WORKING CAPITAL MANAGEMENT AND ANALYSIS IN NALCO

Summer Project / Final Dissertation

Submitted by

SANKHA CHAKRA MAHAPATRA

For the award of the

POSTGRADUATE DIPLOMA IN MANAGEMENT

LOYOLA INSTITUTE OF BUSINESS ADMINISTRATION LOYOLA COLLEGE, CHENNAI JUNE, 2013

ACKNOWLEGEMENTS
Words are indeed inadequate to convey my deep sense of gratitude to all those who have helped me in completing this summer project to the best of my ability. Being a part of this project has certainly been a unique and a very productive experience on my part. I am really thankful to Mr. Braja kumar Dash, Assistant General Manager (Finance), at corporate office, NALCO, Bhubaneswar, for making all kinds of arrangements to complete the project successfully and for guiding and helping me to solve all kinds of queries regarding the project work. His systematic way of working and guidance has inspired the pace of the project to a great extent. I would also like to thank my mentor and project coordinator, Mr P.V Alexander, Professor (Finance) for his extended guidance, encouragement, support and reviews without whom this project would not have been a success. This project would not have been successful without the help of Mr. S.C Mohanty, AGM (Materials, ERP) and Mr. Sudesh Patnaik , Manager(ERP) of NALCO.

Last but not least I would like to thank all the employees of NALCO, who have directly or indirectly helped me with their moral support for the completion of my project. I also thank my parents and friends who aided me in completing the project.

(SANKHA CHAKRA MAHAPATRA)

BONAFIDE CERTIFICATE
This is to certify that the Summer Project entitled Working Capital Management at NALCO submitted by SANKHA CHAKRA MAHAPATRA to Loyola Institute of Business Administration (LIBA), Chennai for the award of the Post Graduate Diploma in Business Management is a bonafide record of the work carried out by his under our supervision. The contents of this report in full or in parts have not been submitted to any other Institute or University for the award of any degree or diploma.

The project work has been carried out at NATIONAL ALUMINIUM COMPANY, Bhubaneswar

Date: June 2, 2013 Research Guide

Professor P.V. Alexander

Research Co-ordinator

Mr. Braja Kumar Dash, Assistant General Manager (Finance), NALCO

EXECUTIVE SUMMARY
The project on Working Capital Management has been a very good experience. Every manufacturing company faces the problem of Working Capital Management in their day-today processes. An organizations cost reduced and the profits increased only if it is able to manage its Working Capital efficiently. At the same time, the company can provide customer satisfaction and hence can improve their overall productivity and profitability. The project entitled Working Capital Management and its Appraisal in NALCO deals in this segment. The term of study was kept limited to make the title true. This project is a sincere effort to study and analyze the Working Capital Management of National Alumunium Company Limited, a Navratna Company . The project focused on making a financial overview of the company by conducting a Working Capital analysis of NALCO group for the years 2007 to 2012 and Ratios & various components of working capital & format emphasizing on Working Capital. The internship is a bridge between the institute and the organization. This made me to be involved in a project that helped me to employ my theoretical knowledge about the myriad and fascinating facets of finance. Moreover, in the process I could contribute substantially to the organizations growth. The experience that I gathered over the past two months has certainly provided the orientation, which I believe will help me in shouldering any responsibility in future.

Contents
ACKNOWLEGEMENTS ....................................................................................................................... 2 CHAPTER 1: INTRODUCTION TO WORKING CAPITAL ............................................................... 8 1.1 1.2 1.3 1.4 1.5 1.6 CONCEPT OF WORKING CAPITAL .......................................................................................... 11 OPERATING CYCLE OF WORKING CAPITAL............................................................................ 13 COMPONENTS OF WORKING CAPITAL .................................................................................. 15 IMPORTANCE OF WORKING CAPITAL: .................................................................................. 15 PRINCIPLES OF WORKING CAPITAL ....................................................................................... 16 FINANCING OF WORKING CAPITAL ....................................................................................... 17 Permanent or Fixed Working Capital: .......................................................................... 17 Financing of Temporary or Variable Working Capital: ................................................ 18

1.6.1 1.6.2 1.7

SECURITY REQUIRED IN BANK FINANCE ............................................................................... 19

CHAPTER 2: COMPANY ANALYSIS............................................................................................... 20 2.1 2.2 2.3 NATIONAL ALUMINIUM COMPANY-AN OVERVIEW ............................................................. 20 HISTORICAL BACKGROUND ................................................................................................... 21 OPERATIONS ......................................................................................................................... 22 Bauxite Mines: .............................................................................................................. 23 Alumina refinery ........................................................................................................... 23 Aluminium Smelter Plant.............................................................................................. 24 Captive Power Plant ...................................................................................................... 25 Port facility.................................................................................................................... 26

2.3.1 2.3.2 2.3.3 2.3.4 2.3.5 2.4 2.5 2.6 2.7 2.8 2.9

PRODUCT MIX OF NALCO...................................................................................................... 27 RECENT MILESTONES ............................................................................................................ 28 VISION OF NALCO.................................................................................................................. 28 MISSION OF NALCO............................................................................................................... 28 NALCO STRATEGIES ............................................................................................................... 29 NALCOS PERFORMANCE AT A GLANCE ................................................................................ 29 Mines............................................................................................................................. 29 Alumina Refinery.......................................................................................................... 30 Smelter Plant ................................................................................................................. 31 Power ............................................................................................................................ 32 Financials ...................................................................................................................... 32

2.9.1 2.9.2 2.9.3 2.9.4 2.9.5 2.10

ONGOING EXPANSION PROJECTS ......................................................................................... 34

CHAPTER 3: ALUMINIUM INDUSTRY ANALYSIS ...................................................................... 36

3.1 3.2

INTRODUCTION TO ALUMINIUM .......................................................................................... 36 GROWTH OF ALUMINIUM INDUSTRY ................................................................................... 38 Background: .................................................................................................................. 38 History: ......................................................................................................................... 38 Major Demand Drivers For Aluminium: ...................................................................... 41

3.2.1 3.2.2 3.2.3 3.3 3.4 3.5

ALUMINIUM INDUSTRY IN INDIA .......................................................................................... 42 FEATURES OF INDIAN ALUMINIUM INDUSTRY ..................................................................... 42 MAJOR PLAYERS IN MARKET ................................................................................................. 44

CHAPTER 4: ANALYSIS OF WORKING CAPITAL AT NALCO .................................................. 45 4.1 ANALYSIS THROUGH COMPONENTS OF CURRENT ASSETS .................................................. 45 Inventory Analysis ........................................................................................................ 45 Analysis Of Sundry Debtors ......................................................................................... 48 Analysis Of Cash & Bank Balances.............................................................................. 49 Analysis Of Loans And Advances ................................................................................ 51 Analysis Of Current Investments .................................................................................. 53

4.1.1 4.1.2 4.1.3 4.1.4 4.1.5 4.2

ANALYSIS THROUGH COMPONENTS OF CURRENT LIABILITIES ............................................ 53 Position Of Trade Payables ........................................................................................... 54 Provision Analysis ........................................................................................................ 55

4.2.1 4.2.2 4.3 4.4

ANALYSIS THROUGH NET WORKING CAPITAL OF NALCO ..................................................... 56 ANALYSIS THROUGH FINANCIAL RATIOS .............................................................................. 57

CHAPTER 5: INVENTORY MANAGEMENT IN NALCO .............................................................. 57 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 MATERIAL CLASSIFICATION................................................................................................... 57 SYSTEM OF CODIFICATION.................................................................................................... 58 SELECTIVE METHODS OF INVENTORY ANALYSIS: ................................................................. 59 MATERIALS PLANNING .......................................................................................................... 62 INVENTORY FORECASTING.................................................................................................... 65 ANNUAL HOLDING NORM..................................................................................................... 70 RECEIPT OF MATERIALS ........................................................................................................ 71 OPERATING CYCLE ANALYSIS OF NALCO ............................................................................... 71 Raw Material Holding Period ....................................................................................... 74 Work In Progress Conversion Period............................................................................ 76 Finished Goods Holding Period .................................................................................... 78 Debtors Conversion Period ........................................................................................... 80 Payment Deferral Period ............................................................................................... 80

5.8.1 5.8.2 5.8.3 5.8.4 5.8.5

5.8.6 5.8.7

Gross Operating Cycle For Nalco ................................................................................. 81 Cash Cycle Of Nalco..................................................................................................... 82

CHAPTER 6: CASH MANAGEMENT SYSTEM IN NALCO .......................................................... 84 6.1 6.2 6.3 6.4 CASH BUDGETING ................................................................................................................. 86 NALCOS INVESTMENT OF SURPLUS FUNDS ......................................................................... 88 CASH COLLECTION SYSTEM OF NALCO ................................................................................. 89 CASH DISBURSEMENT SYSTEM OF NALCO............................................................................ 92

CONCLUSION ..................................................................................................................................... 95 RECOMMENDATIONS & SUGGESTIONS...................................................................................... 96

LIST OF TABLES
Table 1: Captive Power Plant Performance of NALCO .......................................................... 32 Table 2: NALCO's Financials for 5 years ................................................................................ 34 Table 3: Inventories, NALCO.................................................................................................. 46 Table 4: Inventory Turnover Ratio .......................................................................................... 47 Table 5: Sundry Debtors, NALCO .......................................................................................... 48 Table 6: Cash & Bank Balances, NALCO............................................................................... 50 Table 7: Loans & Advances, NALCO ..................................................................................... 52 Table 8: Investments, NALCO ................................................................................................ 53 Table 9: Trade Payables, NALCO ........................................................................................... 54 Table 10: Provision Analysis, NALCO ................................................................................... 55 Table 11: Net Working Capital of NALCO ............................................................................. 56 Table 12: Annual Bauxite Excavation, 2012-13 ...................................................................... 66 Table 13: Specific Consumption, Mines.................................................................................. 66 Table 14: Annual Target for Bauxite Excavation, 2013-14 ..................................................... 66 Table 15: Materials Estimation, 2013-14................................................................................. 66 Table 16: Annual Production of Refinery, 2012-13 ................................................................ 67 Table 17: Specific Consumption, Refinery.............................................................................. 67 Table 18: Target Production of Refinery, 2013-14 .................................................................. 67 Table 19: Materials Estimation, 2013-14................................................................................. 67 Table 20: Annual Production of Smelter, 2012-13 .................................................................. 68 Table 21: Annual Target, 2013-14 ........................................................................................... 68 Table 22: Specific Consumption, Smelter ............................................................................... 68 Table 23: Materials Estimation, Smelter ................................................................................. 69 Table 24: Annual Generation of CPP, 2012-13 ....................................................................... 69 Table 25: Specific Consumption.............................................................................................. 69 Table 26: Target Generation, 2013-14 ..................................................................................... 69 Table 27: Material Estimation ................................................................................................. 69 Table 28: Annual Holding Norm ............................................................................................. 70 Table 29: Raw Materials Holding Period, M&R ..................................................................... 74 Table 30: Raw Material Holding Period(days) ........................................................................ 75 Table 31: Work in Progress Conversion Period, Alumina Refinery ....................................... 77 Table 32: Work in Progress Conversion Period, Smelter ........................................................ 78 Table 33: Finished Goods Holding Period, Refinery............................................................... 79 Table 34: Finished Goods Holding Period, Smelter ................................................................ 79 Table 35: Payment Deferral Period.......................................................................................... 80 Table 36: Gross Operating Cycle ............................................................................................. 81 Table 37: Cash Conversion Cycle, NALCO ............................................................................ 83 Table 38: Cash Budgeting ........................................................................................................ 87

LIST OF FIGURES
Figure 1: Types of Working Capital ........................................................................................ 12 Figure 2: Operating Cycle ........................................................................................................ 14 Figure 3: Principles of Working Capital .................................................................................. 17 Figure 4: Aluminium Process Flowchart ................................................................................. 22 Figure 5: Bauxite Mines at Panchpatmali Hills ....................................................................... 23 Figure 6: Alumina Refinery Unit of NALCO .......................................................................... 24 Figure 7: Smelter Unit of NALCO .......................................................................................... 25 Figure 8: Captive Power Plant Unit of NALCO ...................................................................... 26 Figure 9: Ingots ........................................................................................................................ 27 Figure 10: Rolled Aluminium .................................................................................................. 28 Figure 11: 5 years Bauxite Production of NALCO ................................................................. 30 Figure 12: Alumina Hydrate sales (MT) of NALCO............................................................... 30 Figure 13: Aluminium Production and Sales (MT) ................................................................. 31 Figure 14: Aluminium Sales (Crores) ...................................................................................... 32 Figure 15: Aluminium Metal ................................................................................................... 36 Figure 16 : Bauxite Ore............................................................................................................ 37 Figure 17: Demand prediction by Analysts ............................................................................. 39 Figure 18: Geographic distribution of bauxite, 2012 ............................................................... 40 Figure 19: Geographic distribution of Alumina, 2012............................................................. 40 Figure 20: Geographic distribution of primary Aluminium, 2012 .......................................... 41 Figure 21: Sector wise pattern for consumption of Aluminium .............................................. 43 Figure 22: Inventories, NALCO .............................................................................................. 46 Figure 23: Inventory Turnover Ratio ....................................................................................... 47 Figure 24: Sundry Debtors, NALCO ....................................................................................... 48 Figure 25: Cash & Bank Balances, NALCO ........................................................................... 50 Figure 26: Term Deposits, NALCO......................................................................................... 51 Figure 27: Current A/C, NALCO ............................................................................................ 51 Figure 28: Loans & Advances, NALCO.................................................................................. 52 Figure 29: Current Investments, NALCO ................................................................................ 53 Figure 30: Sundry Creditors, NALCO ..................................................................................... 54 Figure 31: Provision Analysis, NALCO .................................................................................. 55 Figure 32: Net Working Capital, NALCO ............................................................................... 56 Figure 33: Usage Value for Raw Materials in SAP ................................................................. 60 Figure 34: ABC Analysis ......................................................................................................... 60 Figure 35: Consolidated XYZ Analysis in SAP ...................................................................... 61 Figure 36: ABC Analysis ......................................................................................................... 61 Figure 37: Operating Cycle of NALCO................................................................................... 72 Figure 38: Refinery Process flow ............................................................................................ 73 Figure 39: Smelter Process Flow ............................................................................................. 73 Figure 40: Raw Material Holding Period(days)....................................................................... 75 Figure 41: Raw Material Holding Period, Smelter .................................................................. 76
9

Figure 42: Work in Progress Conversion Period, Refinery ..................................................... 77 Figure 43: Work in Progress Conversion Period, Smelter ....................................................... 78 Figure 44: Finished goods Holding Period, NALCO .............................................................. 79 Figure 45: Payments Deferral Period, NALCO ....................................................................... 80 Figure 46: Gross Operating Cycle ........................................................................................... 82 Figure 47: Cash Conversion Cycle, NALCO .......................................................................... 83 Figure 48: Stores Receipt Voucher .......................................................................................... 84 Figure 49: SBI Functioning, NALCO ...................................................................................... 91 Figure 50: Cheque Issue System, NALCO .............................................................................. 95

10

CHAPTER 1: INTRODUCTION TO WORKING CAPITAL

Working Capital means the amount of funds necessary to cover the cost of operating the enterprise. Working Capital is the amount of capital required for the smooth and uninterrupted functioning of normal business operations of a company ranging from the procurement of the raw-material, converting the same into finished products for sale and realizing cash along with the profit from the accounts receivable that arise from the sale of finished goods on credit.

