Abstract
The management of Working Capital is one of the most important and challenging
aspect of the overall financial management. Merely more effective and efficient
management of working capital can ensure survival of a business enterprise. Working
Capital Management is concerned with the problems that arise in attempting to manage the
Current Assets, Current Liabilities and the interrelation that exists between them. This is a
two-dimensional study which examines the policy and practices of cash management,
evaluate the principles, procedures and techniques of Investment Management, Receivable
and Payable Management deals with analyzing the trend of working capital management
and also to suggest an audit program to facilitate proper working capital management in
Indian Tyre Industry. The study covers a production of 8 year viz, 1999-2007. For the
purpose of investigation both primary and secondary data is used. The collected data is
analyzed by applying research tool which include accounting tools like Analysis, Cash Flow
Analysis, Common Size and Trend Analysis. They reveal that there is a stand off between
liquidity and profitability and the selected corporate has been achieving a trade off between
risk and return. Efficient management of working Capital and its components have a direct
effect on the profitability levels of tyre industry.
Introduction
Working Capital Management refers to all management decisions and actions that ordinarily
influence the size and effectiveness of the working capital. It is concerned with the most effective
choice of working capital sources and the determination of appropriate levels of the current assets and
their use. It focuses attention to the managing of current assets, current liabilities and the relationships
that exist between them. In the present day of rising capital cost and scarce funds, the importance of
working capital needs special emphasis. It has been widely accepted that the profitability of a business
concern likely depends upon the manner in which its working capital is managed. The inefficient
management of working capital not only reduces profitability but ultimately may also lead a concern to
financial crises. On the other hand, proper management of working capital leads to a material savings
and ensures financial returns at the optimum level even on the minimum level of capital employed.
Both excessive and inadequate working capital is harmful for a firm. Excessive working capital leads to
un-remunerative use of scarce funds. On the other hand, inadequate working capital usually interrupts
the normal operations of a business and impairs profitability. There are many instances of business
failure for inadequate working capital e.g. Modi Rubbers. Further, working capital has to play a vital
role to keep pace with the scientific and technological developments that are taking place in the area of
tyre industry. Also, the current financial parameters of tyre industry are much less than the desired
level. In this context, an attempt has, therefore, been made to undertake an indepth study on working
capital management of Indian Tyre Industry.
Objectives of the Study
The primary aim of our study is to examine and assess management of working capital of selected
companies of Indian Tyre industry i.e. JK, MRF, Apollo, Ceat.
In this broader framework an attempt will be made to meet out the following specific objectives
of the study:-
1. To study the components of Working Capital Management in Indian tyre Industry
2. To assess at length, prevalent practices of inventory management, cash management and
receivables management on the profitability and liquidity of firms in the Tyre Industry.
3. To analyse the relative proportion of different sources of finance for working capital of Indian
Tyre industry.
Research Design
The present study is focused on understanding the impact of efficient working capital
management on the profitability and liquidity of the companies. Hence, it’s a case of purposive
sampling requiring an in-depth analysis of each selected company. This has led to selection of four
companies representing India Tyre Industry, namely MRF Ltd., Apollo Tyres Ltd., J.K. Tyres Ltd. and
Ceat Ltd.
The study covers a period of 8 years (1999-2000 – 2006-2007) and the data is collected from
primary and secondary sources. The data so collected is analyzed by applying various research tools
which include accounting tools like Ratio Analysis, Cash Flow Analysis, Common Size and Trend
Analysis.
Key Observations and Findings
The following are the major observations and findings of the study w.r.t each component of the
working capital of the sample companies:
Inventory Management (a)
• Inventory Turnover ratio signifies the amount of sale generated with each unit invested in raw
material. The inventory utilization by J.K. and Ceat is quite effective but Apollo and MRF need
to take measures to increase to stock turnover. This is possible only by shortening the operating
cycle in days taken from the point of purchase of raw material to its conversion to the final sale
to the consumers and the money getting back into the organization to be utilized again by the
company to purchase raw materials for the next operating cycle.
Exhibit 1:
Year Apollo J.K. Ceat MRF
2000-01 3.82 3.86 3.83 3.23
2001-02 5.30 7.17 4.34 2.94
2002-03 6.12 -- 5.76 3.67
2003-04 5.75 7.54 6.16 3.92
2004-05 5.67 7.62 7 4.25
2005-06 5.29 7 7 4.69
2006-07 5.75 5.5 8.76 5.9
Comparative Inventory Turnover Ratio
10
9
8
7
6 Apollo
5 J.K.
4 Ceat
3 MRF
2
1
0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
• The raw material holding period identifies the number of days the raw material stays in the
company before being put into the production process. The raw material holding period of Ceat
is quite reasonable but Apollo and J.K. Tyres have to reduce the number of holding days.
