A STUDY ON WORKING CAPITAL WITH REFERENCE TO LARSEN &TOUBRO- CHENNAI BY V.

AARTHI (Reg No: 35104001) PROJECT REPORT SUBMITTED In Partial fulfilment of the requirements For the award of the degree OF MASTER OF BUSINESS ADMINISTRATION

SRM SCHOOL OF MANAGEMENT SRM ENGINEERING COLLEGE SRM INSTITUTE OF SCIENCE AND TECHNOLOGY (DEEMED UNIVERSITY) KATTANKULATHUR.

MAY 2006

DECLARATION

I, V.Aarthi, student of S.R.M School of Management, S.R.M Institute of Science & Technology, Kattankulathur, and here by declare that this project report titled A STUDY ON WORKING CAPITAL MANAGEMENT IN LARSEN & TOUBRO is an original work done by me and submitted to the S.R.M Deemed University, for the award of Master Degree in Business Administration. I further declare that any part this project itself has not been submitted elsewhere for award of any degree.

PLACE: KATTANKULATHUR DATE:

V.AARTHI (35104001)

BONAFIDE CERTIFICATE Certified that this project report titled A STUDY ON WORKING CAPITAL MANAGEMENT IN LARSEN & TOUBRO is an original work done by Miss. V.AARTHI (Reg.No 35104001) of Fourth Semester, SRM School of Management, SRM Institute of Science and Technology, (Deemed University) Kattankulathur during the academic year 2006, who carried out the research under my supervision. Certified further, that to the best of my knowledge the work reported herein does not form part of any other project report or dissertation on the basis of which a degree or award was conferred on an earlier occasion on this or any other certificate.

Faculty Guide

HOD/Dean

Internal Examiner

External Examiner

PLACE: KATTANKULATHUR DATE:

ABSTRACT

L&T

Larsen & Toubro Limited - an engineering and construction major - is among the largest and most reputed companies in India's private sector.

ECC

ECC - The Construction division of Larsen & Toubro Limited - is India's largest construction organization. Many of the country's prized landmarks - its exquisite buildings, tallest structures, largest industrial projects, longest flyover, and highest viaducts - have been built by ECC. Leading-edge capabilities cover every discipline of construction: civil, mechanical, electrical and instrumentation.

As a division of L&T, ECC has the resources to execute projects of large magnitude and technological complexity in any part of the world.

The business of ECC Division is organized in four business sectors which

will primarily be responsible for Technology Development, Business Development, International Tendering and work as Investment Centres.

Business Sector

Buildings and Factories Sector Transportation Infrastructure Sector Industrial Projects & Utilities Sector Hydrocarbon & Power Sector Electrical & Instrumentation Sector Hydel & Nuclear Sector

To give support and enhance business both in domestic and focused international markets, the Global Operations will be operating through four Zones for seamless flow of resources across the Division.

The four Zones are:

West Zone consisting of Mumbai Region, Middle East and Africa North Zone consisting of Ahmedabad Region, Delhi, Afghanistan, Central Asia, Uzbekistan, Kazakhstan and Russian Federation

East Zone consisting of Kolkata Region, Nepal, Bhutan, Bangladesh, Myanmar, Laos, Cambodia and Philippines

South Zone consisting of Chennai Region, Hyderabad Region, Bangalore Region, Sri Lanka, Male, Malaysia and Indonesia

Locations - ECC Division

ECC Division's head quarters in Chennai, India. In India, the Division has 4 Zonal Offices, 7 Regional Offices and over 250 project sites. In Overseas the division has offices in 11 countries.

Awards for outstanding construction projects

ICI-Mc Bauchemie award for Most Outstanding Concrete Structure for ECC's center (EDRC building) from Indian Concrete Institute

Most Outstanding Bridge National award for a Chennai Flyover from Indian Institution of Bridge Engineers

ACCE-Billimoria award for excellence in construction of High rise buildings for Corporate HQ building of ICICI from Association of Consulting Engineers

Export Award for the year 1995-1996 in recognition of second best performance in the category of maximum turnover in overseas construction projects from Overseas Construction Council of India.

"Federation Internationale de la Precontrainte (FIP), UK Award for outstanding structure-1994" for the Administrative Office Building of ECC at Chennai and special mention of the multi-purpose auditorium at Hyderabad, both constructed by ECC. This was presented during the 12th Quadrennial congress of FIP at Washington DC USA on June 2, 1994

ICI-MC Bauchemie Award for the "Most Outstanding Concrete Structure" for the year 1995-96 for the Sree Kanteerava Indoor Stadium, Bangalore from the Indian Concrete Institute.

The Panvel Nadi viaduct near Ratnagiri in Maharashtra and the Jawaharlal Nehru Stadium at Chennai constructed by ECC has been adjudged the "Most Outstanding Concrete Structures in India for 1994".

The open sea ethylene jetty at Ratnagiri and Sri Sathya Sai Institute of Higher Medical Sciences at Puttaparthi won "Certificates of Merit".

A study on this topic in L&T Ltd is necessary and it is very important in Working Capital Ratios which helps in knowing liquidity, profitability and turnover position of the company. Analysis of composition of current assets and current liabilities helps in framing control measures of items under it.

A study is confirmed to the detailed study about the organization and identifies the companys position in the industry and to suggest means or improvement in existing system.

To study this various tools of analysis have been used on last five years,

1. The position of working capital has been analyzed through various working capital ratios.

2. Analysis of various items of current asset and current liabilities for the past five years. 3. Funds Flow Statement analysis has been analyzed 4. Finally, with the help of analysis, Future trends were calculated & free hand/graphic method was used to show the measured trend.

From this analysis if found that working capital ratios are better as a whole. Liquidity position is satisfactory as there are sufficient creditors it pay its liability. Operating profit shows the decreasing trends even through the sales have been increasing. Due to increase in expenses and in consistent utilization of assets invested.

ACKNOWLEDGEMENT First of all, I thank Almighty for his enlightening presence throughout my project work and helping me to complete my project successfully.

I express my gratitude to my beloved Dean Dr. Jayashree Suresh for her invaluable support .I also wish my gratitude to her contribution towards successful completion of the project.