Capital required for a business can be classified under two categories:

1) Fixed Capital 2) Working Capital Every business needs funds for two purposes for its establishments and to carry out its dayto-day operations. Long term funds are required to create production facilities through the purchase of fixed assets. Funds are also needed for short term purposes for the purchase of raw materials and other day-to-day expenses. These funds are known as Working Capital. Working capital in short may be said as the capital required in meeting the short term needs. The requirement of working capital differs from firm to firm. The firm may require large amount of working capital or may be less, it depends on the kind of work done by the particular organization.

1.1 CONCEPT OF WORKING CAPITAL

11

Figure 1: Types of Working Capital GROSS WORKING CAPITAL: Total current assets Gross working capital refers to the firms investment in current assets. Current assets are the assets which can be converted into cash within an accounting year and include cash, short term securities, debtors, (account receivable or book debts) bills receivable and stock (inventory).

NET WORKING CAPITAL: Change in current assets and current liabilities. Thus Net Working capital= current assets- current liabilities Net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsider which are expected to mature for payment within an accounting year and include creditors (account payable), bills payable, and outstanding expenses. Net working capital can be positive. Or negative. A positive net working capital will arise when current assets exceed current liabilities. A negative net working capital occurs when current liabilities are in excess of current assets. The two concepts of working capital gross and net-are not exclusive rather, they have equal significance from the management viewpoint.

Permanent or fixed working capital: It is the minimum amount which is required to ensure effective utilization of fixed facilities and maintaining the circulation of current assets. For
12

example every firm has to maintain a minimum level of raw material, work-in-progress, finished goods and cash balance. This minimum level of current asset is called permanent or fixed working capital as this part of capital is permanently blocked in current asset. Temporary or variable working capital: It is the amount of working capital which is required to meet the seasonal demand and some exigencies. Variable working capital can be further be classified as Seasonal working capital: the capital required to meet the seasonal needs of the enterprises is called as seasonal working capital. Special working capital: That part of working capital which is required to meet special exigencies such as launching of extensive marketing campaigns for conducting research etc. Regular working capital: This type of working capital remains always in the enterprise for the successful operation. It supplies the funds necessary to meet the current working expenses i.e. for purchasing raw material and supplies, payment of wages, salaries and other sundry expenses. Reserve margin working capital: Reserve margin working capital represents the amount utilized at the time of contingencies. These unpleasant events may occur at any time in the life of the business such as inflation, depression, slump, flood, fire, earthquakes, strike, lay off and unavoidable competition etc. In this case greater amount of capital is required for maintenance of the business.

1.2 OPERATING CYCLE OF WORKING CAPITAL Sufficient working capital is necessary to sustain sales activity. Technically this is referred to as an operating/ cash cycle. It can be said to be at the heart of the need of working capital. Cash/operating cycle is the length of time necessary to complete following event. Conversion of cash into raw materials. Conversion of raw materials into work in process. Conversion of work in process into finished goods. Conversion of finished goods into bills receivables through sales. Conversion of debtors and bills receivables into cash.

The cycle is a continuous process

13

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 (collect money due from debtors more quickly) or reduce the amount of money tied up (i.e.., reduce inventory level relative to sales). 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 freee4 money available to support addition sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit, you festively create freed finance to help fund future sales a perusal of operational cycle reveals that the cash invested in operations are recycled back in to cash. However it takes time to reconvert the cash. Cash flows in cycle into around and out of a business it the businesss lifeblood and every managers primary task to help keep it flowing and to use the cash flow to generate profits. The shorter the period of operating cycle the larger will be the turnover of the funds invested in various purposes.

Figure 2: Operating Cycle

14

1.3 COMPONENTS OF WORKING CAPITAL

Current Assets This is any cash or assets that can be quickly turned into cash. Current assets are assets, which can be converted into cash within an accounting year. Constituents of Current Assets:

Cash in hand and bank balance Inventories Trade Receivables Current Investments Short term loans and advances

Current Liabilities Current liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year. Constituents of current Liabilities: Sundry Creditors/ Trade Payables Provisions

1.4 IMPORTANCE OF WORKING CAPITAL: Working Capital is the life blood and nerve system of any business organization. Just as circulation of blood is necessary in human body to maintain life, working capital is very essential to the business organization for smooth running of the business. No business can run successfully without and adequate working capital. The main advantage of maintaining adequate amount of working capital is as follows:1. Solvency of the business: Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production. 2. Goodwill:

15

Sufficient working capital enables a business concern to make prompt payments and hence helps in creating and marinating goodwill. 3. Easy Loans: A concern having adequate working capital, high solvency and good credit standing can arrange loans from banks and other financial institutions on easy and favourable terms. 4. Cash Discounts: Adequate working capital also enables a concern to avail cash discounts on the purchase and hence it reduces cost. 5. Regular Supply of Raw Materials: Sufficient working capital ensures regular supply of raw materials and continuous production. 6. Regular Payment of Salaries, Wages and Day-to-Day Commitments: A company which had ample working capital can make regular payment of salaries, increase their efficiency, reduces wastage costs and enhances production and profile. 7. Exploitation of Favourable Market Conditions: Only concerns with adequate working capital can exploit favourable market condition such as purchasing its requirements in bulk when the prices are lower and by holding its inventories for higher prices. 8. Ability to Face Crises: Adequate working capital enables a concern to face business crisis in emergencies such as depreciation because during such periods, generally, there is much presence on working capital. 9. Quick and Regular Return On Investment: Every investor wants a quick and regular return on his investments. Sufficient working capital enables a concern to pay quick dividends to its investors as there may not be much pressure to plough back profit. This gains the confidence of its investors and creates favourable markets to raise additional markets to raise additional funds in future. 10. High Morale: Adequacy of working capital creates an environment of securities, confidence and high morale and creates overall efficiency in business.

1.5 PRINCIPLES OF WORKING CAPITAL

16

Figure 3: Principles of Working Capital The following are the principle of a sound working capital management policy: Principle of Risk Variation: There is an inverse relationship between the degree of risk and profitability. A consecutive management prefers less risk by maintaining a high level of current assets, while a liberal management assumes greater risk by having low working capital. Principle of Cost of Capital: The various source of raising working capital have different cost of capital and risk involved. Generally, higher the risk lower is the cost of capital and lower the risk higher the cost of capital. Principle of Equity Position: According to this principle, the amount of working capital invested in each component should be adequately justified by a firms equity position. Every rupee invested in current assets should contribute to the net worth of the firm. Principle of Maturity Payment: According to this principle, a firm should make every effort to relate maturities of payment to its flow of internally generated funds.

1.6 FINANCING OF WORKING CAPITAL 1.6.1 Permanent or Fixed Working Capital:

Shares:

17

Issue of shares is the most important source of raising long term capital. A company can issue various types of shares such as equity, preference and deferred shares. A company should try to raise the maximum amount by issue of shares. Debentures: A debenture is an instrument issued by a company acknowledging its debt to its holders. The firm issuing debentures enjoys a number of benefits such as trading on equity, retention of benefits, tax controls, etc. Public Deposits: Public Deposits are the fixed deposits by a business enterprise directly from the public. According to The Reserve Bank of India, a non-banking concern cannot borrow by the way of public deposits more than 25% of the paid up capital and free reserves. Ploughing back of profits: It means the reinvestment by a concern of its surplus earnings in the business. It is an internal source of finance and is more suitable for an established firm for its expansions. Loans: Financing Institutions like commercial banks, Life Insurance Corporation provide short term, long term loans. This source of finance is more suitable to meet the medium term demands of the working capital. 1.6.2 Financing of Temporary or Variable Working Capital:

Commercial banks: The different forms of loans provided by commercial banks are as follows: 1. Loans 2. Cash Credit 3. Over Drafts 4. Purchasing and Discounting of bills.

Indigenous Bankers: It refers to private money lenders and other country bankers. The interest rates are very high in such cases. Trade Creditors:

18

It refers to the credit extended by the suppliers of goods in the normal course of business. When a firm delays payment beyond the due date, it is called Stretching. Installment Credit: It is a method by which assets are purchased and the possession of goods is taken immediately but the payment is made in installment over a period of time. Factoring: A commercial bank may provide finance by discounting the bills or invoice to its customers. Thus a firm gets immediate payment for sale made on credit. A factor is a financial institution, which offers services relating to management and financial debts arising out of credit sales. Commercial Papers: It represents unsecured promissory notes issued by the firms to raise short term funds. The Reserve Bank of India introduced commercial paper India on recommendations from VAGHUL COMMITTEE.

1.7 SECURITY REQUIRED IN BANK FINANCE Following are the most important modes of security requirements Hypothecation: Under this agreement, bank provides working capital against the security of moveable property usually inventories. The borrower does not give the possession of the property to the bank. Pledge: Under this agreement the borrower is required to transfer the possession of the property or goods to the bank as security. Mortgage: It is a transfer of a legal or equitable interest in a specific immovable property for the payment of debt. The possession of the property remains with the borrower but the total legal title is transferred to the lender.

19

CHAPTER 2: COMPANY ANALYSIS

2.1 NATIONAL ALUMINIUM COMPANY-AN OVERVIEW Incorporated in the year 1981, NALCO is considered as a critical juncture in the history of Indian Aluminium Industry. NALCO has emerged as a star performer not only in production, export of alumina and aluminium but also in propelling a self-sufficient growth in Indian Aluminium Industry. Started as a Public sector undertaking of the Government of India (87.15% stake), it also holds the crown of Asias largest integrated aluminium complex, congregating bauxite mining, alumina refining, aluminium smelting, aluminium casting, power generation, rail and port facilities. It has units in Odisha at places like Angul(Smelter & Power plant Complex) and Damanjodi (Mining & Refinery Complex). The Bauxite mines known as the Panchpatmalli Mines are situated at the top of set of five mountains called Panchpatmalli. These are open cast mines. The refinery complex for processing and producing bauxite is located in Damanjodi. The smelter plant of NALCO is located at Nalconagar, Angul. The company's headquarters are located in Bhubaneswar, which is the capital of Odisha. NALCO has undertaken a capital expenditure programme of Rs.41 billion to expand aluminium production capacity from 345,000 tonnes to 460,000 tonnes, and also to expand the capacity of its mining, refining and power generation units.

Nalco has also spent more than Rs. 100 crore towards various corporate social responsibility activities. Creation of infrastructure in the peripheral villages for health care, communication, education and drinking water gets priority in the periphery development plans of the company. Community participation in pisciculture, innovative farming, social forestry and sanitation programmes apart, encouragement to arts, culture, sports and literature are all a part of Nalco's involvement with the life of the community. Successful operational units of the company have led to employment and income generation for the localities in many significant ways. NALCO had bagged numerous prestigious awards and recognitions to its credit. One of them was achieved in the field of afforestation and wasteland development i.e. Indira Priyadarshini Vrikshamitra Award from Govt. of India. The 1200 MW Captive Thermal Power Plant of the

20

Company also received the prestigious Indira Gandhi Paryavaran Puraskar ,2000 from Govt. of India for its remarkable contributions in the field of environment management. Besides these, the Company and its plants have received distinct National, State and Institutional awards for excellence in Safety & Environment practices. Nalco has also received ISO 9001:2000 awards and OHSAS 140001 for its eminence in production technology & occupational health & safety systems respectively.

2.2 HISTORICAL BACKGROUND The history of NALCO is deep rooted with the benevolence of benign mother earth and in the indomitable spirit of man. It took years for the prospectors to discover over 1000 million tonnes of bauxite reserve in the hostile wilderness of Eastern Ghats in 1975. India moved forward to the 5th rank in the world bauxite with a total estimation of 2900 million tons. The Government of India on 28th March, 1978 went into contract with Aluminium Pechiney of France to produce a feasibility report on commercial exploitation of bauxite for foundation of an integrated Aluminium complex. Feasibility report focuses on Panchapatmali (which means five flat-top hills in local dialect), located at 30 km east of Koraput district of Orissa and 130 km north of Vishakhapatnam port, containing the single largest reserve of 310 million tonnes of bauxite of enormous potential. In May 1980, Bharat Aluminium Company Limited (BALCO), the forerunner in public sector Aluminium industry, put forward the Orissa Aluminium proposal to the Government of India. The Government takes the ponderous investment decision on 1 November 1980. Thus National Aluminium Company, truly a national venture gets incorporated on 7 January 1981 in1981 to implement one of the largest multi-location integrated Aluminium projects of the world with its own captive power unit and port facilities. With the technical collaboration of aluminium Pechiney of France, Euro Dollar loan from a consortium of international banks and the special provision of the govt. of India and the govt. of Orissa helped the company to implement the project within the budgeted expenditure of Rs2408crores, under very difficult logistics of project management. Different units of the company went into production in a phased manner starting from November1985. Within a short duration of time, the company has emerged as a leader in the field of aluminium production in the country and also has made significant impact abroad. In a major leap forward, Nalco has not only addressed the need for self-sufficiency in
21

aluminium, but also given the country a cutting edge technology in producing this strategic metal to the best of world standards. 2.3 OPERATIONS Registered officeBhubaneswar Bauxite mine..Panchpatmali Aluminium refinery............................Damonjodi Aluminium smelter..Angul Captive power power plant.Angul Port facilities....Visakhapatnam Rolled product unit......Angul

Figure 4: Aluminium Process Flowchart

Raw Materials: The primary raw materials required for the manufacture of aluminium includes Bauxite Caustic soda Calcined petroleum coke Coal tar pitch and

22

LS/FS furnace oil.

