Summer Training Report-2011

On

Shree Cement Limited

Bangur Nagar, Beawar (Raj)

Project Title:-
Working Capital Management
Submitted in partial fulfillment of the requirements of
Graduate Programme

BY
Lakshya Sharma
(MBA)
 Acknowledgement

At the outset, I offer my sincere thanks to SHREE CEMENTS LTD. for

giving me an opportunity to work on the project titled, Working Capital
Management .

First of all I would like to express my gratitude to Mr. N.C. Jain (Asst. Vice
President, Finance) who despite his tight schedule spared time for
discussions and informed about basic groundwork and direction without
whose support, this report would not have been possible. I appreciate him of
giving me an option of selecting such a wonderful project. The learning has
been immense for me from this project.

I am thankful to all employees at Shree Cement Ltd. for providing me all the
information and help I required for completion of this project. I am highly
grateful to the management at Shree Cement Ltd. for giving me this
opportunity to work on a dream project and in the process harness myself
with the huge learning on all aspects.

I would like to give credit to all sources form where I have drawn material for
this project.
Sr. No. Particulars

1 Introduction of Shree Cement Ltd

Share Holding Pattern

The Companys Vision & Mission

Origin of the Company

Market Classification of Shree Cement Limited

Expansion of Shree Cement

Policies

Trade and Non Trade Network

SWOT Analysis for Shree Cements

Performance of Shree Cement Limited

Success Drivers at Shree

2 Objectives of the study

3 Research Methodology

4 Introduction of Working Capital

Uses and Types of Working Capital

Forms of Working Capital Financing

RBI Guidelines about Working Capital
Financing

Introduction of Working Capital Management

Working Capital Cycle

Method of Assessment

5 Working capital requirements bove Rs I crore

6 Tandon Committee on follow up of bank credit

7 Approaches to Lending
8 Other Modes of Financing

9 Computation of Working Capital Requirement of Shree Cement

10 Credit Rating of the Company

11 Modes of Working Capital Financing With Company.

12 Results and Conclusions

13 Bibliography

14 Comments

Introduction of Shree Cement Limited

Shree Cements Ltd. is a Rajasthan based company, located at Beawar. The Company is a
part of the Bangur Group and was incorporated on 25 th Oct, 1979 at Jaipur with a Vision:
To register strong consume surplus through a superior cement quality at
affordable price. The company has installed capacity of 6.825 mtpa (opc basis) tones
per annum in Rajasthan.. For the last 18 years, it has been consistently producing many
notches above the nameplate capacity. The company retains its position as north Indias
largest single-location manufacturer.

Shrees principal cement consuming markets comprise Rajasthan, Delhi, Haryana,

Punjab, Uttar Pradesh and Uttranchal. Shree manufactures Ordinary Portland Cement
(OPC) and Portland Pozzolana Cement (PPC). Its output is marketed under the Shree
Ultra Ordinary Portland Cement and Shree Ultra Red Oxide jung rodhak Cement
brand names.

COMPANY PROFILE

COMPANY Shree Cement Ltd.

INCORPORATION YEAR 1979

REGISTERED OFFICE Bangur Nagar, Beawar, Ajmer (Rajasthan)

CORPORATE OFFICE 21, Strand Road, Kolkata

INDUSTRY Cement Manufacturing

EXECUTIVE CHAIRMAN B.G. Bangur

MANAGING DIRECTOR H.M. Bangur

EXECUTIVE DIRECTOR M.K. Singhi

 SHAREHOLDING PATTERN

Govt. / Financial Corporate

Institutions Bodies
Foreign Holdings
7% 4%
18%

Other including
Indian Public
7%
Directors and
Their Relatives
64%

Chart 1: Shareholding Pattern of Shree Cement

EQUITY CAPITAL 34.84 Crores

FACE VALUE OF SHARE 10

 The companys vision

To register a strong customer surplus through superior cement quality at

affordable prices

The companys Mission

The company continues to be one of the most operationally efficient and energy
conserving cements producers in the world. Its mission statement is;

To sustain its reputation as the most efficient cement manufacturer in the world.
To drive down costs through innovative plant practices.
To increase the awareness of superior product quality through a realistic and
convincing communication process with consumers.
To strengthen realizations through intelligent brand building.

Origin of the Company

The company is promoted by the Bangur Group. Shree Cements is the largest cement
producer in Rajasthan. The company has a total installed capacity of 6.825 million tonne
(opc basis) the plants are strategically located in central Rajasthan, from where it can
cater to the entire Rajasthan market as well as Delhi and Haryana. The company has
about 100 sales offices spread across the states of Rajasthan, Uttar Pradesh, Uttaranchal,
Delhi, Haryana, Punjab and Jammu & Kashmir. Its cement is marketed under the brand
name of Shree Ultra Cement with different grades like 33, 43 and 53 and sub-brand
names like "red oxide cement", "jung rodhak cement", etc. Shree Cement Ltd (SCL) is
located at Beawar, Rajasthan, Indias largest cement producing state. It was incorporated
in 1979. Commercial production at its 0.6 million tones per annum (mtpa) cement plant
in Rajasthan commenced in May 1985. Three companies of the Bangur group promoted
SCL.These companies are Shree Digvijay Company Ltd, Graphite India Ltd and Fort
Gloster Industries Ltd. Over the years, SCL's capacity rose and touched 2 mtpa by 1997-
98..
 Increasing net turnover

Shree caters to cement demand arising in Rajasthan, Delhi, Haryana, UP and Punjab.
What is strategic for SCL is that it is located in central Rajasthan so it can cater to the
entire Rajasthan market with the most economic logistics cost. Also, Shree Cement is the
closest plant to Delhi and Haryana among all cement manufacturers in its state and
proximity to these profitable cement markets renders the company an edge over other
cement companies of the company in terms of lower freight costs.

SCL has a 99 MW captive thermal power plant, which has achieved over 90 per cent load
factor. In 2000-01, the company has succeeded in substituting conventional coke with
100 per cent pet coke, a waste from refineries, as primary fuel resulting in lower
inventory and input costs.
In the past two years the price of coal has gone up. Earlier dependent on good quality
imported coal, the company's switch to pet coke could not have come at a better time.
The company also replaced indigenous refractory bricks with imported substitutes,
reducing its consumption per tonne of clinker.
The company has one of the most energy efficient plants in the world. The captive plant
generates power at a much lower cost of Rs 2.5 per unit (excluding interest and
depreciation) as compared to over Rs 5 per unit from the grid. In appreciation of its
achievements in Energy sector, the Company has been awarded the prestigious 'National
Energy Conservation Award" for the year 1997. Shree is rated best by Whitehopleman, an
international agency specializing in the rating of cement plants
 PRODUCTS
1 Shree Ultra Red Oxide Jung Rodhak Cement (ROC)
2 Bangur Cement
3 Tuff Cemento

Market Classification of Shree

Markets classification
Markets States
Primary Rajasthan
Delhi, Punjab, Jammu and Kashmir, Haryana, Western
Secondary
U.P. and Uttaranchal
Tertiary Gujarat, M.P. and Central U.P.

