WORKING CAPITAL MANAGEMENT OF TATA STEEL

NAZ PARWEEN Roll no:WOMENS COLLEGE

OBJECTIVE
To understand the need of working capital in a company. To understand the factors which affect the working capital requirement. To make a detailed comparison of TATA STEELS working capital with various other steel companies. To highlight the reasons for deviations of actual from the target.

GLOBAL STEEL INDUSTRY

Top 10 Steel Producing Nations (Mn tonnes) Rank Nation 2009 2008 Variance 1 China 567.8 500.3 +13.5% 2 Japan 87.5 118.7 -26.3% 3 Russia 59.9 68.5 -12.5% 4 The US 58.1 91.4 -36.4% 5 6 RoK 48.6 53.6 -9.4% 7 Germany32.7 45.8 -28.7% 8 Ukraine 29.8 37.3 -20.2% 9 Brazil 26.5 33.7 -21.4% 10 Turkey 25.3 26.8 -5.6% Top-10 992.8 1,031.2 -3.7% World 1,223 1,329 -8.0% (Source: world steel) In 2009, the top10 nations accounted for 81% of the crude steel production

SWOT ANALYSIS OF INDIAN STEEL INDUSTRY

STRENGTHS

WEAKNESS

Availability of iron ore and coal

Unscientific mining

Low labour wage rates

Low R&D investments

OPPORTUNITIES

THREATS

Unexplored rural market

China becoming net exporter

Growing domestic demand

Protectionism in the West

PRESENT SCENARIO OF THE STEEL INDUSTRY

GLOBAL COMPANIES IN THE STEEL MARKET

Name Arcelor Mittal MARKET SHARE 103.30 mtpa 37.50 mtpa

Nippon Steel
Baosteel Group
Posco

35.40mtpa
34.7 mtpa

Hebei Steel Group

Jfe

33.3 mtpa
33.0 mtpa

Wuhan Steel Group

Tata Steel

27.7 mtpa
24.4 mtpa

COMPANY PROFILE TATA STEEL LTD

THE FOUNDER At the age of 43, Jamshedji Nusserwanji Tata read a report by a German geologist, Ritter Von Schwartz on the, availability Of iron ore in Chanda district in the central Provinces, which gave him the idea of giving India a steel plant. Jamshedji Nusserwanji Tata formed the Tata Iron and Steel Company Limited in 1907 in Mumbai.

The worlds10th largest steel company and the worlds 2nd most geographically diversified steel producer. A balanced global presence in over 50 markets and manufacturing operations in 26 countries.

 Tata Steel is among the top ten global steel companies with a crude steel production capacity of over 28 million tonnes per annum (mtpa). A Fortune 500 company, the Tata Steel Group is the worlds second most geographically diversified steel producer, employing over 80,000 people across five continents in nearly 50 countries. Tata Steel became the 5th Largest Steel maker after the acquisition of Corus.

SWOT ANALYSIS OF TATA STEEL

Tata steel Indian operations are self sufficient in the case of its
major raw material iron ore through its captive mines

STRENGTH

Tata steel has a stong retail and distribution network in India Accelerated growth through mergers and acquisitions

Crude steel capacity increasing each and every year

It deploys the best technologies to ensure quality, cost.

There are several endemic deficiencies which are inherited in

the quality of raw material available in India eg high ash

WEAKNESS

content which adversely effects the productivity efficiency High cost of basic inputs and services. Though India has huge labour available but the productivity is not upto the mark. It is characterised by low labour productivity.

 Unexplored rural market.

Indian iron and steel consumption to double in next

25 years.

OPPORTUNITY

Booming infrastructure The biggest scope of Indian steel sector is that it has

got enormous scope for increasing consumption of

steel.

Industries facing greater environmental cost due to increased concern of global warming.

THREATS

Threats to subsitute.

CORUS
Corus is Europes second largest steel maker with operation in the UK and mainland Europe and over 40,000 employees worldwide. On January 31, 2007 Tata Steel limited acquired the Anglo Dutch steel producer Corus for US $ 12.11 billion. This acquisition was the biggest overseas acquisition by an Indian company. Tata Steel emerged as the fifth largest steel producer in the world after the acquisition.

WORKING CAPITAL MANAGEMENT

Capital required for a business can be classified under two main categories via, 1. Fixed Capital 2. Working Capital There are two concepts of working capital: 1. Gross working capital 2. Net working capital
NET WORKING CAPITAL
CURRENT LIABILITIES

CURRENT ASSET

CONSTITUENTS OF WORKING CAPITAL

1) 2) 3) 4) 5) Cash in hand and cash at bank Bills receivables Sundry debtors Short term loans and advances. Inventories of stock as: a. Raw material b. Work in process c. Stores and spares d. Finished goods 6) Temporary investment of surplus funds. 7) Prepaid expenses 8) Accrued incomes. 9) Marketable securities.