The mined bauxite ore is mixed in proportionate with caustic liquor and is refined to produce alumina. This is then smelted (through electrolysis in a smelter) to produce aluminium. Depending on the quality of bauxite, generally 2.5 3 tonnes are required for manufacture of 1 tonne of alumina. In general, 2 tonnes of alumina are required to manufacture 1 tonne of aluminium. 2.3.1 Bauxite Mines:

Nalco has an estimated 1,600 million tonnes of bauxite reserves located at only 20 kms from its alumina refinery, enabling it to become one of the most economical bauxite manufacturers in the world. A fully mechanized open-cast mine of 4800000 MT, on Panchpatmali hills of Koraput district in Odisha, serves as a feed-stock to the Alumina Refinery located at Damanjodi, situated 16km downhill. The transportation is done through a 14.6km multi-curved cable conveyor belt of 1800tph capacity. The mining capacity has been expanded to 6300000 MT.

Figure 5: Bauxite Mines at Panchpatmali Hills

2.3.2 Alumina refinery

The 15,75,000 MT Alumina Refinery, consisting of three parallel streams of equal capacity, is located in the quaint valley of Damanjodi in Koraput district. It is in operation since

23

September, 1986, the Refinery is setup to provide Alumina to the Company's Smelter unit at Angul and export the balance Alumina to overseas markets via Visakhapatnam Port.

Presently, the capacity is under expansion to 21,00,000 MT. The salient features:

Digestion process with atmospheric pressure. Higher productivity with Pre-desilication and inter-stage cooling. Reduced energy consumption with fluidised bed calciners. Co-generation of 3x18.5 MW power by usage of back pressure turbine in steam generation plants.

Figure 6: Alumina Refinery Unit of NALCO

.

2.3.3 Aluminium Smelter Plant

The 3450,000 MT capacity Aluminium Smelter is situated at Angul in Orissa. Based on energy efficient cutting edge technology of smelting and pollution control, the Smelter Plant is under operation since 1987. Presently, the capacity is under expansion to 4600,000 MT. With the acquisition and eventually merger of International Aluminium Products Limited (IAPL) with Nalco, the 50,000 MT export-oriented Rolled Products Unit is all set to produce foil stock, can stock, fin stock, coil stock, circles, cable wraps, standard sheets and coils. The salient features:

Digestion process with atmospheric process.

24

Inter-stage cooling to achieve higher productively.

Co-generation of 3818.5 MW power by using back pressure turbine in steam generation plant.

Figure 7: Smelter Unit of NALCO

2.3.4 Captive Power Plant

Situated close to Aluminium Smelter at Angul, a Captive Power Plant with 960 MW capacity, comprising of 8 x 120 MW clusters, has been commissioned for firm supply of power to the Smelter unit. Presently, the capacity is under expansion to 1200 MW.

25

Figure 8: Captive Power Plant Unit of NALCO

The water required for the plant is drawn from Brahmani river through a 7 km long twin circuit pipeline. The coal requirement is met from a mine of 3.5 MT capacity commissioned for Nalco at Bharatpur in Talcher by authorities of Mahanadi Coalfields Ltd. The Power Plant is inter-connected with the State grid power supply. Nalcos production costs are one of the lowest globally and it has the advantage of 100% captive power, essential in a power intensive industry and in a power deficit nation like India.

The salient features: Optimal thermal efficiency by Micro-processor based burner Management system. On-line monitoring by Computer controlled data acquisition system. Automatic turbine run-up system. Specially designed turbine with high pressure.

2.3.5 Port facility

On the Northern phase of inner Harbor of Vishakhapatnam port located on the Bay of Bengal, Nalco has setup mechanized storage & ship handling facilities for exporting Alumina in bulk & importing Caustic Soda from overseas market.

The salient features: Maximum ship size-35000 DWT

26

Alumina reception-48*53 tone pay-load wagons Alumina storage-3*25000 tonnes RCC silos Ship loading rate-2200tph

2.4 PRODUCT MIX OF NALCO ALUMINIUM METAL Sows ingots Billets Wire rods Cast strips

Figure 9: Ingots

ALUMINA AND HYDRATE Calcined alumina Alumina hydrate ZEOLITE-A SPECIAL PRODUCTS Speciality hydrate/alumina (alumina chemicals) Rolled products Aluminium rolled products
27

Figure 10: Rolled Aluminium

2.5 RECENT MILESTONES 2004: Nalco open offer to acquire 20% stake for Ondeo Nalco India. 2005: Agreement with NMDC. 2006: 2nd Best Practice in Environment, Safety & Health in industries of Odisha award by CII-ER to CPP -2006. 2007: Best Environment Management Award to CPP for 2007. Best Performance in Safety management, Accident Prevention & communication System to CPP for 2007. 2008: Pollution Control Excellent Award 2008 to Panchpatmali Bauxite Mines from State Pollution Control Board, Bhubaneswar. 2009: 2nd Best Practice in Environment Management instituted by Confederation of Indian Industry (CII) to Alumina Refinery for 2008-09. Pollution Control Excellence Award 2009 by OSPCB to Alumina Refinery.

2011: Nalco signs JV agreement with NPCIL for nuclear plant. 2012: NALCO Bags Dun & Bradstreet Best PSU Award. 2013: NALCO Achieves Highest-Ever Turnover & Foreign Exchange Earnings

2.6 VISION OF NALCO To be a reputed global company in the metals and energy sectors 2.7 MISSION OF NALCO

28

To achieve growth in business with global competitive edge providing satisfaction to the customers, employees, shareholders and community at large. 2.8 NALCO STRATEGIES To bring in committed personnel with growth potential and develop their skills and capabilities in congenial work and social environment through opportunity for training, development, career advancement and incentives. To develop the favourable attitude among the employees and to obtain their best construction to the organization by providing stable employment ,safe working conditions job satisfaction, reduce grievance through good pay and welfare amenities commensurate with company capacity to spend in accordance with government guidelines. To promote fellowship and sense of belongingness among all section of employees through closer association of employees with the management and by encouraging healthy trade union practices. 2.9 NALCOS PERFORMANCE AT A GLANCE 2.9.1 Mines

The National Aluminium Company Ltd. (Nalco) has achieved the highest-ever bauxite production of 50.03 lakh tonnes in 2011-12, against the earlier best of 48.79 lakh tonnes in 2009-10.

29

5100

Bauxite Production
5000 4900 4800 4700 4600 4500 2007-08 2008-09 2009-10 2010-11 Production in MT 2011-12 4684 4700 4878 4824 5002

Figure 11: 5 years Bauxite Production of NALCO

2.9.2 Alumina Refinery

The alumina refinery of NALCO produced 16.87 lakh tonnes of alumina hydrate against 15.56 lakh tonnes produced previous financial year. The unit achieved the alumina hydrate sale of 842,396 tonnes, against 681,917 in the year 2010-11.

Calcined Alumina Performance (MT)

Production Sales Internal Consumption

1575

1576

1591

1556 888.5 667.5

1687

871.3 703.7

872.9 703.1

862.96 728.04

858.9 828.1

2007-08

2008-09

2009-10

2010-11

2011-12

Figure 12: Alumina Hydrate sales (MT) of NALCO

30

2.9.3 Smelter Plant

During the year, the metal production of the company dropped marginally from 4.44 lakh tonnes to 4.13 lakh tonnes. Besides coal shortage, the dwindling LME (London Metal Exchange) prices of metal, forced the company to slump its production of metal to some extent. Nalco also recorded 415,916 tonnes of cast metal sale, against 438,952 tonnes in the year 2010-11. Aluminium export by the company was recorded at 98,399 tonnes this year, against 98,200 tonnes accounted in the last financial year.

Aluminium Production (Million Tonnes)

500 400 300 252 200 100 0 2007-08 2008-09 2009-10 Export sales 2010-11 2011-12 Production Domestic sales 146.9 101.7 82.3 98.2 98.4 431 360 361 271 289 443 341 413 317

Figure 13: Aluminium Production and Sales (MT)

31

Aluminium Sales (in Crores)

5000 4000 3000 2000 1000 0 2007-08 2008-09 2009-10 2010-11 2011-12 1075.05 846.12 3137.5 3176.91 2833.65 1332.84 1148.27 4184.76 4234.76

1043.37

Export sales

Domestic sales

Figure 14: Aluminium Sales (Crores)

2.9.4 Power

Year Production (MU) Sales (MU)

2007-08 5609 129

2008-09 5541 81

2009-10 6293 15

2010-11 6608 56

2011-12 6200 16

Table 1: Captive Power Plant Performance of NALCO The energy-intensive aluminium production at Nalco's facilities dropped as annual power generation fell to 6,200 million units from the last year's 6,608 million units. Power generation and subsequently metal production were down due to lower than contractually linked supply of coal, resulting in shut down of 10 % of smelting capacity. 2.9.5 Financials

The current aluminium price of around $2100 a tonne on LME allows the company to recover all its variable costs in full. In the domestic market, Nalco charges a premium over LME-linked (between $90 and $100 per tonne) and currency-adjusted price for aluminium.
32

Despite increase in the income from Rs. 5,959 Crores during 2010-11 to Rs.6,500 Crores during 2011-12, the profit after tax (PAT) has gone declined from RS. 1,069 Crores (201011) to Rs 850 Crores (2011-12) due to increase in operating cost. The operating expenses were more by about RS. 1,003 Crores during the year over the previous year mainly because of increase in prices of various raw materials, impact of non-executive pay revision and rise in volume of production at Refinery. The details of financial performance is provided below: (Rs. in Crores)

Sl. A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Particulars (in Crores) Income Statement: Exports Domestic Sales Gross Sales (1+2) Less: Excise Duty Net Sales (3-4) Other Income: Operating Non-operating Operating expenses Operating Profit (5+7-9) Exceptional Expenditure Earnings before interest, dep. & taxes(EBIDT)(10+8-11) Interest & Financing Charges Earnings before dep. & taxes(EBDT)(12-13) Depreciation and Amortisation Profit before tax(PBT)(14-15) Provision for tax Net Profit (PAT)(16-17)

2007-08

2008-09

2009-10

2010-11

2011-12

2134 3340 5474 485 4989

2085 3446 5531 423 5108

2209 3101 5310 256 5054

2065 4305 6370 411 5959

2569 4358 6927 427 6500

146 441 2822 2313

123 400 3427 1804

119 374 4071 1102

98 353 4464 1593

112 542 5467 1145 22

2754 2 2752 285 2467 835 1632

2204 4 2200 273 1927 655 1272

1476 2 1474 319 1155 341 814

1946

1665 1

1946 422 1524 455 1069

1664 467 1198 348 850

B 19 20 21 22 23 24 25

Balance Sheet Equity Capital Reserves & Surplus Net worth (19+20) Loans Net Fixed Assets Working Capital Capital Employed (23+24) 3531 3500 7031 4032 2596 6628 644 8230 8874 644 9126 9770 644 9751 10395 9 4836 2998 7834 1289 9876 11165 15 5494 3304 8798 6612 4193 10805 1289 10426 11715

33

C 26 27 28 29 30

Ratios: Operating Profit Margin (OPM) (%)(10/5*100) Net Profit Margin (%) (18/5*100) Return on Capital Employed (ROCE) (%) (18/25*100) Return on Net Worth (RONW) (%) (18/21*100) Debt Equity (21/20) 46.36 32.71 23.21 18.39 35.32 24.9 19.19 13.02 21.8 16.11 10.39 7.83 26.73 17.94 12.15 9.57 17.62 13.07 7.86 7.25

D 31 32 33

Others Book value per share of Rs 5 each (in Rs.) Earnings per share (in Rs.) Dividends (Rs. Per Share) 34.43 6.33 6 37.91 4.94 5 40.34 3.16 2.5 43.32 4.15 2.5 45.46 3.3 1

Table 2: NALCO's Financials for 5 years

Dividends and Appropriations: NALCO paid an Interim Dividend for the year 2011-12 @ Rs. 0.90 per share (18%) in March, 2012. The Board of Directors have recommended payment of final dividend @ Rs. 0.10 per share (2%) making aggregate of RS. 1.00 per share (20%) for the year 2011-12 as against Rs. 2.50 per share (Rs.2 per pre-split and bonus share of Rs. 10 each (10%) as interim dividend and Rs.0.50 per post-split and bonus share of Rs. 5 each (10%) as final dividend) paid for the previous year 2010-11. The Directors have recommended a lower rate of dividend keeping in view the falling profit margins due to slow down of global economy affecting industrial growth and also keeping in view the requirement of funds for the growth projects under consideration by your Company. The final dividend will be paid after shareholders approval in the Annual General Meeting.

2.10

ONGOING EXPANSION PROJECTS

1. Alumina Refinery- Upgradation Project

Capacity expansion of 4th Stream of Alumina Refinery from 5.25 lakh tonnes/year to 7.0 lakh tonnes/year and that of Bauxite Mines from 6.3 million tonnes/year to 6.825 million tonnes/year at an estimated project expenditure of Rs. 409 Crores is in progress. Total

34

progress up to 81% has been achieved. The project is scheduled to start during the duration of current financial year.

2. Utkal- E Coal Block

Utkal- E Coal Block project at an estimated cost of Rs. 337.61 Crores is in progress, it contains reserve of around 67.49 million tonnes. Almost all statutory permissions have been cleared. Activities for acquisition of Government as well private land and construction of rehabilitation colony are at hand.

3. 3rd Phase Expansion Project

NALCO has initiated activities for 3rd Phase brown field expansion at existing facilities at Angul and Damanjodi, in Odisha at a capital investment of Rs. 7,500 Crores.

4. 50 MW Wind Power Plant

In pursuit of endeavour to harness the potential in renewable energy sources, company has approved the investment of RS. 274 Crores for setting up 50 MW Wind Power Plant in Andhra Pradesh. Equipments manufacturing has been completed and has reached the site. Stage-2 Forest Clearance for the Project is being pursued with Ministry of Environment & Forests for commissioning of the unit.

5. Nuclear Power Plant in Joint Venture

Your Company has entered into joint venture with Nuclear Power Corporation of India Ltd. for setting up of 1400 MW nuclear power plant in Gujarat at an estimated cost of Rs. 11,459 Crores. NALCOS present equity share is 26% and the same would be increased to 49% after approval of the Government of India.