I am extremely thankful to Prof.T.P.NAGESH Senior Professor and my Internal Faculty, for being the source of encouragement through out the project. I extend my profound gratitude and heartfelt thanks for his valuable guidance, timely help, wonderful suggestions and constructive criticism offered to me for the project. I am indebted to him for his contribution in helping me with the information for accomplishing my task. I also express my sincere gratitude to him for his valuable guidance and advices in all stages of the project work.

I extend my gratitude to Mr.T.S.Venkatesh Joint General Manager (Finance& Accounts ) & my external guide Mr.S.Sridhar(Accounts Manager) and Mrs.

M.Lakshmi without them this project would have been just a dream .I sincerely thank them for their valuable advises throughout the course of the project work. I express my heartfelt thanks to my wonderful Parents for their moral support and wholehearted encouragement. My sincere thanks to all those friends and well wishers who had helped me during the course of the project work.

CONTENTS

CHAPTER

DESCRIPTION

PAGE: NO

LIST OF TABLES LIST OF FIGURES 1. INTRODUTION OF THE STUDY 1.1 INTRODUCTION 1.2 STATEMENT OF THE OBJECTIVE 1.3 SCOPE OF THE STUDY 1.4 LIMITATION OF THE STUDY 5 6 2 4

2.

INDUSTRY PROFILE

3.

COMPANY PROFILE 3.1 COMPANY PROFILE 3.2 VISION 3.3 CORPORATE 3.4 PRODUCTS/ SERVICES 3.5 HISTORY 3.6 RESOURCE PLANNING 16 17 18 20 21 30

4.

RESEARCH METHODOLOGY 4.1 NATURE OF STUDY 4.2 PERIOD OF STUDY 4.3 METHODOLOGY 4.4 TOOLS APPLIED 32 32 33 34

5.

DATA ANALYSIS AND INTERPRETATION

45

6 7. 8.

FINDINGS SUGGESTIONS CONCLUSION APPENDIX EXCEL PROFIT& LOSS ACCOUNT & BALANCE SHEET. BIBLIOGRAPHY BOOKS

69 72 76 78

80

LIST OF TABLES Table No Table 5.1 Current Ratio Table 5.2 Quick ratio 47 Particulars Page no 45

Table 5.3

Absolute Liquid Ratio

49

Table 5.4

Interest Coverage Ratio

51

Table 5.5

Asset Turnover Ratio

53

Table 5.6

Inventory Turnover Ratio

55

Table 5.7

Working Capital Turnover Ratio

57

Table 5.8

Changes in Working Capital for the year 2001-02

59

Table 5.9

Funds Flow Statement for the year 2001-02

60

Table 5.10

Changes in Working Capital for the year 2002-03

61

Table 5.11

Funds Flow Statement for the year 2002-03

62

Table 5.12

Changes in Working Capital for the year 2003-04

63

Table 5.13

Funds Flow Statement for the year 2003-04

64

Table 5.14

Changes in Working Capital for the year 2004-05

65

Table 1.15

Funds Flow Statement for the year 2004-05

66

LIST OF FIGURES

Chart No Fig 5.1

Particulars Current ratio

Page No 46

Fig 5.2

Quick Ratio

48

Fig 5.3

Absolute Liquid Ratio

50

Fig 5.4

Interest Coverage Ratio

52

Fig 5.5

Asset Turnover Ratio

54

Fig 5.6

Inventory Turnover Ratio

56

Fig 5.7

Working Capital Turnover Ratio

58

Fig 5.16b

Trend Analysis

67

Chapter I

Introduction of the Study CHAPTER - I 1.1 Introduction General ECC ECC - The Construction division of Larsen & Toubro Limited - is India's largest construction organization. Many of the country's prized landmarks - its exquisite buildings, tallest structures, largest industrial projects, longest flyover, and highest viaducts - have been built by ECC. Leading-edge capabilities cover every discipline of construction: civil, mechanical, electrical and instrumentation.

As a division of L&T, ECC has the resources to execute projects of large magnitude and technological complexity in any part of the world.

The business of ECC Division is organized in four business sectors which will primarily be responsible for Technology Development, Business Development, International Tendering and work as Investment Centers.

Working Capital management research is made at L&T Ltd for International Services at ECC division for detailed analysis of the short term funds. This is done to check whether the company is below standard or above standard. This study also helps to find their operating efficiency and credit management of the company.

This research Working Capital management helps to understand the utilization of the stock, work in progress (wip), finished goods. It also gives check on receivables and inventory management. If company utilizes the working capital efficiently and effectively it would become marked leader in the world.

1.2 STATEMENT OF OBJECTIVE

Objective of the study is to analyze Working Capital and Ratio analysis of the Company for the year 2001 to 2005. This is being attempted to through the detail study following tools of analysis.

Comparison of various Working Capital ratios for the past five years 2001 to 2005.

Analysis of Current Asset and Current Liabilities To estimate Working Capital requirements

1.3 SCOPE OF THE STUDY

The scope of the study is confined to the detailed study, about the organization and identifies the companys position in the industry and to suggest means of improvements in the existing system. 1.4 LIMITATIONS OF THE STUDY

This analysis is based on secondary data like published annual reports and companys income statement and Balance Sheet. This scope of the study is limited to that extent.

Chapter II Industry Profile CHAPTER II

INDUSTRY PROFILE

The Rupees 2, 40,000 crore construction industry could well see a faster growth driven by the buoyancy in the economy and increased investments in major infrastructure projects, including roads, ports and other sectors.

Indian construction industry was worth about $70 billion (Rs. 2, 40,000 crore) and by the year 2005-2006, this could grow considerably driven by major projects across the country. It was estimated that about three crores of people were engaged in the construction market caught up.

The demand for domestic housing was yet to be tapped and as per projections, there was a shortage of about 40 million homes. According to experts We need to look at these areas and bring in new technologies that would help to speed up projects due to new technologies and equipment.