SWOT Analysis for Shree Cements

Strengths
Focused strategy
Lowest cost producer of cement in north India
A secure source of raw materials
High penetration in Govt. projects
Largest single plant capacity in India
Shree power plant , which is producing electricity enough for Ras plant
Weaknesses
Less dealer incentives as compared to its competitors
Color of the cement has not been perceived greatly, green color was
preferred the most
Poor advertising and brand promotion
Opportunities
Real estate boom will lead to increased demand
International expansion
Demand from Pakistan side
Reduction in customs duties
Governments thrust on infrastructure and tax incentives on housing
loans
Threats
Increased competition from domestic as well as international players
Rising input (oil) prices
Sales highly dependent on monsoons
Growth of counterfeits

Policies
Quality Policy:

To provide products conforming to national standards and meeting customers

requirements to their total satisfaction.
To continually improve performance and effectiveness of quality management system
by setting and reviewing quality objectives for:
Customer Satisfaction
Cost Effectiveness

Energy Policy:

To reduce to the maximum extent possible the consumption of energy

without imparting productivity which should help in:
Increase in the profitability of the company
Conservation of Energy
Reduction in Environmental pollution at energy producing areas
Since Energy is Blood of Industry, It is the responsibility of all of us to
utilize energy effectively and efficiently

Water Policy:

To provide sufficient and safe water to people & plant as well as to

conserve water, we are committed to efficient water management practices
viz,
Develop means & methods for water harvesting
Treatment of waste discharge water for reuse
Educate people for effective utilization and conservation of water
Water audit & regular monitoring of water consumption

Environment Policy:
 To ensure:
Clean, green and healthy environment
Efficient use of natural resources, energy, plant and equipment
Reduction in emissions, noise, waste and greenhouse gases
Continual improvement in environment management
Compliance of relevant environmental legislation

Health & Safety Policy:

To ensure good health and safe environment for all concerned by:
Promoting awareness on sound health and safe working practices
Continually improving health and safety performance by regularly
setting and reviewing objectives & Targets
Identifying and minimizing injury and health hazards by effective
risk control measures
Complying with all applicable legislations and regulations

Human Resource Policy:

We at Shree Cement are committed to

Empower People
Honour individuality
Non discrimination in recruitment process
Develop Competency
Employees shall be given enough opportunity for betterment
None of the person below the age of 18 years shall be engaged to
work
Incidence of Sexual Harassment shall be viewed seriously
 Statute enacted shall be honoured in letter & spirit & standard
Labour Practices shall be followed. Every employee shall be
accountable to the law of the land & is expected to follow the same
without any deviation
Management will appreciate observance of Business ethics &
professional code of conduct

Performance of Shree Cement Ltd

NET TURNOVER (RS CRORES)

 Rising Market Share (%)

30

24

24
22
20

19
18

18

18
18

16
12
12

10
8

8
6

7
5
0
Rajasthan Delhi Haryana Punjab Uttaranchal

2007-08 2008-09 2009-10

Trade and Non-Trade Networks

There are two types of Networks: Trade and Non-trade

a) Non-trade Network

Govt. Non-trade Private Non-trade

for govt infrastructure building for Group housing / retail housing

Govt. Housing Projects Contractors projects on behalf of
Railways govt.
Airports Any industrial projects taken up
Cement Roads by the private sector like bridges,
Bridges roads etc.
Dams
Canals
These are all bulk requirements
b) Trade Network

Company Handling Agent Stockiest Retailers

Consumers

Success Drivers at Shree

People as Progress Drivers

Shree believes that what is present in the minds of people is more valuable
than the assets on the shop floor. All the companys initiatives are directed to
leverage the value of this growing asset.

Teamwork
Shree leverages effective team working to generate a sustainable
improvement.

Leaders at Every Level

Shree believes in creating leaders -not just at the organizational apex but at
every level, resulting in a strong sense of emotional ownership.

Culture of Innovation
Shree believes that what is good can be made better -across the organization.

Customer Focus
Shree is committed to deliver a superior quality of cement at attractively
affordable prices.
Shareholder Value
Shree is focused on the enhancement of value through a number of strategic
and business initiatives that generate larger and a better quality of earnings.
Community and Environment Shrees community concern extends from direct
assistance to safe and dependable operations for its members and the
environment.

Lowest Cost of Production

Its cost of production is around Rs.860 per ton, making it the lowest cost
cement producer in India.

Energy Efficient Producer

Shree Cement is one of the most power efficient units in the country with a
power consumption of 75 units per ton. Te Company sources 100% of power
requirement from its captive power plants. The company has existing power
plant capacity of 42 MW. The company is installing additional power plant
of 18 MW capacities, which would supply power to its new cement units,
thus ensuring self-sufficiency.
 Objectives of the study: -

- The main objective of this project is to get the

practical knowledge of working capital management
in the organization.

- The aim of the project was to identify the working

capital need of the company and various ways to
finance it.

- To get a good insight of cement industry.

- To know the significance of proper working capital

management.

- To get the practical experience of industrial

environment.
 Research Methodology

Methodology used for organization study;

PRIMARY
The following are the primary datas collected for the study

Personal Interviews: There was interview sessions with each of the

functional heads and that was followed as questions which were asked
depending upon situations.

Observations:There was akeen sense of observation followed during

the study period to follow the various functions of the company and how
they are integrated with each other.

SECONDARY
The following are the secondary datas collected for the study

Internal data: These are all the companies own data which they
provided like organization structures , balance sheet , annual report
etc.

External data: These are all the datas relating to the company or
organization derived from external sources such as internet and other
 types of media services that give a wide picture of the organization
with respect to the external work.

Limitations of the study

The following are the limitations of the study,

As we had a limitation of time , the detailed report

about the operations of the organization was not
possible.

The information given by the persons may not be

complete because of their busy work schedules.

The report suffers from the limitation of meeting only

the departmental heads because of lack of permission
to interact with other people.
 A Brief about Working Capital

The term working capital has several meanings in business and

economic development finance.

In accounting and financial statement analysis, working capital is

defined as the firms short-term or current assets and current liabilities.
Net working capital represents the excess of current assets over current
liabilities and is an indicator of the firms ability to meet its short-term
financial obligations.

From a financing perspective, working capital refers to the firms

investment in two types of assets. In one instance, working capital means
a businesss investment in short-term assets needed to operate over a
normal business cycle. This meaning corresponds to the required
investment in cash, accounts receivable, inventory, and other items listed
as current assets on the firms balance sheet. In this context, working
capital financing concerns how a firm finances its current assets.

