CONTENTS

Topic 1. Preface 2. Declaration 3. Acknowledgement 4. Introduction 5. Company profile 6. Problem 7. Objective of the study 8. Research methodology 9. Scope of the study 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. Data sources Introduction of working capital Inventory management Conversion periods Cash management Receivable management Managing paybless Working capital and short term financing Data analysis Limitations Conclusions Suggestions Bibliography Annexure 108 99 10073-82 83-94 95 96 97-98 42-47 48-58 59-66 67-72 Pg. No. 1 2 3 4 5-12 13 14 15 16 17 18-34 35-41

PREFACE
This project is based on the study of working capital management in NTPC, DADRI. An insight view of the project will encompass what it is all about, what it aims to achieve, what is its purpose and scope, the various methods used for collecting data and their sources, including literature survey done, further specifying the limitations of our study and in the last, drawing inferences from the learning so far. NTPC, DADRI (NTPC, DADRI), is a leading domestic computer hardware and hardware services company. NTPC, DADRI is engaged in selling manufactured and traded to institutional clients as well as in retail segment. It also offers support services to existing clients through annual maintenance contracts, network consulting and facilities management. The working capital management refers to the management of working capital, or precisely to the management of current assets. A firms working capital consists of its investments in current assets, which includes shortterm assetscash and bank balance, inventories, receivable and marketable securities. This project tries to evaluate how the management of working capital is done in NTPC, DADRI inventory ratios, working capital ratios, trends, computation of cash, inventory and working capital, and short term financing.

DECLARATION I hereby declare that the study entitled WORKING CAPITAL MANAGEMENT in the context of NTPC being submitted by me in the partial fulfilment of the requirement by the TIPS, Meerut is a record of my own work. The study was conducted at Finance Department, NTPC.

GAURAV KUMAR MBA III Sem

ACKOWLEDGEMENT
Achievement is finding out what you would be then doing, what you have to do. The higher the summit, the harder is the climb. The goal was fixed and we began with a determined resolved and put in ceaseless sustained hard work. Greater challenge, greater was our effort to overcome it. This project work, which is my first step in the field of professionalization, has been successfully accomplished only because of my timely support of well-wishers. I would like to pay my sincere regards and thanks to those, who directed me at every step in my project work. The guidance, help and co-operation of my supervisor Mr. RANJEET BHATTACHARYA (G.M., Finance), is gratefully acknowledged with profound gratitude. I have been benefited from discussion with Dr. SHAILENDER KUMAR (Director, TIPS, Meerut).

GAURAV KUMAR

INTRODUCTION: The project undertaken is on WORKING CAPITAL MANAGEMENT IN NTPC. It describes about how the company manages its working capital and the various steps that are required in the management of working capital. Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's ability to fund operations, reinvest and meet capital requirements and payments. Understanding a company's cash flow health is essential to making investment decisions. A good way to judge a company's cash flow prospects is to look at its working capital management (WCM). Working capital refers to the cash a business requires for day-to-day operations or, more specifically, for financing the conversion of raw materials into finished goods, which the company sells for payment. Among the most important items of working capital are levels of inventory, accounts receivable, and accounts payable. Analysts look at these items for signs of a company's efficiency and financial strength. The working capital is an important yardstick to measure the companys operational and financial efficiency. Any company should have a right amount of cash and lines of credit for its business needs at all times. This project describes how the management of working capital takes place at NTPC .

COMPANY PROFILE
NTPC Limited is the largest thermal power generating company of India. A public sector company, it was incorporated in the year 1975 to accelerate power development in the country as a wholly owned company of the Government of India. At present, Government of India holds 89.5% of the total equity shares of the company and the balance 10.5% is held by FIIs, Domestic Banks, Public and others. Within a span of 31 years, NTPC has emerged as a truly national power company, with power generating facilities in all the major regions of the country. National Thermal Power Corporation is the largest power generation company in India. The Forbes Global 2000 ranking for 2005 ranks it as the 5th leading company in India and the 486th leading company in the world. It is a public listed (Bombay Stock Exchange) Indian public sector company, with majority shares owned by the Government of India. At present, Government of India holds 89.5% of the total equity shares of the company and the balance 10.5% is held by FIIs, Domestic Banks, Public and others. NTPC ranks amongst the top five companies, in terms of market capitalisation. NTPC's core business is engineering, construction and operation of power generating plants and also providing consultancy to power utilities in India and abroad. As on date the installed capacity of NTPC is 26, 404 MW through its 14

coal based (21,395 MW), 7 gas based (3,955 MW) and 4 Joint Venture Projects (1,054 MW).

