Working Capital Analysis of India Cement Limited

Rajat Kataria

10ESPHH010006

ContentsCement Industry in India....................................................................................................................3

Brief profile of India Cements Ltd...................................................................................................3

Impact of Budget on Cement Industry from year 2007 to 2010..........................................4

Working Capital Analysis....................................................................................................................4

Working Cycle and Turnover Ratio Analysis................................................................................5

Conclusion...............................................................................................................................................6

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Cement Industry in India India, being the second largest cement producer in the world after China with a total capacity of 151.2 Million Tones (MT), has got a huge cement industry. The cement industry in India is dominated by around 20 companies, which account for almost 70% of the total cement production in India. The cement industry comprises of 125 large cement plants with an installed capacity of 148.28 million tonnes and more than 300 mini cement plants with an estimated capacity of 11.10 million tonnes per annum. In last few years, the Indian cement industry witnessed strong growth, with demand reporting a compounded annual growth rate (CAGR) of 9.3% and capacity addition a CAGR of 5.6% between 2004-05 and 2008-09.

Cement tracks GDP growth: In general it is said that the sector grows at the rate of 1.25 to 1.3 times of GDP. It holds true if one looks at the ratio over a two decade period. Annual average rate has been around this level.

Brief profile of India Cements Ltd. The India Cements Ltd was established in 1946 and the first plant was setup at Sankarnagar in Tamilnadu in 1949. India Cements is the largest cement manufacturer in South India. It is the third largest cement producer in the country with an annual capacity of 8.8 million tonnes. Cement manufactured by India cements is marketed under the brand names of ``Coromandel King'', ``Sankar Sakti'' and ``Rassi Gold''.

After largely focusing on the South since its inception, the company has now set its eyes on the Northern markets. It announced plans to set up two cement plants in Rajasthan and Himachal Pradesh with a total annual capacity of 3.5--4 million tonnes and captive power plant of about 40--50 MW. These would entail a total investment of Rs.1,450 crore.

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Impact of Budget on Cement Industry from year 2007 to 2010

The increased focus on infrastructure development and housing sector is expected to raise demand for cement, key construction material, and hence volumes of cement manufacturers.

The hike in excise duty on cement products is negative for the industry but this can be overwhelmed by improved demand from the greater thrust on infrastructure and rural sectors. The cement industry, especially asbestos cement manufacturers, could benefit from the rural housing impetus in the budget. Acceleration in urban housing and construction, and other infrastructure-related activity under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and National Rural Employment Guarantee Act (NREGA) will revive demand for various cement products, which is experiencing excellent demand from the rural markets.

The government has increased budgetary allocation for roads under NHDP. Further, with more incentives being spelled out for the infrastructure and housing sector, cement manufacturers will continue to benefit.

Over the years, the custom duty has been reduced for the cement sector, there by benefiting the sector and encouraging more infrastructure development.

Working Capital Analysis Working capital is a measurement of an entity’s current assets, after subtracting its liabilities. Sometimes referred to as operating capital, it is a valuation of the amount of liquidity a business or organization has for the running and building of the business. Generally speaking, companies with higher amounts of working capital are better positioned for success. They have the liquid assets needed to expand their business operations as desired.

Working Capital Analysis for India Cements Ltd.

India Cements Ltd. Mar 2004

Mar 2005

Mar 2006

Mar 2007

Mar 2008

Mar 2009

Rs. Crore (Non-Annualized) 12 mths 12 mths 12 mths 12 mths 12 mths 12 mths

Current assets 624.49 581.45 727.13 981.19 1348.54 1304.16

Cash & bank balance 3.73 2.92 43.62 230.19 425.64 311.63

Inventories 159.07 201.6 213.82 248.49 350.64 390.91

Receivables 461.69 376.93 465.17 480.98 482.17 596.23

Expenses paid in advance 0 0 4.52 21.53 90.09 5.39

             Current liabilities & provisions 258.55 321.4 380.27 434.32 984.51 1153.34

Sundry creditors 115.06 122.27 115.06 151.77 623.94 744.55

Acceptances 45.32 73.36 69.26 22.13 0 0

Deposits & advances from customers & employees 76.24 79.75 129.9 169.98 216.32 256.44

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Interest accrued 18.89 15.81 37.77 5.49 4.73 5.07

Share application money 0.04 0 0 0 0 0

Other current liabilities 1.81 28.79 28.28 54.49 73.63 61.9

Provisions 1.19 1.42 0 30.46 65.89 85.38

             

Net Working Capital 365.94 260.05 346.86 546.87 364.03 150.82

Looking over the 6 years, we see that the current assets increase from 2004 to 2008 and then declined slightly.