35

CHAPTER 3: ALUMINIUM INDUSTRY ANALYSIS

3.1 INTRODUCTION TO ALUMINIUM Pure Aluminium is a silvery white and a ductile member of the boron group of chemical elements. It possesses many desired characteristics which makes it more usable. It has the symbol Al. It doesnt dissolve in water under normal circumstances. It is light, non-sparkling, non-toxic (as a metal) and non-magnetic. It is somewhat decorative in appearance. Pure aluminium is delicate and lacks strength, but alloys with some amounts of silicon, manganese, copper, magnesium, and other elements have very useful properties.

Figure 15: Aluminium Metal

Aluminium is the most abundant metal found in the Earth's crust, and it is the third most abundant element available after oxygen and silicon. It makes up about 8% of total weight of the Earths solid surface. Aluminium is very reactive chemically to occur in nature as a free metal. Instead, it is available in combination with over 270 different minerals in earths crust. The major percentage of aluminium is found in the form of Bauxite Ore. Bauxite is found in several types with alumina content varying from 35% to 60%. Bauxite is refined to produce alumina predominantly by using the Bayer process, although this process is varied depending on the quality and type of bauxite used. Thereafter, Alumina is processed into aluminium metal using an electrolytic process.

36

Figure 16 : Bauxite Ore

Aluminium has a remarkable property for its ability to resist corrosion and its low density. Structural components that are made from aluminium and its alloys are essential to the aerospace industry and very important in other areas of automobile and construction business. Its reactive characteristics make it useful as a catalyst or additive in chemical formulations, including being used in ammonium nitrate explosives to enhance the blast intensity.

Aluminium is not only used for building large architectural structures but also in domestic household purposes. Below are some of the common uses of Aluminium today:

Transportation (automobiles, bicycles, aircraft, railway cars trucks, marine vessels, etc.). Packaging (foils, cans, etc.) Construction (doors, windows, siding, building wire, etc.) Cutleries and utensils. Walking Poles, Street lighting poles, sailing ship masts, etc. Photographic equipment Electrical transmission lines for power distribution Alnico and MKM steel magnets Super pure aluminium used in electronics and CDs. Powdered aluminium is used in paint and in rocket propellants.

37

3.2 GROWTH OF ALUMINIUM INDUSTRY 3.2.1 Background:

Aluminium is one of the most multifaceted and essential materials for our dynamic global economy. Its key properties like strength, conductivity, recyclability, and light weight make it ideally suited to the needs of a highly technologically sophisticated world. Above all, aluminium came out as the most environmentally sustainable material available to our increasingly resource-conscious planet. It offers customers a distinct advantage through its ability to be repeatedly recycled without loss of quality and with only 5% of the original process energy use and emissions. On a life-cycle basis, aluminium has surpassed the energy and environmental performance with competing materials in virtually all applications and will totally offset the environmental footprint of its original manufacturing.

3.2.2 History:

In 1972, bauxite production was dominated by four countries Australia, USSR, Jamaica and Suriname which together held a global market share of 60%. Today, only Australia is on the list of the top six producers. Even greater shifts have occurred in the location of alumina-producing countries. In 1972, more than 45% of alumina production globally was concentrated in five industrialized countries, poorly-bestowed with bauxite reserves: United States, Canada, France, Japan and Germany. The other major producers were then Australia (13%), USSR (12%), Jamaica (9%) and Suriname (6%).

The geographical distribution of bauxite, alumina and aluminium production has changed significantly since 1972. In bauxite, while Australia increased its share of global production from 20% to 32% over the last 41 years, Suriname, Jamaica and Russia are no longer on the list of the major producers, having been replaced by Brazil (15%), China (14%), Indonesia (11%) and India(4%). The combined market share of the five largest producers is now over 75%.

38

Figure 17: Demand prediction by Analysts

A complete relocation of production centres has also been taking place in the global alumina industry. While the BRIC countries today account for about 40% of global bauxite output, this share jumps to 53% for alumina. In the latter case, production has undoubtedly shifted towards countries with access to an abundant and cheap source of bauxite. China has become the largest alumina producer, but continues to import a large volume of its bauxite needs, mainly from Indonesia.

39

Jamaica, 4% Russia, 3% India, 6% Others, 7%

Australia, 32%

Guinea, 8%

Indonesia, 11% China, 14%

Brazil, 15%

Figure 18: Geographic distribution of bauxite, 2012

Others 16%

India Jamaica 2% 4%

Ireland 2%

Australia 23%

Russia 3%

Brazil 11%

United States 4%

China 35%

Figure 19: Geographic distribution of Alumina, 2012

40

Middle East 6% India 4%

Norway Canada 7% 3%

Australia Brazil 5% 4%

China 39% Others 19% Russia 9%

United States 4%

Figure 20: Geographic distribution of primary Aluminium, 2012

3.2.3 Major Demand Drivers For Aluminium:

The rise in the demand for the lightweight silvery metal is fuelled largely by the boom in Chinese economy which now consumes a quarter of the worlds aluminium production. Analysts forecast an annual growth rate of 7% to 14% in the automotive industry up to 2015 in China, a 12% increase in construction expenditure and a minimum of plus 16 million annual growth in urban population in the next 8 years. According to analysts, all these factors will combine to see China consume 50% of worlds aluminium production as early as 2025. In addition to that, the EU is discussing the possibility of introducing stringent CO2 emission requirements for automobiles which will inevitably boost demand for the metal. As aluminium is lighter than steel, so its use in the automotive industry will make cars much more efficient. A kilo of aluminium, used as an alternative for heavier metals in car industry will reduce gas consumption by 8.5 litres and would produce 20 kg less CO2 emissions. Results say that a 10% decrease in cars weight results in a 9% increase in fuel consumption efficiency. Finally, high price rise for substitute metals, such as copper and zinc, stimulate a

41

direct increase in demand for aluminium in the power, construction and transportation industry in particular. The usage pattern for aluminium in the sectors mentioned earlier is different in India in comparison with the rest of the world. Internationally, the transportation and construction sectors are the major consumers of aluminium. While in India, the bulk of the demand is accounted for by the power sector, followed by transportation sector. 3.3 ALUMINIUM INDUSTRY IN INDIA Aluminium production in India started in the year 1938 with the commissioning of INDAL owned by Aluminium Corporation of India in financial and technical collaboration with Alcan, Canada having a production capacity of 2,500 ton per annum. The plant started with the production of sheets using imported aluminium ingots. In 1959, HINDALCO (Hindustan Aluminium Corporation) was set up at Renukoot, UP with an initial capacity of 20,000 tonnes per annum. MALCO (Madras Aluminium Company Ltd), a public sector enterprise was commissioned in 1965 with an initial capacity of 10,000 tonnes per annum. This was followed by BALCO (Bharat Aluminium Company Ltd) in 1975, a PSU with an equivalent capacity of 10,000 ton. Finally in 1987, NALCO (National Aluminium Company Ltd) with a capacity of 0.218mn tonnes was setup in technical collaboration with Pechinery of France. In the year 1970s, the government regulated and took control of the aluminium industry through price distribution controls and entry barriers. The 1970 Aluminium Control Order intended the Indian Aluminium companies to sell 50% of the aluminium produced for electrical utilities. The government deregulated the industry in 1989 with the disposal of the Aluminium Control Order. The industry was de-licensed in year 1991 and was permitted liberal import of capital goods and technologies. The demand for aluminium went up by 6% in the 1980. The demand for Aluminium post-liberalization registered a growth rate of 12%. This coupled with the rise in the global aluminium prices ($1800/ ton in 1994) led to increased investments in this sector.

3.4 FEATURES OF INDIAN ALUMINIUM INDUSTRY

Highly concentrated industry with only five primary plants in the country. Industry is controlled by two private groups and one public sector unit.
42

 Bayer-Hall-Heroult technology used by all leading producers. Electricity, coal and furnace oil are the primary energy inputs for production. All plants have in-house captive power units for inexpensive and un-interrupted power supply. Energy cost is maximum i.e. 40% of manufacturing cost for metal and about 30% for rolled products. Plants have set internal target of 1% to 2% reduction in specific energy consumption in the next 5 8 years by focussing on usage of renewable sources of energy. Two plants have declared formal energy policy and each plant has setup an Energy Management Cell. The major end users of aluminium are the transportation, power, packaging, construction and consumer durables sectors. The usage pattern for aluminium in the mentioned sectors is not the same in India as compared with the rest of the world. While globally, the transportation (automobiles) and construction sectors are the major consumers of aluminium, while in India, the bulk of the demand is accounted for by the power sector, followed by transportation. This anomaly can be attributed largely due to the Government regulations that were in force till the end of the year 1991.

Figure 21: Sector wise pattern for consumption of Aluminium

43

3.5 MAJOR PLAYERS IN MARKET Indias share in global aluminium production is hovering around 5 per cent. The Indian aluminium industry is highly concentrated with only five primary plants in the country from three big business groups. 2. The Aditya Birla Group: Hindalco Industries Limited (Hindalco), Indian Aluminium Company Limited (Indal) 3. Sterlite Industries: Bharat Aluminium Company Limited (Balco), Madras Aluminium Company Limited (Malco) 4. Public Sector Undertakings: National Aluminium Company Limited (Nalco).

44

CHAPTER 4: ANALYSIS OF WORKING CAPITAL AT NALCO

4.1 ANALYSIS THROUGH COMPONENTS OF CURRENT ASSETS 4.1.1 Inventory Analysis Inventories constitute the most significant part of current assets of a large majority of companies in India. On an average, inventories are approximately 60 % of current assets in public limited companies in India. Because of the large size of inventories maintained by firms maintained by firms, a considerable amount of funds is required to be committed to them. It is, therefore very necessary to manage inventories efficiently and effectively in order to avoid unnecessary investments. A firm neglecting a firm the management of inventories will be jeopardizing its long run profitability and may fail ultimately. The purpose of inventory management is to ensure availability of materials in sufficient quantity as and when required and also to minimize investment in inventories at considerable degrees, without any adverse effect on production and sales, by using simple inventory planning and control techniques.

Need to Hold Inventories:-

There are three general motives for holding inventories:1) Transaction motive emphasizes the need to maintain inventories to facilitate smooth production and sales operation. 2) Precautionary motive necessities holding of inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors. 3) Speculative motive influences the decision to increases or reduce inventory levels to take advantage of price fluctuations and also for saving in re-ordering costs and quantity discounts etc.Inventory is total amount of goods and materials. Inventory means stock of Raw materials Semi-finished goods. Finished goods. Stores & Spares Scrapes & Unserviceable materials
2007-08 65.59 2008-09 64.96 45 2009-10 64.57 2010-11 105.3 2011-12 125.42

Particulars(in Crs.) Raw materials

W.I.P Finished goods Stores & Spares Scraps Materials Inventory (all items) Inventory (RM, WIP, FG) & Unserviceable

164.89 102.04 338.44

230.99 131.91 430.69

208.94 142.06 511.54

219.71 214.72 522.4

270.83 169.63 629.98

15.69 686.65 332.52

14.95 873.5 427.86

17.81 944.92 415.57

8.87 1071 539.73

16.84 1212.7 565.88

Table 3: Inventories, NALCO

Inventory (in Crs.)

1400 1200 1000 800 600 400 200 0 2007-08 2008-09 2009-10 Inventory (all items) 2010-11 2011-12 686.65 873.5 944.92 1071 1212.7

Figure 22: Inventories, NALCO

Inventory forms 15% to 20% of working capital for all the 5 years. By analysing the 5 years data we see that the inventories have increased year by year. By looking at the graph, we can say that inventories have grown by 70% from 2007 to 2011. By this growth we can say that NALCO is growing very rapidly in aluminium sector. A company uses inventory when they have demand in market and NALCO is having a great demand in aluminium sector. There was a great demand for aluminium globally in the year 2008 due to which there was an increasing trend in sales which was the biggest reason for increase in inventories. From other point of view we can say that the liquidity of firm is blocked in inventories but to stock is

46

very good due to uncertainty of availability of raw material in time. This has been proved because in the year 2009, due sharp fall in global economy there was a decrease in demand for alumina and aluminium and thus there was a marginal fall in inventories compared with the previous year 2008. Economic Conditions and markets for most of commodities improved considerably in comparison to pre-global recession levels in 2009 showing an increase in demand for aluminium and alumina. Inventory Turnover Ratio Inventory Turnover ratio measures how many times the company has sold and replaced its inventory during a period. To compute this ratio, sales is divided by average inventory at cost. Following formula is used for the calculation of this ratio: Inventory Turnover Ratio = Net Sales/Avg. Stock
Particulars Net Sales Average Inventory ITOR 2007-08 5474.45 686.65 7.97 2008-09 5517.52 764.275 7.22 2009-10 5311.4 909.21 5.84 2010-11 6369.88 1001.695 6.36 2011-12 6926.93 1141.85 6.07

Table 4: Inventory Turnover Ratio

Inventory Turnover Ratio

7.97 8.00 6.00 4.00 2.00 0.00 2007-08 2008-09 2009-10 ITOR 2010-11 2011-12 7.22 5.84 6.36

6.07

Figure 23: Inventory Turnover Ratio

47

Stock velocity is an indicator of firms activeness. It directly influences the profitability of firm. The calculated ratio of NALCO for the last 4 years is very poor when compared to industry average wich is 9.5 which signifies excessive inventory or over investment in inventory. It may be result of inferior quality goods, over valuation of closing inventory, stock of obsolete goods. 4.1.2 Analysis Of Sundry Debtors

Debtors or an account receivable is an important component of working capital and fall under Current assets. Debtors will arise only when credit sales are made.

Particulars(in Crs.) Sundry Debtors

2007-08 60.5

2008-09 26.5

2009-10 181.78

2010-11 112.4

2011-12 139.09

Table 5: Sundry Debtors, NALCO

Sundry Debtors (in Crs.)

200 150 100 50 0 2007-08 2008-09 2009-10 2010-11 2011-12 60.5 26.5 181.78 139.09 112.4

Sundry Debtors

Figure 24: Sundry Debtors, NALCO

Sundry debtors occupy very small portion of the working capital. It is nearby 1% to 2% for the last 5 years. In the table and figure, we see that there are continuous variations in the debtors of NALCO in five successive years. A simple logic is that debtors increase only when sales increase and if sales increases it is good sign for growth. We can see that in the year

48

2008 the Debtors are at minimum level and the company has invested this money in 2nd and third expansion. We can say that it is a good sign as well as negative also. Company policy of debtors is very good as a risk of bad debts is always present in high debtors Moreover, in next year in 2009 the debtors has increased more than 500%, this was because of slowdown in global economy and inability of consumers to pay money. Although the company is able to decrease its debtors in the next successive years which is very good for NALCO.