From the above graph its been clear that NTPC is creating that leading benchmark in all over the country, like above graph is dictating that the intensive and remarkable growth covered by NTPC was started in year 1986-87 from 3000MW with 20000BU and goes to inconsistent growth in year 2006-07 by 30000MW with 200000BU. This shows the effective installed capacity is leading a terrific generation of power.

NTPCs core business is engineering, construction and operation of power generating plants. It also provides consultancy in the area of power plant constructions and power generation to companies in India and abroad. As on date the installed capacity of NTPC is 27,904 MW through its 15 coal based (22,895 MW), 7 gas based (3,955 MW) and 4 Joint Venture Projects (1,054 MW). NTPC acquired 50% equity of the SAIL Power Supply Corporation Ltd. (SPSCL). This JV company operates the captive power plants of Durgapur (120 MW), Rourkela (120 MW) and Bhilai (74 MW). NTPC also has 28.33% stake in Ratnagiri Gas & Power Private Limited (RGPPL) a joint venture company between NTPC, GAIL, Indian Financial Institutions and Maharashtra SEB Holding Co. Ltd. The present capacity of RGPPL is 850MW. 47817.4 crore

NTPCs share on 31 Mar 2007 in the total installed capacity of the country was 20.18% and it contributed 28.50% of the total power generation of the country during 2006-07. NTPC has set new benchmarks for the power industry both in the area of power plant construction and operations. It is providing power at the cheapest average tariff in the country. With its experience and expertise in the power sector, NTPC is extending consultancy services to various organisations in the power business. NTPC is committed to the environment, generating power at minimal environmental cost and preserving the ecology in the vicinity of the plants. NTPC has undertaken massive afforestation in the vicinity of its plants. Plantations have increased forest area and reduced barren land. The massive afforestation by NTPC in and around its Ramagundam Power station (2600 MW) have contributed reducing the temperature in the areas by about 3c. NTPC has also taken proactive steps for ash utilisation. In 1991, it set up Ash Utilisation Division to manage efficient use of the ash produced at its coal stations. This quality of ash produced is ideal for use in cement, concrete, cellular concrete, building material. A "Center for Power Efficiency and Environment Protection (CENPEEP)" has been established in NTPC with the assistance of United States Agency for International Development. (USAID). Cenpeep is efficiency oriented, eco-friendly

and eco-nurturing initiative - a symbol of NTPC's concern towards environmental protection and continued commitment to sustainable power development in India. As a responsible corporate citizen, NTPC is making constant efforts to improve the socio-economic status of the people affected by the projects. Through its Rehabilitation and Resettlement programmes, the company endeavors to improve the overall socio-economic status of Project Affected Persons. NTPC was among the first Public Sector Enterprises to enter into a Memorandum of Understanding (MOU) with the Government in 1987-88. NTPC has been Placed under the 'Excellent category' (the best category) every year since the MOU system became operative. Recognising its excellent performance and vast potential, Government of the India has identified NTPC as one of the jewels of Public Sector Navratnas- a potential global giant. Inspired by its glorious past and vibrant present, NTPC is well on its way to realise its vision of being A world class integrated power major, powering Indias growth, with increasing global presence.

ORGANISATIONAL VISION
TO BE ONE OF THE WORLDS LARGEST AND BEST POWER UTILITIES, POWERING INDIAS GROWTH.

MISSION
MAKE AVAILABLE RELIABLE, QUALITY POWER IN INCREASINGLY LARGE QUALITIES AT APPROPRIATE TARIFFS, AND ENSURE TIMELY REALISATION OF REVENUES. SPEEDILY PLAN AND IMPLEMENT POWER PROJECTS, WITH

CONTEMPORARY TECHNOLOGIES . IMPLEMENT STRATEGIC DIVERSIFICATIONS IN THE AREAS OF R&M, HYDRO,LNGAND NON CONVENTIONAL AND ECOFRIENDLY FUELS AN EXPLORE NEW AREAS LIKE TRANSMISSION, INFORMATION

TECHNOLOGY ETC., PROMOTE CONSULTANCY AND MAKE PRUDENT ACQUISITIONS CONTINUOUSLY DEVELOP COMPETENT HUMAN RESOURCES TO MATCH WORLD STANDARDS. BE A RESPONSIBLE CORPORATE CITIZEN WITH TRUST ON

ENVIRONMENT PROTECTION, REHABILITATION AND ASH UTILISATION .

