INDUSTREIAL REPORT ON

ESSAR GROUP OF COMPANY

PREPARED BY

VIDHI R. SACHDEV

SUBMITTED TO MILAN UMRADIYA

COLLEGE SMT.N.C. & B.V.GANDHI MAHILA ARTS AND COMMERCE COLLEG

PREFACE
As per the syllabus prescribed by Mumbai university B.M.S. programme . It is compulsory to take INDUSTRTIAL VISIT and Prepare a report. I have visited an industry that played dominant role to develop Practical viewpoint and made aware about the problems, opportunities.

The industrial training at ESSAR GROUP OF COMPANY INDIA, LTD. Proved to be a golden opportunity for me enrich my knowledge By comparing practical Knowledge with theoretical knowledge.

ACKNOWLEDGEMENT
Wisdom is knowing what to do next Skill is knowing how to do it And Virtue is doing it! To work the corporate environment of Essar has taught me all these three Wisdom, Skill and Virtue. I would like to express my sincere feeling to all those who have guided and taken kind interest to me is useful to business and industry.

I express my deep sincere gratitude to all those persons who have helped me through out the project and without their kind cooperation this project would never have reached to its fruitfully conclusion. First of all, I sincerely thank the management of Essar learning centre for allowing me to carry out my project in their organization.

I would like to special thanks to our principal and my project guide Mr. Milan Umradiya who has given me his precious time for making my report perfectly. VIDHI SACHDEV

SR. NO. 01 02 03 04 05 06 07 08 09 10 11 12

TOPIC HISTORY ESSAR GROUP PROFILE ESSAR SHIPPING ESSAR OIL & GAS RETAIL & MARETING OTHER BUSINESS OF ESSAR MISSIO AND VISION OF ESSAR GROUP ESSAR PHILOSOPHY ESSAR LEADERSHIP VALUE WORKING CAPITAL MANAGEMENT WORKING CAPITAL CYCLE AND POLICY WORKING CAPITAL ANALYSIS

PAGE NO. 04 06 08 13 20 21 23 24 25 26 36 40

HISTORY OF ESSAR GROUP

The name of the company ESSAR is getting from the first letter of the two brothers SHASHI and RAVI S as ESS and R as AR thus the combination of them make ESSAR The essar group builds enduring value through: Assets of $4.4bn (Rs. 20000cr.) in services & manufacturing. Rapid Growth in key sectors, build on firm foundations Setting & surpassing world-class benchmarks Using cutting-edge technology for strategic advantage Moving ever closer to customers and building strong brands Their valuable employees and their positive attitude

Ruia family has been in business and trading since the 1800s. when the family first move to Mumbai from Rajasthan in Western India in 1956, Nand kishore Ruia, the group founder, moved south to Chennai to begin independent business activities. In 1969, following the untimely demise of Nand kishore Ruia, his sons Shashi and Ravi Ruia took over the group. Along with a team of seasoned professionals, the Ruia have built the perfect platform for Essars accelerating growth, with a strong foundations at Indias industrial core and in the sunrise services sector, Essar has stayed firmly in the forefront of new opportunities. An early start has made us a key player in Indias exploding telecom market. Similarly, we set up Indias first independent power plant and its first new generation private steel plant.

From the beginning, the group was built on businesses at the heart of the Indian economy, often replacing foreign enterprises in India, such as in oil & gas services, construction or shipping. The year 1987 marked its entry into the core manufacturing sector, as Essar Construction began to build a hot briquette iron plant at Hazira. Over the next decade, it invested billions to build a 2.4 mtpa steel mill and a 515 MW power plant at Hazira, a 3.3 mtpa pelletisation plant in Vishakhapatnam, a 400,000 tpa cold rolling mill in Indonesia and a 12 mtpa oil refinery which is under construction at Vadinar, Jamnagar (Gujarat).

THE ESSAR GROUP PROFILE

ESSAR POWER LTD. ESSAR STEEL LTD. ESSAR OIL & GAS LTD.

ESSAR GROUP

ESSAR CONSTRU-CTION INDIA LTD.

ESSAR TELECOM LIMITED

ESSAR SHIPPIN G LTD.

