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International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

WORKING CAPITAL MANAGEMENT OF INDIAN ELECTRICAL EQUIPMENT MANUFACTURERS-A COMPARATIVE STUDY

T.CHANDRABAI*; DR.K.VENKATA JANARDHAN RAO**
*Assistant Professor in Department of Management Studies, Padmasri Dr.B.V.Raju Institute of Technology, Narsapur, Medak, **Professor of Commerce & Business Management, Kakatiya University, Warangal, AP.

ABSTRACT The companies in the electrical equipment industry have performed fairly well for financial year 2010. The sales of most of the companies have increased which has resulted in an overall increase of 10.39% for the year 2010 as compared to the year 2009. In this Industry the MultiProduct companies comprises of companies like ABB, Areva T&D, Crompton, L&T, Siemens, BHEL etc. The performance of these companies (Multi-Product) is fairly well for the year 2010. The sales have increased by 9.8%, Operating profit has increased by 37.9% for the year 2010. The management of Working Capital is one of the most important and challenging aspect of the overall performance of the organization. Merely more effective and efficient management of working capital can ensure survival of a business enterprise. Working Capital Management is concerned with the problems that arise in attempting to manage the Current Assets, Current Liabilities and the interrelation that exists between them. This study analyses the comparative study of working capital management in Indian Electrical Equipment Industry and it is limited to the companies BHEL and ABB Ltd represent public and private sector enterprises respectively. Relevant data has been extracted from the consecutive annual reports between financial years 2005-06 to 2009-10 of both the companies. KEYWORDS: Working Capital, Liquidity, Operating cycle, Profitability. ______________________________________________________________________________ INTRODUCTION The world in which we live is not perfect. It is characterized by considerable amount of uncertainty regarding the demand, market price, quality and availability of own products and those of suppliers. These real world facts introduce problems and require the necessity of working capital. The most important areas in the day to day management of the firm, is the management of working capital. Working Capital Management refers to all management decisions and actions that ordinarily influence the size and effectiveness of the working capital. It is concerned with the most effective choice of working capital sources and the determination of appropriate levels of the current assets and their use. It focuses attention to the managing of current assets, current liabilities and the relationships that exist between them. Proper management of working capital leads to a material savings and ensures financial returns at the optimum level even on the minimum level of capital employed. Both excessive and inadequate working capital is harmful for a firm. Excessive working capital leads to unproductive use of

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International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

scarce funds. On the other hand, inadequate working capital usually interrupts the normal operations of a business and impairs profitability. In this article an effort has been made to analyze the working capital management in Indian Electrical Equipment Manufacturers during the period 2005-06 to 2009-10. And this study is limited to the companies BHEL and ABB Ltd represent public and private sector enterprises respectively. PROFILE OF THE COMPANIES BHEL has been at the helm of indigenous Heavy Electrical Equipment industry in India with a sustained track record of earning profit since 1971-72. BHEL has grown in stature over the years with continued inflow of orders, manufacturing prowess, continued thrust on technology leading to a strong presence in domestic and international markets as a major supplier of power plant equipment besides establishing substantial inroads in select segment of products in Industrial sector and Railways. BHEL caters to core sectors of the Indian Economy viz., Power Generation and Transmission, Industry, Transportation, Renewable Energy, Defense, etc. The wide network of BHELs 15 manufacturing divisions, 2 repair units, 4 power sector regions, 8 service centers, 15 regional offices, 1 subsidiary and a large number of Project Sites spread all over India and abroad enables the Company to promptly serve its customers and provide them with suitable products, systems and services - efficiently and at competitive prices. ABB is one of the worlds leading powers, automation engineering companies and provide solutions for secure, energy-efficient generation, transmission and distribution of electricity and for increasing productivity in industrial, commercial and utility operations. ABB operations in India are in excess of one billion US dollars and the company has 14 manufacturing facilities and over 6,000 employees in the country. ABB has an extensive countrywide presence with around 18 marketing offices, 8 service centers, 3 logistic warehouses and a network of over 850 channel partners. OBJECTIVES OF THE STUDY The main objective of the present study is to analyze the working capital management in BHEL and ABB Ltd-A comparative study over a period of 5 years i.e., from 2005-06 to 2009-10. The specific objectives of the study are as under: To study liquidity position of the company by taking four measures at time namely, inventory to current assets, debtors to current assets, cash and bank to current assets and loan &advances and other assets to currents assets. To analyze the component of working capital to identify the items responsible for changes in working capital.
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International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