CORE VALUES

(COMIT)
CUSTOMER FOCUS ORGANISATIONAL PRIDE MUTUAL RESPECT AND TRUST INITIATIVE AND SPEED TOTAL QUALITY

Corporate objectives
To add generating capacity within prescribed time and cost.

To operate and maintain power stations at high availability ensuring minimum cost Of generation.

To maintain the financial soundness of the company by managing the financial Operations in accordance with good commercial utility practices. To develop appropriate commercial policy leading to remunerative tariffs and

Minimum receivables.

To function as a responsible corporate citizen and discharge social responsibility, In respect of environment protection and rehabilitation.

The corporation will strive to utilize the ash produced at its stations to the Maximum extent possible through production of ash bricks building materials etc.

To adopt appropriate human resources development policy leading to creation of Team of motivated and competent power professional.

To introduce, assimilate and attain self sufficiency in technology, acquire expertise in utility management practices and to disseminate knowledge essentially as a Contribution to other constituents of the power sector in the country.

To develop research & development (R&D) for achieving improved plant Reliability.

To expand the consultancy operations and to participate in ventures abroad.

THE PROBLEMS
In the management of working capital, the firm is faced with two key problems:
1.

First, given the level of sales and the relevant cost considerations, what

are the optimal amounts of cash, accounts receivable and inventories that a firm should choose to maintain?
2.

Second, given these optimal amounts, what is the most economical way

to finance these working capital investments? To produce the best possible results, firms should keep no unproductive assets and should finance with the cheapest available sources of funds. Why? In general, it is quite advantageous for the firm to invest in short term assets and to finance shortterm liabilities.

OBJECTIVE OF THE STUDY The objectives of this project were mainly to study the inventory, cash and receivable at NTPC Ltd., but there are some more and they are The main purpose of our study is to render a better understanding of the concept Working Capital Management.

To understand the planning and management of working capital at NTPC Ltd.

To measure the financial soundness of the company by analyzing various ratios.

To suggest ways for better management and control of working capital at the concern.

RESEARCH METHODOLOGY

This project requires a detailed understanding of the concept Working Capital Management. Therefore, firstly we need to have a clear idea of what is working capital, how it is managed in NTPC , what are the different ways in which the financing of working capital is done in the company.

The management of working capital involves managing inventories, accounts receivable and payable and cash. Therefore one also needs to have a sound knowledge about cash management, inventory management and receivables management.

Then comes the financing of working capital requirement, i.e. how the working capital is financed, what are the various sources through which it is done. And, in the end, suggestions and recommendations on ways for better management and control of working capital are provided.

SCOPE OF THE STUDY This project is vital to me in a significant way. It does have some importance for the company too. These are as follows

This project will be a learning device for the finance student.

Through this project I would study the various methods of the working

capital management. The project will be a learning of planning and financing working capital. The project would also be an effective tool for credit policies of the companies.

This will show different methods of holding inventory and dealing with

cash and receivables.

This will show the liquidity position of the company and also how do

they maintain a particular liquidity position.

DATA SOURCES: The following sources have been sought for the prep of this report:

Primary sources such as business magazines, current annual reports, book on Financial Management by various authors and internet websites the imp amongst them being : www.NTPC.com, www.indiainfoline.com, www.studyfinance.com .

Secondary sources like previous years annual reports, reports on working capital for research, analysis and comparison of the data gathered. While doing this project, the data relating to working capital, cash management, receivables management, inventory management and short term financing was required.

This data was gathered through the companys websites, its corporate intranet, NTPCs annual reports of the last five years.

A detailed study on the actual working processes of the company is also done through direct interaction with the employees and by timely studying the happenings at the company.

 Also, various text books on financial management like ICFAIs book, Khan & Jain, Prasanna Chandra and I.M.Pandey were consulted to equip ourselves with the topic.