Exhibit 2: Comparative Raw Material holding days of Apollo, J.K. Ceat and MRF (in days)
Year Apollo J.K. Ceat MRF
2000-01 34 33 -- 22
2001-02 27 61 21 27
2002-03 30 -- 14 25
2003-04 32 57 23 25
2004-05 38 54 26 21
2005-06 38 34 10 25
2006-07 30 30 15 25
Comparative Raw Material holding day
70
60
50 Apollo
40 J.K.
Ceat
30
MRF
20
10
0
2000- 2001- 2002- 2003- 2004- 2005- 2006-
01 02 03 04 05 06 07
• J.K .tyres has already started taking the initiative to reduce the number of holding days from 61
days to 30 days. This can be done by avoiding stocking up of raw materials.
• The finished goods holding period of Ceat is very less of 12 days as compared to Apollo, J.K.
and MRF which is around 18-20 days.
• Reducing the number of holding days whether raw materials or finished goods is important as
this will shorten the operating cycle which would increase the working capital turnover
indicating its efficient use.
Exhibit 3: Comparative Finished goods holding period of Apollo, J.K. Ceat and MRF (in times)
Year Apollo J.K. Ceat MRF
2000-01 25 28 -- 36
2001-02 19 15 23 37
2002-03 12 -- 20 32
2003-04 15 12 18 30
2004-05 14 10 12 29
2005-06 17 17 11 23
2006-07 18 18 12 20
Comparative finished goods holdiong period
40
35
30
25 Apollo
20 J.K.
Ceat
15 MRF
10
5
0
2000- 2001- 2002- 2003- 2004- 2005- 2006-
01 02 03 04 05 06 07
• MRF has the highest inventory to current assets ratio of around 50%. This means that a lot of
money of MRF is blocked in excess inventory storage which should be reduced.
Receivables Management (b)
• Receivables management indicates management’s efficiency in getting the money back into the
organization in the shortest period of time. The debtors turnover ratio reflects the number of
times the money received from debtors is rotated in the business cycle in a year. The Debtors
Turnover Ratio of Apollo is the best indicating the management’s efficiency in getting the
money back from the debtors and again rotating it in the business to generate sales.
Exhibit 4: Comparative Debtors Turnover Ratio of Apollo, J.K. Ceat and MRF (in times)
Year Apollo J.K. Ceat MRF
1999-2000 -- 7.06 -- --
2000-01 9.25 6.73 6.04 6
2001-02 9.89 8.46 7.2 6.37
2002-03 16.65 - 8 6.74
2003-04 22.69 5.63 7.59 7.52
2004-05 19 5.52 7.75 7.98
2005-06 18 6.63 7.97 8.45
2006-07 20 6 4.68 8.08
Comparative Debtors Turnover Ratio
25
20
15 Apollo
J.K.
10 Ceat
MRF
5
0
1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006-
2000 01 02 03 04 05 06 07
• J.K., Ceat and MRF should take stringent steps to get the money back into the organization
quickly by reducing the average collection period.
Exhibit 5: Comparative Average Collection Period of Apollo, J.K. Ceat and MRF (in days)
Year Apollo J.K. Ceat MRF
1999-2000 -- 51 55 --
2000-01 39 53 60 60
2001-02 36 43 50 57
2002-03 22 -- 45 53
2003-04 16 64 47 48
2004-05 19 65 47 46
2005-06 20 54 45 43
2006-07 18 60 77 45
Comparative Average Collection Period
90
80
70
60 Apollo
50 J.K.
Ceat
40
MRF
30
20
10
0
1999- 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
2000
• The Debtors Turnover Ratio of Apollo is very high which is quite appreciable. This is due to
the fact that the average collection period of Apollo is very short of around an average of 24
days as compared to others ranging from 50 to 55 days.
• The average payment period of MRF is very short which is almost equivalent to its average
collection period. MRF should increase the payment period unless and until early payment
helps in getting heavy cash discounts.