The ESSAR group is one of Indias largest corporate houses with interests spanning the manufacturing and services in both old and new economies: Steel, Power, Shipping, Construction, Oil &Gas and Telecom. The groups enterprise value is approximately US$ 15 billion (Rs. 67,000 crore) and a turnover of over US$ 2.08 bn (Rs. 95 crore). Strategic investments made by the group over the past decade have resulted in the creation of tangible and intangible assets that are at the heart of the Indian economy. Essar is one of Indias largest corporate houses with leadership position in the high-growth infrastructure sectors of Steel, Power, Construction, Communication, and Shipping & Logistic. It employs 20,000 people in 50 locations worldwide. The Groups revenue guidance for the year ending March 2007 is over USD 4 billion. The entire groups investments have been consolidated under Essar Global Ltd., along with its Ssix sectorial holding companies: Essar Steel Holdings Limited, Essar Energy Holdings Limited, Essar Power Holdings Limited, Essar communications holdings limited, Essar shipping & Logistic Holdings limited, and Essar construction India Limited. The group takes pride in being a high-performance multinational organization, providing world-class services and products. Manned by a highly efficient and dynamic team of employees, the group is growing stronger every day. A committed corporate citizen, the group provides unwavering support to the community as well as initiates various social and ecological drives that have a positive impact on society.

ESSAR SHIPPING

The Company Essar Shipping Ltd. (ESL) is e of the worlds leading integrated sea logistics companies, with a special focus on transportation solutions for the global energy business. A strong management team of experienced marine professionals steers the company, maintaining customer focus, world-class operations, an impression safety record and a consistent financial performance. Their fleet accounts for almost 14% of India shipping fleet and they own the countrys largest VLCC (very Large crude carrier), which is also Indias first double hull, double bottom VLCC.

Rig to refinery and beyond As an end-to-end sea logistics provider, ESL serves customers across the value chain form rig to refinery-and beyond; offering services in the areas of bulk transport, supply chain management and storage and distribution. They are global experts in the energy business, with over 20 years of oil-handing experience. Their fleet handles a daily average of eight million barrels of crude oil, 320,000 barrels of petroleum products and 355,000 tonnes of dry cargo. ESL operates in three main business areas: first, their energy transportation group provides sea transportation management services to the global energy industry, including US, European and Indian oil companies. A key advantage is that they are one of the worlds largest independent owner/operators of Suezmaxes tankers. In March 2004 we acquired first and largest double hull double-bottom VLCC. They have long-standing relationship with all the major global oil companies and chartered to international oil majors like Shell, Exxon/Mobil, Chevron, Stat oil, Ultramar Inc., BP Amoco and Texaco. Second, ESLs integrated bulk/petroleum product transportation services group offers supply chain mgt. services for the sea transportation of bulk cargo and refined products. This group services Steel, power, cement, fertilizer and petroleum companies in South East Asia and India, for clients such as Indian Oil Corporation, Bharat petroleum and Hindustan petroleum. ESL also handles 5 million metric tonnes of coastal dry bulk cargo annually. Third, to complete the integrated solution chain, their crude oil and refined products handling and storage group provides storage group and distribution services in Indias, through a wholly owned subsidiary vadinar oil Terminal Ltd., owns port and terminal facilities to

handle the receipt, Storage and dispatch of crude oil and petroleum products at Vadinar in Jamnagar, Gujarat, which is an all-weather, deepdraft port. A complete sea logistics provider ESL is a truly global company, deriving nearly three-quarters of revenues from international business. Their fleet of vessels made up of one VLCC, six Suezmaxes, three product tankers, five dry cargo bulk carriers, 11 mini-bulk is modern, sophisticated, and fuel-efficient and one of the Indias youngest, with an average are of 14 years against of 19 years. The Vadanir terminal extends the value chain of ESLs sea logistics services by providing storage and handling facilities for 32 MTPA of crude oil and 14 MTPA of petroleum products.

World-class Standards Essar Shipping is one of the worlds lowest-cost operators with an exemplary safety record. They handle their technical management entirely in-house, maintaining their fleet to the highest quality, safety and operational standards. T hey were the first Indian shipping company to obtain the international safety management(ISM) code for their fleet of bulkers and tankers in July 1995, three years ahead of the international Maritime Organizations (IMO) deadline. They were also the first Indian shipping to voluntarily comply with ISO 9002:1994 standards and have now upgraded to ISO 9001:2000 standards. Their vessels received the US Coast Guards AMVER award for high maritime safety standards. They were the first Indian company to operate oil tankers in the highly competitive Atlantic region,