INTRODUCTION TO WORKING CAPITAL

Working Capital is the Life-Blood and Controlling Nerve Center of a business The working capital management precisely refers to management of current assets. A firms working capital consists of its investment in current assets, which include shortterm assets such as: Cash and bank balance, Inventories, Receivables (including debtors and bills), Marketable securities. Working capital is commonly defined as the difference between current assets and current liabilities. Working Capital = Current Assets-Current Liabilities There are two major concepts of working capital: Gross working capital Net working capital Gross working capital:

It refers to firm's investment in current assets. Current assets are the assets, which can be converted into cash with in a financial year. The gross working capital points to the need of arranging funds to finance current assets. Net working capital: It refers to the difference between current assets and current liabilities. Net working capital can be positive or negative. A positive net working capital will arise when current assets exceed current liabilities. And vice-versa for negative net working capital. Net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds. Net working capital also covers the question of judicious mix of long-term and short-term funds for financing current assets.

Significance Of Working Capital Management The management of working capital is important for several reasons: For one thing, the current assets of a typical manufacturing firm account for half of its total assets. For a distribution company, they account for even more.

Working capital requires continuous day to day supervision. Working

capital has the effect on company's risk, return and share prices,

There is an inevitable relationship between sales growth and the level of

current assets. The target sales level can be achieved only if supported by adequate working capital Inefficient working capital management may lead to insolvency of the firm if it is not in a position to meet its liabilities and commitments.

Liquidity Vs Profitability: Risk - Return trade off Another important aspect of a working capital policy is to maintain and provide sufficient liquidity to the firm. Like the most corporate financial decisions, the decision on how much working capital be maintained involves a trade off- having a large net working capital may reduce the liquidity risk faced by a firm, but it can have a negative effect on the cash flows. Therefore, the net effect on the value of the firm should be used to determine the optimal amount of working capital. Sound working capital involves two fundamental decisions for the firm. They are the determination of: The optimal level of investments in current assets.

The appropriate mix of short-term and long-term financing used

to support this investment in current assets, a firm should decide whether or not it should use short-term financing. If short-term financing has to be used, the firm must determine its portion in total financing. Short-term financing may be preferred over long-term financing for two reasons: The cost advantage Flexibility

23

But short-term financing is more risky than long-term financing. Following table will summarize our discussion of short-term versus long-term financing.

Maintaining a policy of short term financing for short term or temporary assets needs (Box 1) and long- term financing for long term or permanent assets needs (Box 3) would comprise a set of moderate risk profitability strategies. But what one gains by following alternative strategies (like by box 2 or box 4) needs to weighed against what you give up.

24

CLASSIFICATION OF WORKING CAPITAL Working capital can be classified as follows: On the basis of time On the basis of concept

25

Types of Working Capital Needs Another important aspect of working capital management is to analyze the total working capital needs of the firm in order to find out the permanent and temporary working capital. Working capital is required because of existence of operating cycle. The lengthier the operating cycle, greater would be the need for working capital. The operating cycle is a continuous process and therefore, the working capital is needed constantly and regularly. However, the magnitude and quantum of working capital required will not be same all the times, rather it will fluctuate.

The need for current assets tends to shift over time. Some of these changes reflect permanent changes in the firm as is the case when the inventory and receivables increases as the firm grows and the sales become higher and higher. Other changes are seasonal, as is the case with increased inventory required for a particular festival season. Still others are random reflecting the uncertainty associated with growth in sales due to firm's specific or general economic factors. The working capital needs can be bifurcated as: Permanent working capital
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 Temporary working capital Permanent working capital: There is always a minimum level of working capital, which is continuously required by a firm in order to maintain its activities. Every firm must have a minimum of cash, stock and other current assets, this minimum level of current assets, which must be maintained by any firm all the times, is known as permanent working capital for that firm. This amount of working capital is constantly and regularly required in the same way as fixed assets are required. So, it may also be called fixed working capital.

Temporary working capital: Any amount over and above the permanent level of working capital is temporary, fluctuating or variable working capital. The position of the required working capital is needed to meet fluctuations in demand consequent upon changes in production and sales as a result of seasonal changes.

27

The permanent level is constant while the temporary working capital is fluctuating increasing and decreasing in accordance with seasonal demands as shown in the figure. In the case of an expanding firm, the permanent working capital line may not be horizontal. This is because the demand for permanent current assets might be increasing (or decreasing) to support a rising level of activity. In that case line would be rising.