Current Liabilities increased at a decent pace from 2004 till 2007. Liabilities got drastically increased to 984.51 Cr in 2008. This was due to the fact that the amount from Sundry Creditors got increased.

The big increase in operating cash flow has come in the back of increase in Sundry creditors in year 2008. It appears that the company has outsourced more of its work to third party manufacturers and hence the big increase in Creditors. This is reason why we have decreasing working capital from year 2008 onwards.

In year, there was a sudden surge in net working capital to 546.87 crore. This is due to the fact that the company’s plants suffered a marginal set back in terms of production. Unscheduled breakdowns at 'the cement plants at Vishnupuaram, Chilamakur and Yerraguntla together with a planned stoppage of one of the kilns at Vishnupuram for up gradation, all led to marginal loss in clinker production.

This was also due to Restrictions on power availability from the grid both in Tamil Nadu and Andhra Pradesh. Tamil Nadu Electricity Board imposed a 40% power cut in terms of both Maximum Demand and Energy besides imposing peak hour restrictions for 8 hours a day when power supply is limited to lighting loads, in Andhra Pradesh unofficial load shedding and power restrictions were experienced. The company could not avoid some loss of production besides higher power cost on account of running its DG sets.

Working Cycle and Turnover Ratio AnalysisWorking cycle & Turnover atios

India Cements Ltd. Mar 2004

Mar 2005

Mar 2006

Mar 2007

Mar 2008

Mar 2009

Rs. Crore (Non-Annualized) 12 mths 12 mths 12 mths 12 mths 12 mths 12 mths

Working cycle (days)            

Raw material cycle164.2787

434153.2625

471189.0760

787182.6265

069187.5789

474195.2410

979

WIP cycle22.31267

21719.98105

0915.61197

9210.76257

20912.31359

314.37468

42

Finished goods cycle4.277914

7664.178011

4612.982510

1742.867143

5773.001027

0912.968676

328

Debtors40.94628

03244.70729

07642.89318

05935.06813

7229.44722

54131.99861

647

Gross working capital 231.8156 222.1289 250.5637 231.3243 232.3407 244.5830

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cycle 107 002 487 598 929 749

Creditors77.75564

03888.97209

55681.34280

28677.77075

338134.8637

508133.3643

706 Net working capital cycle

154.0599703

133.1568046

169.2209458

153.5536064

97.47704209

111.2187043

             Turnover ratios (times)            

Raw material turnover1.262138

3491.577868

6511.166885

8691.256452

731.325991

3951.337424

245 Finished goods turnover

9.194108516

8.102289132

7.965722525

8.062375528

9.888024721

9.57216028

Debtors turnover8.914118

6248.164216

4818.509511

18610.40830

87712.39505

57311.40674

317

Creditors turnover3.730121

6236.414126

0167.266711

6817.752115

716.743346

8885.200789

106

Here we see that the raw material cycle increased from 2005 to 2006 then almost decreased and then increased. This means that more cash is being blocked in form of raw materials.

WIP Cycle is the amount of time required in making a product. It is continuously decreasing. This is a healthy sign for the company.

Finished Goods Cycle decreased from 2005 to 2006 and then almost remained constant.

Working cycle for Debtors is continuously decreasing and for creditors increased from 2007 to 2009. This means that company is getting quick money from its debtors and taking more days in paying it.

The working capital cycle measures the amount of time that elapses between the moment when your business begins investing money in a product or service, and the moment the business receives payment for that product or service. It is decreasing from 2004 to 2005 then increase in 2006, then decreased till 2008 and then got increased in 2009. A short working capital cycle suggests a business has good cash flow.

Debtor turnover ratio was constant till 2006, and then got increased till 2009. Similarly Creditors turnover ratio was constant till 2006 and then got decreased till 2009. This means that the company has become more efficient in credit management.

ConclusionThe rub on effect of the slow down in the Indian economy did not however impact the cement industry, which again registered a healthy growth of 8.4% in domestic demand during FY 09. On the back of this demand cement prices have also remained firm during the year. India is expected to clock 7% GDP growth over the next few years. Cement demand growth can provide a valuable insight into the growth of the construction activity. The same in turn will indicate dynamics of infrastructure development. Thus, this basic construction material plays a pivotal role in the growth of an economy.

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