especially to the US, which has stringent environment laws and heavy liabilities for failure. They are among the first shipping in the world to comply with the International Ship and Port Security (ISPS) code. Customer-led, flexible and Profitable The needs of their customers drive their business and their core competencies are closely aliened to their requirements. They carefully study the geographical and product mix of their clients to provide the best solutions, optimizing their businesses and saving them time and money. Their customers know they can count on them for scheduling flexibility, reliability, availability and management accessibility. They also support clients with a comprehensive shipbroker network and a sophisticated e-backbone, which allows them to track their cargo status on a real-time basis. Their lean organization and management give them the flexibility to respond quickly to customer needs and to market conditions. Their astute mix of long-term and spot contracts gives us a vessel utilization rate of around 95%. Since trending assets wisely are crucial in the shipping business, ESL has invested consistently during recessions to be able to profitable encase assets during revivals. ESL is publicly listed and has remained financially strong even during periods of industry, with consistently strong revenues and profit.

ESSAR OIL & GAS

The Company Essar Oil Ltd. (EOL) is emerging as a leading integrated oil and gas company spanning the entire value chain, from deep within the earth all the way to the end-consumer. They have exploration and production (E&P) rights in some of India are most valuable oil and gas blocks. EOL is building a state-of-the-art refinery and a countrywide network of modern retail fuel outlets.

Exploration and Production They were one of the first private companies to bid for exploration blocks in 1993. They won two onshore blocks in Rajasthan and one in the Mumbai offshore region, where they have completed the first phase and are moving into test grilling. They were than awarded a block each in the Cam bay basin (Gujarat) and Cachar (Assam). They believe that they have lowered the risks and increased the rewards of exploration by carefully selecting the blocks with maximum potentia They also won the Ratna and R-series for development and production, in partnership with ONGS and a major international company. The Ratne series, located south of the prolific Bombay High Field, holds an estimated 500 million barrels of oil reserves. Independent international engineering firms have certified its high latent value and EOLs share is worth around US$ 230 million. Their CBM (Coal Bed Methane) division pioneered a project in Mehsana, Gujarat using innovative technology to establish the presence of methane gas. Although the US the lone country to exploit CBM commercially, EOL has already drilled three wells and is producing the gas experimentally, the only Indian company to do so. EOL has also won a CBM block in Raniganj, West Bengal.

Global-scale refinery They were among the first to enter the refining sector when it was opened to private participation. Their US$ 2.14 bn (Rs.99 billion) refinery at Vadinar. This has achieved full financial closure, is two-third complete and will be commissioned in 24 months. With a capacity of 10.5 MTPA (that can rise to 12MTPA after de-bottlenecking), this world-class refinery complex focus on producing middle distillates like aviation turbine fuel, kerosene oil and high speed diesel, which from over 60% of Indias demand. They will also produce LGP and transport fuels including petrol conforming to Euro 3rd and 4th product quality standards for the domestic and export markets. High automation, the latest technology and an ideal location on Indias West Coast will give them significant competitive advantages. They permission to import crude oil freely in VLCCs, which offers considerable cost savings especially since they are one of the closest refineries to the Middle East, the main supply source for crude oil. With an eye on future value building, they have also created the infrastructure to double their refining capacity at a third of the cost and in half the time of a Greenfield project.

Essar Oil operates a fully integrated oil company of international size and scale
Essar Oil's assets include developmental rights in proven exploration blocks, a 14 MTPA refinery on the west coast of India and over 1,376 Essar-branded oil retail outlets across India. Plans are under way to increase its exploration acreage in various parts of the globe, expand its refinery capacity to 18 MTPA, and open 1,700 outlets countrywide by March 2011. Our global portfolio of onshore and offshore oil and gas blocks, with about 45,000 sq km is available for exploration. We have over 300,000 bpsd (barrels per stream day) of global cruderefining capacity that is being expanded to 375,000 bpsd, with the refining capacity being enhanced by almost double. We have a controlling stake of 50 percent stake in Kenya Petroleum Refineries Ltds 80,000-bpsd refinery; the remaining 50 percent is owned by the Kenyan government.

Global exploration portfolio

We are aggressively growing our presence in the Exploration and Production business. We have 2C contingent resources of 148 mmboe (million barrels of oil equivalent), and best estimate prospective resources of 1,012 mmboe.

Largest CBM player in India

We have an acreage of over 2,700 sq. km in India, which gives us the largest CBM acreage in the country. Our CBM block in Raniganj is close to commercial production and has signed customer contracts with several companies

Large refining capacity

We have a 14 MTPA refinery at Vadinar in Gujarat, which started commercial production on May 1, 2008. It has been built with state-of-the-art technology and has the capability to produce petrol and diesel suitable for use in India as well as advanced international markets.