CONSTITUENTS OF CURRENT LIABILITIES

Accrued or outstanding expenses. Short term loans, advances and deposits. Dividends payable. Bank overdraft. Provision for taxation, if it does not amt. to app. Of profit. 6. Bills payable. 7. Sundry creditors. 1. 2. 3. 4. 5.

IMPORTANCE OF ADEQUATE WORKING CAPITAL

EASY LOANS
GOODWILL

SOLVENCY OF BUSINESS
ABILITY TO FACE CRISES

HIGH MORALE

CASH DISCOUNTS

FACTORS DETERMINING WORKING CAPITAL MANAGEMENT

NATURE OF BUSINESS SIZE OF BUSINESS PRODUCTION POLICY

SEASONAL VARIATIONS

WORKING CAPITAL CYCLE

WORKING CAPITAL ANALYSIS

RATIO ANALYSIS

FUND FLOW ANALYSIS

BUDGETING

RATIO ANALYSIS
1. Current ratio. 2. Quick ratio 3. Absolute liquid ratio 4. Inventory turnover. 5. Receivables turnover. 6. Payable turnover ratio. 7. Working capital turnover ratio. 8. Working capital leverage 9. Ratio of current liabilities to tangible net worth.

TONDON COMMITTEE RECOMMENDATION ON WORKING CAPITAL

The study group headed by Shri Prakash Tandon, the then Chairman of Punjab National Bank, was constituted by the RBI in July 1974. First Method of Lending: Banks can work out the working capital gap, i.e. total current assets less current liabilities other than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and finance a maximum of 75 per cent of the gap; the balance to come out of long-term funds, i.e., owned funds and term borrowings. This approach was considered suitable only for very small borrowers i.e. where the requirements of credit were less than Rs.10 lacs.

 Second Method of Lending: Under this method, it was thought that the borrower should provide for a minimum of 25% of total current assets out of long-term funds i.e., owned funds plus term borrowings. Third Method of Lending: Under this method, the borrower's contribution from long term funds will be to the extent of the entire CORE CURRENT ASSETS and a minimum of 25% of the balance current assets should be financed out of the long term funds plus term borrowings.

DATA ANALYSIS TATA STEEL LTD

WORKING CAPITAL TURN OVER RATIO Formula: net sales NWC
PARTICULARS NET SALES NET WORKING CAPITAL 2005-06 2006-07 2007-08 2008-09 2009-10 15,139.3 17,552.0 19,693.2 24,315.7 25021.98 0 2 8 0 428.9 8248.3 -132.38 1311.09 3247.08

WORKING CAPITAL TURNOVER RATIO

35.29797 2.127956 -148.763 18.54617 7.705994

CURRENT RATIO
Formula: Current asset Current liability
PARTICULARS CURRENT ASSET 2005-06 2006-07 2007-08 2008-09 2009-10 4237.6 13701.9 6636.32 10285.0 9 12246.69

CURRENT LIABILITY CURRENT RATIO

3808.72 5453.66 6768.78 8974.05 1.1126 2.51242 0.98043 1.11962

8999.61 1.360802

QUICK ASSET
Formula: Quick Asset Current liability
PARTICULARS (CURRENT ASSET INVENTORY) CURRENT LIABILITY QUICK RATIO 2005-06 2006-07 2007-08 2008-09 2009-10

1783.61

1369.32 2190.29 2410.06 2505.51

3808.72

5453.66 6768.78 8974.05 8999.61

0.66

2.18

0.68

0.80

0.28

DEBTORS TURNOVER RATIO

Formula: net sales AD AD= average debtors
PARTICULARS AVERAGE DEBTORS NET SALES 2005-06 560.61 15,139.3 2006-07 585.515 17,552.0 29.9771 2007-08 587.555 2008-09 2009-10 589.73 535.405

19,693.2 24,315.7 25021.9 33.5173 41.232 46.73468

DEBTORS TURNOVER 27.005 RATIO

STOCK TURNOVER RATIO

Formula: CGS AS CGS= cost of goods sold AS= average stock
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10 12188.7 13298.4 17308.4 17277.08 1779.82 1937.43 2457.8 2661.135

COST OF GOODS SOLD 10456.9 AVERAGE STOCK STOCK RATIO 1627.72

TURNOVER 6.42428

6.84827 6.86394 7.04226 6.492373

RECOMMENDATIONS
There should be a proper co-ordination between working capital group and its related department i.e. debtors, creditors, inventory etc. New and advanced concept must be introduced in inventory control management. Adequate planning is required for procurement of store items. Details of working capital should be available at the department level, so that efficiency can be analyzed at departmental level.

 Advance payments should be avoided. If at all advance payments are required, it should be against securities like banks guarantee etc. The essence of effective working capital management is proper cash flow forecasting. This should take into account the impact of unforeseen events, market cycles, loss of a prime customer and actions by competitors. So the effect of unforeseen demands of working capital should be factored in. Inventories should be managed on a line-byline basis using the 80/20 rule.