SVKMs NMIMS University

School of Business Management

MBA (First Year) Trimester III, Session 2014-2015

Assignment for Financial Mangement

Working Capital Management in

Cement Sector
By
Group 7
C035 Vivek Kuruvilla
C050 Chirag Shah
C056 Sharan Sistla
C059 Essam Syed
C061 Jinal Trivedi
C062 Kumar Vaibhav

Introduction
Inefficient deployment of resources is one of the major problems faced by developing
nations. Capital scarce and proper utilization promotes growth. Focus on fixed capital in the
capital intensive cement industry has led to a neglecting working capital management.
Implications pertaining to liquidity and profitability lie within this negligence.
Working capital represented by current assets, constitutes a dominant and controllable
segment of investment, mainly in the manufacturing sector, and efforts to optimally and
efficiently utilize it enhances profitability. Such efforts simultaneously activate the flow of
funds through the organization in its entirety by focusing on stagnant dormant inventories,
and the overdue outstanding. Such measures also tend to curb the unwanted tendency of
funds to stagnate at different stages in operations. Fixed costs lead to capacity generation, but
working capital is the main reason for capacity utilization. Significance of working capital
management is further stated from the fact that many at times business failure of an enterprise
has been found to be inadequacy of current assets and their mismanagement. It primarily
handicaps the business, restraining it from functioning and performing its operations.
The Indian cement industry ranks second after Iron and Steel industry [2]. At macroeconomic
level, a strong relationship exists between the growth of a nation and quantity of cement of
cement consumption within the nation. Hence, efficient working capital management in the
cement industry not only leads to the growth of the industry but also provides a stimulus to
the growth of the nation.
The report primarily focuses on working capital management of the cement industry. It aims
to analyze factors/variables that play a vital role in the working capital management and the
correlation that exists between the variables.

Overview of the Indian cement industry

The cement industry plays a vital role in the economic growth of an emerging nation such as
India. The demand of cement being a derived one, depends mainly on industrial activities,
real estate development, construction, and investments in these sectors. Being an integral part
of infrastructure and construction, cement industry will play even a more crucial role with the
recent government's plans to push infrastructure projects and Make In India.
The cement market in India is expected to grow at a compound annual growth rate (CAGR)
of 8.96 percent during the period 2014-2019[1]. India is the second largest producer of quality
cement in the world and comprises of approximately 190 large and 400 mini cement plants.
The cement industry of India is expected to add 30-40 million tonnes per annum (MTPA) of
capacity in 2013. The industry has a current capacity of 324 MTPA and operates at 75-80 per
cent utilisation. Main variants of cement produced are Ordinary Portland Cement (OPC),

Portland Pozzolana Cement (PPC), Portland Blast Furnace Slag Cement (PBFS), Oil Well
Cement, Rapid Hardening Portland Cement, Sulphate Resisting Portland Cement, White
Cement, etc[3]. The Bureau of Indian Standards (BIS) determine the standards to maintain and
are usually at par with international standards. The cooperation pact signed at Geneva
between ACC Ltd, Shree Cement Ltd and Ultratech shows how the industry is also
concentrating efforts in reducing emissions.

Literature Review
Working Capital Management of Selected Cement Companies in India, April 2013, R
Swaminathan, N Rajesh and K Mohamed Jasim.
They conducted a study of major cement companies across India and their mechanisms for
Working Capital Management. Data related to profit and loss account, balance sheet and
other key ratios were collected from the published annual reports of select cement companies.
The study indicated that interest coverage ratio, creditor to working capital and cash to total
fund significantly impact working capital turnover ratio, to the extent of 99.4%. Inventory
turnover ratio has significantly impacted gross profit ratio. Inventory to working capital ratio
and inventory turnover ratio have significantly contributed to total asset turnover ratio and
explain upto 99.6% of its variance.
The study points out that the overall position of the working capital of select cement
companies is satisfactory, but there is a need for improvement in certain factors. The major
portion of the current assets is in the form of Inventory. Investment in current assets should
consider liquidity profitability and solvency. The companies should also try to maintain
adequate quantum of liquidity all the times by keeping considerable proportion of various
components of the working capital in relation to the overall current assets. It is very important
to trade-off between liquidity and profitability by properly arranging the needed funds at right
time, period and source.
Determinants of Working Capital in Cement Sector, Dr. S. Vijayalakshmi, Nikhel Bansal,
Pacific Business Review International, July 2013
This study, conducted on ACC limited, was performed on 12 years worth of data collected
from the CMIE database. The study found that exogenous factors such as prices of raw
materials, growth in sales and business environment did not significantly impact working
capital requirement in the cement industry. Analysis showed that among all endogenous
factors, debt-equity ratio played a significant role in determining the working capital
requirement of a firm. Surprisingly, other endogenous factors such as size of the firm and
operational efficiency had no bearing on working capital requirements.
Working capital management efficiency: A study on the Indian cement industry, Dr. Santanu
Kr. Ghosh, Santi Gopal Maji
The study investigated the efficiency of working capital management in Indian cement
companies during 1992-93 to 2001-2002, with data captured from the Capitaline database.
They employed three index values, representing

