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MANGALORE INSTITUTE OF TECH & ENGG

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Project Report on Working Capital Management

in comparison with Dabur and ITC

Submitted By

Nithish Sebastian

Vivian

Subramanya

Mahesh

Submitted To

Mrs.Rajashreee kini

Faculty,MBA Dept.

Mite,Moodabidri

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INDUSTRY PROFILE:

FMCG industry, alternatively called as CPG (Consumer packaged goods) industry primarily

deals with the production, distribution and marketing of consumer packaged goods. The Fast

Moving Consumer Goods (FMCG) are those consumables which are normally consumed by

the consumers at a regular interval. Some of the prime activities of FMCG industry are

selling, marketing, financing, purchasing, etc. The industry also engaged in operations,

supply chain, production and general management.

FMCG industry economy

FMCG industry provides a wide range of consumables and accordingly the amount of

money circulated against FMCG products is also very high. The competition among FMCGmanufacturers is also growing and as a result of this, investment in FMCG industry is also

increasing, specifically in India, where FMCG industry is regarded as the fourth largest sector

with total market size of US$13.1 billion. FMCG Sector in India is estimated to grow 60% by

2010. FMCG industry is regarded as the largest sector in New Zealand which accounts for

5% of Gross Domestic Product (GDP).

Common FMCG products

Some common FMCG product categories include food and dairy products, glassware, paper

products, pharmaceuticals, consumer electronics, packaged food products, plastic goods, printing and stationery, household products, photography, drinks etc. and some of the

examples of FMCG products are coffee, tea, dry cells, greeting cards, gifts, detergents,

tobacco and cigarettes, watches, soaps etc.

Market potentiality of FMCG industry

Some of the merits of FMCG industry, which made this industry as a potential one are low

operational cost, strong distribution networks, presence of renowned FMCG companies.

Population growth is another factor which is responsible behind the success of this industry.

Leading FMCG companies

Some of the well known FMCG companies are Sara Lee, Nestlé, Reckitt Benckiser, Unilever,

Procter & Gamble, Coca-Cola, Carlsberg, Kleenex, General Mills, Pepsi and Mars etc.

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Company Profile:

Dabur India Ltd. - Corporate Profile

Dabur India Ltd is one of India’s leading FMCG Companies with Revenues of about US$910Million (Rs 4110 Crore) & Market Capitalisation of US$4 Billion (Rs 20,000 Crore).Building on a legacy of quality and experience of over 125 years, Dabur is today India’s mosttrusted name and the world’s largest Ayurvedic and Natural Health Care Company.

Dabur India is also a world leader in Ayurveda with a portfolio of over 250 Herbal/Ayurvedic products. Dabur's FMCG portfolio today includes five flagship brands with distinct brandidentities -- Dabur as the master brand for natural healthcare products, Vatika for premium

personal care,Hajmola for digestives, Réal for fruit juices and beverages and Fem for fairness bleaches and skin care products.

Dabur today operates in key consumer products categories like Hair Care, Oral Care, HealthCare, Skin Care, Home Care and Foods. The company has a wide distribution network,covering over 2.8 million retail outlets with a high penetration in both urban and ruralmarkets.

Dabur's products also have a huge presence in the overseas markets and are today available inover 60 countries across the globe. Its brands are highly popular in the Middle East, SAARCcountries, Africa, US, Europe and Russia. Dabur's overseas revenues stands at over Rs 500Crore in the 2008-09 fiscal, accounting for about 20% of the total turnover.

The 125-year-old company, promoted by the Burman family, had started operations in 1884

as an Ayurvedic medicines company. From its humble beginnings in the bylanes of Calcutta,Dabur India Ltd has come a long way today to become one of the biggest Indian-ownedconsumer goods companies with the largest herbal and natural product portfolio in the world.Overall, Dabur has successfully transformed itself from being a family-run business to

become a professionally managed enterprise. What sets Dabur apart from the crowd is itsability to change ahead of others and to always set new standards in corporate governance &innovation.

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Company profile:

ITC – corporate profile

ITC is one of India's foremost private sector companies with a market capitalisation of over

US $ 33 billion and a turnover of US $ 7 billion. ITC is rated among the World's Best Big

Companies, Asia's 'Fab 50' and the World's Most Reputable Companies by Forbes magazine,

among India's Most Respected Companies by BusinessWorld and among India's Most

Valuable Companies by Business Today. ITC ranks among India's `10 Most Valuable

(Company) Brands', in a study conducted by Brand Finance and published by the Economic

Times. ITC also ranks among Asia's 50 best performing companies compiled by Business

Week.