Another broader meaning of working capital is the companys overall

non-fixed asset investments. Businesses often need to finance activities
that do not involve assets measured on the balance sheet.
 For example, a firm may need funds to redesign its products or
formulate a new marketing strategy, activities that require funds to hire
personnel rather than acquiring accounting assets. When the returns for
these soft costs investments are not immediate but rather are reaped
over time through increased sales or profits, then the company needs to
finance them. Thus, working capital can represent a broader view of a
firms capital needs that includes both current assets and other non-fixed
asset investments related to its operations.

Uses of Working Capital in businesses

Just as working capital has several meanings, firms use it in many

ways. Most fundamentally, working capital investment is the lifeblood of a
company. Without it, a firm cannot stay in business.

Thus, the first, and most critical, use of working capital is providing the
ongoing investment in short-term assets that a company needs to operate.

A business requires a minimum cash balance to meet basic day-to-day

expenses and to provide a reserve for unexpected costs. It also needs
working capital for prepaid business costs, such as licenses, insurance
policies, or security deposits. Furthermore, all businesses invest in some
amount of inventory, from a law firms stock of office supplies to the large
inventories needed by retail and wholesale enterprises. Without some
amount of working capital finance, businesses could not open and operate.
 The second purpose of working capital is addressing seasonal or cyclical
financing needs. Here, working capital finance supports the build-up of
short-term assets needed to generate revenue, but which come before the
receipt of cash.

For example, a cement manufacturer must produce and ship its

products for the construction season several days before it receives cash
payment from the dealers. Since most businesses do not receive prepayment
for goods and services, they need to finance these purchase, production,
sales, and collection costs prior to receiving payment from customers.
Another way to view this function of working capital is providing liquidity.
Adequate and appropriate working capital financing ensures that a firm has
sufficient cash flow to pay its bills as it awaits the full collection of revenue.
When working capital is not sufficiently or appropriately financed, a firm
can run out of cash and face bankruptcy. A profitable firm with competitive
goods or services can still be forced into bankruptcy if it has not adequately
financed its working capital needs and runs out of cash.
Working capital is also needed to sustain a firms growth. As a
business grows, it needs larger investments in inventory, accounts
receivable, personnel, and other items to realize increased sales. New
facilities and equipment are not the only assets required for growth; firms
also must finance the working capital needed to support sales growth.

A final use of working capital is to undertake activities to improve

business operations and remain competitive, such as product
development, ongoing product and process improvements, and cultivating
new markets.
 Permanent and Cyclical Working Capital

Firms need both a long-term (or permanent) investment in working capital

and a short-term or cyclical one. The permanent working capital investment
provides an ongoing positive net working capital position, that is, a level of
current assets that exceeds current liabilities. This allows the firm to operate
with a comfortable financial margin since short-term assets exceed short-
term obligations and minimizes the risk of being unable to pay its
employees, vendors, lenders, or the government (for taxes).
To have positive net working capital, a company must finance part of its
working capital on a long-term basis. Since total assets equal total liabilities
and owners equity, when current assets exceed current liabilities, this excess
is financed by the long-term debt or equities.
For current assets to be greater than current liability, long-term debt and
equity must finance part of area CA.

Beyond this permanent working capital investment, firms need seasonal or

cyclical working capital. Few firms have steady sales and production
throughout the year. Since the demand for goods and services varies over the
course of a year, firms need to finance both inventories and other costs to
prepare for their peak sales period and accounts receivable until cash is
collected.
Cyclical working capital is best financed by short-term debt since the
seasonal build-up of assets to address seasonal demand will be reduced and
converted to cash to repay borrowed funds within a short predictable period.
By matching the term of liabilities to the term of the underlying assets,
short-term financing helps a firm manage inflation and other financial risks.
Short-term financing is also preferable since it is usually easier to obtain and
priced lower than long-term debt.

Working capital financing is a key financing need and challenge for small
firms. Small businesses have less access to long-term sources of capital than
large businesses, including limited access to equity capital markets and
fewer sources of long-term debt. Thus, many small firms are heavily
dependent on short-term debt, much of which is tied to working capital.
However, limited equity and reliance on short-term debt increases the
demand on a firms cash flow, reduces liquidity, and increases financial
leverageall of which heighten the financial risks of extending credit.

Consequently, small firms may have trouble raising short-term debt while at
the same time facing obstacles to securing the longer-term debt necessary to
improve their financial position and liquidity, and lessen their credit risk.
Development finance has an important role in addressing this problem,
either by offering working capital loans when private loans are not available
or by providing debt terms that reduce a firms financial risk and help it
access private working capital financing.
 Forms of Working Capital Financing

Working capital financing comes in many forms, each of which has

unique terms and offers certain advantages and disadvantages to the
borrower. There are five major forms of debt used to finance working capital
each having its own relative advantages. A firm can design its short term
loan in the different ways as per the demand of the situation.

Line of Credit
A line of credit is an open-ended loan with a borrowing limit that the
business can draw against or repay at any time during the loan period. This
arrangement allows a company flexibility to borrow funds when the need
arises for the exact amount required. Interest is paid only on the amount
borrowed, typically on a monthly basis.
A line of credit can be either unsecured, if no specific collateral is
pledged for repayment, or secured by specific assets such as accounts
receivable or inventory. The standard term for a line of credit is 1 year with
renewal subject to the lenders annual review and approval. Since a line of
credit is designed to address cyclical working capital needs and not to
finance long-term assets, lenders usually require full repayment of the line of
credit during the annual loan period and prior to its renewal. This repayment
is sometimes referred to as the annual cleanup.
Two other costs, beyond interest payments, are associated with
borrowing through a line of credit. Lenders require a fee for providing the
line of credit, based on the lines credit limit, which is paid whether or not
the firm uses the line. This fee, usually in the range of 25 to 100 basis points,
covers the banks costs for underwriting and setting up the loan account in
the event that a firm does not use the line and the bank earns no interest
income.
A second cost is the requirement for a borrower to maintain a
compensating balance account with the bank. Under this arrangement, a
borrower must have a deposit account with a minimum balance equal to a
percentage of the line of credit, perhaps 10% to 20%.

Consider a line of credit for Rs.10 lakhs at a 10% interest rate with a
20% compensating balance requirement. When the company fully draws on
the line of credit, it will have borrowed Rs.10 lakhs but must leave Rs.200,
000 on deposit with the lender, resulting in net loan proceeds of Rs.800, 000.
However, it pays interest on the full Rs.10 lakhs drawn. Thus, the effective
annual interest rate is 12.5% rather than 10% (one years interest is Rs.100,
000 or 12.5% of the Rs.800, 000 in net proceeds).

Accounts Receivable Financing

Some businesses lack the credit quality to borrow on an unsecured
basis and must instead pledge collateral to obtain a loan. Loans secured by
accounts receivable are a common form of debt used to finance working
capital.

