds being blocked in Working Capital.Although the Net profit figure shows an upward trend but when it is looked at as a Percentage of capital employed it is decreased (ROI 38.8 to 20.36).

HUL

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Ratios 2008-09 2009-10 2010-11 2011-12 2012-13



Gross Profit Ratio 13.5 14.7 12.45 13.89 14.59ROA 9.45 11.84 12.32 16.25 12.37ROI 118.59 106.78 102.66 95.2 163.59Net Profit 2500.71 2202.03 2305.99 2691.4 3796.67

DSI 39.42 40.60 51.99 41.52 35.75DSO 8.73 12.48 15.00 13.38 10.69Operating Cycle 48.14 53.08 66.99 54.91 46.44DSP 88.59 135.69 128.98 106.41 94.56Cash Conversion Cycle -40.45 -82.60 -61.99 -51.50 -48.12Net Working Capital 71.99 -1116.63 -1059.01 -1288.12 -2165.18

HUL

Turnover Ratios

Profitabilty Ratio


Liquidity Ratios

Investment in Inventories has increased (9.26 to 10.21); Investment in Debtors havedecreased (41.53 to 34.13); and credit from Creditors have reduced (4.12 to 3.86); Since the net working capital has reduced (71.99 to -2165.18) it can be inferred that the WC requirement is being funded by borrowing and reduced investment in debtor. The Net profit figure shows an upward trend and when it is looked at as a Percentage of capital employed it is increased (ROI 118.59 to 163.59).

NESTLE INDIA

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Ratios 2008-09 2009-10 2010-11 2011-12 2012-13



Gross Profit Ratio 19.33 19.74 19.91 20.53 21.92ROA 49.09 60.29 88.72 132.13 186.53ROI 163.97 160.29 135.06 63.73 55.43Net Profit 534.08 655 818.66 961.55 1067.93

DSI 32.05 31.44 29.60 31.47 31.60DSO 4.18 3.90 3.72 4.35 4.43Operating Cycle 36.22 35.33 33.32 35.82 36.03DSP 65.30 63.48 62.93 49.06 37.63Cash Conversion Cycle -29.07 -28.14 -29.61 -13.24 -1.60Net Working Capital -422.90 -597.81 -656.92 -883.93 -1064.61

NESTLE INDIA

Turnover Ratios

Profitabilty Ratio


Liquidity Ratios

Investment in Inventories has increased (11.39 to 11.55); Investment in Debtors have also reduced (87.37 to 82.4); and credit from Creditors have increased (5.59 to 9.7); Since the net working capital has reduced (-422.9 to -1064.61) it can be inferred that the WC requirement is being funded by borrowing and reduced investment in debtor. Although the Net profit figure shows an upward trend but when it is looked at as a Percentage of capital employed it is decreased (ROI 163.97 to 55.43).

DABUR

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Ratios 2008-09 2009-10 2010-11 2011-12 2012-13


Inventory Turnover Ratio 10.94 11.31 8.65 7.19 8.8Debtors Turnover Ratio 19.65 19.84 17.35 15.95 16.61

Creditors Turnover Ratio 5.38 5.23 4.78 5.01 5.41

Gross Profit Ratio 17.19 18.06 17.91 16.56 15.66ROA 8.43 8.6 5.85 7.17 9.15ROI 47.98 61.62 44.16 40.51 41.82

Net profit 373.55 433.33 471.41 463.24 590.98

DSI 33.36 32.27 42.20 50.76 41.48DSO 18.58 18.40 21.04 22.88 21.97

Operating Cycle 51.94 50.67 63.23 73.65 63.45DSP 67.84 69.79 76.36 72.85 67.47

Cash Conversion Cycle -15.90 -19.12 -13.13 0.79 -4.02Net Working Capital 276.45 29.94 242.85 359.54 473.30

DABUR

Liquidity Ratios

Turnover Ratios

Profitabilty Ratio


Investment in Inventories has decreased (10.94 to 8.8); Investment in Debtors has also decreased (19.65 to 16.61); and credit from Creditors has increased (6.93 to 7.53); hence much of working capital previously available for other uses is now blocked in WC (Net WC 276.45 to 473.3).Increase in the cash conversion cycle has led to more funds being blocked in Working Capital.Although the Net profit figures shows an upward trend but when it is looked at as a Percentage of capital employed it is decreased (ROI 47.98 to 41.82).