ITC has a diversified presence in Cigarettes, Hotels, Paperboards & Specialty Papers,

Packaging, Agri-Business, Packaged Foods & Confectionery, Information Technology,

Branded Apparel, Personal Care, Stationery, Safety Matches and other FMCG products.

While ITC is an outstanding market leader in its traditional businesses of Cigarettes, Hotels,

Paperboards, Packaging and Agri-Exports, it is rapidly gaining market share even in its

nascent businesses of Packaged Foods & Confectionery, Branded Apparel, Personal Care and

Stationery.

As one of India's most valuable and respected corporations, ITC is widely perceived to be

dedicatedly nation-oriented. Chairman Y C Deveshwar calls this source of inspiration "a

commitment beyond the market". In his own words: "ITC believes that its aspiration to create

enduring value for the nation provides the motive force to sustain growing shareholder value.

ITC practices this philosophy by not only driving each of its businesses towards international

competitiveness but by also consciously contributing to enhancing the competitiveness of the

larger value chain of which it is a part."

ITC's diversified status originates from its corporate strategy aimed at creating multiple

drivers of growth anchored on its time-tested core competencies: unmatched distribution

reach, superior brand-building capabilities, effective supply chain management and

acknowledged service skills in hoteliering. Over time, the strategic forays into new

businesses are expected to garner a significant share of these emerging high-growth markets

in India.

ITC's Agri-Business is one of India's largest exporters of agricultural products. ITC is one of

the country's biggest foreign exchange earners (US $ 3.2 billion in the last decade). The

Company's 'e-Choupal' initiative is enabling Indian agriculture significantly enhance its

competitiveness by empowering Indian farmers through the power of the Internet. This

transformational strategy, which has already become the subject matter of a case study at

Harvard Business School, is expected to progressively create for ITC a huge rural distribution

infrastructure, significantly enhancing the Company's marketing reach.

ITC employs over 24,000 people at more than 60 locations across India. The Company

continuously endeavors to enhance its wealth generating capabilities in a globalising

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environment to consistently reward more than 4,15,000 shareholders, fulfill the aspirations of

its stakeholders and meet societal expectations. This over-arching vision of the company is

expressively captured in its corporate positioning statement: "Enduring Value. For the

Nation. For the Shareholder."

Objectives of the Study :

To identify the financial strengths & weakness of the company.

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To introspect into aspects like working capital requirement and havingUndue comparison

.Evaluating company s performance relating to financial statementanalysis.

Measuring relative importance of working capital in the function of business and

moreover understanding the different mode of financing the working capital

Limitations of the study:

The study have been carried on for a short while and have done purely based onsecondary source of data.

The chances of Error in the secondary data are not omitted,

The study has been exposed to effects of Lack of experience and lack of availabilityof data.

Assumptions have been drawn due to non-availability of data.

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Introduction:

Management is an art of anticipating and preparing for risks, uncertainties and overcomingobstacles. An essential precondition for sound and consistent assets management isestablishing the sound and consistent assets management policies covering fixed as well as

current assets. In modern financial management, efficient allocation of funds has a greatscope, in finance and profit planning, for the most effective utilization of enterprise resources,the fixed and current assets have to be combined in optimum proportions.

Working capital in simple terms means the amount of funds that a company requires for financing its day-to-day operations. Finance manager should develop sound techniques of managing current assets. WORKING CAPITAL:

Working capital refers to the investment by the company in short terms assets such as cash,marketable securities. Net current assets or net working capital refers to the current assets lesscurrent liabilities.Symbolically, it means,

Net Current Assets = Current Assets Current Liabilities.

DEFINITIONS OF WORKING CAPITAL:

The following are the most important definitions of Working capital:

Working capital is the difference between the inflow and outflow of funds. In other words it is the net cash inflow .

Working capital represents the total of all current assets. In other words it is the Gross

working capital , it is also known as Circulating capital or Current capital for currentassets are rotating in their nature.

Working capital is defined as The excess of current assets over current liabilities and provisions . In other words it is the Net Current Assets or Net Working Capital .

Concepts of working capital

Gross Working Capital: It refers to the firm’s investment in total current or circulating assets.

Net Working Capital: The term “Net Working Capital” has been defined in two

different ways:• It is the excess of current assets over current liabilities. This is, as a matter of fact, the

most commonly accepted definition. Some people define it as only the difference between current assets and current liabilities.