It will also produce LPG, Naphtha, light diesel oil, Aviation Turbine Fuel (ATF) and kerosene. The refinery has been designed to handle a diverse range of crude from sweet to sour and light to heavy. It is supported by an end-to-end infrastructure setup including SBM (Single Buoy Mooring), crude oil tankage, water intake facilities, a captive power plant (currently 500 MW, being expanded to 1,200 MW), product jetty and dispatch facilities by both rail and road.

We have made huge investments in installing the most advanced equipment and units in our refinery. At 97 m, the refinerys crude column is Asias tallest and capable of enhanced separation of petroleum products. The DHDS reactor is

also the largest in its category capable of producing Euro V compliant diesel. The refinery is, in fact, unique in its complexity and its ability to produce value-added products. All units have operated many notches over their rated capacities with the crude unit achieving over 14 million tonnes (300,000 bpsd) in the very first year of operation. This is a first for any refinery in India. We are expanding the refinery capacity to 18 million tonnes with an increase in its complexity from 6.1 currently to 11.8 on the Nelson index. As part of a continuous optimization programme, the company has decided to further expand the refinerys capacity by 2 million tonnes to 20 million tonnes (405,000 bpsd) by September 2012. If market conditions are favourable, the capacity will be enhanced further to 38 million tonnes, with a complexity of 12.8. Until date, our Vadinar refinery has successfully processed more than 32 varieties of crude from across world, including some of the toughest crudes. Plans are afoot to expand the refinery capacity threefold in the next few years. Post expansion, the Vadinar refinery will be among the five largest singlelocation refineries in the world.

Retail and Marketing

Essar Oil serves retail customers through a modern, countrywide network of over 1,376 retail outlets, with plans to increase the numbers to 1,700 retail outlets by March 2011. We were the first private Indian company to enter petro retailing, looking beyond urban markets and reaching out to consumers in Indias heartland. We offer a wide range of products to bulk customers in the industrial and transport sectors. EOL has product offtake and infrastructure sharing agreements with oil PSUs, namely Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL) and Indian Oil Corporation (IOCL). We have received approvals to supply Aviation Turbine Fuel (ATF) to the Indian Armed Forces.

OTHER BUSINESSES OF ESSAR

The Essar Group is a key player in the other blooming sector of Indias growing economy, such as Information Technology, Publishing and Agro-businesses. Essar Information Technology Limited

EITL provides the full spectrum of services including consulting, Enterprise solution, e-business solution, Application & infrastructure and integration & mgt. of IT operation. Following the domain strategy of combining business and technical expertise, the company offer complete business solution in areas ranging from IT strategy formulations, IT infrastructure planning and implementation, to SAP Our core Competencies include:Business Consulting SAP implementation & Support and infrastructure Mgt.

 WORLD CLASS STANDARDS: They insist on settings and surpassing world-class benchmarks in everything they do. No wonder they have the worlds largest gas-based sponge iron plant and are one of the worlds largest integrated sea logistics companies that owns Indias largest double hull, double bottom VLCC (Very Large Crude Carrier). All their business is highly integrated across the value chain and use the latest technology to stay strong and agile. They have invested several billion dollars on exclusive state-of-the-art technology because we believe that it confers strong strategic advantages. TOUCHING MILLIONS OF LIVES: For decades, they have quietly touched the lives of millions of people with the steel to build cars, the oil to fuel, the power to light up thousands of lives and the pipelines to bring drinking water to remote villages. Today, they have come closer by connecting customers with our cellular phone services and talking to thousands of people through our call centers, a countrywide chain of fuel outlets and marketing steel at the retail level.

MISSION & VISION OF ESSAR GROUP

MISSION: To create enduring value for customers and stakeholders in core manufacturing and service businesses, through world-class operating standards, state-of-the-art technology and the POSITIVE ATTITUDE OF their people VISSION: There are 7 Es which define the VISSION of the ESSAR GROUP.
1. EFFECTIVENESS:

Doing the right thing at right time.

2. EFFICIENCY:

Doing things in right way Conserving resources

Creating opportunities Innovating Taking initiative

4. EMPOERMENT: Nurturing self esteem Providing self respect Ensuring self worth Creating trust

5. EDUCATION: Sharing information & knowledge Learning Communicating

6. ETHICS: Having transparent business operation.

7. ENVIRONMENTAL HARMONY: Adding value to society Creating sustainable development

ESSAR PHILOSOPHY
The success of the ESSAR GROUP is dependent on the development & realization of the potential of each of them. The mindset of yesterdays manager was to accept compromise & keep things neat complacency, they should not be afraid to go against todays currents because they know that tomorrow is theirs. They must work on a vision of what business can become.