Under accounts receivable debt, the maximum loan amount is tied to a

percentage of the borrowers accounts receivable. When accounts
 receivable increase, the allowable loan principal also rises. However, the
firm must use customer payments on these receivables to reduce the loan
balance.
The borrowing ratio depends on the credit quality of the firms customers
and the age of the accounts receivable. A firm with financially strong
customers should be able to obtain a loan equal to 80% of its accounts
receivable. With weaker credit customers, the loan may be limited to
50% to 60% of accounts receivable.
Additionally, a lender may exclude receivables beyond certain age (e.g.,
60 or 90 days) in the base used to calculate the loan limit. Older
receivables are considered indicative of a customer with financial
problems and less likely to pay.
Since accounts receivable are pledged as collateral, when a firm does not
repay the loan, the lender will collect the receivables directly from the
customer and apply it to loan payments. The bank receives a copy of all
invoices along with an assignment that gives it the legal right to collect
payment and apply it to the loan. In some accounts receivable loans,
customers make payments directly to a bank-controlled account (a lock
box).
One disadvantage of accounts receivable financing is the higher
costs associated with managing the collateral, for which lenders may charge
a higher interest rate or fees.

Factoring
Factoring entails the sale of accounts receivable to another firm,
called the factor, who then collects payment from the customer. Through
factoring, a business can shift the costs of collection and the risk of non-
payment to a third party. In a factoring arrangement, a company and the
factor work out a credit limit and average collection period for each
customer. As the company makes new sales to a customer, it provides an
invoice to the factor. The customer pays the factor directly, and the factor
then pays the company based on the agreed upon average collection period,
less a slight discount that covers the factors collection costs and credit risk.

In addition to absorbing collection risk, a factor may advance

payment for a large share of the invoice, typically 70% to 80%, providing
the company with immediate cash flow from sales. In this case, the factor
charges an interest rate on this advance and then deducts the advance
amount from its final payment to the firm when an invoice is collected.

Factoring has several advantages for a firm over straight accounts receivable
financing.

First, it saves the cost of establishing and administering its own

collection system.
Second, a factor can often collect accounts receivable at a lower cost
than a small business, due to economies of scale, and transfer some of
these savings to the company.
Third, factoring is a form of collection insurance that provides an
enterprise with more predictable cash flow from sales.

On the other hand, factoring costs may be higher than a direct loan,
especially when the firms customers have poor credit that lead the factor to
charge a high fee. Furthermore, once the collection function shifts to a third
party, the business loses control over this part of the customer relationship,
which may affect overall customer relations, especially when the factors
collection practices differ from those of the company.
Inventory Financing

As with accounts receivable loans, inventory financing is a secured

loan, in this case with inventory as collateral. However, inventory financing
is more difficult to secure since inventory is riskier collateral than accounts
receivable. Some inventory becomes obsolete and loses value quickly, and
other types of inventory, like partially manufactured goods, have little or no
resale value.

Firms with an inventory of standardized goods with predictable prices,

such as automobiles or appliances, will be more successful at securing
inventory financing than businesses with a large amount of work in process
or highly seasonal or perishable goods like cement bags. Loan amounts also
vary with the quality of the inventory pledged as collateral, usually ranging
from 50% to 80%. For most businesses, inventory loans yield loan proceeds
at a lower share of pledged assets than accounts receivable financing.

When inventory is a large share of a firms current assets, however,

inventory financing is a critical option to finance working capital. Lenders
need to control the inventory pledged as collateral to ensure that it is not sold
before their loan is repaid. Two primary methods are used to obtain this
control:

1) warehouse storage; and

 2) Direct assignment by product serial or identification numbers.

Under one warehouse arrangement, pledged inventory is stored in a

public warehouse and controlled by an independent party (the warehouse
operator). A warehouse receipt is issued when the inventory is stored, and
the goods are released only upon the instructions of the receipt-holder. When
the inventory is pledged, the lender has control of the receipt and can
prevent release of the goods until the loan is repaid.

Term Loan
While the four prior debt instruments address cyclical working capital needs,
term loans can finance medium-term non-cyclical working capital.
A term loan is a form of medium-term debt in which principal is repaid over
several years, typically in 3 to 7 years. Since lenders prefer not to bear
interest rate risk, term loans usually have a floating interest rate set between
the prime rate and prime plus 300 basis points, depending on the borrowers
credit risk. Sometimes, a bank will agree to an interest rate cap or fixed rate
loan, but it usually charges a fee or higher interest rate for these features.
Term loans have a fixed repayment schedule that can take several forms.

Level principal payments over the loan term are most common. In this case,
the company pays the same principal amount each month plus interest on
the outstanding loan balance.
A second option is a level loan payment in which the total payment amount
is the same every month but the share allocated to interest and principle
varies with each payment.
 Finally, some term loans are partially amortizing and have a balloon
payment at maturity.

RBI Guidelines about Working Capital

Financing

In the context of rapid growth of primary (urban) co-op. banks (PCBs),

qualitative aspects of lending, such as adequacy of lending to meet credit
requirements of their borrowers and effective supervision and monitoring of
advances have assumed considerable importance.

1.1 Previously working capital finance provided by the banks to trade and
industry was regulated by the Reserve Bank of India through a series of
guidelines/instructions issued. There were various quantitative and
qualitative restrictions on banks lending. The banks were also expected to
ensure conformity with the basic financial disciplines prescribed by the RBI
from time to time under Credit Authorization Scheme (CAS).

1.2 However, consistent with the policy of liberalisation and financial sector
reforms, several indirect measures to regulate bank credit such as exposure
norms for lending to individual/group borrowers, prudential norms for
income recognition, asset classification and provisioning for advances,
capital adequacy ratios, etc. were introduced by RBI and greater operational
freedom has been provided to banks in dispensation of credit.
1.3 Banks are now expected to lie down, through their boards, transparent
policies and guidelines for credit dispensation, in respect of each broad
category of economic activity, keeping in view the credit exposure normsand
various other guidelines issued by the Reserve Bank of India from time

Working Capital Management

Working capital management is a managerial accounting strategy focusing

on maintaining efficient levels of both components of working capital,
current assets and current liabilities, in respect to each other. Working capital
management ensures a company has sufficient cash flow in order to meet its
short-term debt obligations and operating expenses.

Implementing an effective working capital management system is an

excellent way for many companies to improve their earnings. The two main
aspects of working capital management are

1. Ratio analysis and

2. Management of individual components of working capital.

A few key performance ratios of a working capital management system are

the working capital ratio, inventory turnover and the collection ratio. Ratio
analysis will lead management to identify areas of focus such as inventory
management, cash management, accounts receivable and payable
management.

Working Capital Cycle

Cash flows in a cycle into, around and out of a business. It is the

business's life blood and every manager's primary task is to help keep it
flowing and to use the cashflow to generate profits. If a business is operating
profitably, then it should, in theory, generate cash surpluses. If it doesn't
generate surpluses, the business will eventually run out of cash and expire.

The faster a business expands the more cash it will need for working
capital and investment. The cheapest and best sources of cash exist as
working capital right within business. Good management of working capital
will generate cash will help improve profits and reduce risks. The cost of
providing credit to customers and holding stocks can represent a substantial
proportion of a firm's total profits.