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FINANCING OF WORKING CAPITAL There are two types of working capital requirements as discussed above. They are: Permanent or Fixed Working Capital requirements Temporary or Variable Working Capital requirements Therefore, to finance either of these two working capital requirements, we have long-term as well as short-term sources.

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FACTORS DETERMINING WORKING CAPITAL REQUIREMENTS There are many factors that determine working capital needs of an enterprise. Some of these factors are explained below: Nature or Character of Business.

The working capital requirement of a firm is closely related to the nature of its business. A service firm, like an electricity undertaking or a transport corporation, which has a short operating cycle and which sells predominantly on cash basis, has a modest working capital requirement. Oh the other hand, a manufacturing concern like a machine tools unit, which has a long operating cycle and which sells largely on credit, has a very substantial working capital requirement.

NTPC carry on activities related to Sugar systems. Though they are primarily an assembling firm they also have manufacturing facilities in Chennai and Pondicherry. This requires them to keep a very sizeable amount in working capital. Size of Business/Scale of Operations.

30

NTPC is the leader in its segment in both consumer as well as commercial market share. They have increased their share in the consumer segment notably in the last four years. This they have achieved through retail expansion. The scale of operations and the size it holds in the Indian IT market makes it a must for them to hold their inventory and current asset at a huge level.

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Rate of Growth of Business.

The rate of growth of sales indicates a need for increase in the working capital requirements of the firm. As the firm is projected to increase their sales by 80% from what it was in 2006, it is required to guard them against the increasing requirements of the net current asset by way of efficient working capital management. The sales and projected sales level determine the investment in inventories and receivables.

NTPC

2008 2007 PROJECTE Sales/Income D 3400 2833

2006

2005

2004

Gross

2381

1967.3 7

1522.03

from Operations

Price Level Changes.

Changes in the price level also affect the working capital requirements. It was the reduced margins in the price of the raw materials that had prompted them to go for bulk purchases thus
32

making on additions to their net current assets. They might have gone for this large-scale procurement for availing discounts and anticipating a rise in prices, which would have meant that more funds are required to maintain the same current assets.

33

WORKING CAPITAL CYCLE The upper portion of the diagram above shows in a simplified form the chain of events in a manufacturing firm. Each of the boxes in the upper part of the diagram can be seen as a tank through which funds flow. These tanks, which are concerned with day-to-day activities, have funds constantly flowing into and out of them.

The chain starts with the firm buying raw materials on credit. In due course this stock will be used in production, work will be carried out on the stock, and it will become part of the firms work-in-progress. Work will continue on the WIP until it eventually emerges as the finished product. As production progresses, labor costs and overheads need have to be met. Of course at some stage trade creditors will need to be paid. When the finished goods are sold on credit, debtors are increased. They will eventually pay, so that cash will be injected into the firm.

Each of the areas- Stock (raw materials, WIP, and finished goods), trade debtors, cash (positive or negative) and trade creditors can be viewed as tanks into and from which funds flow.
34

Working capital is clearly not the only aspect of a business that affects the amount of cash. The business will have to make payments to government for taxation. Fixed assets will be purchased and sold Lessors of fixed assets will be paid their rent Shareholders (existing or new) may provide new funds in the form of cash Some shares may be redeemed for cash Dividends may be paid Long-term loan creditors (existing or new) may provide loan finance, loans will need to be repaid from time-to-time, and Interest obligations will have to be met by the business Unlike, movements in the working capital items, most of these non-working capital cash transactions are not every day events. Some of them are annual events (e.g. tax payments, lease payments, dividends, interest and, possibly, fixed asset purchases and sales). Others (e.g. new equity and loan finance and redemption of old equity and loan finance) would typically be rarer events.

35

SOURCES OF WORKING CAPITAL NTPC has the following sources available for the fulfillment of its working capital requirements in order to carry on its operations smoothly:

Banks:

These include the following banks State Bank of India Canara Bank HDFC Bank Ltd. ICICI Bank Ltd. Societe Generale Standard Chartered Bank State Bank of Patiala State Bank of Saurashtra Commercial Papers: Commercial Papers have become an important tool for financing working capital requirements of a company. Commercial Paper is an unsecured promissory note issued by the company to raise short-term funds. The buyers of the

36

commercial paper include banks, insurance companies, unit trusts, and companies with surplus funds to invest for a short period with minimum risk. NTPC issues Commercial Papers and had 4000 commercial papers in the year 2006.