ESSAR LEADERSHIP VALUE

Integrity at all times Satisfaction to internal & external customers. Facilitate all round excellence Continuously innovate & create Explore growth opportunities in new technologies. Constantly focus on cost reduction.

INTRODUCTION OF WORKING CAPITAL MANAGEMENT

Working capital management is concerned with the management of current assets. It is an important and integral part of financial management as short-term survival is a prerequisites for longterm success. One aspect of working capital management is the trade-off between profitability and risk (liquidity). There is a conflict between profitability and liquidity. If a firm does not have adequate working capital, that is, it does not invest sufficient funds in current assets, it may become illiquid and consequently may not have the ability to meet its current obligations and, thus invite the risk of bankruptcy. If the current assets are too large, profitability is adversely affected. The key strategies and considerations in ensuring a trade-off between profitability and liquidity is one major dimension of working capital management. In addition, the individual current assets should be efficiently managed so that neither inadequate nor unnecessary funds are locked up.

MEANING OF WORKING CAPITAL

There are two possible interpretations of working capital concept: 1. Balance Sheet Concept 2. Operating Cycle Concept It goes without saying that the pattern of management will be very largely influenced by the approach taken in defining it. Therefore the two concepts are discussed separately in a nutshell. Balance Sheet Concept: There are two interpretations of working capital under the balance sheet concept. It is represented by the excess of current liabilities and is the amount normally available to finance current operations but, sometimes working capital is also used as a synonym for gross or total current assets. In that case, the excess of current assets over current liabilities is called net working capital or net current assets. Economists like Mead, Mallot, Baker and Field support the latter view of working capital. They feel that current assets should be considered as working capital as the whole of its help to earn profit and the management is more concerned with the total current assets as they constitute the total funds available for operational purposes. On the other hand, economists like Lincoln and Saliers uphold the former view. They argue that (A) in the long run what matters is the surplus of current assets over current liabilities (B) it is this concept which helps creditors and investors to judge the financial soundness of the enterprise (C) what can always be relied upon to meet the contingencies, is the excess of current assets over the current liabilities since this amount is not to be

returned and (D) this definition helps to find out the correct financial position of companies having the same amount of current assets. The conventional definition of working capital on terms of the differences between the current assets and current liabilities somewhat confusing. Working capital is really what a part of long term finance is locked in and used for supporting current activities. Consequently, the larger the amount of working capital so derived, Greater the proportion of long term capital resources siphoned off to short-term activities. It is difficult to say whether this is right or wrong. Apparently, when firm are warned about right working capital situation, the logic of the above definition would perhaps indicate diversion of long-term finances for short-term purposes. For, if shortterm bank loan were procured to bring in cash, under the conventional method, working capital would evidently remain unchanged. Liquidation of debtors and inventory into cash would also keep the level of working capital according to this definition may produce a false sense of security at a time when cash resources in the absence of adequate profits. Again, under the conventional method, cash enters into the computation of working capital. But it may have been more appropriate to exclude cash from such calculations because one compares cash requirements with current assets less current liabilities. The implications of this in conventional working capital computations is that during the financial period current asset get converted into cash which after paying off the current liabilities, can be used to meet other operational expenses. The paradox, however, is that such current assets as are relied upon to yield cash must themselves to be supported by long-term funds until they are converted into cash. At least three points seem to emerge from the above. 1. The balance sheet definition of working capital is perhaps not as meaningful, except as an indication of the firms current solvency in repaying its creditors. 2. When firms speak of shortage of working capital, they in fact possible imply scarcity of cash resources.

3. In fund flow analysis an increase in working capital, as conventionally defined represents employment or application of funds.

Sources of Working Capital

In India the most prevalent practices to finance working capital is short term funds. The two most sources of finance for working capital are: (1) Trade Credit (2) Bank Borrowing. Trade Credit Trade credit is mostly an informal arrangement and is granted on an open account basis. A supplier sends good to buyer on credit, which the buyer accepts and in effect agrees to pay the amount due as per sales term in the invoice. Open account credit appears as sundry creditors on the buyers balance sheet. Also takes forms of bills payable/notes payable. It refers to the credit customer gets from supplier of goods in the normal course of business. Buying firms do not have to pay the cash immediately for the purchase rate and this deferral is, facilitate company to finance short term working capital, called trade credit. Credit Trade Credit term refer to the condition under which the supplier sells on credit to the buyer is required to pay the credit. It includes the due date and cash discount. Benefits and Costs of Trade Credit: It is spontaneous sources of finance and its major advantages are: Easy availability Flexibility