ITC Ltd

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Ratios 2008-09 2009-10 2010-11 2011-12 2012-13



Gross Profit Ratio 13.13 15.37 13.44 12.9 14.35ROA 6.04 9.38 14.21 18.28 30.89ROI 38.8 34.07 23.87 25.37 20.36Net Profit 3,263.59 4,061.00 4,987.61 6,162.37 7,418.39

DSI 69.39 60.43 60.33 55.90 80.57DSO 17.12 15.01 15.27 13.77 13.12Operating Cycle 86.51 75.44 75.60 69.67 93.69DSP 132.73 132.73 86.49 44.46 39.42Cash Conversion Cycle -46.22 -57.28 -10.90 25.21 54.28Net Working Capital 2,588.91 -706.17 819.34 875.65 2,596.83

ITC

Liquidity Ratios

Turnover Ratios

Profitabilty Ratio


Investment in Inventories has increased (5.46 to 4.53); Investment in Debtors has decreased (21.32 to 27.82); and credit from Creditors has reduced (2.75 to 9.26); Even though the cash conversion cycle has increased there is not much change in the net working capital. Although the Net profit figures shows an upward trend but when it is looked at as a Percentage of capital employed it is decreased (ROI 38.8 to 20.36).

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V. CONCLUSION

We take an in-depth view of most profitable company that is HULSince the net working capital has reduced (71.99 to -2165.18) i t can be inferred that the WC requirement is being funded by borrowing and reduced investment in debtor. The Net profit figure shows an upward trend and when it is looked at as a Percentage of capital employed it is increased (ROI 118.59 to 163.59).

Ratios 2008-09 2009-10 2010-11 2011-12 2012-13ROI 118.59 106.78 102.66 95.2 163.59Net Profit 2500.71 2202.03 2305.99 2691.4 3796.67Cash Conversion Cycle -40.44959147 -82.6041648 -61.98507149 -51.50486276 -48.11591632Net Working Capital 71.99 -1116.63 -1059.01 -1288.12 -2165.18

Inventories 25288.6 21799.3 28107.7 25166.5 25269.9Cash and bank balance 17773.5 18922.1 16284.7 18300.4 20047.3Receivables 6213.9 7565.7 11121 8536.7 10675.4Current assets 49276 48287.1 55513.4 52003.6 55992.6Current liabilities 42558.3 52916.6 57828.4 54994.2 62600.9Provisions outstanding 15967.4 15134.2 17702.1 19966.5 26316.7Current liabilities & provisions 58525.7 68050.8 75530.5 74960.7 88917.6

HUL

Working Capital

From the above exhibit we see that the Provisions Outstanding by 4% and Current l iabilit ies by 4% have increased hence reducing the working capital requirement. Receivables have reduced by 1% not having much effect on the WC while Cash at bank has increased by 3% and inventories have reduced by

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5% thus investment in WC has over all reduced. Hence from the above exhibit we see that external funding is increasing the profitability.

VI. CONCLUSION

More companies go under because of cash flow issues, rather than declining profitabili ty. Hence traditional prudence always suggests that a firm should have sufficient cash to cover its immediate liabili ties. However there is a growing breed of FMCG companies that claim otherwise. Unlike most other industries, the turnover of a FMCG company is not limited by its abili ty to produce, but its ability to sell. They can generate cash so quickly they actually have a negative working capital. This happens because customers pay upfront and so rapidly, the business has no problem raising cash (like amazom.com, McDonald). In these companies products are delivered and sold to the customer before the company even pays for them. Hence they concentrate their resources on marketing and either outsource their manufacturing or make a limited investment (as compared to their turnover) in plant and machinery. Therefore there is a limited room to raise funds by mortgaging the plant and machinery. The developments in SCM, ERP and implementation of Just InTime have made the firms leaner and hence now it‟s not possible to raise substantial funds via inventories. Typically a firm pledges its plant, machinery or inventory to raise the bank loan/overdraft required to fund its operation. Realizing these limitations, many companies (esp. ITC and Dabur) starting using their negotiating powers over their customers and suppliers to fund their expansion in operations. A negative working capital is a sign of managerial efficiency in a business with low inventory and accounts receivables (which means it operates on an almost strictly cash basis). In other situation, it is a sign a company may be facing bankruptcy or serious financial trouble.

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I. REFERENCES

http://www.moneycontrol.com/financials/marico/balance-sheet/M13#M13

http://www.moneycontrol.com/financials/marico/ratios/M13#M13

http://www.moneycontrol.com/financials/hindustanunilever/balance-sheet/HU#HU

http://www.moneycontrol.com/financials/hindustanunilever/ratios/HU#HU

http://www.moneycontrol.com/financials/nestleindia/balance-sheet/NI#NI

http://www.moneycontrol.com/financials/nestleindia/ratios/NI#NI

http://www.moneycontrol.com/financials/daburindia/balance-sheet/DI#DI

http://www.moneycontrol.com/financials/daburindia/ratios/DI#DI

http://www.moneycontrol.com/financials/itc/balance-sheet/ITC#ITC

http://www.moneycontrol.com/financials/itc/ratios/ITC#ITC CMIE Database - Prowess

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http://www.moneycontrol.com/financials/itc/ratios/ITC#ITC















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ACF Project _Group 7_Sec A

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