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INVENTORY MANAGEMENT Inventories Inventories constitute the most important part of the current assets of large majority of companies. On an average the inventories are approximately 60% of the current assets in public limited companies in India. Because of the large size of inventories maintained by the firms, a considerable amount of funds is committed to them. It is therefore, imperative to manage the inventories efficiently and effectively in order to avoid unnecessary investment.

Nature of Inventories Inventories are stock of the product of the company is manufacturing for sale and components make up of the product. The various forms of the inventories in the manufacturing companies are:

Raw Material: It is the basic input that is converted into the finished product through the manufacturing process. Raw materials are those units which have been purchased and stored for future production.

Work-in-progress: Inventories are semi-manufactured products. They represent product that need more work they become finished products for sale.

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Finished Goods: Inventories are those completely manufactured products which are ready for sale. Stocks of raw materials and workin-progress facilitate production, while stock of finished goods is required for smooth marketing operations. Thus, inventories serve as a link between the production and consumption of goods.

Inventory Management Techniques In managing inventories, the firms objective should be to be in consonance with the shareholder wealth maximization principle. To achieve this, the firm should determine the optimum level of inventory. Efficiently controlled inventories make the firm flexible. Inefficient inventory control results in unbalanced inventory and inflexibility-the firm may sometimes run out of stock and sometimes pile up unnecessary stocks.

Economic Order Quantity (EOQ): The major problem to be resolved is how much the inventory should be added when inventory is replenished. If the firm is buying raw materials, it has to decide lots in which it has to purchase on replenishment. If the firm is planning a production run, the issue is how much production to schedule. These problems are called order quantity problems, and the task of the firm is to determine the optimum or economic lot size. Determine an optimum level involves two types of costs:-

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Ordering Costs: This term is used in case of raw material and includes all the cost of acquiring raw material. They include the costs incurred in the following activities: Requisition Purchase Ordering Transporting Receiving Inspecting Storing Ordering cost increase with the number of orders placed; thus the more frequently inventory is acquired, the higher the firms ordering costs. On the other hand, if the firm maintains large inventorys level, there will be few orders placed and ordering costs will be relatively small. Thus, ordering costs decrease with the increasing size of inventory.

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Carrying Costs: Costs are incurred for maintaining a given level of inventory are called carrying costs. These include the following activities: Warehousing Cost Handling Administrative cost Insurance Deterioration and obsolescence Carrying costs are varying with inventory size. This behavior is contrary to that of ordering costs which decline with increase in inventory size. The economic size of inventory would thus depend on trade-off between carrying costs and ordering cost.

Compositio n Raw Material Stores and Spares

2008 6349 3713

200 7 774 9 298 7

2006 6127 2622

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Finished Goods Work-inprogress

1337 4 595

724 5 784

6506 871

The increasing component of raw materials in inventory is due to the fact that the company has gone for bulk purchases and has increased consumption due to a fall in prices and reduced margins for the year. Another reason might be the increasing sales, which might have induced them to purchase more in anticipation of a further increase in demand of the product. And the low composition of work-in-progress is understandable as because of the nature of the business firm is involved in. To the question as to whether the increasing costs in inventory are justified by the returns from it the answer could be found in the NTPC retail expansion. NTPC caters to the need of the two separate segments: a) Institutions for which they manufacture against orders and, b) Retail segment of the market. They are more into retail than earlier and at present more than 650 retail outlets branded with NTPC sign ages and more are in the pipeline

42

The company in order to meet its raw materials requirements could have gone for frequent purchases, which would have resulted in lesser cash flows for the firm rather than the high expenditure involved when procuring in at bulk. The reason why the firm has gone for these bulk purchases because of the lower margins and the discounts it availed because of procuring in bulk quantities. A negative growth in WIP could be because: a) The time taken to convert raw materials to finished goods is very minimal b) This is also due to capacity being not utilized at the optimum. ABC System: ABC system of inventory keeping is followed in the factories. Various items are categorized into three different levels in the order of their importance. For e.g. items such as memory, high capacity processors and royalty are placed in the A category. Large number of firms has to maintain several types of inventories. It is not desirable the same degree of control all the items. The firm should pay maximum attention to those items whose value is highest. The firm should therefore, classify inventories to identify which items should receive the most effort in controlling. The firm should be selective in approach to control investment in various types of
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inventories. This analytical approach is called ABC Analysis. The high-value items are classified as A items and would be under tightest control. C items represent relatively least value and would require simple control. B items fall in between the two categories and require reasonable attention of management. JIT: The relevance of JIT in NTPC Info system can be questioned. This is because they procure materials on the basis of projections made at least two or three months before. Even at the time of procurement they ensure that they procure much more than what actually is required by the firm that is they hold significant amount of inventory as safety stock. This is done to counter the threat involved in default and accidental breakdowns. The levels of safety stock usually vary according to the usage.