Exhibit 6: Comparative Average Payment period of Apollo, J.K. Ceat and MRF (in days)
Year Apollo J.K. Ceat MRF
1999-2000 -- 148 -- --
2000-01 131 156 90 77
2001-02 141 96 97 80
2002-03 100 -- 141 67
2003-04 82 129 143 57
2004-05 82 114 147 52
2005-06 78 97 125 51
2006-07 81 90 111 48
Comparative Average Payment Period
180
160
140 Apollo
120
100 J.K.
80
Ceat
60
40 MRF
20
0
1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006-
2000 01 02 03 04 05 06 07
Cash Management (c)
• Cash management throws light on the judicious and efficient use of cash (which is the most
liquid asset of an organization). J.K. seems to have the best cash management system since it is
the policy of management to invest excess cash into profitable investment avenues.
• Apollo needs to look into its cash management system and bring some changes as there seems
to be unnecessary idle cash lying in the business which could otherwise be used more
productively.
• Ceat already has started with remedial measures of utilizing excess cash into suitable ventures.
Exhibit 7: Comparative Cash Balance of Apollo, J.K. Ceat, and MRF (crores)
Year Apollo J.K. Ceat MRF
1999-2000 44.83 18.88 71.89 --
2000-01 56.28 55.16 64.18 34.88
2001-02 66.34 39.07 46.42 34.39
2002-03 97.61 -- 66.15 40.26
2003-04 106.35 38.23 38.89 36.72
2004-05 110.43 36.11 31.23 46.02
2005-06 231.36 39.32 39.61 53.32
2006-07 172 23.87 34.92 72.88
Comparative Cash Balance
250
200
Apollo
150 J.K.
Ceat
100 MRF
50
0
1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006-
2000 01 02 03 04 05 06 07
• The percentage of cash out of total current assets of Apollo is very high ranging from 15% -
20% as compared to others ranging from 2% - 10%. The company needs to utilize the excess
cash and bring down the percentage. This will also help the company to increase its
profitability.
Key Observations and Summary
The major observations of the study are as follows:-
• The selected sample companies have been following either an aggressive or a conservative
approach:
APOLLO - Aggressive approach
J.K - Aggressive approach
CEAT - No definitive approach
MRF - Conservative approach
• All the companies have a positive net working capital except in the case of Ceat Ltd. in 2005-
2006 and 2006-2007. On an average, the net working capital is largest in MRF followed by
Apollo, J.K. and Ceat.
• When quick assets are compared with current liabilities, it is revealed that the former are
insufficient to cover current liabilities in case of J.K. Tyres. For Ceat Ltd. there has been a
sudden decline in quick ratio in the year 2005-2006 and 2006-2007. MRF and Apollo are in
good position to pay off current debts from quick assets.
• If standard current ratio is to be taken as 2:1 then Apollo and MRF have current ratios equal to
or more than two. But incase of J.K. and Ceat the current ratio is less than two which reflects a
poor liquidity position of these two enterprises.
• There is a stand off between liquidity and profitability position of the tyre companies. These
two don’t go hand in hand, as incase of MRF where liquidity levels are very high as compared
to the industry standards but profitability levels do not rise upto expectations even though MRF
has the largest market share. There is an inverse relationship between the two as analysed from
financial reports. Higher the liquidity levels, lower would be the profitability and vice-versa,
therefore, tyre companies have to maintain a delicate balance between the two.
• The efficient management of Working Capital and its components have a direct effect on the
profitability levels of the tyre companies:-
• Although J.K. has the highest working capital turnover ratio, much above the industry level, it
shows no effect on the profitability levels. This may be due to over-trading which the company
should look into as early as possible. Also, there is a gradual decline in the liquidity level and
the company should be aware of a liquidity crises coming up.
• The tyre companies have on an average half of their total assets in the form of current assets.
The average ratio of current assets to total assets is largest for MRF followed by Ceat, Apollo
and J.K. Of the total different components of current assets, the share of inventories in total
assets, on an average, is largest followed by receivables and cash. Over a period of time, the
share of cash has declined except incase of MRF. Since inventories occupy a major share in
current assets and its share has increased over a period of time, the tyre industry should pay
more attention to management of inventories. The increasing share of inventories indicates
that current assets seem to have become less liquid.
Conclusion
The present study reflects that the proper management does affect positively on the profitability levels
of the sample companies. The companies over the years have realized the importance of efficient
working capital management and have worked in bringing about a productive change in WCM
techniques. The results reveal that there is a standoff between liquidity and profitability and the
selected corporate has been achieving a tradeoff between risk and return.
WORKING CAPITAL MANAGEMENT SCENARIO
IN
INDIAN INDUSTRY
SUBMITTED TO:
PROF [Link]
SUBMITTED BY:
RAHUL GOSWAMI
094140
MBA-FB&E 2009-11