METHODOLOGY The samples selected for this study are BHEL and ABB Ltd represent public and private sector enterprises respectively. . The study covers five years period from 2005-06 to 2009-10. This study is based on secondary data which is collected from annual reports of the companies and various studies made available through library work. For assessing the performance of the working capital position, in this study the technique of ratio analysis have been used. The collected data have been analyzed in five ways: 1. Analysis of liquidity ratio. 2. Analysis of liquidity position. 3. Analysis of operating cycle. 4. Analysis of components of Gross working capital. 5. Liquidity ranking. For assessing the behavior of data statistical techniques have been also used e.g. mean, growth rate, standard deviation and coefficient of variation in this study. ABBREVIATIONS USED Current Ratio Quick Ratio Absolute Liquid Ratio Inventory/Sales Age of Inventory Debtors/Sales Working Capital Turnover/Total Assets Current Assets/Sales Age of Debtors Debtors Cash &Bank Balances Land &Advances CR QR ALR INV/S AINV D/S
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WCT/TA CA/S AD DEB C&B L&A

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International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

Gross Working Capital Standard Deviation Coefficient of Variation FINDINGS

GWC S.D C.V

The current ratio of BHEL is decreased from 1.58 in 2005-06 to 1.31 in 2008-09 again it increased from later years. Fluctuations were observed in ABB ltd Companys current ratio. The average current ratio of BHEL (1.41) is less than ABB Ltd (1.44). Both the companies having the current ratio less than the ideal which is 2:1. The quick ratio of both the companies also received in the same proportion like current ratio. But the quick ratio of both the companies is more than the ideal which is 1:1. It is cleared that company's short-term liquidity position is satisfactory for creditors working capital point of view (From TABLE_1). The absolute liquidity ratios of both the companies are in satisfactory position because it is more than the ideal ratio which is 0.5:1. It means both the companies having enough cash in hand and cash at bank (From TABLE_1). Inventory to sales ratio measures the velocity of conversion stock in to sales. Usually, a high inventory sales indicates efficient management of inventory because more frequently the stock will be sold, the lesser amount of money is required to finance the inventory. This ratio in BHEL is higher than ABB Ltd and fluctuations were observed in both the companies (From TABLE_1). Age of Inventory shows moving position of inventory during the year. If age of inventory is minimum it means companies activity position is satisfactory, they are able to sell their product within shorter period of time which indicate sound liquidity position of organization. This is very less in BHEL than ABB Ltd and fluctuations were observed in both the companies. On the other, if age of inventory is too high it indicate slow moving of stock, which affected directly liquidity position of company(From TABLE_1). Debtors to sales ratio indicate the velocity of debt collection of the firm. Generally, the higher value of debtor's turnover the more efficient is the management of debtors/sales or more liquid are the debtors. This ratio is higher in BHEL than ABB Ltd and it is increased from 2005-06 to 2009-10 continuously, which is not good sign for liquidity point of view (From TABLE_1). Working capital turnover ratio measures the efficiency with which the working capital is being used by a firm. A higher ratio indicates efficient utilization of working capital. But a very high working capital turnover ratio is not a good situation for any firm. This ratio is higher in BHEL than ABB Ltd(From TABLE_1).

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International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