1) Average performance of current assets,

2) Degree of utilisation of the total current assets in relation to sales, and
3) Efficiency in managing the working capital
The study observed that the Indian cement industrys performance was below par during the
period. The industry average for efficiency index was greater than one in 6 years out of 10
years study period. The high degree of inconsistency between firms in improving working
capital indicates that firms can gain a competitive advantage by employing stricter policies.
Associated Cement and Dalmia Cement had proved the most successful at bringing about
change in this regard.

Conceptual Framework
Working capital of a firm refers to the firm's capital which is used to finance short term or
current assets like cash, inventory, receivables, debtors etc. It is the amount of money which
is required to cover the cost of operating the enterprise.
Current assets are considered to be one of the important components of the total assets of the
firm. A firm may be able to reduce its investment in fixed assets by leasing or renting, but,
the same cannot be done with current assets. Keeping high levels of current assets gives a
firm a better liquidity position. With high level of current assets, a firm is able to meet its
obligations on time and the operations of the firm are smooth.
But, high levels of current asset come at a cost, namely, profitability. The amount blocked in
the current assets has an opportunity cost. As the amount of current assets increase, the cost
associated with it also increases and the profitability of the firm decreases.
Proper estimation of working capital actually required, is a difficult task for the management
because the amount of working capital varies across firms over the periods depending upon
the nature of business, scale of operation, production cycle, credit policy, availability of raw
materials. Modern financial management aims at reducing the amount of working capital,
reducing the cost of financing and preventing unwanted blocking of cash. For instance, due to
time lag between sale of goods and their actual realisation in cash, adequate amount of
working capital is always required to be made available for maintaining the desired level of
sales. Working capital management is essential to bring down the cost of financing by
reducing the needless blocking of capital.
The factors that influence the working capital requirement of a firm can be broadly classified
into two categories depending on their relationship with the firm.
These categories are:
1. Endogenous factors: factors which are internal to the firm and can be controlled to some
extent.
These factors include:
a. Size of the firm.
b. Debt equity ratio.

c. Operating cash flow.

d. Operating efficiency.
e. Performance of the firm.
2. Exogenous factors: these are the factors which are external to the firm and cannot be
controlled.
These factors include:
a. Business environment.
b. Prices of raw materials.
c. Growth in sales of the firm.

Methodology
Objectives of the Study
1. To study the origin and development of cement companies in India.
2. To analyze the Working Capital Management of select cement companies in India.
3. To compare the Working Capital Management of Select Cement companies India.
4. To consolidate findings and offer suggestions for improvement of Working Capital
Management of Select Cement companies in India.
Independent variable: Shulman and Cox (1985) proposed that working capital requirement
represents the spontaneous uses and sources of funds over a firm's operating cycle, which are
computed as follows: WCR (Working Capital requirement) = Accounts receivables +
Inventory Accounts payable other payables.
The present study is based on secondary data. Data related to profit and loss account, balance
sheet and other key ratios were collected from the published annual reports of select cement
companies. Finally the data has been correlated and the working capital management analysis
is evaluated.

Findings
Compan
y

Current

Quick

Debtors
turnover

Inventory
turnover

Working
Capital

Net Profit
Margin

9.35
11.23
5.85

Working
Capital
turnover
Ratio
-9.43
9.21
138.08

ACC
Ambuja
Birla
Corp
Dalmia
J.K.