The country was the second largest producer of cement having an estimated 140 million tones (mt) of cement manufacturing capability and this, would go up significantly over the next few years. This expectation stem from the fact that India and China are amongst the two major nations where the construction activity is poised for much rapid growth when compared to the developed world. The need for cement production capacity would be about 300 mt by 2006 and possibly 800 mt by the year 20010. Out of the Rs.2, 40,000 crore construction industry, the infrastructure component

Accounts for about 50 percent. With major projects such as the Golden Quadrilateral, and other corridors, this could go up much more, according to experts.

A company in the construction industry 2003 has been an encouraging year. Their stock prices rose sharply and out performed the broad market indices comfortably; a

portfolio of five key stock from this sector saw a 100 per cent jump in value this year against an increase of a 46.8 per cent in the S&P CNX. INTERNATIONAL SERVICES MANAGEMENTS DISCUSSION & ANALYSIS

L&T is globalizing its operations with increasing focus on international business opportunities. Today, the activities of construction division extend beyond the subcontinent. TEAM International presents the analysis of performance of the International Services (IS) for the year 2004-05 and the outlook for the future

IS manages the accounting, financial and administrative functions of following areas:

the

A. Project exports representing turnkey construction activities in the Middle East region, Mauritius, Africa, South America and SAARC nations. B. Physical exports representing supply of materials, equipments, etc C. Overseas branch offices like Kazakhstan, Abu Dhabi, and Dubai & Dhaka

set-up for business promotion & liaisons for the on-going projects in that region.

PERFORMANCE HIGHLIGHTS The steady commitment to the pursuit of growth and progress enabled the company to deliver a realistic performance for yet another year.

The following are the highlights of significant achievements, as also the forward-looking measures taken by our team during the year:

Gross Assets of the IS rose to Rs.633.38 croress from Rs.450.55 crores in the previous year Turnover rose to Rs.694.50 crores from Rs.485.48 crores in the previous year.

Working Capital Financing for the execution of projects abroad is governed by the guidelines of Project Export Manual (PEM) of Reserve Bank of India which restricts the borrowings to the maximum of 25% of Contract value. The approval for financing of each project is obtained at the time of award of the contract from the concerned approving authorities as applicable.

ONGOING PROJECTS AND EXPANSION AND DIVERSIFICATION

The International Services operates as two zones for operational convenience namely North West and South East Zone. North West Zone operates from L&T Mumbai (Powai) and South East Zone operates through ECC Headquarters, Chennai.

Major Jobs undertaken in the above mentioned countries: Qatar - Construction of two outdoor multi sports stadium.

UAE Engineering, design, procurement, manufacture, construction,

testing and commissioning of double circuit 400 kV Overhead Transmission line from Fujairah Water and Power plant to Dhaid Main 132/33 kV substation (69 Kms) and two bay extensions at 132/33 kV GIS Dhaid Main substation. Turnkey construction of 220 kV Overhead transmissline from Liwa Grid Station to 220/33 kV Mobile substation to be located at Liwa. Construction of middle trunk bridge at Palm Jumeirah, UA Expansion of 220/33 kV Network in Musaffah Dhabiya Area (74 Kms) for interconnection with ADCO 220 kV Overhead lines. 4 nos 33/11 KV primary substation-Alain, UAE. Turnkey construction of 220 kV double circuit transmission line between Sahama sub-station and Samha sub-station Construction of 'Al Murooj Complex' - a multi-storied residential complex at Dubai. Power supply to Sweihan pumping station via 33KVOHL 33KV submarine cable (2 Runs x 9.8Kmtrs) with integrated fibre optic cable and 3 Route kmtrs of 33KV UG cable from Jebel Dhana to Sir Baniyas Island located West of Abu Dhabi.

Kuwait -Construction of Administration, Training blocks and associated facilities for Electricity & Water training Institute in New University Campus, Shuwaikh, Kuwait.

Nepal -Construction of headrace tunnel, penstock, surge tank, powerhouse and transformer cavern, tail race tunnel for Chilime hydro electric project. Mauritius - Ebene Cybercity Project - construction of 70 m high, 12 storied Cyber Tower, utility buildings and site development works for Business Parks of Mauritius Limited

Suriname - Construction of 161kV / 33kV / 11kV gas insulated substation and stringing of 27km long 161kV transmission line towers with Optical Ground Wire (OPGW) for N.V. Energies Bedrijven Suriname in the North East tip of the South American continent.

Bangladesh - Engineering, Procurement and Construction of 1.2 mtpa cement plant for Lafarge Surma Cement Limited Saudi Arabia - Construction of three 100 bed hospital project Rafha, Domat and Khafji

Chapter III Company Profile

Chapter III

3.1 COMPANY PROFILE

Larsen & Toubro Limited (L&T) is a technology-driven engineering and construction organization, and one of the largest companies in India's private sector. It has additional interests in manufacturing, services and Information Technology. A strong, customer-focused approach and the constant quest for top-class quality have enabled the Company to attain and sustain leadership in its major lines of business across seven decades.

L&T has an international presence, with a global spread of offices. A thrust on international business over the last few years has seen overseas earnings growing to 18 per cent of total revenue. With factories and offices located around the country, further supplemented by a wide marketing and distribution network, L&T's image and equity extends to virtually every district of India. L&T believes that progress must necessarily be achieved in harmony with the environment. A commitment to community welfare and environmental protection constitute an integral part of the corporate vision.

3.2 Vision

L&T shall be a professionally-managed Indian multinational, committed to total customer satisfaction and enhancing shareholder value

L&T-ites

shall

be

an

innovative,

entrepreneurial

and

empowered

team

constantly creating value and attaining global benchmarks. L&T shall foster a culture of caring, trust and continuous learning while meeting expectations of employees, stakeholders and society. 3.3 Corporate

Larsen & Toubro Limited is one of Asia's largest vertically integrated, technology-driven Engineering & Construction conglomerate with additional interests in manufacturing, services and Information Technology. Its reputation is based on a strong customer

orientation, the technological sophistication that characterizes its products and projects and an impressive record of achievements across seven decades. The Engineering core comprises Engineering & Construction Projects, Construction, Heavy Engineering, and Electrical & Electronics. In IT, L&T has a fully-owned subsidiary - Larsen & Toubro InfoTech Limited. The company undertook the following major initiatives to enhance its value proposition: Business Restructuring - The cement business of the Company was demerged into UltraTech CemCo Limited with effect from April 1, 2003. Thrust on Exports - Export revenues account for 14% of the Company's total revenues. Further initiatives were taken to enhance international focus. Talent Retention & Acquisition Value creation by alliances with technology partners, quality improvement, portfolio review of businesses and thrust on engineering & design services through e-Engineering Solutions Strengthening the organizational structure Management review and clearances for developing business in select markets. Recruitment of people including foreign nationals with international experience in specific domains.