• It is that portion of a firm’s current assets which is financed by long-term funds.

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Need for Working Capital

Working capital is needed till a firm gets cash on sale of finished products. It depends on twofactors:

Manufacturing cycle i.e. time required for converting the raw material into finishedproduct; and

Credit policy i.e. credit period given to Customers and credit period allowed bycreditors. Thus, the sum total of these times is called an “Operating cycle” and itconsists of the following six steps:

i. Conversion of cash into raw materials.ii. Conversion of raw materials into work-in-process.iii. Conversion of work-in-process into finished products.iv. Time for sale of finished goods—cash sales and credit sales.v. Time for realisation from debtors and Bills receivables into cash.vi. Credit period allowed by creditors for credit purchase of raw materials, inventory andcreditors for wages and overheads.

Chart for operating cycle or working capital cycle:

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FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS

1. NATURE OF BUSINESS: The requirements of working is very limited in public

utility undertakings such as electricity, water supply and railways because theyoffer cash sale only and supply services not products, and no funds are tied up ininventories and receivables. On the other hand the trading and financial firmsrequires less investment in fixed assets but have to invest large amt. of workingcapital along with fixed investments.

2. SIZE OF THE BUSINESS: Greater the size of the business, greater is therequirement of working capital.

3. PRODUCTION POLICY: If the policy is to keep production steady byaccumulating inventories it will require higher working capital.

4. LENTH OF PRDUCTION CYCLE: The longer the manufacturing time the rawmaterial and other supplies have to be carried for a longer in the process with

progressive increment of labor and service costs before the final product isobtained. So working capital is directly proportional to the length of themanufacturing process.

5. SEASONALS VARIATIONS: Generally, during the busy season, a firm requireslarger working capital than in slack season.

6. WORKING CAPITAL CYCLE: The speed with which the working cycle

completes one cycle determines the requirements of working capital. Longer thecycle larger is the requirement of working capital.

7. RATE OF STOCK TURNOVER : There is an inverse co-relationship between thequestion of working capital and the velocity or speed with which the sales areaffected. A firm having a high rate of stock turnover wuill needs lower amt. of working capital as compared to a firm having a low rate of turnover.

8. CREDIT POLICY: A concern that purchases its requirements on credit andsales its product / services on cash requires lesser amt. of working capital andvice-versa.

9. BUSINESS CYCLE: In period of boom, when the business is prosperous, thereis need for larger amt. of working capital due to rise in sales, rise in prices,optimistic expansion of business, etc. On the contrary in time of depression, the

business contracts, sales decline, difficulties are faced in collection from debtor and the firm may have a large amt. of working capital.

10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we shallrequire large amt. of working capital.

11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have moreearning capacity than other due to quality of their products, monopoly conditions,

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etc. Such firms may generate cash profits from operations and contribute to their working capital. The dividend policy also affects the requirement of workingcapital. A firm maintaining a steady high rate of cash dividend irrespective of its

profits needs working capital than the firm that retains larger part of its profits anddoes not pay so high rate of cash dividend.

12. PRICE LEVEL CHANGES: Changes in the price level also affect the workingcapital requirements. Generally rise in prices leads to increase in working capital.

13. Others FACTORS: These are: Operating efficiency. Management ability. Irregularities of supply. Import policy. Asset structure. Importance of labor. Banking facilities, etc.

WORKING CAPITAL FINANCING:

Accruals

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The major accrual items are wages and taxes. These are simply what the firm owes to itsemployees and to the government.

Trade Credit

Trade credit represents the credit extended by the supplier of goods and services. It is a

spontaneous source of finance in the sense that it arises in the normal transactions of the firmwithout specific negotiations, provided the firm is considered creditworthy by its supplier. Itis an important source of finance representing 25% to 50% of short-term financing.

Working capital advance by commercial banks

Working capital advance by commercial banks represents the most important source for financing current assets.