Current assets to sales ratio indicates the efficiency with which working capital turns into sales. A lower ratio implies by and large a more efficient use of funds. Thus, a High turnover rate indicates reduced lock up of fund in working capital. This ratio is higher in BHEL than ABB Ltd (From TABLE_1). Average collection period measures the quality of debtors. Generally, shorter the average collection period the better is the quality of debtors as a short collection period implies quick payment by debtors. Longer the average collection period, longer are the chances of bed debts. This ratio is higher in BHEL than ABB Ltd (From TABLE_1). The liquidity position of both the companies analyzed in TABLE_2 and TABLE_3. In BHEL the current assets had been increased from 2005-06 to 2009-10 with a growth rate of 162.9%. The liquid assets had been increased with a growth rate of 167.74% and the growth rate of current liabilities is 214.36%. In ABB Ltd the current assets had been increased from 2005-06 to 2009-10 with a growth rate of 76.14%. The liquid assets had been increased with a growth rate of 73.15% and the growth rate of current liabilities is 68.06%. The growth rate of current assets, liquid assets and current liabilities in BHEL is higher than ABB Ltd. But the working capital growth rate in ABB Ltd (201.17%) is higher than BHEL (74.57%). The coefficient of variation in BHEL is higher than ABB Ltd in case of current assets, liquid assets, current liabilities and working capital. From TABLE_4 & TABLE_5, the share of each element has been calculated in percentage separately. In BHEL out of the four element of working capital the element namely debtors contributed highest in gross working capital with a mean of 44.86% which shows that working capital blocked up due to increases in debtors resulting collection charges and bad debts are increases. Where as the other current assets occupied the second position. The mean of inventory to working capital is 21.29%, and it played third position in total current assets. A decrease of inventory in total current assets is positive sign for liquidity and working capital point of view. The same situation has observed in case of ABB Ltd. The mean percentage of all these elements in BHEL is higher than ABB Ltd. From TABLE_4 & TABLE_5, the liquidity ranking in case of debtors to current assets ratio, cash & bank to currents ratio and other currents assets including loan & advances to current assets ratio, a high value indirect relatively favorable position and ranking has been done in that order. On the other hand, a low inventory to current assets ratio shows a more favorable position and hence ranking has been done in that order. Final ranking has been done on the principle that the lower points scored the more favorable are the liquidity position. From TABLE_6 & TABLE_7, the operating cycle indicate efficient utilization of working capital within the organization. If the operating cycle is maximum, means the working capital is properly and efficiently utilized. The operating cycle and cash cycle in BHEL is increased from 2005-06 to 2009-10 with fluctuations. The same situation has observed in case of ABB Ltd. But the operating cycle and cash cycle in BHEL is higher than ABB Ltd.

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International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

TABLE_1: LIQUIDITY RATIOS OF SELECTED COMPANIES Company Year CR QR ALR INV/S AINV (%) 213.2 1131 255.7 1017 237.5 875 259.6 658.5 242.2 672.9 241.6 870.9 D/S WCT/ TA BHEL ABB BHEL ABB BHEL ABB BHEL ABB BHEL ABB Mean(BHEL Mean(ABB) 1.58 1.22 0.88 2005- 1.41 1.23 0.62 06 1.46 1.17 0.79 2006- 1.37 1.21 0.56 07 1.40 1.11 0.79 2007- 1.42 1.22 0.52 08 1.31 1.03 0.74 2008- 1.52 1.28 0.60 09 1.32 1.04 0.69 2009- 1.47 1.26 0.59 10 1.41 1.12 0.78 1.44 1.24 0.58 0.28 0.08 0.24 0.08 0.30 0.09 0.30 0.12 0.28 0.11 0.28 0.09 0.54 0.37 0.56 0.41 0.62 0.43 0.61 0.46 0.63 0.46 0.59 0.43 0.34 0.26 0.29 0.24 0.27 0.26 0.22 0.29 0.22 0.27 0.27 0.26 1.22 0.64 1.22 0.69 1.43 0.69 1.41 0.76 1.31 0.78 1.32 0.71 179.4 111.1 178.6 122.9 204.1 144.2 194.6 170.7 203.4 167.9 192 143.4 CA/S AD

Source: Annual reports of BHEL & ABB Ltd

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International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

TABLE_2: LIQUIDITY POSITION OF BHEL (RS IN CRORES) Year Current Assets Liquid Assets Current Liabilities Working Capital Increase/ Decrease in 2005-06 2006-07 2007-08 2008-09 2009-10 Mean Growth Rate (%) S.D C.V 16330.78 21062.97 27906.18 36901.07 42934.81 29027.16 162.9 9811.26 33.8 12586.41 16845.3 22169.78 29064.05 33699.35 22872.98 167.74 7722.44 33.76 10320.02 14420.11 20022.30 28332.90 32441.72 21107.41 214.36 8281.78 39.24 6010.76 6642.86 7883.88 8568.17 10493.09 7919.75 74.57 3509.77 44.32 +632.1 +1241.02 +684.29 +1924.92 -