4.1.3 Analysis Of Cash & Bank Balances

Cash is the important current asset for the operation of the business. Cash is the basic input needed to keep the business running in the continuous basis, it is also the ultimate output expected to be realized by selling or product manufactured by the firm. The firm should keep sufficient cash neither more nor less. Cash shortage will disrupt the firms manufacturing operations while excessive cash will simply remain ideal without contributing anything towards the firms profitability. Thus a major function of the financial manager is to maintain a sound cash position. Cash is the money, which a firm can disburse immediately without any restriction. The term cash includes coins, currency and cheques held by the firm and balances in its bank account. Sometimes near cash items such as marketing securities or bank term deposits are also included in cash. Generally when a firm has excess cash, it invests it is marketable securities. This kind of investment contributes some profit to the firm. The firms need to hold cash may be attributed to the following three motives: The Transaction Motive: The transaction motive requires a firm to hold cash to conduct its business in the ordinary course. The firm needs cash primarily to make payments for purchases, wages and salaries, other operating expenses, taxes, dividends, etc. The Precautionary Motive: A firm is required to keep cash for meeting various contingencies. Though cash inflows and outflows are anticipated but there may be variations in these estimates. For example a debtor who pays after 7 days may inform of his inability to pay, on the other hand a supplier who used to give credit for 15 days may not have the stock to supply or he may not be in opposition to give credit at present. Speculative Motive: - The speculative motive relates to the holding of cash for investing in profit making opportunities as and when they arise.The opportunities to
49

make profit changes. The firm will hold cash, when it is expected that interest rates will rise and security price will fall.

Particulars In Current A/C Term Deposits Unpaid Dividend Account Unpaid Debenture Interest Cash on Hand including stamps Cheques, Drafts in Hand Cash & Bank

2007-08 38.06 3476.33 0.93 0.39 0.13 0.62 3516.46

2008-09 12.96 2854.41 0.92 0.34 0.18 0.23 2869.04

2009-10 5.1 3144.6 2.17 0.31 0.17 0 3152.35

2010-11 2.47 3791.63 0.85 0.11 0.17 0 3795.23

2011-12 3.18 4161.18 3.82 0 0.17 0 4168.35

Table 6: Cash & Bank Balances, NALCO

Cash & Bank (in Crs.)

5000 4000 3000 2000 1000 0 2007-08 2008-09 2009-10 Cash & Bank 3516.46 2869.04 3152.35

3795.23

4168.35

2010-11

2011-12

Figure 25: Cash & Bank Balances, NALCO

Cash and bank balances occupy a major part of the working capital. It is 70% of the working capital in the year 2007, 63% in the year 2008, it is 61% in the year 2009 & it is 63% in the year 2010. NALCO maintains a centralized cash management system so the cash management is very good in NALCO. NALCO has a certain good amount of cash and bank

50

balances at hand throughout 5 years, and the company is utilizing this fixed cash for exploding the Projects of 2nd and third in the year that is good for growth.

Term Deposits (in Crs.)

5000 4000 3000 2000 1000 0 2007-08 2008-09 2009-10 3476.33 2854.41 3144.6

3791.63

4161.18

2010-11

2011-12

Term Deposits

Figure 26: Term Deposits, NALCO

Current A/C (in Crs)

38.06 40 30 20 10 0 2007-08 2008-09 2009-10 2010-11 2011-12 In Current A/C 12.96 5.1 2.47 3.18

Figure 27: Current A/C, NALCO

There was an increase in term deposits and decrease in current accounts.

4.1.4 Analysis Of Loans And Advances

51

In their day-to-day activities companies are required to make advance payments of expenses, pay to the suppliers in advance, provide loans and advances to associate, subsidiary or holding companies, subscribe to investments in securities pending allotment, extend advances and loans to their employees (known as Advances Recoverable in Cash or in Kind or for Value to be Received), provide securities to various government departments like excise, pay advance income tax which may exceed the actual provision, or park their short-term surplus in call money or inter-corporate deposits, which are included here and known as loans and advances. They can be secured as well as unsecured which need to be disclosed.

Particulars Loans & Advances

2007-08 541.1

2008-09 616.02

2009-10 785.59

2010-11 1227.29

2011-12 1680.49

Table 7: Loans & Advances, NALCO

Loans & Advances (Cr.)

2000 1500 1000 500 0 2007-08 2008-09 2009-10 2010-11 2011-12 541.1 616.02 785.59 1227.29 1680.49

Loans & Advances

Figure 28: Loans & Advances, NALCO

If we analyse the table and the chart we can see that it follows an increasing trend which is a good sign for the company. The increasing pattern shows that company is giving advances for the expansion of plants and machinery which is good sign for better production of cement and other goods. Although companys cash is blocked but this is good that company is doing modernization of plants in time to compete with other competitors in market.

52

Nalco, apart from strengthening its business as usual, its major thrust is on diversification both sectoral and geographical and capacity addition. Nalco is planning to set up smelter plants internationally and locally. Apart from this Nalco is also planning to set up new power plants and other development projects. In the year 2008 it tried to venture into Independent Power production. 4.1.5 Analysis Of Current Investments

Particulars Current Investments Non-current Investments

2007-08 0 115.03

2008-09 135.9 760.03

2009-10 516.721 470.03

2010-11 1215.65 116.02

2011-12 753.24 1.02

Table 8: Investments, NALCO

Current Investments
1400 1200 1000 800 600 400 200 0 1215.65 753.24 516.721 135.9

0 2007-08

2008-09

2009-10

2010-11

2011-12

Current Investments

Figure 29: Current Investments, NALCO

NALCO's current investment was exponentially increasing until 2010. From 2011 its current investments showed a downward trend due to decrease in PAT because of increase in operational expense. 4.2 ANALYSIS THROUGH COMPONENTS OF CURRENT LIABILITIES

53

4.2.1 Position Of Trade Payables

A trade payable is an amount billed to a company by its suppliers for goods delivered to or services consumed by the company in the ordinary course of business. These billed amounts, if paid on credit, are entered in the accounts payable module of a company's accounting software, after which they appear in the accounts payable aging report until they are paid.In the accounting system, trade payables are recorded in a separate accounts payable account, with a credit to the accounts payable account and a debit to whichever account most closely represents the nature of the payment, such as an expense or an asset.
Particulars Trade Payables 2007-08 1155.62 2008-09 1297.26 2009-10 1588.5 2010-11 2062.42 2011-12 2337.15

Table 9: Trade Payables, NALCO

Trade Payables (in Crs.)

2500 2000 1500 1000 500 0 2007-08 2008-09 2009-10 2010-11 2011-12 Trade Payables 1155.62 1297.26 1588.5 2337.15 2062.42

Figure 30: Sundry Creditors, NALCO

The Creditors of the company has increased year by year, and the increment is more than 25%. This shows that the company is having a good will near the suppliers side; they have confidence on the company. In working Capital management the buying firms do not have to pay cash immediately for the purchases made. The deferral of payments is a short term financing otherwise called trade credit, and it is mostly an informal agreement and is granted
54

on an open account to pay cash immediately for the purchases made. Trade credit is mostly an informal agreement and is granted on an open account basis. This open account trade credit appears as sundry creditors on the companys balance sheet. Hence this shows th at the company is having a good name in the market, but it is losing in terms of Cash discount. 4.2.2 Provision Analysis

An amount from profits that has been put aside in a company's accounts to cover a future liability is called a provision.

Particulars Provisions

2007-08 222.557

2008-09 329.84

2009-10 369.98

2010-11 386.49

2011-12 283.27

Table 10: Provision Analysis, NALCO

Provisions (in Crs)

400 300 200 100 0 2007-08 2008-09 2009-10 Provisions 2010-11 2011-12 222.557 369.98 329.84 283.27 386.49

Figure 31: Provision Analysis, NALCO From the above table we can see that provision shows an increasing trend and the huge amount is being kept in these provisions. In the year 2007 and 2008 there was a huge provision for bad debts, it can be due to economic slowdown in the year 2009. But for the year 2010 and 2011, provisions was kept for income tax and employee and public benefits which shows that the company is earning profits and trying to earn goodwill in the market.

55

Still it being a liability it should be kept in control. The position is currently improving from the year 2011 and 2012.

4.3 ANALYSIS THROUGH NET WORKING CAPITAL OF NALCO Net Working Capital (which is also known as Working Capital or the initials NWC) is a measurement of the operating liquidity available for a company to use in developing and growing its business. The working capital can be calculated very simply by subtracting a companys total current liabilities from its total current assets.
Particulars(in Crs.) NWC 2007-08 3500.45 2008-09 2627.17 2009-10 2998.32 2010-11 3304.32 2011-12 4345.44

Table 11: Net Working Capital of NALCO

Net Working Capital (in Crs.)

5000 4000 3000 2000 1000 0 2007-08 2008-09 2009-10 NWC 2010-11 2011-12 3500.45 2627.17 2998.32 3304.32 4345.44

Figure 32: Net Working Capital, NALCO The Net Working Capital has increased and decreased year by year, but it has increased by 25% from 2007 to 2011.Though there was an increase in sales in 2008 the net working capital decreased because the company tried to invest low in current assets. In the year 2009 , 2010, and 2011 increase in current assets was more than current liabilities, because the company decided to follow a conservative approach for financing the current assets which was possible as NALCO had cash surplus.
56

4.4 ANALYSIS THROUGH FINANCIAL RATIOS

CHAPTER 5: INVENTORY MANAGEMENT IN NALCO

Inventory is defined as an idle resource which has got an economic value. In an industry, inventory comprises of raw materials, process materials, general stores, consumables and spare parts, semi-finished and finished goods. Inventory of input materials are carried to support production and maintenance activities so that the same is available in right quantity, at right point of time. Carrying excessive inventory not only results in blocking up of working capital but also adds inventory carrying cost to it. Inventory carrying cost consists of interest on locked working capital, cost of storage, obsolescence and deterioration. On an average it works out to 20% to 25% per annum of the value of the locked up inventory. The objectives of inventory control are: (i) To keep required stock of materials so that production and maintenance activities do not suffer. (ii) Minimum blockage of funds in inventory. Optimization can be achieved and efforts need to be made to improve input-output ratio of materials by scientific methods of determining. To achieve these objectives it is necessary to analyse the inventory and to classify the items in to different categories. 5.1 MATERIAL CLASSIFICATION Logical grouping of materials is called classification, which facilitates Codification. Materials can be broadly classified into following groups: (i) Raw Materials: Materials which are used for making the finished product. For example for Alumina Refinery :-Bauxite, Caustic Soda, Lime, CGM, Wheat Bran etc. for Smelter Plant :-Alumina, CP Coke, CT Pitch, Al. Fluoride, etc.

57

(ii) Fuel: HFO, LDO, LSHS, Coal etc. (iii) Explosives: Used for mining. (iv) General Stores, P.O.L & Consumables Lubricants, hardware, transmission belts, ropes and yarn, bearings, packing and jointing materials, welding consumables and accessories, industrial and calibration gases, rubber goods, pipes & fittings, paints, electrical stores, grinding media, refractory items, tools and tackles, laboratory chemicals & reagents, safety items etc. (v) Spare Parts (Classified Area Wise) (vi) Liveries (vii) Medicines and Hospital Stores (viii) Horticulture (ix) Printing & Stationeries (including Computer Stationeries and consumables) (x) Building Materials like Steel & Cement (xi) Capital items -Plant & Machinery -Furniture & Fixture -Office Equipment

5.2 SYSTEM OF CODIFICATION The items are codified Area-wise in eleven digit numeric system. The first three digits represent the area, the next two digits represent the equipment, the next four digits represent materials for the equipment, the tenth one is a check digit. The check digit is given to ensure that the same material code is not repeated elsewhere and the last one represents the source code (Indigenous or Imported). Example: Description of item: Ball Mill Feed Spout seal Material Code allotted: 125 06 0810 5 0 Here:125 - Area Secondary crusher 06 - Equipment - Ball Mill 0810 - Feed spout seal of XYZ specification 5 - Check digit
58

Procedure to find Check Digit :125 06 0810 xxx xx xxxx 713 57 1357 Logic 7+2+15+0+42+0+24+5+0 = 95 !10 Remainder = 5 is the check digit 0 is the Source code for Indigenous Materials and 1 is for Imported Materials. Although this system of codification is obsolete and a new standard similar to the previous one is being currently used in SAP.

5.3 SELECTIVE METHODS OF INVENTORY ANALYSIS: Any effective approach to inventory control, where thousands of items are procured, stored and consumed, must be on the basis of selectivity. It is not possible to control each item of inventory in the same way to meet the above two objectives. The below theories are based on 80:20 principle which says 80% of the profit margin comes from only 20% of goods and hence more focus needs to be given to those 20% of goods. The following analytical concepts are some of the selective methods to manage and control inventory. The analysis will apply to items other than raw material, capital and insurance.

i) ABC ANALYSIS: Here the selection is on the basis of annual consumption value. A few items will have large proportion of annual consumption value while a large number of items will have small proportion of annual consumption value. These two categories of items are called A and C class respectively. The middle range is called B class. While A and B class items require tight and moderate control respectively, the C class items require least control. A class - 70% of total consumption value in a year B class - 20% of total consumption value in a year C class - 10% of total consumption value in a year

ABC Analysis is generally used for controlling A & B class items.

59

With the support of Systems Department, Store will arrange ABC analysis report after the final Inventory/PSL of the previous year is prepared. This report is to be circulated amongst the user departments. Also A,B & C class indication is to be made available on the indents before submitting it to the Indent Screening Committee. Below is a sample report generated from NALCOs SAP reporting tool.

Figure 33: Usage Value for Raw Materials in SAP

Figure 34: ABC Analysis ii) XYZ ANALYSIS: The selection is on the basis of stock holding value of items. There will be few items of high value and large number of items of low value. These are called X and Z class respectively. The middle range is called Y class.