0.81
1.27
0.99

0.53
1.04
0.80

29.06
43.43
40.31

-1244.38
1083.08
21.85

11.24
14.32
12.64

3.36
0.89

3.59
0.73

3.25
9.81

14.75
10.74

-0.67
-30.38

-341.14
-92.04

17.58
6.34

JK
Lakshmi
Orient
Prism
Ramco
Shree
Ultratech

0.68

0.62

38.94

20.08

-3.58

-573.89

7.81

0.53
0.83
0.46
0.90
0.76

0.83
0.76
0.42
0.77
0.52

20.18
24.64
12.14
19.26
17.65

20.38
5.16
5.37
7.27
8.56

-9.32
-10.50
-3.71
-67.31
-6.74

-154.41
-472.79
-992.14
-87.47
-3007.79

8.85
1.63
9.26
20.75
12.43

Study 1
Null Hypothesis: The independent variables Quick Ratio, Current Ratio, Debtors Turnover
Ratio and Inventory Turnover Ratio do not significantly contribute to Working Capital
Turnover Ratio.
Alternate Hypothesis: The independent variables Quick Ratio, Current Ratio, Debtors
Turnover Ratio and Inventory Turnover Ratio significantly contribute to Working Capital
Turnover Ratio.
Regression Model and Analysis of Variance for Y- Working Capital Turnover Ratio
df

SS

MS

Regression
Residual
Total

4
6
10

10940.54104
14019.43911
24959.98014

2735.135259
2336.573184

1.170575473

Variable

Coefficients

Standard
Error

t Stat

R2

Intercept
Current Ratio

28.02282414
105.1530217
121.1333943

Quick Ratio
Debtors Turnover
3.074065377
Ratio
Inventory
-4.71065139
Turnover Ratio

129.5264574

0.505630494
0.778508254
0.935201941

1.489775359

2.063442221

3.88051181

1.213925281

55.42154692
135.0698867

Significance
F
0.410208412

0.438323

Analysis of the data reveals that the R-squared values are low, indicating that there isnt a
significant correlation between working capital turnover ratio and the independent variables
chosen for study. Variations in the independent variables under study explain upto 43.83% of
the variations in overall working capital turnover. However, even within this framework,
current ratio and quick ratio seem to have the most significant impact on working capital
turnover ratio.

Study 2

Null Hypothesis: The independent variables Quick Ratio, Current Ratio, Debtors Turnover
Ratio and Inventory Turnover Ratio do not significantly contribute to Net Profit Margin as a
percentage of sales.
Alternate Hypothesis: The independent variables Quick Ratio, Current Ratio, Debtors
Turnover Ratio and Inventory Turnover Ratio significantly contribute to Net Profit Margin as
a percentage of sales.

df

SS

Regression

74.84910558

Residual

206.3031526

Total

10

281.1522582

Variable

Coefficients

Intercept

6.38579343
8
10.2919243
9
6.56050806
3
0.00469412
6
0.02389878

Standard
Error
6.723048692

Current
Quick

Debtors turnover
Inventory
turnover

16.3849888
15.71252931

0.180720908
0.470735144

MS

Significance
F

18.7122763
9
34.3838587
7

0.54421688
2

0.710630557

t Stat

R2

0.94983596
4
0.62813130
5
0.41753354
5
0.02597444
8
0.05076905
9

0.26622
3

Analysis of the data reveals that the R-squared values are low, indicating that there isnt a
significant correlation between net profit margin and the independent variables chosen for
study. Variations in the independent variables under study explain upto 26.63% of the
variations in the overall net profit margin of the firms. However, even within this framework,
current ratio and quick ratio seem to have the most significant impact on net profit margin.

Conclusion
Working capital management is a highly important decision for overall business planning.
Our study finds that overall working capital management at the companies under review is
satisfactory, but could do with improvement in certain factors. Firms in the cement sector
must look to invest in current assets, particularly taking into consideration liquidity
profitability and solvency. There should be an equitable distribution of different components
of current assets in the company portfolio to ensure efficient working capital management
and to maintain sufficient liquidity at all times. Lowering cost of capital and arranging for the

right funds at the right time will ensure that companies in the cement sector excel at working
capital management.

REFERENCES
[1]. http://www.ibef.org/industry/cement-india.aspx
[2]. http://www.ibef.org/industry/steel.aspx
[3].
http://newsletters.cii.in/newsletters/mailer/trade_talk/pdf/Cement%20Industry%20in%20India%20Trade%20Perspectives.pdf