There are two elements in the business cycle that absorb cash

Inventory (raw material, work-in-progress and finished goods) and

Receivables (debtors owing you money).

The main sources of cash are

Payables (your creditors) and

 Equity and Loans.

If you can get money to move faster around the cycle (e.g. collect monies
due from debtors more quickly) or reduce the amount of money tied up (e.g.
reduce inventory levels 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'll have
additional free money available to support additional sales growth or
investment. Similarly, if you can negotiate improved terms with suppliers
e.g. get longer credit or an increased credit limit; you effectively create free
finance to help fund future sales.

Working Capital Requirements ABOVE Rs. 1 crore

3.1 Method of Assessment

3.1.1 The revised guidelines in respect of borrowers other than SSI units,
requiring working capital limits above Rs.1 crore and for SSI units requiring
fund based working capital limits above Rs.5 crore, from the banking system
bestow greater level of flexibility to the primary (urban) co-operative banks
in their day-to-day operations without diluting the prudential norms for
lending as prescribed by Reserve Bank of India.

3.1.2 The earlier prescription regarding Maximum Permissible Bank Finance

(MPBF), based on a minimum current ratio of 1.33:1, recommended by
Tandon Working Group has been withdrawn. Banks are now free to decide
on the minimum current ratio and determine the working capital
requirements according to their perception of the borrowers and their credit
needs.
3.1.3 Banks may evolve an appropriate system for assessing the working
capital credit needs of borrowers whose requirement are above Rs.1 crore.
Banks may adopt any of the under-noted methods for arriving at the working
capital requirement of such borrowers.

a). The turnover method, as prevalent for small borrowers may be used as a
tool of assessment for this segment as well,

b). Since major corporates have adopted cash budgeting as a tool of funds
management, banks may follow cash budget system for assessing the
working capital finance in respect of large borrowers.

c) The banks may even retain the concept of the MPBF with necessary
modifications.

3.2 Norms for Inventory/Receivables

3.2.1 In order to provide flexibility in the assessment of credit requirements

of borrowers based on a total study of borrowers' business operations, i.e.,
taking into account the production/processing cycle of the industry as well
as the financial and other relevant parameters of the borrower, the banks
have also been permitted to decide the levels of holding of each item of
inventory as also of receivables, which in their view would represent a
reasonable build-up of current assets for being supported by bank finance.

3.2.2. Reserve Bank of India no longer prescribes detailed norms for each
item of inventory as also of receivables.

3.3 Classification of Current Assets and Current Liabilities

3.3.1 With the withdrawal of MPBF, inventory norms and minimum current

ratio, the classification of current assets and current liabilities ceases to be

mandatory. The banks may decide on their own as to which items should be
included for consideration as current assets or current liabilities.

3.3.2 Banks may also consider evolving suitable internal guidelines for
accepting the projections made by their borrowers relating to the item
"Sundry Creditors (Goods)" appearing as an item under "Other Current
Liabilities" in the balance sheet.

3.4 Bills Discipline

In respect of borrowers enjoying fund-based working capital credit limits of

Rs. 5 crore and more from the banking system, the banks are required to
ensure that the book-debt finance does not exceed 75 per cent of the limits
sanctioned to borrowers for financing inland credit sales. The remaining 25
per cent of the credit sales may be financed through bills to ensure greater
use of bills for financing sales.

3.5 Grant of Ad hoc Limits

To meet the contingencies, banks may decide on the quantum and period for
granting ad hoc limits to the borrowers based on their commercial judgments
and merits of individual cases. While granting the ad hoc limits the banks
must ensure that the aggregate credit limits (inclusive of ad hoc limits) do
not exceed the prescribed exposure ceiling.

3.6 Commitment Charge

The levy of commitment charge is not mandatory and it is left to the
discretion of the financing banks/ consortium/syndicate. Accordingly, banks
are free to evolve their own guidelines in regard to commitment charge for
ensuring credit discipline.

3.7 Consortium Arrangement

The mandatory requirement of formation of consortium for extending

working capital finance under multiple banking arrangements has been
withdrawn.

3.8 Syndication of Credit

The syndication of loans is an internationally practiced model for financing

credit requirements. The banks are free to adopt syndication route,
irrespective of the quantum of credit involved, if the arrangement suits the
borrower and the financing banks.

3.9 Loan System for Delivery of Bank Credit

3.9.1 Background

In order to bring about an element of discipline in the utilisation of bank

credit by large borrowers, instill efficiency in funds management, loan
system for delivery of bank credit was been introduced for borrowers
enjoying working capital credit limits of Rs.10 crore and above from the
banking system and the minimum level of loan component for such
borrowers was fixed at 80 per cent. These guidelines have been revised by
RBI, in the light of current environment of short-term investment
opportunities available to both the corporates and the banks. In case any
primary (urban) co-operative bank is having borrowers with MPBF of Rs. 10
crore and above where it has participated under consortium/syndication, it
should ensure strict compliance with the under-noted guidelines.

3.9.2 Loan Component and Cash Credit Component

i. Banks may change the composition of working capital by increasing

the cash credit component beyond 20 per cent or to increase the loan
component beyond 80 per cent, as the case may be, if they so desire.
ii. Banks are expected to appropriately price each of the two components
of working capital finance, taking into account the impact of such
decisions on their cash and liquidity management.
iii. If a borrower so desires, higher loan component can be granted by the
bank; this would entail corresponding pro-rata reduction in the cash
credit component of the limit.
iv. In the case of borrowers with working capital (fund based) credit limit
of less than Rs. 10 crore, banks may persuade them to go in for the
Loan System by offering an incentive in the form of lower rate of
interest on the 'loan component' as compared to the 'cash credit
component' The actual percentage of 'loan component' in these cases
may be settled by the bank with its borrower clients.
 v. In respect of certain business activities which are cyclical and
seasonal in nature or have inherent volatility, the strict application of
loan system may create difficulties for the borrowers. Banks, may
with the approval of their respective Boards, identify such business
activities which may be exempt from the loan system of credit
delivery.

3.9.3. Sharing of Working Capital Finance

i. The ground rules for sharing of cash credit and loan components may
be laid down by the consortium, wherever formed, subject to the
stipulations contained in paragraph 3.9.2 above.
ii. The level of individual bank's share shall be governed by the norm for
single / group borrowers credit exposure.

3.9.4 Rate of Interest

Banks are allowed to fix separate lending rates for 'loan component' and
'cash credit component'.

3.9.5 Period of Loan

The minimum period of the loan for working capital purposes may be fixed
by banks in consultation with borrowers. Banks may decide to split the loan
component according to the need of the borrower with different maturity
bases for each segment and allow roll over.

3.9.6 Security
In regard to security, sharing of charge, documentation, etc., banks may
themselves decide on the requirements, if necessary, in consultation with the
other participant banks.

3.9.7 Export Credit

Export credit limit would be allowed in the form hitherto granted. The
bifurcation of the working capital limit into loan and cash credit
components, as stated in paragraph 3.9.2 (i) above, would be effected after
excluding the export credit limits (pre-shipment and post-shipment).