Source: Annual reports of BHEL TABLE_3: LIQUIDITY POSITION OF ABB LTD (RS IN THOUSANDS) Year Current Assets 27,966,725 41,106,989 46,998,260 47,492,652 49,262,216 42565368.4 76.14 Liquid Assets Current Liabilities 19,919,063 29,993,114 33,215,206 31,319,765 33,476,911 29584811.8 68.06 Working Capital 8,047,662 11,113,875 13,783,054 16,172,887 24,237,036 12102139.8 201.17 Increase/ Decrease in 2005-06 2006-07 2007-08 2008-09 2009-10 Mean Growth Rate (%) 24,419,730 36,219,887 40,571,726 40,198,591 42,283,690 36738724.8 73.15 www.zenithresearch.org.in 466

3066213 2669179 2389833 8064149 -

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International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

S.D C.V

7797739.15 18.32

6472032.71 17.62

4998633.24 16.89

6067414.91 50.13

Source: Annual reports of ABB Ltd TABLE_4: BHEL COMPANYS COMPONENTS OF WORKING CAPITAL (%) Year INV/GWC DEB/GWC C&B/GWC L&A/GWC Liquidity 4 1 2005-06 2006-07 2007-08 2008-09 2009-10 Mean 22.93 20.02 20.75 21.24 21.51 21.29 2 43.89 46.03 42.91 43.29 48.18 44.86 3 25.32 27.58 30.05 27.95 22.81 26.74 7.35 5.42 4.97 6.57 6.55 6.17 Rank 1 4 2 3 13 10 13 11 9 5 2 5 3 1 Total Final Rank Rank

5 3 4 1 1 2 3 4 2 5 1 5 3 4 2 2 4 1 1 3

Source: Annual reports of BHEL TABLE_5: ABB LTD COMPANYS COMPONENTS OF WORKING CAPITAL (%) Year INV/GWC DEB/GWC C&B/GWC L&A/GWC Liquidity 4 1 2005-06 2006-07 2007-08 2008-09 2009-10 12.7 11.9 13.7 15.4 14.2 56.1 58.9 63.3 60.2 59.4 2 19.5 15.6 7.40 11.1 11.9 3 6.36 6.82 7.50 6.70 7.20 Rank 1 2 4 3 4 1 1 5 3
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Total Rank

Final Rank

2 5 1 5 13 1 4 2 3 10 3 1 5 1 10 5 2 4 4 15 4 3 3 2 12

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International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

Mean

13.58

59.58

13.1

6.92

Source: Annual reports of ABB Ltd TABLE_6: OPERATING CYCLE OF BHEL (IN DAYS) Component Inventory conversion period Debtors conversion period Total operating cycle Less: Creditors conversion period Cash cycle Source: Annual reports of BHEL TABLE_7: OPERATING CYCLE OF ABB LTD (IN DAYS) Component Inventory conversion period Debtors conversion period Total operating cycle Less: Creditors conversion period Cash cycle Source: Annual reports of ABB LTD
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2005-06 171.22 179.31 350.53 126.06 224.47

2006-07 142.71 178.54 321.25 113.69 207.56

2007-08 153.68 204.08 357.76 121.67 236.09

2008-09 140.58 194.60 335.18 106.44 228.74

2009-10 150.72 203.62 354.44 118.58 235.86

2005-06 32.28 110.99 143.27 109.45 33.82

2006-07 35.86 122.91 158.77 112.25 46.52

2007-08 41.71 144.13 185.84 115.07 70.77

2008-09 55.42 170.69 226.11 126.37 99.74

2009-10 54.24 167.88 222.12 118.52 103.60

CONCLUSION From the viewpoint of conventional standard of working capital, the quick ratio, absolute liquidity ratios in both the companies are satisfactory. The age of inventory, working capital turnover is very much satisfied in BHEL than ABB Ltd, so some improvement is required in case of ABB Ltd. In this study it is cleared that the overall position of the working capital in both the companies are satisfactory. In both the companies the major portion of the current assets are in form of debtors and loan and advances. The liquidity position mainly depends upon debtors and debt collection policy, but other components like inventory, loan and advances, cash and bank balance and bills receivable etc. are also responsible. The ratio debtors to gross working capital is very high in case of ABB Ltd, Average collection period is very high in case of BHEL,

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International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

so in this study we found that there is a need of improvement in debtors and debt collection policy. The management of should be try to proper utilization of debtor's and also try to maintain the debtors as per their requirement so liquidity will not interrupted. REFERENCES I. M. Pandey: "Financial Management theory and practices", Vikas publishing company, New Delhi (2000). Prasanna Chandra: "Financial Management theory and practice", TMH, New Delhi (2001). www.bhel.com www.abb.co.in

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