 Informality

Cost of trade credit: buyer should calculate the cost of foregoing cash discount to decide whether or not to avail cash discount. The following formula can be used: %Discount 100% Discount * 360 (credit-discount period)

Buyer should also consider the implicit costs of trade credit, and particularly of stretching account payable. These implicit costs may be built into the piece of goods and services. Buyer can negotiable for lower prices for payment in cash. Stretching account payable does generate additional short term finance, but it can prove to be very costly sources. The firm will have to sometimes forgone cash discount and required to penalty interest charges. Thus the firm will not be adversely affected. A firm should compare the opportunity cost of trade credit with other source of credit while making its financing decision. Accrued expenses and deferred income: These are spontaneous source of short term financing of working capital. Accrued expenses represent a liability that a firm has to pay for the services, which it has already received. It is an interest free source of financing but limited, as payment of accrued expenses can not be postponed for a long period. Similarly advance income will be received only there is a demand and supply gap or firms monopoly. Bank Finance:

Bank finance is the most common negotiate sources of the working capital finance. It can be availed in the form of over draft, purchase/discount of bill and loan. Bank finance is regulated by loan.

Over draft Under the facility, the borrower is allowed to withdraw funds in excess of the balance in his current account up to certain specified limit during a stipulated period. It is flexible arrangement from the borrowers point if view, since they can withdraw and repay funds whenever they desire. Interest is charged on daily balance on the amount actually withdrawn subject to some minimum charges. Cash credit Popular method of bank finance and similar to over draft facility. A borrower is allowed fund from the bank up to the sanctioned limit. Cash credit sanctioned against the security of current assets. There is no commitment charges therefore interest is payable on the amount actually utilized by the borrower. Purchases and discount of Bills: Under this borrower obtain a credit from a bank against its bills. Before purchasing the bills, the bank satisfies itself as to the credit worthiness of a drawer. Bank holds the bills as security for the credit. When a bill is discounted, the borrower is paid the discounted amount of the bill bank collects the full amount of maturity. Working capital loan

A borrower any sometimes require ad-hoc or temporary accommodation in excess of sanctioned credit limit to meet unforeseen contingencies. Banks provide such accommodation through a demand loan account or a separate no-operable cash credit account. The borrower is required to pay a higher rate of interest above normal rate of interest on such additional credit.

Hypothecation Under this working capital finance provide against the security of movable property, generally inventories. Banks generally grant credit hypothecation only to first class customer. Pledge Under this borrower is required to transfer the physical possession of the property offered security to the bank to obtain credit. Mortgage Transfer of legal or equitable interest in specific movable property of the payment of a debt. Lien It means right to the lender to remain property belonging to the borrower until they repays credit.

Levels of Working Capital Management

In a perfect world, there would be no necessity for working capital assets and liabilities. In such a world, there would be no uncertainty, no transaction costs, information search costs, scheduling costs, or production and technology constraints. The unit cost of producing goods would not vary with the amount produced. Firms would borrow and lend at the same interest rate. Capital, labor, and product markets would reflect all available information and would be perfectly competitive. In such a world, it can be shown that there would be no advantage for firms to invest or finance in the short term. But the world in which real firms function is not perfect. It is characterized by the firms considerable uncertainty regarding the demand, market price, quality, and availability of its own products and those of suppliers. There are transaction costs for purchasing or selling goods as securities. Information is costly to obtain, and the firms is faced with limits on the production capacity and technology that it can employee. There are fixed as well as variable cost associated with producing goods for sale, and there are spreads between the borrowing and leading rates for investments and financing of equal risk. Information is not equally distributed and may not be fully reflected in the prices in product and labor markets, and these markets may not be perfectly competitive. These real world circumstances introduce problems with which the firm must deal. While the firm has many strategies available to address these circumstances, strategies that utilizes investment or financing with working capital accounts often offer substantial advantage over other techniques. For example, assume that the firm is faced with uncertainty regarding the level of its future cash flows and will incur substantial cost if it has insufficient cash to meet expenses. Several strategies may be formulated to address this uncertainty and the costs that it may engaged.