Proactive certifications from international customers, EPC contractors and process licensors

Increased speed in introduction of new products with contemporary features.

3.4 PRODUCTS / SERVICES

L&T products/services catalogue Aerospace Equipment Bulk Material Handling Cement & Allied Machinery Chemical Plants Cogeneration and Captive Power Construction Equipment Construction Services Control & Automation Systems Cutting Tools Defense Fertilizer Projects Fertilizer, Petrochemical & Heat Transfer Equipment Hydrocarbon & Related Projects Hydraulic Equipment Industrial Valves & Allied Products Information Technology Iron & Steel Castings Medical Equipment Minerals & Metals Nuclear Power Plant Equipment Oil & Gas & Special Projects Petrol Pumps Plastics Processing Machinery Power Rubber Processing Machinery

3.5 HISTORY

The evolution of L&T into the country's largest engineering and construction organizations is among the more remarkable success stories in Indian industry. The company was founded in Bombay (Mumbai) in 1938 by two Danish engineers, Henning Holck-Larsen and Soren Kristian Toubro - both of whom were strongly committed to developing India's engineering talent and enabling it to meet the demands of industry. Beginning with the import of machinery from Europe, L&T rapidly took on engineering and construction assignments of increasing sophistication. Today, the company sets engineering benchmarks in terms of scale and complexity.

Record of Achievements

L&T's signature of excellence is evident on:

India's first indigenous hydro cracker reactor Oil and gas platform projects executed to global benchmarks The world's largest continuous catalyst regeneration reactor The simultaneous execution of clean fuel projects at eight refineries around India The world's biggest fluid catalytic cracking regenerator The world's longest product splitter Asia's highest viaduct - built for the Konkan Railway The world's longest LPG pipeline

The world's longest cross country conveyor Building an international class football stadium in 260 days

Engineering & Construction Projects

L&T's engineering & construction track record consists of successful implementation of turnkey projects in major core and infrastructure sectors of Indian industry. L&T has integrated its strengths in process technology, basic and detailed engineering, equipment fabrication, procurement, project management, erection, construction and commissioning, to offer single-point responsibility against stringent delivery schedules. Strategic alliances with world leaders enable L&T to access technical know-how and execute processintensive large-scale turnkey projects to maintain its leadership position. L&T's core competencies in engineering include highly qualified and experienced personnel from various disciplines, state-of-the-art 2-D and 3-D CAD facilities with sophisticated plant design systems and basic engineering capabilities. L&T is the only Indian EPC company pre-qualified for executing large, process-intensive projects for oil & gas, refinery, petrochemical and fertilizer sectors. Heavy Engineering L&T is acknowledged as one of the top five fabrication companies in the world, with engineering and manufacturing capabilities that are among the most sought after in industry. Operating at the high end of the technological spectrum, L&T has led Indian industry in introducing new processes, products and materials in manufacturing. L&T also has the logistics capabilities of fabricating and supplying over-dimensional

equipment to tight delivery schedules. L&T's globally-benchmarked workshops are located in Mumbai, Hazira, Baroda and Kansbahal.

Construction ECC - the Engineering Construction & Contracts Division of L&T is India's largest construction organization. Many of the country's prized landmarks - its exquisite buildings, tallest structures, largest industrial projects, longest flyovers, highest viaducts, longest pipelines have all been built by L&T. L&T's leading edge capabilities cover every discipline of construction - civil, mechanical, electrical and instrumentation. L&T has also expanded its focus to the Middle East, South East Asia, Russia, CIS, Mauritius, African and SAARC countries. L&T is also developing markets for its construction services in the Indian Ocean rim countries, Africa and Latin America.

Electrical & Electronics L&T is a major international manufacturer of a wide range of electrical and electronic products and systems. In the electrical segment, the Company is India's largest manufacturer of low tension switchgear, and is rapidly establishing itself in international markets. Its products are widely sold in markets in Europe and Australia. Recently, L&T set up a new manufacturing base for high-end air circuit breakers in China. L&T also manufactures custom-engineered switchboards for industrial sectors like power, refineries, petrochemical, cement, etc. In the electronic segment, L&T offers a wide range of meters and provides complete control and automation systems for diverse

industries. Medical equipment and systems manufactured by L&T include advanced ultrasound scanners and patient monitoring systems.

Information Technology Larsen & Toubro Infotech Limited, a 100 per cent subsidiary of L&T, offers comprehensive, end to end software solutions and services with a focus on Manufacturing, BFSI and Communications & Embedded Systems. It provides a cost cutting partnership in the realm of offshore outsourcing, application integration and package implementation. Leveraging the heritage and domain expertise of the parent company, its services encompass a broad technology spectrum, catering to leading international companies across the globe. It leverages the L&T parentage to also provide services in the embedded intelligence space. and e-Engineering

Machinery & Industrial Products L&T manufactures markets and provides service support for critical construction and mining machinery - surface miners, hydraulic excavators, aggregate crushers, loader backhoes and vibratory compactors. Corporate Social Responsibility Beyond the corporate objectives of achieving growth and profitability, L&T is conscious of its larger social obligations. The Company's efforts have been widely recognized.

Safety, Health and Environment At ECC, safety is given the highest priority. The Occupational Safety, Health and Environment Policy enunciated by the Corporate Management lays emphasis on Safety, Health and Environment through a structured approach and a well defined organization. Systems and procedures have been established for implementing the requisites of safety at all stages of construction and in respect of plants, machinery and materials. The Head of the Safety Engineering Department operates from the

Headquarters. He is assisted by the Regional Safety coordinators who in turn monitor implementation of Safety, Health & Environment measures through Safety coordinators located at job sites.