Forms of Bank Finance: Working capital advance is provided by commercial banks in three primary ways: (i) cash credits / overdrafts, (ii) loans, and (iii) purchase / discount of bills. Inaddition to these forms of direct finance, commercials banks help their customers in obtaining

credit from other sources through the letter of credit arrangement.i. Cash Credit / Overdrafts: Under a cash credit or overdraft arrangement, a pre-determinedlimit for borrowing is specified by the bank. The borrower can draw as often as required

provided the out standings do not exceed the cash credit / overdraft limit.ii. Loans: These are advances of fixed amounts which are credited to the current account of the borrower or released to him in cash. The borrower is charged with interest on theentire loan amount, irrespective of how much he draws.iii. Purchase / Discount of Bills: A bill arises out of a trade transaction. The seller of goods draws the bill on the purchaser. The bill may be either clean or documentary(a documentary bill is supported by a document of title to gods like a railwayreceipt or a bill of lading) and may be payable on demand or after a usance periodwhich does not exceed 90 days. On acceptance of the bill by the purchaser, theseller offers it to the bank for discount / purchase. When the bank discounts /

purchases the bill it releases the funds to the seller. The bank presents the bill tothe purchaser (the acceptor of the bill) on the due date and gets its payment.iv. Letter of Credit: A letter of credit is an arrangement whereby a bank helps itscustomer to obtain credit from its (customer’s) suppliers. When a bank opens aletter of credit in favour of its customer for some specific purchases, the bank undertakes the responsibility to honour the obligation of its customer, should thecustomer fail to do so.

Public DepositsMany firms, large and small, have solicited unsecured deposits from the public in recentyears, mainly to finance their working capital requirements.

Inter-corporate Deposits

A deposit made by one company with another, normally for a period up to six months, isreferred to as an inter-corporate deposit. Such deposits are usually of three types.Fianancial Management & international financea. Call Deposits: In theory, a call deposit is withdrawable by the lender on giving aday’s notice. In practice, however, the lender has to wait for at least three days.The interest rate on such deposits may be around 10 percent per annum.

b. Three-months Deposits: More popular in practice, these deposits are taken by

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borrowers to tide over a short-term cash inadequacy that may be caused by one or more of the following factors: disruption in production, excessive imports of rawmaterial, tax payment, delay in collection, dividend payment, and unplanned capitalexpenditure. The interest rate on such deposits is around 12 percent per annum.c. Six-months Deposits: Normally, lending companies do not extend deposits beyond

this time frame. Such deposits, usually made with first-class borrowers, carry andinterest rate of around 15 percent per annum.

Short-term loans from financial institutions

The Life Insurance Corporation of India and the General Insurance Corporation of India provide short-term loans to manufacturing companies with an excellent track record.

Rights debentures for working capital

Public limited companies can issue “Rights” debentures to their shareholders with the objectof augmenting the long-term resources of the company for working capital requirements. Thekey guidelines applicable to such debentures are as follows:

i. The amount of the debenture issue should not exceed (a) 20% of the gross currentassets, loans, and advances minus the long-term funds presently available for financing working capital, or (b) 20% of the paid-up share capital, including

preference capital and free reserves, whichever is the lower of the two.ii. The debt. -equity ratio, including the proposed debenture issue, should not exceed1:1.iii. The debentures shall first be offered to the existing Indian resident shareholders of the company on a pro rata basis.

Commercial paper

Commercial paper represents short-term unsecured promissory notes issued by firms whichenjoy a fairly high credit rating. Generally, large firms with considerable financial strengthare able to issue commercial paper. The important features of commercial paper are asfollows:i. The maturity period of commercial paper usually ranges from 90 days to 360 days.ii. Commercial paper is sold at a discount from its face value and redeemed at its facevalue. Hence the implicit interest rate is a function of the size of the discount andthe period of maturity.iii. Commercial paper is either directly placed with investors who intend holding ittill its maturity. Hence there is no well-developed secondary market for commercial

paper.

Factoring

Factoring, as a fund based financial service, provides resources to finance receivables as wellas facilitates the collection of receivables. It is another method of raising short-term financethrough account receivable credit offered by commercial banks and factors. A commercial

bank may provide finance by discounting the bills or invoices of its customers. Thus, a firmgets immediate payment for sales made on credit. A factor is a financial institution whichoffers services relating to management and financing of debts arising out of credit sales.Factoring is becoming popular all over the world on account of various services offered bythe institutions engaged in it. Factors render services varying from bill discounting facilitiesoffered by commercial banks to a total takeover of administration of credit sales including

maintenance of sales ledger, collection of accounts receivables, credit control and protection

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from bad debts, provision of finance and rendering of advisory services to their clients.Factoring, may be on a recourse basis, where the risk of bad debts is borne by the client, or ona non-recourse basis, where the risk of credit is borne by the factor. At present, factoring inIndia is rendered by only a few financial institutions on a recourse basis. However, the Reportof the Working Group on Money Market (Vaghul Committee) constituted by the Reserve

