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Working capital ppt

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Working capital ppt

  1. 1. A P L A P O L L O T U B E S L T D . Working Capital
  2. 2. Introduction  Working Capital is a financial metric which represents operating liquidity available to a business.  The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.
  3. 3. Components of Working Capital The working capital cycle is made up of four core components:  Cash & Cash equivalent.  Creditors/accounts payable.  Inventory/stock in hand.  Debtors/accounts receivables.
  4. 4. Importance of Working Capital  It is important we work out the right level of working capital you will need. If the working capital is too:  High - Business has surplus funds which are not earning a return; and  Low - May indicate that your business is facing financial difficulties.  To Forecast the optimum working capital requirement the following formula may be used:  (Estimated cost of good sold x Operating cycle) + Desired cash balance.  Operating Cycle, O = R + W + F + D – C  Where, O = Duration of operating cycle. R = Raw Material storage period. W= Work-in-process period. F = Finished Good Storage period. D = Debtors collection period. C = Creditors payment period.
  5. 5. Working Capital Financing  Fund Based:  Cash Credit  Overdraft  Bills Discounting  Working Capital Demand Loan  Non Fund Based:  Letter of Credit  Bank Guarantee  Structured Product:  Factoring  Commercial Paper  Securitization of receivables  Buyers/Supplier credit.
  6. 6. APL Apollo Tubes Ltd.  Among the 3 top manufacturer of the steel tubes, pipes and hollow sections in India.  Delhi based with 5 manufacturing location at northern, southern and western part of the India with installed capacities ½ Million MTPA.  Despite a slowdown in the Indian economy Company has recorded a gross sales growth of 56% over 2010-11, EBIDTA growth of 26.19% and net profit growth of 13.83%.  Intends to double production capacity to a million tonnes per annum by 2015 and generating revenues worth US$1 billion.  Plan to increase presence in new geographies including Tier II & Tier III cities.
  7. 7. Working Capital Cycle APL Apollo Tubes Ltd Tubes Industry 30 Days 44 Days 60 Days 60 Days 30 Days 30 Days 40 Days 34 Days
  8. 8. Operating Cycle in number of days Working Capital Cycle : No. of days F-2012 F-2011 Inventory Raw Material 14 22 Finished Goods 16 35 Debtors 44 46 Total 74 103 Creditors 34 36 Net Working Capital 40 68
  9. 9. Current Ratio - Analysis 3.60 4.45 2.78 3.87 3.00 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 Mar '12 Mar '11 Mar '10 Mar '09 Mar '08
  10. 10. As per Tondon Committee Current Assets : Mar '12 Mar '11 Inventories 93.00 97.22 Sundry Debtors 139.89 80.68 Cash and Bank Balance 3.15 1.20 Total 236.04 179.10 Current Liabilities 65.52 40.22 Net Current Assets 170.52 138.88 75% on current assets 177.03 134.33 Less: Current Liabilities 65.52 40.22 MPBF 111.51 94.11
  11. 11. Analysis of Peer Companies KEY RATIOS APL Man Ind Mah Seam OPBDIT (% of Total operating Income) 6.7% 12.7% 20.5% OPBIT (% of Sales) 6.1% 10.4% 19.6% PBT (% of Sales) 4.0% 8.8% 19.4% PAT (% of Sales) 2.7% 6.0% 13.6%
  12. 12. Analysis of Peer Companies’Particulars APL Man Ind Mah Seam Sources Of Funds Total Share Capital 21.3 27.6 35.3 Equity Share Capital 21.3 27.6 35.3 Share Application Money 8.3 - - Reserves 236.9 617.3 2,724.6 Networth 266.5 644.9 2,759.8 Secured Loans 192.5 230.2 1.6 Unsecured Loans - - 29.3 Total Debt 192.5 230.2 30.9 Total Liabilities 459.0 875.2 2,790.7 Application Of Funds Gross Block 140.8 589.8 1,502.2 Less: Accum. Depreciation 16.7 241.8 179.5 Net Block 124.1 348.0 1,322.7 Capital Work in Progress 33.9 0.9 9.9 Investments 76.8 302.5 473.6 Inventories 93.0 160.2 717.2 Sundry Debtors 139.9 298.5 362.2 Cash and Bank Balance 3.2 107.8 20.1 Total Current Assets 236.0 566.5 1,099.6 Loans and Advances 85.0 284.5 261.1 Total CA, Loans & Advances 321.1 851.0 1,360.6 Current Liabilities 87.4 557.5 366.7 Provisions 9.6 69.7 9.4 Total CL & Provisions 96.9 627.2 376.1 Net Current Assets 224.1 223.8 984.6 Total Assets 459.0 875.2 2,790.7 KEY RATIOS APL Man Ind Mah Seam Current Ratio 3.6 1.4 3.4 Holding Days Inventory Raw Material 14.0 18.6 94.0 Finished Goods 16.0 13.8 24.6 Sundry Debtors 44.0 63.2 54.5 Sundry Creditors 34.0 132.9 31.1
  13. 13. Recommendation  The company should increase its creditors cycle to 60 days as per the industry benchmark.  The company can also look for channel financing through contractual arrangement with its present lender.  The company has recently shown tremendous growth towards trading goods. The company should reduce its inventory through efficient supply chain management .  The company should also explore the possibilities of factoring keeping in mind the factoring cost ( both recourse and non- recourse) vis a vis collection cost and bad debt as a percentage of sale.  The company has improved its rating from LBBB+ to A- ( long term) as per recent ICRA rating. The company can also go for financing its working capital through commercial paper, if accessible which is available at a lower cost.
  14. 14. Short term Borrowings v/s Credit Period  The Company has obtained short term obligations at around 13.6 % .  It is very important to understand that as per the credit policy of the company it offers around 2%( 0 days) cash discount to its debtors for payment upfront.  The company needs to make an effective credit policy to ensure that the credit period offered is not at the cost of its earnings.  The company also needs to ensure that the implicit cost imbedded in the credit period does not exceed market rate of competitive goods.
  15. 15. Recommendations  The company has exports of 273million in the recent years. The same has reduced from 334 million in previous years.  The company can search for innovative products such as forfeiting or pre shipment or post shipment finance  Advantages: (1) Improved liquidity. (2) Convert credit sales into cash sales. (3) Credit limit does not get blocked
  16. 16. Pros Cons  Signifies efficient working capital management.  Saving in interest expenses.  Less risk of Bad-debt  For eg. Automobile Industry  Risk of failure to meet short-term obligation.  May result in lower credit rating because of failure/delay in payments.  Bank may charge higher interest rate.  For eg. Steel Industry Negative Working Capital
  17. 17. THANK YOU

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