3.9.8 Bills Limit

Bills limit for inland sales may be fully carved out of the 'loan component'.
Bills limit also includes limits for purchase of third party (outstation)
cheques/bank drafts. Banks must satisfy themselves that the bills limit is not
mis-utilised.

3.9.9 Renewal/Roll-over of Loan Component

The loan component, may be renewed/rolled over at the request of the

borrower. However, banks may lay down policy guidelines for periodical
review of the working capital limit and the same may be scrupulously
adhered to.

3.9.10 Provision for Investing Short Term Surplus Funds of Borrowers

The banks, at their discretion, may permit the borrowers to invest their short
term/temporary surpluses in short-term money market instruments like
Commercial Paper (CP), Certificates of Deposit (CDs) and in Term Deposit
with banks, etc.

3.9.11 Applicability

The loan system would be applicable to borrower accounts classified as

'standard' or 'sub-standard'.

Tandon Committee on Follow-up of Bank Credit

The group (headed by Sh. Prakash Tandon) was appointed in July

1974 which was to frame guidelines for follow-up of bank credit and
submitted its final report during 1975 and gave following
recommendations, applicable to borrowers availing fund based
working capital limits of Rs. 10 lac or more:

Norms for inventory and receivables

Norms for 15 major industries proposed by the committee now have

more than 50 disintegrated industry groups. Normally the borrower
would not be allowed deviations from norms except in case of
bunched receipt of raw material, power cuts, strikes, transport delays,
accumulation of finished goods due to non-availability of shipping
space for exports, build up of finished goods stocks due to failure on
the part of purchasers. For those units which are not covered by the
norms, past trends to be made the basis of assessment of working
capital.

Approach to lending

The committee suggested three methods of lending out of which RBI

accepted two methods for implementation. According to First Method,
the borrower can be allowed maximum bank finance upto 75% of the
working capital gap (working capital gap denotes difference between
total current assets required and amount of finance available in the
shape of current liabilities other than short term bank borrowings).
The balance 25% to be brought by the borrower as surplus of long
term funds over the long term outlay. As per Second Method of
lending, the contribution of the borrower has to be 25% of the total
current assets build-up instead of working capital gap. (Method of
lending as per Vaz Committee will now apply to borrowers availing
working capital fund based limits of Rs. 100 lac or more only)

Other major recommendations of the committee were:

No slip back in current ratio, normally.

Classification guidelines for Current assets and current liabilities.
Identification of excess borrowing.
Information system, which was modified by Chore Committee
Recommendations.

Approach to Lending
The committee suggested three methods of lending out of which RBI
accepted two methods for implementation. According to First Method, the
borrower can be allowed maximum bank finance upto 75% of the working
capital gap (working capital gap denotes difference between total current
assets required and amount of finance available in the shape of current
liabilities other than short term bank borrowings). The balance 25% to be
brought by the borrower as surplus of long term funds over the long term
outlay.

As per Second Method of lending, the contribution of the borrower has to be

25% of the total current assets build-up instead of working capital gap.
(Method of lending as per Vaz Committee will now apply to borrowers
availing working capital fund based limit of Rs. 100 lac or more only)

Methods of lending

Like many other activities of the banks, method and quantum of short-term
finance that can be granted to a corporate was mandated by the Reserve
Bank of India till 1994. This control was exercised on the lines suggested by
the recommendations of a study group headed by Shri Prakash Tandon.

The study group headed by Shri Prakash Tandon, the then Chairman of
Punjab National Bank, was constituted by the RBI in July 1974 with eminent
personalities drawn from leading banks, financial institutions and a wide
cross-section of the Industry with a view to study the entire gamut of Bank's
finance for working capital and suggest ways for optimum utilisation of
 Bank credit. This was the first elaborate attempt by the central bank to
organise the Bank credit. The report of this group is widely known as
Tandon Committee report. Most banks in India even today continue to look
at the needs of the corporates in the light of methodology recommended by
the Group.

As per the recommendations of Tandon Committee, the corporates should be

discouraged from accumulating too much of stocks of current assets and
should move towards very lean inventories and receivable levels. The
committee even suggested the maximum levels of Raw Material, Stock-in-
process and Finished Goods which a corporate operating in an industry
should be allowed to accumulate. These levels were termed as inventory and
receivable norms. Depending on the size of credit required, the funding of
these current assets (working capital needs) of the corporates could be met
by one of the following methods:

First Method of Lending:

Banks can work out the working capital gap, i.e. total current assets less current
liabilities other than bank borrowings (called Maximum Permissible Bank
Finance or MPBF) and finance a maximum of 75 per cent of the gap; the
balance to come out of long-term funds, i.e., owned funds and term borrowings.
This approach was considered suitable only for very small borrowers i.e. where
the requirements of credit were less than Rs.10 lacs

Second Method of Lending:

Under this method, it was thought that the borrower should provide for a
minimum of 25% of total current assets out of long-term funds i.e., owned
funds plus term borrowings. A certain level of credit for purchases and other
current liabilities will be available to fund the build up of current assets and the
bank will provide the balance (MPBF). Consequently, total current liabilities
inclusive of bank borrowings could not exceed 75% of current assets. RBI
stipulated that the working capital needs of all borrowers enjoying fund based
credit facilities of more than Rs. 10 lacs should be appraised (calculated) under
this method.

Third Method of Lending:

Under this method, the borrower's contribution from long term funds will be
to the extent of the entire CORE CURRENT ASSETS, which has been
defined by the Study Group as representing the absolute minimum level of
raw materials, process stock, finished goods and stores which are in the
pipeline to ensure continuity of production and a minimum of 25% of the
balance current assets should be financed out of the long term funds plus
term borrowings.(This method was not accepted for implementation and
hence is of only academic interest).As can be seen above, the basic
foundation of all banks' appraisal of the needs of creditors is the level of
current assets. The classification of assets and balance sheet analysis,
therefore, assumes a lot of importance. RBI has mandated a certain way of
analyzing the balance sheets. The requirements of this break-up of assets and
liabilities differs slightly from that mandated by the Company Law Board
(CLB).

Other Modes of Financing

After the development of financial markets in India, a significant rise has
been evident in the use of the rated and non-rated instruments for short term
financing. Some of the most popular instruments are

1. Commercial Papers
2. FCNR(B) Loans
3. MIBOR based loans
4. Channel Financing
Computation of Working Capital of Shree Cement

The Requirement of current assets for Shree Cement Ltd. may be calculated
as follows:
(All figures used for calculation of working capital gap are in Rs. lacs)

I. Inventory
A company's merchandise, raw materials, and finished and unfinished
products which have not yet been sold. These are considered liquid
assets, since they can be converted into cash quite easily. There are
various means of valuing these assets, but to be conservative the lowest
value is usually used in financial statements.

a. Raw Material & other Material :

The yearly consumption of raw materials for the year 2008-09 was Rs.56156
lacs and stock was Rs.5412 lacs . For the year 2009-10, was consumption of
Rs. 83079 lacs.