Bank of India has recommended that banks should be encouraged to set up factoringdivisions to provide speedy finance to the corporate entities.Inspite of many services offered

by factoring, it suffers from certain limitations. The most critical fall outs of factoring include(i) the high cost of factoring as compared to other sources of short-term finance, (ii) the

perception of financial weakness about the firm availing factoring services, and (iii) adverseimpact of tough stance taken by factor, against a defaulting buyer,

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Dabur India Limited

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Additional information:

Stocks are valued at lower of cost or net realizable value. Basis of determination of costremain as follows:• Raw materials, Packing materials, Stores & Spares :- On Weighted Average Basis• Work-in-process:- At cost of input plus overhead upto the stage of completion.• Finished goods:- At cost of input plus appropriate Overhead

• Stock Rs20000 cr

• WIP Rs 14000cr

• Finished Goods Rs21000 cr

• Sundry Debtors Rs 32000cr

• Creditors Rs 16000cr

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Here, RMCP – Raw Material Conversion PeriodWIPCP – Work in Progress Conversion PeriodFGCP – Finished Goods Conversion Period

DCP- Debtors Conversion PeriodCCP- Creditors Conversion period

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Calculation of Operating Cycle:

RMCP = Average Stock x 360

Annual Consumption

=360 x Rs20000cr

Rs 96000cr = 75 days

WIPCP = Average Stock x 360

Cost of Production

= 360 x Rs14,000cr

Rs140000cr = 36 days

FGCP = Average Stock x 360

Cost of Goods Sold

= 360 x Rs21,000cr


Debtors Conversion Period = Average Debtors x 360

Cost of sales

= 360 x Rs32,000cr


Creditors = Average Creditors x 360

Cost of Goods Sold

= 360 x Rs16000cr

Rs 96000cr =60 days

Duration of Operating cycle is = 75+36+54+72-60=177 days

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Calculation of Operating Cycle:

RMCP = 360 x Rs3486.70cr

Rs8118.37 cr = 154 days

WIPCP= = 360 x Rs98.92cr

Rs24643.37 cr = 2 days

FGCP= 360 x Rs1591.14cr

Rs24643.37cr =24 days

Debtors Conversion Period= 360 x Rs1101.68cr

Rs16039.12cr =25 days

( here, 50% of sale is assumed to be credit sales)

Creditors= 360 x Rs4668.28cr

Rs11605.07cr =145 days

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(here, liability is assumed to be creditors)

Duration of Operating cycle is =154+2+24+25-145=60 days

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Findings and Interpretations:

The Raw material conversion period for Dabur company is 75 days whereas for ITC it

is 154 days Thus we can infer that Dabur has least RMCP which means the best

utilisation of raw materials in comparison with ITC

The Work in Process conversion period for Dabur company is 36 days whereas for

ITC it is 2 days Thus we can infer that ITC has least WIPCP which means the best

utilisation of machineries in the function of production and adoption of modernizes

technologies in the production function.

The Finished goods conversion period for Dabur company is 54 days whereas for ITC

it is 24 days Thus we can infer that ITC has least FGCP which means there is huge

demand and market for the products of ITC company.

The Debtors conversion period for Dabur company is 72 days whereas for ITC it is 25days. Thus we can infer that ITC has least DCP which means specialized collection

of bills receivables and liquidity strength of the company.

The Creditors conversion period for Dabur company is 60 days whereas for ITC it is

145 days Thus we can infer that Dabur has the least Creditors conversion period

which means credit payment capacity of the comapany.

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Conclusions:

The Working Capital is very essential for any business to meet its day to

day operation. To enable smooth flow of business activity the company

has to maintain optimum level working capital. There is an adverse effecton the company if they have either excess or inadequate working capital.

The working Capital requirement for Dabur and ITC is an monthly

requirement to meet there financial needs. Each and every company has

to manage there working capital in systematic way of management to

evade any adverse effects which creep out due to inefficiency

management of working capital.

The company ITC have to restructure its Raw material management and

should ensure credit payment capacity to enable at its earliest payments

and Dabur has to manage its Debtors management to collect its

receivables and realise its receipts towards credit sales timely and have

shorten its period of collection.

To conclude , Its very important for the companies to maintain adequate

working capital to ensure smooth flow of operating cycle i.e to ensure all

the activities from production to sales and to receipt or realisation of

collection.

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