Besides the enforcement of engineering measures and management controls, Personal Protective Equipment (PPE), as per needs of the operations, are provided to the employees free of cost. PPE conforming to relevant Indian Standards / International Standards are procured to ensure the quality of the appliances. Inspection and safety audits are conducted periodically. Awareness among employees is sustained through regular training programmes

Quality Assurance The E&C Division of L&T has integrated the requirements of timely delivery within-cost completion and supply of plant and equipment to the highest standards of quality in line with contractual requirements by implementing Quality Assurance (QA). The QA system is based on ISO 9000 international standards. The Strategic Business

Units (SBUs) and Service Units (SUs) of E&C Division have been certified to ISO 9001 standards. The division has also secured ISO 14001 certification.

A major part of the activities of E&C Division is carried out at project sites where plant and equipment is fabricated, constructed, erected and finally commissioned under meticulous quality control standards. These are carried out in line with OHSAS 18001, the global occupational health and safety management benchmark. The QA system has been modeled on the CII-EFQM Model for Business Excellence - a model jointly developed by the Confederation of Indian Industries and the European Foundation for Quality Management. L&T's corporate policy is a reflection of an Integrated Management System for Quality, Environment, Occupational Health & Safety, IT Security and Personnel & Human Resources, whilst implementing globally recognized standards such as ISO 9001, ISO 14001, OHSAS 18001 and BS 7799. 3.6 Resource Planning

Centralized Resources dept at HQ takes care of allocation, distribution and movement of Staff and Plant & Machinery to meet the requirements for deployment in various regions and overseas across the company. Resources dept in the Regional Offices takes care of this function within the regions and also acts as a resource centre with data on subcontractors available for various types of works. Resources department as a focal

point helps the Operational Units to optimize the productivity by maintaining a balance

between the availability and the requirement of resources (Staff and Plant & Machinery). It also facilitates the process of decision and deployment of equipment from external agencies as needed. This department plays the vital role in effective distribution and deployment of resources in co-ordination with all Sectors, BUs, Zones, and Regions etc.

Chapter IV Research Methodology

Chapter IV

RESEARCH METHODOLOGY 4.1 Nature of the study A study in this topic in L&T is necessary and it is very important in Working Capital ratios of the company which helps in knowing liquidity, solvency, profitability and turnover position of the company. It also helps in studying the composition of various items of Current Asset and Current Liability. This helps in framing control measures of items of Current Asset and Current Liability.

4.2 Period of Study The period of study was limited to three months during February to May of 2006. During this period all the required data was collected through secondary sources and analyzed with the help of financial tools of analysis.

4.3 Methodology The objective of the study is to analyze the Working Capital position of the company for the past five years 2001 to 2005. The major sources of data were secondary data (i.e.) published annual reports and financial reports etc. Discussion with the officials of the company.

Firstly, the position of the Working Capital has been analyzed through various Working Capital ratios with the help of data available in the financial statement of the past five years.

Secondly, an analysis of the various items of Current Asset and Liabilities for past five years has been done.

Current

Thirdly, the funds flow statement is prepared for the past five years of the company,

Finally, the future trend analysis of the companies working capital is done.

4.4 Tools applied in the study The various tools applied in the study to analyze the Working Capital position of the company are as follows:

Ratio Analysis Funds Flow Statement Trend Analysis

LITERATURE REVIEW ANALYSIS OF WORKING CAPITAL RATIOS

Working Capital in simple terms is the amount funds, which a company must have to carry out its day-to-day operations. It can also be regarded as that proportion of a companys total capital, which is employed in short-term operations. Working Capital can take the form of cash and near-cash assets or even a little further from cash but yet in the process. Such items are stocks of raw materials and supplies needed for manufacture, stocks of finished goods awaiting sale, semi-processed items or components that will soon emerge as final-products, sundry debtors representing pending collections against credit sales and short-term investments if any. Working Capital is required because of the time gap between the sales and their actual realizing in cash. This time gap is technically termed as operating cycle of the business.

Importance of Working Capital Management

Business activity is dynamic in character and subject to wide fluctuations.

The

movement from working capital to income and profits and back to working capital is one of the most vital characteristics of business administration. This operation is concerned with the expenditure of funds with the hope that they will return with an additional amount called profit. If the operations of an enterprise are to run smoothly, a proper relationship between fixed capital and current capital must be maintained. Sufficient

liquidity must be achieved and maintained to provide the funds to pay off obligations as they arise or mature. The adequacy of cash and other current assets together with their efficient handling virtually determine the survival or diminish of the enterprise. Working capital management policies have a great effect on firms profitability, liquidity and its structural health. The maintenance of a sound working capital position is a constant problem for the finance manager. It involves control of the everyday ebb and flow of financial resources circulating in the enterprise in one of the other, which represents a substantial portion of total investment.

Working Capital Ratios

Ratios are relationships expressed in mathematical terms between figures, which are connected with each other in some manner. Obviously, no purpose will be served by comparing two sets of figures, which are not at all connected with each other. Moreover, absolute figures are also unfit for comparison.

Current Ratio This ratio is an indicator of the firms commitment to meet its short-term liabilities.

Current ratio = Current Assets / Current Liabilities

Current Assets means that will wither be used up or converted into cash within a years time or normal operating cycle of the business, whichever is longer.

Current Liabilities mean liabilities payable within a year or during operating cycle of the business, whichever is longer. Out of the existing current assets or by creation of other current liabilities.

Quick Ratio This ratio is also termed as a acid test ratio or liquidity ratio. This ratio is ascertained by comparing the liquid assets to current liabilities. Prepaid expenses and stock are not taken as liquidity assets.

Quick Ratio = Liquid Assets / Current Liabilities

Absolute Liquid Ratio This ratio is calculated when liquidity is highly restricted in terms of cash and cash equivalents. This ratio is calculated when liquidity is highly restricted in terms of cash & cash equivalents. this ratio measures liquidity in terms of cash and near cash items & short-term current liabilities.