Material Consumption 2008-09 2009-10

Raw Material 25209 32572
Coal (indigenous) 23831 41307
Coal (Imported) 221 -
Packing Material 6895 9200
Total 56156 83079

b. Consumable Spares :
The yearly consumption of consumable spares for the year 2008-09 was Rs.
5533 lacs .

Consumable Spares 2008-09 2009-10

Imported 0 0
Indigenous 5533 6400
Total 5533 6400

c. Stock- in Progress :
The cost of production for 2008-09 was Rs.134492 lacs and for
the year 2009-10 it was Rs.183488lacs.

2. Receivables :
The domestic sales for the year 2008-09 were Rs.246844 lacs and the
average debt collection period in 2008-09 was 0.24 months. Now with
increased production in 2009-10, sales have risen at Rs.287529 lacs. In view
of the requirement of extending more credit to customer due to increased
quantity of sales and opening of more sales outlets, the debt collection
period has been taken as 0.25 months. Working capital requirement for this
specific item will be:

2008-09 2009-10
Domestic Sales 246844 287529
Export Sales 0 0
Total 246844 287529

2008-09 2009-10
Monthly
domestic
sale
5832 8242

3. cash and cash equivalents:

This category includes cash and bank balances, margin money

with the bank, unpaid dividend, sundry depositors etc.Cash in hand for
2008-09 was Rs 47226 lakhs which has come down to Rs 41637.4 in 2009-
10.

2008-09 2009-10
Cash and cash
equivalents 47226 41637.4
4. Other current assets

This category includes sales tax, deposits with the government,

amount recoverable, interest accrued but not due, advance payment of taxes
etc. the value of other current assets is decided on the basis of the
requirement as well as taking last years level into consideration. Against
last year level of Rs.755.2 lacs, it has gone up to Rs1127.8 lacs.

2008-09 2009-10
Other current assets 755.2 1127.8

CURRENT ASSETS 2009-10

 Current Assets of Shree Cement Ltd.
(Rs. In Lacs)
Sr.No. Particulars of Current Assets 2009-10 2008-09

1. Inventory 35813.3 15445.8

2. Receivables 8241.8 5831.7

3. Cash 41637.4 47226
4. Other Current Assets 1127.8 755.2
Total 86820.3 69258.7

The requirement for Current Liabilities (other than bank borrowings) may be calculated
as follows:

1. Creditors for purchase of raw materials:

The A/c payable to the creditors of the company for the year 2008-09

was Rs.1520lacs. The average consumption for the year 2009-10 was
Rs.1680 lacs .
2008-09 2009-10
Sundry Creditors 1520 1680
Total 1520 1680

2. Statutory Liability:
This mainly contains the due sales tax. This has been estimated to be
Rs.13264 lacs and last year the same was Rs.12238 lacs.
3.Other current liabilities:
 This Category includes provision for doubtful debts, dividend payable
(including corporate tax), unclaimed dividend, interest accrued but not
due etc. the value other current liabilities is generally decided on a
judgemental basis.In year 2008-09 it was Rs15242.4lacs and in year
2009-10 it was Rs 31740.5 lacs.

Current Liabilities of Shree Cement Ltd.

Sr. NO Particulars of current liabilities 2008-09 2009-10

1. Creditors (trade) 1520 1680

2. Statutory Liabilities 12238 13264
3. Other Current Liabilities 15242.4 31740.5
(OLC)
Total 29000.4 46684.5
WORKING CAPITAL GAP = (CURRENT ASSETS) (CURRENT LIABILITIES)
= 86820.3 46684.5
= RS 40136 lacs (Adjusted for number after
decimal)

Working capital 2009-10 2008-09

Working Capital Days (days gross sales) 36.50 46.80

Receivables (days gross sales) 7.50 6.90

Creditors (days cost of sales) 43.20 61.50

FG Inventory (days cost of sales) 7.60 4.70

RM Inventory (days consumption) 28.00 10.40

Working Capital to Sales (x) 0.10 0.10

The amount of borrowings of Shree Cement Ltd. for the year 2008-09 is calculated
as follows: (Rs. In lacs)
Sr.No. Particulars 2008-09 2009-10

1 Total current assets 69258.7 86820.3

2 Current Liabilities 29000.4 46684.5
3 Working Capital Gap (1) (2) 40258.3 40135.8

4 Min. stipulated net working capital (i.e. 17314 21705

25% of total current assets)
5 Actual / Projected net working capital 39475 38399
(short term bank borrowings)
6 (3) (5) 783.3 1736.8

7 Maximum Permissible Bank Finance 783.3 1736.8

Credit Rating of the Company

Credit rating given to Shree Cement by various institutions is as follows:

Sr. No. Institution Rating Description

1 CARE PR-1 PLUS Investment Grade

Highest Rating, Most Credit

2 SBBJ SBBJ-1
worthy

Various Modes Available for company to fulfill Working

Capital Finance:-

1. Cash Credit and Overdraft facility from banks

2. Long Term Loans from banks (For Permanent Working Capital part)
3. FCNR (B) Loans
4. MIBOR Linked Loans
5. Commercial Papers

The above mentioned options for working capital financing of Shree Cement
are discussed below.

1. Cash Credit and Overdraft facility

Shree Cement has high credit standing in the domestic market. It continues
to enjoy the highest credit rating from its bankers (eg. SBBJ-1) as well as
from credit rating agencies like CARE (PR-1 PLUS) for its working capital
requirements. The company continues to secure high investment grade rating
from CARE (CARE AA) for its long term funds. These high ratings indicate
the strong financial status of the company in the eyes of financial institutes.

The consortium of bankers of the company includes

State Bank of Bikaner and Jaipur

State Bank of India
ICICI Bank Ltd.
IDBI Bank Ltd.
UTI Bank Ltd.
BNP Paribas
Standard Chartered Bank
DBS Bank
ABN Amro Bank

It is understood from finance executives of Shree Cement that in the

financial year 2009-10, it was able to avail its entire working capital
financing requirement through this mode at 8.5% from its banks due to its
high credit standing.

Generally, for the customers having highest credit rating and loan
requirement of more than Rs.25 Cr., the interest rate on these accounts
ranges from 9% to 12%. As Shree Cement has better credit rating, it is able
to acquire cash credit loans at lower limit of interest rate. To get it approved
to the maximum limit can be understood from financial safety point, but
total reliance on a single mode is not advisable. It may be simple in
procedure and less rigorous, but in an economic situation in which higher
inflation and higher liquidity are causing problems to financial regulators,
there are all the way chances of tightening of liquidity and bank finances.

