The document discusses working capital, which represents a business's liquidity and ability to meet short-term debts and expenses. It defines working capital's key components and importance, outlines formulas for calculating optimal levels, and financing options. It then analyzes an Indian steel manufacturer's working capital cycle, current ratio, inventory levels, and compares it to peers. Recommendations include increasing creditors cycles, exploring factoring, and utilizing export financing options to improve liquidity.

1. A P L A P O L L O T U B E S L T D .
Working Capital

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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

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