Absolute Liquid Ratio = Cash & Bank balances + Marketable Securities / Current Liabilities

Interest Coverage Ratio This ratio measures the margin of safety the firm enjoys with respect to its interest burden. A high interest coverage ratio means that the firm can easily meet its interest burden even if earnings before interest and taxes suffer a considerable decline. A low interest coverage ratio may result in financial embarrassment when earning before interest and taxes decline.

Interest Coverage Ratio = EBIT/ Interest

Assets Turnover Ratio This ratio measures how efficiently assets are employed. It is a kind to the output capital ratio used in economic analysis.

Assets Turnover Ratio = Net Sales / Total Assets

Inventory Turnover Ratio This ratio is calculated to ascertain the efficiency of inventory management in terms of capital investment. It shows the relationship between the cost of goods sold/cost of sales and the amount of average inventory. This ratio helpful in evaluating and review of inventory policy.

Inventory Turnover Ratio = Net Sales / Average Inventory

Working Capital Turnover Ratio This ratio measures the effective utilization of working capital. It also measures the smooth running of business. The ratio establishes the relationship between cost of sales and working capital.

Working Capital Turnover Ratio = Sales / Net Working Capital

Funds Flow Statement Flow means change. Funds is interpreted as working capital in the context of funds flow statement. Thus, Funds flow is change in working capital. Flow of funds implies any changes in working capital. These changes are a continuous process, day after day, as and when transactions take place. So, the changes in working capital may be called FLOW. It can be Inflow or Outflow of working capital. Funds flow statement measures and presents in an analytical manner the summarized version of the numerous flows of funds for a specified period. Working Capital Funds flow statement is based on the working capital concept of funds. However, working capital is also a controversial term. Gross working capital is the total of current assets. Circulating capital is the amount revolving in the cycle of cash inventories Receivables and cash. Net working capital is the excess of current assets over current liabilities. Funds flow statement is generally prepared and interpreted on the basis of Networking capital. Networking capital can be computed as the difference between Current Assets and Current liabilities.

Importance or uses or Benefits of Funds Flow Statement. Funds flow statement is an important tool in the armory of the finance manager. It helps in the planning, deployment and controlling of funds year after year. The following benefits or uses of funds flow statement:

It provides a detailed analysis and understanding of changes in the distribution of financial resources between two balance sheet data.

It shows how the funds were obtained and used during a period. The sources from which funds were obtained are useful in computation of cost of capital of the business.

A detailed analysis of sources of funds in the past acts as a guide for obtaining funds for future requirements.

A study of the applications of the funds provides an understanding about the utilization of resources in the past. It can form the basis for selection of investment proposals or future capital expenditure decisions.

It gives indications of any weakness or strength in the general financial of a firm.

It throws light on the financial consequences of business operations. It can be compared with the relevant budgets to assess the usage of funds as per plans.

Re arrangement of capital structure, formulating long term financial plans, and policies, etc; are facilitated by funds flow analysis.

Working capital and the causes for changes in working capital are highlighted. This can help in the formulation of sound policy for liquidity and short term solvency of the firm.

Chapter V

Data Analysis & Interpretation CHAPTER V

DATA ANALYSIS

Ratios Analysis 5.1 Current Ratio Current Assets means that will wither be used up or converted into cash within a years time or normal operating cycle of the business, whichever is longer. Current Liabilities mean liabilities payable within a year or during operating cycle of the business, whichever is longer. Out of the existing current assets or by creation of other current liabilities Current Ratio = Current Assets / Current Liabilities Table 5.1 Current Ratio for the Period 2001-2005

Particulars Current Asset Current Liabilities Ratio

2001-2002 5544.37 3059.67 1.81

2002-2003 6278.05 3977.64 1.58

2003-2004 6799.72 4615.42 1.47

2004-2005 8838.23 5599.39 1.58

*Source: Secondary data

Fig 5.1 Current ratio

Current Ratio
2 1.5 Ratio 1 0.5 0 1 2 Years 3 4 1.81 1.58 1.47 1.58

*Base: Table 5.1 Inference The current ratio of L&T satisfies the conventional rule of current ratio that is 2:1 it test the quantity and not quality from 2001-02, 2002-03,2003 -04,2004-05. There is a sudden hike in price of raw material. There is a slow of moving stock of goods.

5.2 Quick Ratio

This ratio is also termed as a acid test ratio or liquidity ratio. This ratio is ascertained by comparing the liquid assets to current liabilities. Prepaid expenses and stock are not taken as liquidity assets.

Quick ratio = Liquid Asset / Current Liabilities Table 5.2 Quick Ratio for the Period 2001-2005

Particulars Liquid Asset Current Liabilities Ratio

2001-2002 2943.99 3059.67 0.96

2002-2003 4762.23 3977.64 1.2

2003-2004 4987.42 4615.42 1.08

2004-2005 6527.39 5599.39 1.17

: *Source: Secondary data

Fig 5.2 Quick Ratio

Quick Ratio
1.2 1 0.8 Ratio 0.6 0.4 0.2 0 1 2 Years 3 4 1.20 0.96 1.08 1.17

*Base: Table 5.2

Inference The ideal ratio is 1:1. During the year 2002-03 the companys overall performance and production is high by this the share price will get increased. Hence the ratio for that year is high compared to the next consecutive years.

5.3 Absolute Liquid Ratio

This ratio is calculated when liquidity is highly restricted in terms of cash and cash equivalents. This ratio is calculated when liquidity is highly restricted in terms of cash & cash equivalents. This ratio measures liquidity in terms of cash and near cash items & short-term current liabilities.

Absolute Liquid Ratio = Cash & Bank balances + Marketable Securities / Current Liabilities Table 5.3 Absolute Liquid Ratio for the Period 2001-2005

Particulars Cash & Bank balances Current Liabilities Ratio

2001-2002 237.14 3059.67 0.08

2002-2003 320.53 3977.64 0.08

2003-2004 375.27 4615.42 0.08

2004-2005 828.02 5599.39 0.15

*Source: Secondary data

Fig 5.3 Absolute Liquid Ratio

Absolute liquid ratio

0.16 0.14 0.12 0.1 Ratio 0.08 0.06 0.04 0.02 0 0.15

0.08

0.08

0.08

2 Year

*Base: Table 5.3 Inference By this the absolute liquid ratio is high during the year 2004-05. This is due to the delay in getting payments from its clients so by this the liability is high.