60

Figure 35: Consolidated XYZ Analysis in SAP X class - 70% of stock value Y class - 20% of stock value Z class - 10% of stock value

Figure 36: ABC Analysis

61

XYZ analysis is generally used for perpetual stock verification and controlling high value items. With the support of Systems Department, Store will arrange XYZ analysis report after the final Inventory/PSL of the previous year is prepared. This report is to be circulated amongst the user departments.

iii) FSN ANALYSIS: Here items are analysed on the basis of frequency of issue as stated below: a) Fast Moving: Item issued at least once in each of the last three years. b) Slow Moving: Item issued at least once in one or two of the last three years. c) Non Moving: Item not issued at all for last three years. Non-moving items falling in the category of three years, up to five years are required to be reviewed by the concerned user department quarterly so as to find out their alternate use with some modifications or in capital repairs / overhauling in future. Items which have not moved for more than five years are reviewed once in a year by a committee of Senior Technical Officers not below the rank of DGM of technical department to identify the items which will not be used in future, and submit a report to the unit Head for approval for disposal. Items falling under Non-moving category are also required to be blocked to avoid raising of further indents. With the support of Systems Department, Store shall arrange reports on Non-moving items after the final Inventory/PSL of the previous year is prepared. This list is to be circulated amongst the user department and Indent Screening Committee. The above report shall also be made available at least once in a year to other units. Insurance items and capital items are excluded for the purpose of review of Non-moving items.

5.4 MATERIALS PLANNING

62

Planning of material is an important aspect. Although the exact future requirement cannot be accurately forecasted as factors beyond control may influence the procurement planning. However, without proper planning events are left to many uncertainties. The objective of materials planning is to ensure timely availability of materials for trouble free operation of the plant. Besides timely availability of materials, deciding right quality and quantity of materials, is equally important, otherwise it may lead to high inventory. For the purpose of planning, the materials are grouped into following categories on the basis of nature of items, storage capacity, cost and logistics. i) Raw materials, process materials & fuel ii) Spares (Insurance, Critical & General spares) iii) General Stores & Consumables iv) Automatic Procurement items v) Construction materials and Capital items vi) Stationeries, liveries and items for township maintenance

RAW MATERIALS, PROCESS MATERIALS & FUEL

These materials account for more than 75% of the cost of the total materials consumed in the plant and therefore require utmost attention for procurement planning and follow-up. One or more factors, which can be taken into consideration for procurement and scheduling of deliveries for these items are as follows: i) Annual consumption ii) Cost iii) Storage capacity iv) Location of sources v) Number of suppliers and their dependability as per past experience vi) Lead time vii) Mode of transport and escape route in the event of failure of Regular mode viii) Market condition. The procurement planning for these items should be done in a manner as prescribed in the Purchase Manual and it is to be ensured that the required stocks are maintained.

SPARES

63

Spare Parts account for 15 - 25% of the cost of the material consumed in the plant, but covers more than 90% of items required for plant maintenance and operation. Identification of Various Categories of Spares. All Spares have been segregated into 3 categories i.e Insurance, Critical and General category of spares: 1. Insurance Spares: Insurance Spares are defined as those machinery spares; a) that are specific to a particular item and fixed assets i.e. they can be used only in connection with a particular item of the fixed assets. b) Whose use is expected to be irregular and c) Whose unit value is high (more than Rs. 1 lakh). 2. Critical Spares; Critical Spares are those spares; a) Which are installed on equipments on the critical path of production. b) Which do not normally wear-out. c) Which are not easily available and have long lead time. d) Whose failure / damage / breakdown can lead to stoppage and production loss. The critical spares which satisfy the definition of Insurance Spares are also to be treated as Insurance Spares and not as critical spares. 3. General Spares; Spares not falling under any of the above two definition will be treated as general spares. Procedure for Identification & Accounting of Insurance Spares. The standing committee for indent screening at each unit, comprising of representative of Technical, Materials and Finance, shall record the type of spare i.e. Insurance, Critical or General, on the body of the indent at the time of clearing the indent. The technical member of the screening committee will indicate the fixed asset to which the insurance spare relates to. The SRV of insurance spare shall have a reference of the fixed asset to which it belongs. The Store shall send a list of insurance spares annually to the Indentor, Finance & Unit Head.

ITEMS UNDER THE AUTOMATIC PROCUREMENT (AP) LIST

Common items (other than Shelf Life items) used by different departments, and those having more or less regular / rhythmic consumption pattern are kept under AP list. This list may be

64

revised once in a year on the basis of past three years consumption pattern with the approval of Unit Head of Materials. Based on the recommendations of HOD, User Department and duly approved by the Head of Unit Materials/GM (Materials), consumable items may be added to AP List, provided they are common items used by different departments, and such items more or less have regular / rhythmic pattern of consumption for a period of 3 years. Items which are under AP list, but do not follow rhythmic /regular pattern of consumption or not issued once in a year shall stand deleted from AP list. In the beginning of every financial year, the list of AP items giving their stock with details of movement of preceding year will be circulated to the concerned User Department through Email/Online. Any addition or deletion of items from AP list will be communicated to the concerned user department by Store from time to time. Indents for AP items are to be raised by Store on the basis of stock review. Items of one class code are to be included in one indent. Supplementary indents can be raised on the basis of periodic stock review of items under different class codes. AP items are multi-user and fast moving items. The annual consumption of these items may therefore go beyond the highest annual consumption of any of the preceding three years (basis for raising an indent).

5.5 INVENTORY FORECASTING As a part of my analysis I have made a dry inventory forecast which is done to understand the basics of the procedure. Following are the steps involved in inventory forecasting: 1) Production target from the production section for each unit of Manufacturing was found out i.e. production target was known for M & R, CPP and Smelter. The same are estimated on yearly basis by the marketing team keeping in view the factors like raw material availability, demand for the product, etc. 2) Specific raw materials and other input materials involved in converting the raw materials to finished goods are estimated from each production unit. 3) Last years average consumption pattern was found out from each production division per unit product. 4) The total demand of each input material is calculated.

65

The above steps are explained in a simpler fashion, but in real situation a lot of work is being done in the background which involves the efforts from NALCOs Marketing, Finance, Materials, Production and ERP department.

Mines:
Production for 2012-13 Item Bauxite Excavation Unit MT Annual production (2012-13) 6300000

Table 12: Annual Bauxite Excavation, 2012-13

Specific Consumption Item Explosive Diesel Oil Lubricants OMS Unit GM/MT Lt/MT Lt/MT MT Norm (2012-13) 165 0.65 0.022 40 Average for 2012-13 166 0.63 0.011 33 Remarks More than norm Less than norm Less than norm Less than norm

Table 13: Specific Consumption, Mines

Production Target (2013-14) Item Bauxite Excavation Unit MT Target for 2013-14 6450000

Table 14: Annual Target for Bauxite Excavation, 2013-14

Materials Forecast(2013-14) Item Explosive Diesel Oil Lubricants OMS Unit MT KL KL MT Total Estimate per annum 1070.7 4063.5 709.5 40

Table 15: Materials Estimation, 2013-14 Alumina Refinery

Production (2012-13) Item Alumina Hydrate Calcined Hydrate Unit MT MT Annual Production 2012-13 2100000 2074000

66

Special Hydrate Zeolite Special Alumina Power Generation

MT MT MT MU

10068 Nil Nil 390

Table 16: Annual Production of Refinery, 2012-13

Specific Consumption Item Bauxite(wet) Bauxite(dry) Caustic Soda Power Fuel Oil for Calciners Fuel Oil for SGP Coal(SGP) CGM Lime Unit kg/MT kg/MT kg/MT Kwh/MT Lt/MT Lt/MT Kg/MT kg/MT kg/MT Avg for 2012-13 3257 2970 95 324 76.9 3.25 592 0.073 31.55 Norm(MOU) 3000 72 335 77 4 620 0.125 34 Remarks More More Less Less Less Less Less Less

Table 17: Specific Consumption, Refinery

Target Production for 2013-14 Item Alumina Hydrate

Unit MT

Target production 2013-14 2150000

Table 18: Target Production of Refinery, 2013-14

Materials Estimation Item Bauxite(wet) Caustic soda(100%) Power Fuel Oil for calciners Fuel oil for SGP Coal (SGP) CGM Lime

Unit MT MT MU KL KL MT Kg MT

Total Required(2013-14) Total Used (2012-13) 7002550 6300000 204250 199500 696.5 680.4 165335 161490 6987.5 6825 1272800 1243200 156950 153300 67832.5 66255

Table 19: Materials Estimation, 2013-14

67

Aluminium Smelter
Production (2012-13) Item Standard Ingot(including Alloy ingots) SOWS/T-Ingots Billets/Bus Bar/Anode Stem Wire Rods(including alloy wire rod) Rolled Products Total Casted Aluminium Units MT MT MT MT MT MT Annual Production 2012-13 226776 56592 18340 78000 14400 394108

Table 20: Annual Production of Smelter, 2012-13

Annual Target (2013-14) Item Aluminium Production

Unit MT

Production 2013-14 405000

Table 21: Annual Target, 2013-14

Specific Consumption Item Alumina CP Coke CT Pitch Net Carbon AC Power DC Power Fuel Oil Al. Fluoride

Unit kg/T kg/T kg/T kg/T Kwh/T Kwh/T kg/T kg/T

Avg for 2012-13 2095 387 93 430 15366 13507 76 21

Norm(MOU) 1932 383 91 430 14850 13580 90 22

Remarks More More More Same More Less Less Less

Table 22: Specific Consumption, Smelter

Materials Estimation Item Alumina CP Coke CT Pitch Net Carbon AC Power DC Power

Unit MT MT MT MT MU MU 68

Estimate 848475 156735 37665 174150 6223.23 5470.34

Fuel Oil Al. Fluoride

MT MT

30780 8505

Table 23: Materials Estimation, Smelter

Captive Power Plant

Production Item Net generation Unit MU Annual generation 201213 6842

Table 24: Annual Generation of CPP, 2012-13

Specific Consumption Item Oil Coal

Unit ML/Kwh Kg/Kwh

Avg. for 2012-13 0.97 0.79

Norm 1.2 0.785

Table 25: Specific Consumption

Target Net Generation

MU

6341

Table 26: Target Generation, 2013-14

Materials Estimation Item Oil Coal

Unit ML Kg/Kwh

Total Estimation per annum 6150.77 5009.39

Table 27: Material Estimation

69

5.6 ANNUAL HOLDING NORM Materials Imported and prop. Items Spares, other than imported & prop. Spares Consumables Raw Materials Cathode Block & Paste Caustic Soda Coal and Fuel Month Consumption 17 14 6 1 12 2 1

Table 28: Annual Holding Norm

The above are NALCOs internal norms. These norms may be reviewed once in 2 years by a committee consisting of Head of both Complexes, Heads of Materials and Finance and submit their recommendations for revision of holding norms, if any, to the Chairman-cumManaging Director for approval.

STOCK LEVELS FOR AP ITEMS: When the stock of an item shall reach to Re-ordering Level (ROL), the Indent shall be raised as per the following formula: IQ = k x AC - (S + POQ + PIQ) Where; IQ = Indented quantity AC = Highest of last three years annual consumption. S = Stock in hand POQ = Pending Order Quantity PIQ = Pending Indent Quantity k = Constant which can be taken as:
70

1.5 for imported items 1.3 for spares (other than imported items) 1.2 for other items

5.7 RECEIPT OF MATERIALS The Receipt Section of Store is the central agency to receive and account for both Indigenous and Imported materials purchased for use in the Company. The main functions of the Receipt Section are given below: 1) To receive all Railway Receipts (RR)/Lorry Receipts (LR) and other dispatch documents directly from the supplier and Finance Department. 2) To collect & receive materials from Railways and other carrier go-downs and suppliers. 3) To receive the materials delivered at Store. 4) To arrange inspection of the materials. 5) To account for materials received. 6) To handover accepted materials to the Custody section along with Stores Receipt Voucher (SRV). 7) To deal with claim arising out of over, short, reject and damage (OSRD) with suppliers, carriers and underwriters. 8) Fixation of handling and transportation contracts. 9) To certify bills of materials handling contractor and freight bills of transporters. To send the SRV copies to respective departments.

5.8 OPERATING CYCLE ANALYSIS OF NALCO Operating cycle refers to the time period which starts from the raw material purchases and ends with realization of receivable. So it is total time gap between raw material purchases to total debtors collection. This is also known as working capital cycle. The higher the operating cycle period, higher will be the working capital requirement. The basic reason for calculating operating cycle is to find out the means for reducing the duration of operating

71

cycle because if duration of operating cycle will be less than working capital requirement will be less. NALCOS operating cycle is not a simple process as found in simple manufacturing business. It consists of 2 cycles. One cycle is the production of alumina and selling it in the market. The other is the production of alumina and then producing aluminium to be sold in the market. Thus the half the production of alumina goes for sale and half is used in production of aluminium. Thus in this process the total operating cycle comes to around 38 days. The same is depicted in simple layman terms without any technical details. The figure was generated out of the experience of line managers of NALCO. Below is the figure.