2. Long Term Loans from banks (For Permanent Working Capital part)
The permanent working capital of Shree Cement can be determined in
a this way.
Permanent Working Capital =
(A/c Receivables) + (Inventory) (A/c Payable) (Accruals)

The Permanent component of the working capital can be financed through

long term financing. This long term financing can be in the form of
Term Loans
Preferred Stocks
Right Issue

Term Loans
The interest rates for the long term loans are generally higher than the
short term loans. But, they reduce the future uncertainty in arranging
finances for the firm. Financing all or most of the short term financial
requirements through short term loans reflects flexible approach of the firm.
Shree Cement is a growing company and is in the process of capacity
expansion. The cement industry in India as such is going to see lot of
capacity addition in coming few years. In such circumstances, the long term
loans from banks and financial institutions could be better utilised for the
expansion plans. It will not be a good idea to finance the current
requirements through long term loans at this point of time. The prevailing
interest rates on long term loans are 12 to 15%.
 Preferred Stock
One of the modes of long term finance is preferred stock. Preferred
stock represents equity of a corporation, but it is different from common
stock because it has preference over common stock in the payment of
dividends and in the assets of the corporation in the event of bankruptcy.
Preference means only that the holders of the preferred share must receive a
dividend (in the case of an ongoing firm) before holders of common shares
are entitled to anything.
Following benefits can be availed by Preference Capital:
There is no legal obligation to pay preference dividend. A company
does not face bankruptcy or legal action if it skips preference
dividend.
Preference capital is redeemable in nature. Financial distress on
account of redemption obligation is not high because periodic sinking
fund payments are not required and redemption can be delayed
without significant penalties.

Preference capital is generally regarded as part of net worth. Hence, it

enhances the creditworthiness of the firm. This will help Shree
Cement in maintaining its creditworthiness with its banks by
maintaining good financial indicators.
Preference shares do not, under normal circumstances, carry voting
right. Hence, there is no dilution of control. There will be no threat to
the company of losing control to financial institutions or other
investors if this mode of capital rising is adopted.
 Rights Issue
A rights issue is an issue of capital to the existing share holders of the
company through a letter of offer made in the first instance to the existing
shareholders on a pro rata basis. The share holders may forfeit this right
partially or fully.
It has been observed in the market that a pure rights issue is much cheaper
than an equity issue with underwriting or a rights issue with standby
underwriting. But, as cement sector as such is experiencing a bearish phase
on the stock markets, the offer in the rights issue need to be very much
attractive to the shareholder. After touching the highs of Rs.1600, the price
of the stock has corrected in a big way and is now trading in the range of
Rs.850.
No. of outstanding shares = 3,48,37,225
Face value of each right share = Rs.10/-
Share Capital = Rs.34.84 crores

3. FCNR (B) Loans

FCNR (B) loans will be one of the better options available for the
company. FCNR (B) loans are available at the select branches of major
private and PSU banks.
These loans are available in Dollar, Euro, Japanese Yen and GBP. As
these rates are offered in above mentioned foreign currencies, the
fluctuations in the currency rates are a major worry in these loans.
The base rate for these FCNR loans is generally LIBOR or EURIBOR. The
following figure shows the fluctuations in the LIBOR in recent times and
predicted changes in it.
Banks generally charge a rate differential over the base rate as per the credit
rating of the borrower. As Shree Cement enjoys very good credit rating in
the financial world, it will be possible for it to get these loans at lower
differential charges.
The only concern for Shree Cement will be that it doesnt earn much of its
income in foreign currencies. Hence, it has to go for aggressive foreign
currency hedging. A hypothetical calculation for net interest rate on FCNR
loans is shown below.
= Base Rate (1.5 to 2.5 %)
Differential charges (2 %)
Hedging charges (1.5 to 2%)
Processing & other charges (1 to 1.5%)
= Net Interest will range from 5.5% to 8%.

(The interest on FCNR deposits at various banks is shown in the appendix

attached.)
The maximum limit of the interest rate is comparable to the interest rate on cash credit
facility. Hence, company can seriously look for the FCNR loans in these currencies
(preferably Euro or Yen). If the company succeeds in getting the loans at interest rate 1%
lower than the CC facility, it will translate into savings of almost Rs.1.5Cr.

4. MIBOR Linked Loans

The loans offered by banks which uses MIBOR, i.e. Mumbai Inter
bank Offer Rate, as a base rate are termed as MIBOR Linked Loans.
MIBOR for various periods, like daily, 14-day, one month and three month,
is available. MIBOR loans are generally based on 14-day or one month
MIBOR. The following graph shows movements of MIBOR in recent times.
 The MIBOR rates are fluctuating well below the prevailing short term
lending rates on the bank. It may prove profitable for the company to
explore this option.

5. Commercial Papers
The market of commercial papers in India is not developed as such. It is
believed in the industry that cement sector have almost completed its
upward journey in recent times and may follow the downward path of the
business cycle. It is all the way possible that market may not respond
enthusiastically to the commercial papers and the bonds may need to offer at
larger discount. Hence, this is not a good option at this point of time.
 RESULTS AND CONCLUSIONS

The results obtained during the studies have brought me to several

conclusions and enabled me to give my opinion on financial standing of the
company:

Over the last few years the company has been in the expansion mode and
constantly increasing the installed capacity. The latest being the addition
of 1 MTPA clinker unit in RAS in the world record time of 367 days.

Though there is a slowdown going on in the country and it also includes

the cement industry. But the effect is least visible on the performance of
this top organization. In fact this organization is getting better every year.
This is because of the huge cost cutting measures going on in the
company which also includes live projects like Mission 11 (to reduce
cost by 11% and increase profitability by 11%) and also with the increase
demand of its products in the country.

Shree Cement is a company where best practices of financial

management are applied every day. It is very well rated by financial
 institutions. This gives the company possibility of cooperation with
financial basis on every field and even the most sophisticated products
are dedicated to the company. The company also has good relations with
governmental institutions and wisely uses scheme and facilities provided
by state. In effect costs of debts are very low and cost of borrowing
capital for new projects is at lowest possible level.

Industry situation is highly competitive within the next few years due to
major capacity additions within the last period surplus of cement may take
place on the market. This situation may result in margin cuts and price war.
For Shree Cement it should still be very comfortable because its costs are
well controlled and margin at above-the-average level. India as a second
largest cement producer in nominal terms still can count on recovery in
building industry.
 Bibliography

1) Shree Cements annual reports 2008-09, 2009-10

2) www.shreecementltd.com
3) http://www.indiainfoline.com/Markets/Company/Background/Compa
ny-Profile/Shree-Cement-Ltd/500387
4) www.cseindia.org/programme/industry/cement_rating.htm
5) www.worldcement.com
6) international_cement_industry.htm
7) Quarterly Performance Analysis of Companies, India Cement
Industry:
8) http://www.wikipedia.com
9) http://www.investopedia.com
10) http://myiris.com/shares/company/financial.php?
icode=SHRCEMEN
11) http://www.moneycontrol.com
12) www.indiancementindustry.com
13) Times of India (News Paper)
14) Economic times (News paper)
15) http://money.rediff.com/companies/shree-cements-
ltd/11510016/balance-sheet
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