5.4 Interest Coverage Ratio This ratio measures the margin of safety the firm enjoys with respect to its interest burden. A high interest coverage ratio means that the firm can easily meet its interest burden even if earnings before interest and taxes suffer a considerable decline. A low interest coverage ratio may result in financial embarrassment when earning before interest and taxes decline.

Interest Coverage Ratio = EBIT / Interest Table 5.4 Interest Coverage Ratio for the Period 2001-2005

Particulars EBIT Interest Ratio

2001-2002 8137.58 7738.67 1.05

2002-2003 9614.46 9129 1.05

2003-2004 9959.35 9232.11 1.08

2004-2005 13788.32 12522.82 1.1

*Source: Secondary data

Fig 5.4 Interest Coverage Ratio

Interest coverage ratio

1.12 1.1 Ratio 1.08 1.06 1.04 1.02 1 2 Year 3 4 1.05 1.05 1.08

1.10

*Base: Table 5.4

Inference The interest coverage ratio is high during the year 2004-05 .This is due to the depreciation made in the asset of the company. The company gains income from the same asset.

5.5 Asset Turnover Ratio This ratio measures how efficiently assets are employed. It is a kind to the output capital ratio used in economic analysis.

Asset Turnover Ratio = Net Sales / Total Assets

Table 5.5 Asset Turnover Ratio for the Period 2001-2005

Particulars Net Sales Total Assets Ratio

2001-2002 7917.90 10,735.3 0.74

2002-2003 9360.12 11,377.84 0.82

2003-2004 9561.33 8,732.37 1.09

2004-2005 13091.82 10,859.1 1.21

*Source: Secondary data

Fig 5.5 Asset Turnover Ratio

Asset turnover ratio

1.21 1.09 0.82 0.74 0 0.2 0.4 0.6 0.8 1 1.2 1.4

4 3 Years 2 1

Ratio

*Base: Table 5.5

Inference The asset turnover ratio is of increasing in trend. During the year 2004-05 the ratio is high by this the fixed assets remains the same. The company generates income from the sale of fixed asset hence the ratios are of increasing in trend.

5.6 Inventory Turnover Ratio This ratio is calculated to ascertain the efficiency of inventory management in terms of capital investment. It shows the relationship between the cost of goods sold/cost of sales and the amount of average inventory. This ratio helpful in evaluating and review of inventory policy.

Inventory Turnover Ratio = Net Sales / Average Inventory

Table 5.6 Inventory Turnover Ratio for the Period 2001-2005

Particulars Net Sales Average Inventory Ratio

2001-2002 7917.90 2513.8 3.15

2002-2003 9360.12 3358.29 2.79

2003-2004 9561.33 2421.97 3.95

2004-2005 13091.82 2967.7 4.41

*Source: Secondary data

Fig 5.6 Inventory Turnover Ratio

Inventory turnover ratio

4.41 3.95 2.79 3.15 0 1 2 Ratio 3 4 5

4 3 Years 2 1

*Base: Table 5.6

Inference This ratio is of increasing in trend. It is high during the year 2004-05. In the manufacturing company the inventory of finished goods is also to convert into inventory turnover ratio. The inventory is being properly utilised by which the company gains income out of inventory which is used for production.

5.7 Working Capital Turnover Ratio

This ratio measures the effective utilization of working capital. It also measures the smooth running of business. The ratio establishes the relationship between cost of sales and working capital.

Working Capital Turnover Ratio = Net Sales / Net Working Capital

Table 5.7 Working Capital Turnover Ratio for the Period 2001-2005

Particulars Net Sales Net Working Capital Ratio

2001-2002 7917.90 8358.85 0.95

2002-2003 9360.12 9869.83 0.95

2003-2004 9561.33 9806.76 0.97

2004-2005 13091.82 13268.66 0.99

*Source: Secondary data

Fig 5.7 Working Capital Turnover Ratio

Working capital ratio

0.99 0.97 0.95 0.95 0.93 0.94 0.95 0.96 0.97 0.98 0.99

4 3 Years 2 1 0.92

Ratio

*Base: Table 5.7 Inference The working capital turnover ratio is of increasing in trend. This is being

increased during the year 2004-05. This is due to the company maintaining current asset and current liability properly. But this helps in avoiding Bank borrowing and long term source of funds.

Funds Flow Statement

Changes in Working Capital for the year 2001-02

Table 5.8

Particulars Current Assets Cash Stock

Year(Rs)2001

Year(Rs)2002

Increase

Decrease

138.90 2427.35

237.14 2600.38

173.03 173.03

Debtors Total (A) Current Liabilities Provisions Total (B) W.C (A-B) Increase in W.C Total

1374.99 3941.24

1442.31 4279.45

67.32

271.22 271.22 3670.03 322.66 3991.9

287.55 287.55 3991.9

16.33

322.66 3991.9 338.59 338.59

*Source: Secondary data

Funds Flow Statement for the year 2001-02

Table 5.9

Sources of funds

Application of funds

Issue of shares

363.91

Repayment of loan

919.82

Sale of investment

71.65

Purchase of fixed assets

338.44

Sale of fixed assets

124.11

Increase in working capital

322.66

Funds from operations

1021.25

Total

1580.92

1580.92

*Source: Secondary data

Changes in Working Capital for the year 2002-03

Table 5.10

Particulars Current Assets Cash Debtors Stock Total (A) Current Liabilities Provisions Total (B) W.C (A-B) Increase in W.C Total

Year(Rs)2001

Year(Rs)2002

Increase

Decrease

237.14 1442.31 2600.38 4,279.83

320.53 3042.65 1515.82 4,879

83.39 1600.34 1084.56

287.55 287.55 3992.28 461.97 4454.25

424.75 424.75 4454.25

137.2

461.97 4454.25 1683.73 1683.73

*Source: Secondary data

Funds Flow Statement for the year 2002-03

Table 5.11

Sources of funds Issue of shares 378.6

Application of funds Repayment of loan 367.87

Sale of investment

275.05

Purchase of fixed assets

1600.34

Sale of fixed assets

1513.61

Increase in working capital

461.97

Funds from operations

1188.86

Tax paid

925.94

Total

3356.12

3356.12

*Source: Secondary data

Changes in Working Capital for the year 2003-04

Table 5.12

Particulars Current Assets Cash Stock Debtors Total (A) Current Liabilities Provisions Total (B) W.C (A-B) Increase in W.C Total