Figure 37: Operating Cycle of NALCO

72

Figure 38: Refinery Process flow

Figure 39: Smelter Process Flow

OC = R + W + F + D C Where, R = raw material conversion period W = work in process period F = finished goods conversion period D = debtor collection period
73

C = creditors payment period

5.8.1 Raw Material Holding Period

RMHP=ARMS*365/ARMC

ARMS=Average Raw Material Stock ARMC=Average Raw Materials consumed during the year

Raw material holding period is the time period between receiving the raw material and sending them for production. It is the period of stocking the raw materials for usage. It is known that not all the raw materials would take the same number of days to get converted to WIP. For a company like NALCO which is having four production units i.e. Mines & Refinery, Aluminium Smelter and CPP, it requires different raw materials for each process and each of it has different RMHP. The following are the details which was collected for M & R and Smelter unit
Mines & Refinery Average Raw Materials Bauxite Caustic Soda Coal Fuel Oil Lime 2757.02 80883.1335 5243.92 4251.57 157456.089 1153566 147696.5 57944.716 6.30 25.24 12.78 26.41 19.47 days material stock(A)(MT) 301034.4 Raw Average Raw material consumed(B)(MT) 5565480 RMHP RMHP(days)=A*360/B for M&R 19.47

Table 29: Raw Materials Holding Period, M&R

74

Raw Material Holding Period (days)(M&R)

30.00 25.00 20.00 15.00 10.00 5.00 0.00 25.24 19.47 12.78 6.30 26.41

Bauxite

Caustic Soda

Coal

Fuel Oil

Lime

RMHP(days)=A*360/B

Figure 40: Raw Material Holding Period(days)

Bauxite being the primary raw material for Alumina Production takes 20 days from the time it is excavated till the time it goes to production. Due to the large volume of excavation, calculating bauxite holding period was challenging. Caustic soda which is required for removing residual particles is used to produce slurry takes about 7 days to get used in grinding mills. Coal which is required for generating high temeperature and electricity generation takes 25 days to enter production run. This is because coal being used in generating power is required frequently and hence large amount of coal stock is maintained at the factory to reduce the chance of running out of stock. Fuel oil being used as a subsidiary of coal is also used for the same purpose of steam generation required during the digestion process takes 13 days for moving to production. Lime being used in causticization in big tanks takes 26 days to enter production due to its slow reactivity.
Smelter Raw Materials Alumina CP Coke CT Pitch Al Fluoride HFO 1840.5 122.6 7462 2845.6 88.79 15.51 14.25 days Average Raw material Average stock(MT) 31330.5 13782.5 805 Raw material RMHP(days) 14.25 31.77 7.74 RMHP for Smelter

consumed(MT) 791244 156163 37445

Table 30: Raw Material Holding Period(days)

75

Raw Material Holding Period (days)(Smelter)

88.79 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00

31.77 14.25 15.51 7.74

Alumina

CP Coke

CT Pitch RMHP(days)

Al Fluoride

HFO

Figure 41: Raw Material Holding Period, Smelter

Alumina is the major raw material required for Aluminium production. It is the only raw material that stays in the process for the whole production cycle. Alumina takes on average 14 days to enter production run after arriving from Damanjodi. Raw materials like CP Coke and CT Pitch which are required for anode production in electrolysis process, takes substantial days (32 days) to enter into potline. This is because NALCO have a separate unit for making anodes and there are 16 anodes in each pot. There are 4 potlines containing a total of 900 pots and each anode is replaced after 20-30 days and recycled. Aluminium Fluoride used to reduce the melting point in potline takes 89 days to enter production. This is because very little cryolite is lost in the process and can be replenished.

5.8.2

Work In Progress Conversion Period

WIPCP=ASP*365/COP

ASP=Average stock in progress

76

COP=Cost of Production= Salaries + Repairs + Stores/Spares expense + Other Manufacturing Expense + Rent + Admin Expense + Raw Material purchase + Power & Fuel + Opening WIP- Closing WIP

Work in progress conversion period is the time it takes for the raw materials to get converted to finished goods. This is product specific and we cannot find out the average WIPCP for the whole company. For a company like NALCO having two operating cycles, it has many products from refinery unit and Smelter unit. Hence, calculations are made specific to each category of product.
Alumina Refinery Average inventory of WIP Cost of production Products Alumina Hydrate Calcined Alumina (Cr.) 275.31 279.21 (Cr.) 3887.23 3891.35 WIPCP WIPCP(days) for M&R 25.50 25.83 25.83

Table 31: Work in Progress Conversion Period, Alumina Refinery

Work in progress Conversion Period(days)(Refinery)

15.00 14.90 14.80 14.70 14.60 Alumina Hydrate 14.75

14.92

Calcined Alumina

WIPCP(days)

Figure 42: Work in Progress Conversion Period, Refinery

From the above figures it can be interpreted that it takes 15 days on average for 1MT of bauxite to get converted to Calcined Alumina. Calcined Alumina being the major product despatched from Refinery is taken into consideration for calculating operating cycle of NALCO.
77

Smelter Products Smelter Cast Aluminium Anodes from Average value of WIP (Cr.) 21.23 67.09 Cost (Cr.) 4383.6 1640.53 of production WIPCP for WIPCP(days) Smelter 1.74 14.72 1.74 days

Table 32: Work in Progress Conversion Period, Smelter

Work in progress conversion period (days)(Smelter)

14.72 15.00 10.00 5.00 0.00 Cast Aluminium Anodes 1.74

WIPCP(days)

Figure 43: Work in Progress Conversion Period, Smelter Smelter Unit of NALCO takes 32 hours to produce casted metal from alumina. This is because the electrolysis process is quick and it takes just 4 hours in cast house to form different shapes of the metal. Anodes are prepared at Bake oven unit where CP Coke and CT Pitch are mixed at high temperature to produce carbon based anodes which are utilized in Hall-Heroult process for producing molten aluminium. This whole anode production process takes on average 14 days to complete.

5.8.3 Finished Goods Holding Period FGHP=AFGS*365/COGS

AFGS=Average finished goods stock COGS=Cost of Goods sold= Cost of Production + Opening FG Stock Closing FG Stock Finished Goods Holding Period is the time of storage of finished goods in the warehouse until they are sold. As NALCO have different products from each manufacturing units

78

(Refinery & Smelter). Hence, FG Holding Period will vary across all the products. Below are the calculations.
Alumina Refinery Average value of FG stock Cost Finished goods Alumina Hydrate Calcined Alumina (Cr.) 39.63 90.19 of goods FGHP 3.04 6.51

sold(Cr.) 4692.23 4782.12

Table 33: Finished Goods Holding Period, Refinery

Smelter Average value of FG stock Cost Finished goods Aluminium (Cr.) 79.67 of goods FGHP 5.32

sold(Cr.) 5392.23

Table 34: Finished Goods Holding Period, Smelter Finished Goods Holding Period(in days)

8 6 4 2 0

6.51 5.32 3.04

Aluminium

Alumina Hydrate
FGHP

Calcined Alumina

Figure 44: Finished goods Holding Period, NALCO From the above figures it can be interpreted that Alumina Hydrate inventory is maintained for a period of 3 days (approx.). Calcined Alumina which is produced as the end product after calcination of Alumina Hydrate takes 6.5 days (approx.) to sell from the inventory storage area. Throughout the year the Zeolite and Special Alumina plant was stopped as per management decision due to high stock and poor off-take.

79

5.8.4 Debtors Conversion Period

NALCO sales policy doesnt encourage credit sales i.e. all sales are made in advance by Advance cell. In this way NALCO has substantially reduced its operating cycle and thereby its working capital requirements. This also shows the goodwill and faith customers have for NALCOs product in terms of quality and timely delivery. Hence, Debtors conversion period is not included for calculating operating cycle.

5.8.5 Payment Deferral Period

PDP=AC*365/TCP AC=Average Trade Payables TCP = Total Credit Purchase The Payments Deferral period is the length of time the firm is able to defer payments on various resources purchases.
Particulars Average Creditors Total credit purchase PDP Refinery 92.98 1041.76 32.13 Smelter 81.72 953.52 30.85

Table 35: Payment Deferral Period

Payments Deferral Period (in days)

33.00 32.00 31.00 30.00

32.13 30.85

Refinery PDP

Smelter

Figure 45: Payments Deferral Period, NALCO

80

Since the payments deferral Period for Refinery and Smelter are 32 days and 31 days. Hence, the suppliers have a good faith with NALCO and they provide ample time for making payments. In spite of that NALCO makes much of its payments in advance to maintain a good will in the market.

5.8.6 Gross Operating Cycle For Nalco The gross operating cycle calculation does not take creditor deferral periods into account.

GOC= RMHP+WIPCP+FGHP+DCP
Mines Particulars From Mines to Refinery Transport Raw Material Holding Period Work in Progress Conversion Period Finished Goods Holding Period Debtors Conversion Period Transport to Angul Raw Material Holding Period Work in Progress Conversion Period Finished Goods Holding Period Debtors Conversion Period Gross Operating Cycle NA NA NA 51.89 1.74 5.32 0 24.31 25.83 6.51 0 NA NA NA NA NA 3 14.25 Refinery 0.08 19.47 & Smelter NA NA

Table 36: Gross Operating Cycle

81

Gross Operating Cycle (days)

51.89 60.00 40.00 20.00 0.00 Mines & Refinery Smelter 24.31

Gross Operating Cycle

Figure 46: Gross Operating Cycle The Gross Operating Cycle is the average length of time for a company to acquire materials, produce the products, sell the products and collect the proceeds from customers. The gross operating cycle of Refinery unit is much higher than the smelter unit because of operational delays. To be specific the precipitation of Sodium Aluminate in rows of big six storey building takes the maximum period of 19 days. This is what can be called as a bottleneck for Refinery unit. The following are the process flow for each unit. 5.8.7 Cash Cycle Of Nalco

The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties. CC= GOC-CDP
Particulars Gross Operating Cycle Payments Deferral Period Refinery 51.81 32.13 Smelter 21.31 30.85

82

Cash Cycle

19.68

-9.54

Table 37: Cash Conversion Cycle, NALCO

Cash Cycle (in days)

19.68 20 10 0 Refinery -10 Smelter -9.54 Cash Cycle

Figure 47: Cash Conversion Cycle, NALCO

The operating cycle is the length of time or a company to acquire materials, produce the product, sell the products and collect the proceeds from customers. Working Capital is required to meet the time gap between the raw materials and actual realization of stocks. NALCO is able to decrease the cash cycle by applying techniques like inventory control through SAP and latest technology in production. NALCO could achieve a negative CCC in Smelter unit by collecting from customers before paying suppliers, a policy of strict collections and lax payments. Majorly the negative cash cycle for the period 2011-2012 is due to increase in creditors deferred payments. This is a good sign for the company because if the operating cycle requires a longer time span between cash to cash, the requirement of working capital will be more because of huge funds required in the whole process. Hence NALCO has to make less investment in working capital.

83

Figure 48: Stores Receipt Voucher

CHAPTER 6: CASH MANAGEMENT SYSTEM IN NALCO

NALCO has accumulated cash surplus over last several years & it has to generate required funds from within the organization i.e. from internal sources. After surveying the annual report of NALCO it has been seen that opening balance of cash flow statement in the year ended march 31, 2012 is Rs. 3795.23 crores & closing balance is Rs 4168.35 crores which is more than the previous year 2011. The key areas of effective cash management in NALCO are:84

Identifying the requirement of funds in various units. Investment of surplus funds productively. Repayment of loans Proper capital expenditure. Standardized reporting system.

Centralised cash management system of Nalco NALCO has chosen State Bank of India (SBI) as its sole banker for its centralized cash management system. The transactions are transmitted to the central cash account at the corporate office on a day to day basis. Similarly an account is also maintained by NALCOs corporate office for proper reconciliation. NALCO has its sound reconciliation with SBI having 25 accounts in total (5 in Orissa & 20 outside the state). NALCO is making transaction of crores of rupee with SBI. In return SBI makes free of exchange fee or commotion fee for NALCOs any type of transaction. NALCO has even a cash credit arrangement with SBI though there has never been any excess withdrawal during last 8 years. As NALCO has the centralized cash management system, the company is also using ECS (Electronic Clearing System) & EFT (Electronic Fund Transfer). Besides NALCO also has cash collection centres at different branches & realization of sales credited & transferred to the central cash amount daily. This ensures timely & quick realization of cash. Moreover optimum levels of funds are readily available with the company by maintaining balances at different branches of SBI. NALCO is exercising strict control over the payments made by its various branches & it issues the payment through letter of credit. Though the manufacturing units are authorized to issue cheques, they are required to obtain clearance from the corporate office for all payments exceeding a prescribed limit before the actual realization of such cheques. NALCO being a cash rich company by nature the extent of success lies in how quick the company has identified its surplus funds & invested the same in short term investments for optimization of wealth. Reporting system in NALCO:The reporting system is the key factors for the success of an organization. It occurs in proper manner in NALCO. NALCO is introduced a strict management information system to ensure

85

functioning of control mechanism of fulfilment of objectives. The reporting system of NALCO mainly includes: 1. Forecasting of daily cash flows/ operating performance. 2. Reporting of actual vis--vis forecasted cash flows on daily basis. 3. Reporting of receipts & payments at different units on daily basis. The monthly forecasts of cash flows are flexible in nature. While reporting the weekly cash flows the units have a scope to revise submitting them to the corporate office from the beginning of every month. Based on these reports the corporate office prepares a consolidated cash flow statement and it forms the basis for planning the fund flows for the coming month & this is a continuous process. In other hand the daily report enables the company to know the latest surplus cash balance available & it also helps the company in taking various investment decisions. NALCO has even a cash credit arrangement with SBI though there has never been any excess withdrawal during latest 8 years. Below is cash budgeting done on the basis of previous annual reports and the experience of senior staff members of NALCO. 6.1 CASH BUDGETING Cash Budget is an estimation of the cash inflows and outflows for a business or individual for a specific period of time. Cash budgets are often used to assess whether the entity has sufficient cash to fulfill regular operations and/or whether too much cash is being left in unproductive capacities. By creating a cash budget - wherein a firm develops a summary of the anticipated revenues, operating expenditures, purchase and sale of assets, and settlement or admission of debt one can determine when there will be a need for more cash resources, and when there will be an excess of cash.
Months Opening Balance Cash 4168.35 4359.14 4554.92 4663.63 4727.94 4844.19 5549.14 5241.66 5218.17 5107.63 4689.20 4775.62 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13

EXPECTED CASH RECEIPTS

Income operations Interest income Income Investments on 8.21 8.21 8.21 8.21 8.21 8.21 8.21 8.21 8.21 8.21 8.21 8.21 from

621.00 35.16

621.00 35.16

621.00 35.16

567.13 35.16

567.13 35.16

567.13 35.16

513.23 35.16

513.23 35.16

513.23 35.16

623.56 35.16

623.56 35.16

623.56 35.16

86

Miscellaneous Income Total Cash Receipts 1.76 666.13 1.76 666.13 1.76 666.13 1.76 612.26 1.76 612.26 1.76 612.26 1.76 558.36 1.76 558.36 1.76 558.36 1.76 668.69 1.76 668.69 1.76 668.69

EXPECTED CASH PAYMENTS

Raw Materials Coal and Fuel Purchased Power Indirect tax Corporate tax Interest charges Repayment of loan Capital Expenditure Employee Benefits Repairs Stores & Spares Miscellaneous manufacturing expense Freight expense Rent Insurance Puja Bonus Security expense Admin Expenses Selling Distribution Expenses Interim Dividends Final Dividend Total payments Cash Surplus/Deficit Minimum cash &