Among these strategies are some that involve working capital investment or financing such as holding additional cash balances beyond expected needs, holding a reserve of short term marketable securities, or arranging for the availability of additional short term borrowing capacity One of these strategies (or a combination of them; may well be the least costly approach to the problem. Similarly, the existence of fixed set up costs in the production of goods may be addressed in several ways, but one possible alternative is to hold inventory. By these examples, we see that strategies using working capital accounts are some of the possible ways firms can respond to many of the problems engendered by the imperfect and constrained world in which they deal. One of the major features of this world is uncertainty (risk), and it is this feature that gives rise to many of the strategies involving working capital accounts. Moreover, a firms net working capital position not only is important from an internal standpoint; it also is widely used one measure of the firms risk. Risk, as used in this context, deals with the probability that a firm will encounter financial difficulties, such as the inability to pay bills on time. All other things being equal, the more net working capital a firm has, the more likely that it will be able to meet current financial obligations. Because net working capital is one measure risk, a companys net working capital position affects its ability to obtain debt financing. Many loan agreements commercial banks and other lending institutions contain a provision requiring the firm on maintain a minimum net working capital position. Likewise, bond indentures also often contain such provision. The overall policy considers both the level of working capital investment and its financing. In practice, the firm has to determine the

joint impact of these two decisions upon its profitability and risk. However, to permit a better understanding of working capital policy, the working capital investment decision is discussed in this section, and the working capital financing decision is discussed in the following section. The size and nature of a firms investment in current assets is a function of a number of different factors, including the following: The type of products manufactured The length of the operating cucle The sales level (because higher sales require more investment in inventories and receivables) Inventory policies Credit policies How efficiency the firm manages current assets. (Obviously, the more effectively management economies on the amount of cash, marketable securities, inventories, and receivables employed, the smaller the working capital requirements). For the purposes of discussion and analysis, these factors are held constant for the remainder of this topic. Instead of focusing on these factors, this section examines the risk-return tradeoff associated with alternative levels of working capital investments.

Working Capital Cycle and Policy

Cash flows in a cycle into, around and out of a business. It is the businesss life blood and every managers primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, run out of cash and expire. The faster a business expands the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profit and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firms total profits. There are two elements in the business cycle that absorb cash inventory (stock and work-in-progress) and receivables (debtors owing you money). The main sources of cash are payables (your creditors) and Equity and loans. Each component of working capital (namely inventory, receivables and payables) has two dimensions..TIME..and MONEY. When it comes to managing working capital TIME IS MONEY. If you can get money to move faster around the cycle or reduce the amount of money tied up, the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you will have additional free money available to support additional sales growth or investment. Similarly, if you can negotiate improved terms with supplier e.g. get longer credit or an increased credit limit; you effectively create free finance to help fund future sales.

If you

Collect receivables (debtors) faster Collect receivables (debtors) slower Get better credit from supplier Shift inventory (stocks) faster Move inventory (stocks) slower Then You release cash from the cycle Your receivables soak up cash You increase your cash resources You free up cash You consume more cash It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. if you do pay cash, remember that this is now longer available for working capital. Therefore, if cash is tight, consider other ways of financing capital investment loans, equity, leasing etc. similarly, if you pay downs a plug hole; they remove liquidity from the business.

Factors influencing Working Capital:

Working capital needs of a firm are influenced by numerous factors. The important ones are: Nature of business Seasonality of operations Production policy Market condition Condition of supply

Strategy of constant production in Essar Construction Ltd. Not affected by seasonal fluctuations.

Working Capital Policy

Two important issues in formulating the working capital policy are: What should be the ratio of current assets to sales? What should be the ration of long-term financing to short-term financing?

Profit Criterion for Current Assets:

Current assets can be easily and the value realized to liquidation would be more or less equal to the amount invested initially, and the profit per year can be calculated as: P = I* (r-k) I = Initial investment P = Profit R = Rate of return K = Cost of Capital

Operating Cycle Analysis: Raw material and store storage period Work in process stage Finishing goods inventory stage Debtors collection stage

Operating cycle is helpful forecasting and control of working capital

Economic Model Approach: The economic model approach signifies an explicit rational model of profit maximization or cost minimization. The approach arrives at an optimal solution for a case making trade off between risk and profitability, using economic decision criterion. Economic order quantity model is typical e.g. of this approach. The economic model approach avoids the myth of the means, implicit in the industry norm approach. It is nearer to reality in basing itself on the assumptions that every company at particulars point in time represents more of less a unique case. Even so the approach has been tried in limited way, in part because of its restrictive assumptions and exclusive reliance on financial or economic variables and total conditions. This approach however incorporates that profit motive is inherent in business decision. Even if such model can provide indicative solution it can prove helpful in day-to-day management of funds. Strategies Choice Approach: It is possible to take the position that there are no ideal solutions to the working capital problem of company. As condition and goals change, solution must be worked out every time to fit each unique situation. Without letting conventional restrictions limit our choice. There is thus concept of strategies choice involved in the area of current asset management. Need of the Working Capital: Companys working capital is used to pay short-term obligations such as accounts payable and buying inventory. If companys working capital dip too low, its risk running cut of cash. Even very profitable business can run into trouble if they lose the ability to meet their short-term obligations. The calculator assists you in determining working capital needs for the next year.