Year(Rs)2001

Year(Rs)2002

Increase

Decrease

320.53 1515.82 3042.65 4879

375.27 1812.30 3314.58 5502.15

54.74 296.58 271.93

424.75 424.75 4454.25 386.91 4841.16

660.99 660.99 4841.16

236.24

386.91 4841.16 623.25 623.25

*Source: Secondary data

Funds Flow Statement for the year 2003-04

Table - 5.13

Sources of funds Issue of shares 223.79

Application of funds Repayment of loan 1851.65

Sale of investment

308.85

Purchase of fixed assets

2940.97

Sale of fixed assets

3087.01

Increase in working capital

386.91

Funds from operations

2248.53

Tax paid

688.65

Total

5868.18

5868.18

*Source: Secondary data

Changes in Working Capital for the year 2004-05

Table 5.14

Particulars Current Assets Cash Stock Debtors Total (A) Current Liabilities Provisions Total (B) W.C (A-B) Increase in W.C Total

Year(Rs)2001

Year(Rs)2002

Increase

Decrease

375.27 1812.30 3314.58 5502.15

828.02 2310.84 3963.60 7102.46

452.75 498.54 649.02

660.99 660.99 4841.16 1466.66 6307.82

794.64 794.64 6307.82

133.65

1466.66 6307.82 1600.31 1600.31

*Source: Secondary data

Funds Flow Statement for the year 2004-05

Table 5.15

Sources of funds Issue of shares 1325.45

Application of funds Repayment of loan 1391.95

Sale of investment

1173.11

Purchase of fixed assets

1725.09

Sale of fixed assets

1182.01

Increase in working capital

1466.66

Funds from operations

3680.63

Tax paid

1470.04

Total

6053.74

6053.74

*Source: Primary data

5.16b TREND ANALYSES Working Capital for the year 2001 - 2005 Years 2001- 2002 2002- 2003 2003- 2004 2004- 2005 Working Capital 322.66 461.97 386.91 1466.66

Fig 5.16 b

TREND

1600 1400 1200 1000 800 600 400 200 0 200102 200203 200304 200405
Inference Here in the above figure it shows that the trend lines of the actual trend shows a increase and decrease in working capital, but during the 2004- 05 it shows that the working capital has been increased tremendously this is due to the increase in sales for the year. During the year 2003- 04 the working capital has decreased due to the economical changes which affected the sales of the company.
actual line

During the year 2004-05 the company had planned to increase profit during the year through production. The company management planned during the year 2003 -04 to purchase machines out of the previous year profit.

The interest coverage ratio is high during the year 2004-05 .This is due to the depreciation made in the asset of the company. The company gains income from the same asset.

Chapter VI

Findings CHAPTER VI

FINDINGS The current ratio of L&T satisfies the conventional rule of current ratio that is 2:1 it test the quantity and not quality from 2001-02, 2002-03,2003 -04,2004-05. There is a sudden hike in price of raw material. There is a slow of moving stock of goods.

The ideal ratio is 1:1. During the year 2002-03 the companys overall performance and production is high by this the share price will get increased. Hence the ratio for that year is high compared to the next consecutive years.

By this the absolute liquid ratio is high during the year 2004-05. This is due to the delay in getting payments from its clients so by this the liability is high.

By this the absolute liquid ratio is high during the year 2004-05. This is due to the delay in getting payments from its clients so by this the liability is high. The interest coverage ratio is high during the year 2004-05 .This is due to the depreciation made in the asset of the company. The company gains income from the same asset. This ratio is of increasing in trend. It is high during the year 2004-05. In the manufacturing company the inventory of finished goods is also to convert into

inventory turnover ratio. The inventory is being properly utilised by which the company gains income out of inventory which is used for production. The working capital turnover ratio is of increasing in trend. This is being increased during the year 2004-05. This is due to the company maintaining current asset and current liability properly. But this helps in avoiding Bank borrowing and long term source of funds.

Chapter VII

Suggestions & Recommendations

CHAPTER VII

SUGGESTIONS

During the year 2001-02 ,2002 -03 , 2003 -04 there was sudden hike in price of raw materials the company cannot do anything against the economical changes . This is due to the companys commitment to its clients with the minimum use of the raw materials the company should work with it. The company should keep an eye on to maximise the production so that the share value of the company will be increased so that the company will get more business.

 The company should able to verify that the due payments they have get at proper time so that there will not be delay in getting payment. The company should follow the method of getting income over the fixed asset. The company can maintain its interest coverage ratio. The company should not disturb its fixed asset frequently that will affect the turn over ratio. The company should maximise stock and it should not be dead stock this will lead to loss of money and place. So the company should utilise its inventory according to the production. The working capital of the company that is the current asset and the current liability should be maintained properly by this it helps in avoiding Bank borrowing and long term source of funds.

Chapter VIII

Conclusion

CHAPTER VIII

CONCLUSION

Based on study being carried out at L&T ECC division, it can inferred that the companys working capital position is good further the company has shown good growth

this can read by their projects made around the world. The company is growing into immense size this can understand by recent contribution to built nuclear reactor project completion at Tarapus. The company has utilized the investment proposals and all the ratios have mostly satisfied the standard norm in the past five years.

Over all we management & inventory and receivables of the company is found to be better and it promises to improve in fast pace with controlled manner.

Appendix

APPENDIX

LARSEN & TOUBRO LIMITED ECC CONSTRUCTION DIVISION PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST March2002

project excel.xls

References

BIBLIOGRAPHY

Management Accounting Prasad Reddy Management Accounting Working Capital Management Business Statistics & Operation Research -

T.S.Reddy & Y.Hari S.N.Maheshwari R.K.Sharma Dr.S.P.Gupta

Project Export Memorandum (PEM) by Reserve Bank of India Internet