85.90 159.69 11.35 41.77 0.00 0.00 0.00

85.90 159.69 11.35 41.77 0.00 0.00 0.00

85.90 159.69 11.35 41.77 87.06 0.00 0.00

85.90 159.69 11.35 41.77 0.00 0.00 0.00

85.90 159.69 11.35 41.77 0.00 0.00 0.00

85.90 159.69 11.35 41.77 87.06 0.00 0.00

85.90 159.69 11.35 41.77 0.00 0.04 111.67

85.90 159.69 11.35 41.77 0.00 0.04 111.67

85.90 159.69 11.35 41.77 87.06 0.04 111.67

85.90 159.69 11.35 41.77 0.00 0.25 111.67

85.90 159.69 11.35 41.77 0.00 0.25 111.67

85.90 159.69 11.35 41.77 87.06 0.25 111.67

0.00 86.21 13.22 33.71

0.00 86.21 13.22 33.71

0.00 86.21 13.22 33.71

77.71 86.21 13.22 33.71

0.00 86.21 13.22 33.71

0.00 86.21 13.22 33.71

274.00 86.21 13.22 33.71

0.00 86.21 13.22 33.71

0.00 86.21 13.22 33.71

337.61 86.21 13.22 33.71

0.00 86.21 13.22 33.71

0.00 86.21 13.22 33.71

10.95 11.48 0.11 4.99 0.00 5.08 8.36

10.95 11.48 0.11 0.00 0.00 5.08 8.36

10.95 11.48 0.11 0.00 0.00 5.08 8.36

10.95 11.48 0.11 0.00 0.00 5.08 8.36

10.95 11.48 0.11 0.00 0.00 5.08 8.36

10.95 11.48 0.11 0.00 0.00 5.08 8.36

10.95 11.48 0.11 0.00 10.00 5.08 8.36

10.95 11.48 0.11 0.00 0.00 5.08 8.36

10.95 11.48 0.11 0.00 0.00 5.08 8.36

10.95 11.48 0.11 0.00 0.00 5.08 8.36

10.95 11.48 0.11 0.00 0.00 5.08 8.36

10.95 11.48 0.11 0.00 0.00 5.08 8.36

1.28 0.00 0.00 474.10

1.28 0.00 0.00 469.11

1.28 0.00 0.00 556.17

1.28 0.00 0.00 546.82

1.28 0.00 25.77 494.88

1.28 0.00 0.00 556.17

1.28 0.00 0.00 864.82

1.28 0.00 0.00 580.82

1.28 0.00 0.00 667.88

1.28 167.23 0.00 1085.87

1.28 0.00 0.00 581.03

1.28 0.00 0.00 668.09

192.03

197.02

109.96

65.44

117.38

56.09

-306.46

-22.46

-109.52

-417.18

87.66

0.60

balance in current A/C Investments in term deposits Loans Advances R & D and 0.00 0.00 0.00 0.00 0.00 650.00 0.00 0.00 0.00 0.00 0.00 0.00 4354.14 0.00 0.00 0.00 81.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 10.00 10.00 10.00 10.00

Expenditure(0.2 % of sales) Closing Balance Cash 4359.14 4554.92 4663.63 4727.94 4844.19 5549.14 5241.66 5218.17 5107.63 4689.20 4775.62 4774.97 1.24 1.24 1.24 1.13 1.13 1.13 1.03 1.03 1.03 1.25 1.25 1.25

Table 38: Cash Budgeting

87

6.2 NALCOS INVESTMENT OF SURPLUS FUNDS As we know the surplus funds can be employed in liquid & risk free securities to earn some interest income. So NALCO has invested its surplus funds in bank fixed deposit. The important managerial decisions are needed for the investment in surplus fund. So it is very important part of NALCOs cash management. As we know NALCO is multi crores organization, therefore it has lot of past experiences to manage cash properly for the smooth running of working capital. Working capital management of NALCO is always enthusiastic to invest its surplus funds for short term time period. NALCO has invested its surplus funds by several investments. These are Fixed deposit with banks Inter-corporate deposits Bill discounting Money market Mutual funds, etc.

NALCO invests term deposits with private & public sector banks & fixed deposits with private & public sector banks which are all guidelines prescribed by the board of directors of NALCO for the investment of surplus fund. These guidelines are evaluating that in which NALCO is going to invest. A mapping is done of the company where NALCO is going to invest. They are based on their performances, safety, liquidity, yield, maturity & marketability.

Cheques issued system Voucher is the first step for issuing a cheque. That means all the computerized approved vouchers from different units are received on day to day basis in cash section & computerized cheques are prepared. Every day the bank gives statement showing all NEFT, RTGS and cheques transactions (debit amount) to the finance department, the same debit amount was forecasted in the daily cash expenditure on day to day basis to the corporate office. At the end of every month a debit advice of remittance from corporate offices received by site for necessary accounting adjustment. NALCO finance has got a unique system of centralized bank management system & centralized management of funds are done at corporate office.

88

Due to RBIs Cheque Truncation Project and its restriction on issuance of cheques, NALCO relies more on NEFT and RTGS transactions than on cheques. Cheques accounts for 5 % of NALCOs transaction and it is meant for the business people who dont have online transactional provisions. 6.3 CASH COLLECTION SYSTEM OF NALCO As NALCO is doing most of its business by letter of credit (L/C). But in case of domestic sale business is done through online banking, DD & cheques & also through direct cash payment. But it was seen that almost of 80% of the business is done through L/C. CASH COLLECTION THROUGH LETTER OF CREDIT:A letter of credit is a promise to pay. Banks issue letters of credit as a way to ensure sellers that they will get paid as long as they do what they've agreed to do. Letters of credit are common in international trade because the bank acts as an uninterested party between buyer and seller. For example, importers and exporters might use letters of credit to protect themselves. In addition, communication can be difficult across thousands of miles and different time zones. A letter of credit spells out the details so that everybody's on the same page. As we know most of the business is done through L/C. After the shipment of goods, all prerequisite documents specified in L/C is bunched in proper order along with L/C. NALCO cannot supply the goods to the customer if customer doesnt open a L/C. It occurs in different stages. When a customer opens his L/C in bank, then NALCO will receive the order. These documents are then forwarded to SBI, Bhubaneswar branch for negotiation of the L/C. This full set of document is then forwarded by SBI to the opening bank by DHL courier. Opening bank upon receiving these documents sends it to the buyer (customer). The buyer verifies these documents after which the opening bank reimburses the advising bank. After advising bank receives the payment, it transfers the amount to the account of NALCO. Thus in this way realization of sale proceeds is made by NALCO. There are certain time periods for L/C transaction. It means L/C is valid within specified period. If you open a L/C for 1-month, so the validity period is only one month or it is the date of shipment & otherwise L/C is expired. Hence, it should be possible to extend the time or date of shipment in bank. The process is not time taking.

89

If the marketing finance division faces any problem in negotiating the L/C, due to irregularities in documents, immediately export division is to be contacted. Then marketing finance division is to collect the DHL receipt of the documents sent to the opening bank, by SBI. The export division of corporate office looks after the complexities & in turn contact to the party or concerned office or authority & gets the documents regularized. If sometimes such type of complexities arises, then amendment of L/C is done to make the documents negotiable by contacting the buyer. So for cash collection the following persons are involved. Those persons are Seller (NALCO) Customer Advising Bank (SBI, Bhubaneswar) Issuing bank (customer bank)

Stock-yard sales:NALCO also sells its products through stock-yards. There are several stock-yards throughout the country. The stock-yards business transaction is done directly & cash is collected directly through online banking, DD or cheques in favour of NALCO, Bhubaneswar payable at SBI commercial branch, Bhubaneswar. The lists of stock-yards are: Faridabad Bengaluru Silvassa Jaipur Damanjodi Kolkata Bhiwandi

STATE BANK OF INDIA (SBI) FAST As SBI is a sole banker of NALCO, so it has introduced a new cash collection system for NALCO. NALCO has opened several accounts in 18-cities within India the customers can herewith deposit the amount in the SBI branches & which is transferred to the central account of NALCO i.e. SBI commercial bank, Bhubaneswar.

90

SBI fast accounts have been opened by NALCO in the following cities: Damanjodi, Kolkata, Bengaluru, Jaipur, Faridabad, Chennai, Mumbai, Rourkela, Indore, New Delhi, Paradip, Hyderabad, Vishakhapatnam, Bhopal, etc. As NALCO has the centralized cash management strategy, so the company is also using ECS (Electronic Clearing System) & EFT (Electronic Fund Transfer). For opening new cash collection strategy SBI is helping NALCO to minimize its float. So NALCO received payment from customers through SBI first by ECS & then by EFT. This SBI fast can be called as the concentration banking system of cash collection. Since NALCO has a lot of stock-yard, so this concentration banking system is possible & smooth going. The concentration banking system or SBI Fast can be explained in the following way:

Figure 49: SBI Functioning, NALCO The objectives of cash concentration of NALCO are: Minimize transaction cost Administrative cost

Collection centres:-

91

Collection centre of NALCOs means from which NALCO is collecting cash. Its collection centres are: New Delhi Mumbai Chennai Bengaluru Visakhapatnam Ahmedabad

6.4 CASH DISBURSEMENT SYSTEM OF NALCO Cash disbursement system is meant to meet all payment obligations in time & cash is described as the lubricant for the ever turning wheel of the business. Therefore disbursement system of NALCO includes the banks & the delivery mechanisms & procedure firm use to facilitate the movement of cash from NALCOs centralized cash pool to disbursement banks & then on to the supplier and other players. NALCO issues all the payment through letter of credit, demand draft, NEFT/RTGS and Cheques. In some cases payment is made by cash like allowances, local small vendor payments etc. Cash book is closed everyday with recording of individual denomination of cash held at the end of the day and updated in the SAP database.

NALCOs cash disbursement system is of 2-types. International disbursement Domestic disbursement

International Disbursement:In the international disbursement the procedure is same as the export of product which is explained below: As NALCO issues all the payment through letter of credit, DD & cheques. So NALCO opens a L/C for the supplier.

92

L/C is advanced to the supplier through advising Bank i.e. SBI or which bank is specified by supplier. The Party dispatches the material with supporting documents. Supporting documents includes Bills of shipment, Test & inspection certificate, Country origin certificate, packing list, Invoice. Then it is submitted to the advising bank. If documents are ok, then the advising bank makes the payment.

Domestic disbursement:Domestic disbursement means the payment towards supplier of raw material, contractors & other parties from whom NALCO gets goods & services. Supplier bill payment:Supplier bill payment means the payment which is prepared for supplier of raw materials, stores & spares, consumables & capital equipment as per terms & conditions of orders issued by material management department of NALCOs corporate office. It consists of 3 -types of bills. These are: A. General supply bill B. Transportation bill C. Raw material bill All these bill payment have a better control by one or more than one person specific to the service area. Again for construction works, contractor bill section has been built. It also works on 3-types. These are A. Repairs & maintenance bill B. Capital addition & modification bill C. Miscellaneous bill Since a large profit making organization NALCO doesnt mind paying earlier or at a time, but always look for getting more discounts for suppliers as well as maintaining quality. It doesnt show much interest in getting credit. Processing of payment through banks:1. Party dispatches supporting documents to the bank on which bank raises amount.
93

2. Verification of documents in the line with PO. 3. If all the documents are correct, then payment to the bank & collection of dispatched documents after paying 90% of the total payment. 4. Documents which are collected at the bank are sent to stores for materials from transporters. 5. After collection, managements goes for inspection. 6. After inspection if it is ok as per order terms, then materials are stock charged through SRV (Stock Received Voucher) & if not accepted, then OSRD note is raised. 7. SRV is valued at finance. 8. Advance paid, if any is adjusted. Then balance amount is paid through cheques or DD. 9. After SRV the payment is paid directly. Direct Payment:1. Supplier paid the payment directly after SRV. 2. Supplier directly dispatches material with a copy of dispatched documents to finance. 3. Stores collect materials from transporter & arrange inspection, verification and accounting. 4. If materials accepted, then a store raises SRV & if rejected, then OSRD is raised. 5. Online data transfer is made to SBPS. 6. One hard copy of SRV is sent to finance department. 7. Evaluation of SRV at finance department with dispatch documents received from supplier & PO issued by MMD & then payment to the supplier is made. The disbursement process of NALCO can be explained in following way:-

94

Figure 50: Cheque Issue System, NALCO

CONCLUSION

The study involves practical and conceptual over view of decisions concerning current assets like cash and bank balance ,inventories( like raw materials ,w-i-p,finished goods ),sundry debtors, loans and advances, other current assets and current liabilities like sundry creditors, securities and other deposits, other current liabilities and provisions of NALCO. Was with the objective of maximizing the overall net profit of the bank. And complete synchronization and co ordination among the working capital components which shall contribute to optimum level of operations. Mismanagement of each or any of these components shall be detrimental to the objectives of efficient operation, profitability and maximization of overall value of the bank. The working capital limits would be considered only after the project nearing completion and after ensuring control over the inventory. The inventory is a great concern for NALCO and it need proper procurement and management. Eligible working capital limits would be assessed by cash Budget method And Projected production method depending the market condition, scale of operation, nature of activity/enterprise and duration/length of operating cycle etc.

95

RECOMMENDATIONS & SUGGESTIONS

The recommendation & suggestion for effective management of working capital at NALCO are given below: For inventory, in order to improve the position, NALCO can reduce the level of stocks by resorting to phased production i.e. producing according to requirement and disposing off or recycling the unserviceable inventories. However, the low turnover of stock may also be due to problems with generation of sales Inventory management is a great concern for NALCO especially stores and spares. The purchase manager should take proper steps for procurement of inventories. The plant must take certain steps to decrease the working capital cycle. One way can be better management of inventories. The plant is suggested to maintain a balance in capacities, synchronization of various inputs availability of some materials or parts which are not easily available. Short term credit period availed must be reduced and sundry creditors should be paid faster. The plant should maintain inventory at an optimum level rather than a very optimistic level. The procurement for materials requisition processing should be reduced so as to minimize the lead time. Plant should be given freedom in deciding the credit policies, cash discount or credit ratings. NALCO can also consider negotiating its creditors for relaxing the debt repayment period and repaying only on or just before the expire of the credit period.

96

BIBLIOGRAPHY

BOOKS AND JOURNALS Financial Management I.M.Pandey Financial Statement Analysis Dr. Anjan Bhattacharya Financial Management S.N.Maheshwari Annual Reports of NALCO 07 & 2011. Annual Highlights 2012-13

97