WORKING CAPITAL ANALYSIS

NET WORKING CAPITAL APPROACH: According to this approach, deducting the current liabilities from the current asset can arrive at working capital. The following table represents the current asset, current liabilities and their % composition and net working capital. COMPONENTS OF CURRENTS ASSETS: (Rs. In 000) 2005-06 2006-07 2,820,662 3,999,139 829,422 971,656 717,402 1,159,855

Particulars Inventories Sundry debtors Cash & Bank Balance Loans & Advances Current Assets

2003-04 1,341,438 460,472 457,982

2004-05 1,802,212 673,283 359,309

932,061 3,191,953

945,055 3,779,859

3,770,406

4,470,984

8,137,892 10,601,634

%COMPOSITION OF CURRENT ASSET: Particulars Inventories Sundry debtors Cash & Bank Balance Loans & Advances 2003-04 43.03 14.43 14.35 2004-05 47.68 17.81 9.51 2005-06 34.66 10.19 8.82 2006-07 37.72 9.17 10.94 AVG. 40.77 12.90 10.91

29.20

25.00

46.33

42.17

35.66

% composition of current assets

120% 100% 80%
%

Series4 Series3 Series2 Series1

60% 40% 20% 0% 2003-04 2004-05 2005-06 2006-07 Year

Analysis: From the above table and chart we find that inventory and loans & advances plays major role in current assets. We can also say that according to demand of finished good the inventory level of the company varies. Previously companys most purchase done through credit purchase and hence cash & bank balance have minor role in current assets of the company. But now it has not specific credit policy. Company suffers losses in the year 2005-06, due to which loan and advances was an increased and sundry debtor decreased. On an average other components of the current assets, loan &advances 35.66%, inventory 40.77%, sundry debtor 12.90%, cash &bank balance 10.91%.

 COMPONENT OF CURRENT LIABILITY : (Rs. In 000) particulars 2003-04 2004-05 2005-06 2006-07 Acceptances 404,919 1,107,366 1,035,539 Sundry 814,722 1,837,271 2,267,068 3,946,848 creditors Advances 639,042 621,042 3,091,819 3,034,763 from customers Other 40,692 52,767 81,437 267,525 liabilities Interest 390 2,332 14,194 accrued but not due on loans Current 2,287,900 2,916,071 6,550,022 8,298,869 Liabilities

% COMPOSITION OF CURRENT LIABILITIES 2005 2006 2007 Particulars 2004 Acceptances 13.89 16.90 12.48 Sundry 35.61 63 34.61 47.56 creditors Advances 27.93 21.30 47.20 36.57 from customers Other 1.77 1.80 1.24 3.22 liabilities

Interest accrued but not due on loans

0.02

0.04

0.17

% composition of current liabilities

100 90 80 70 60

C Acceptances D Sundry creditors E Advances from customers F Other liabilites B Interst accured but not due on loans

50 40 30 20 10 0

2004

2005

2006

2007

Year

Analysis: From the above chart and diagram we find that the sundry creditors and advances from customers contribute larger part of current liabilities and it increases year by year.

NET WORKING CAPITAL Particulars 2004 904,053 Net 2005 863,788 2006 1,587,870 2007 2,302,765

Working Capital
Net working capital
2500000

Amout in Rupees

2000000 1500000 1000000 500000 0 2003-04 2004-05 Year 2005-06 2006-07

Analysis: As we show above chart we find that companys capital decreasing in the year 2004-05. But next year company bounced back and had positive net working capital. And it is increasing since that time. It is good sign for the company. As shown in above diagram we can say that ECIL is having good net working capital, which is good for growth of the company.

EXECUTIVE SUMMERY

ESSAR COMPANY is a private ltd. Company owned by Ruia family.Having six big units like steel, constructions, shipping, communication, oil, and power.

Recently ESSAR has also put their steps in agrotech business also.It always follows leadership value. In coming years it is going to be largest oil refinery of India.