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Conversion Periods Raw Material Particulars Raw Material Consumption Raw Material Consumption/da y Raw Material 7072 21 6960.275 25.93 4364.735 27.57 2008 12107 7 332 2007 97971.31 268.41 2006 57775.14 158.28

Inventory Raw Material Holding Days

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The raw material conversion period or the raw material holding cost has reduced from 26 to 21. This is despite an increase in its consumption. This indicates that the firm is able to convert the raw material at its disposal to the work-in-progress at a lesser time as compared to the last year. It would be to the benefit of the firm to reduce the production process and increase the conversion rate still as the firm is required to meet the increasing demand.

Work-in-progress Particulars Cost of Production Cost of Production/da y Work in progress inventory WIP Holding days 1.31 1.89 2.19 689.5 827.52 679.455 2008 19191 1 525.78 2007 159651.1 9 437.4 2006 113500.33 310.95

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The work-in-progress holding time is important for a firm in the sense that it determines the rate of time at which the production process will be complete or the finished goods will be ready for disposal by the firm. The firm as it is in the process of assembling should take the least possible time in conversion to finished goods unlike a hard core manufacturing firm, as any firm would like to have its inventory in the work-in-progress at the minimum. There would also be less of stock out costs as due to better conversion rates the firm is able to meet the rise in demand situations. More the time it spends lesser its efficiency would be in the market. Here the firm has been able to bring down its WIP conversion periods. Finished Goods Particular s Cost of goods sold Cost of goods sold/day Finished goods inventory Finished 16 14.06 14.8 10310 6875.725 5026.505 2008 22817 7 625 2007 178438.8 5 488.87 2006 124768.92 341.832

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goods inventory Holding days The time taken for the firm to realize its finished goods as sales has increased as compared to last year. This growth in sales could be traced back to the growing domestic IT market for the commercial as consumer segment in India. NTPC has around 15% of the market in desktop and it is the market leader in this segment. So it is only natural that they are able to better their conversion rate of finished goods to sales.

Operating Cycle Particulars Inventory conversion period Average collection period Gross operating cycle Average payment period
48

200 8 38 70 108 22

200 7 42 63 105 23

2006 45 66 111 17

Operating cycle

86

82

94

The operating cycle of the firm reveals the days within which the inventory procured gets converted to sales or revenue for the firm. This time period is of importance to the firm as a lag here could significantly affect the profitability, liquidity, credit terms, and the policies of the firm. All the firms would like to reduce it to such extend that their cash inflows are timely enough to meet their obligations and support the operations. That the firm has been able to reduce the ratio is in itself an achievement as they were having huge stocks of inventory. But the reduction in the cycle could also be attributed to the boom in the market and the growth it is expected to reach. This boom automatically ensures the demand for the finished goods and thus helping in it to garner sales for the firm.

Raw Material Consumption Particular s Imported Indigenous % Imports 2008 9200 7 2907 0 75.99 2007 70784.2 7 27187.0 4 72.25 2006 42129.63 15645.51 72.92

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A major chunk of the imports come from Korea and Taiwan and is purchased in US$. The value of imported and indigenous raw material consumed give a clear picture that if there is a change in the EXIM policy of the government it is bound to affect the company adversely as more than 70% of their consumption is from imports. But this is the scenario witnessed in the industry as a whole and though NTPC is into expanding its operation to Uttaranchal it in the present state is would be affected by a change in the import duty structure. A major chunk of their current assets are in the form of inventory and the change in technology will invariably be a threat faced by the firm. The question of technology applying here like says a certain device going say out of fashion or outdated. For e.g. TFT monitors being in demand more than CRT.

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CASH MANAGEMENT Sources of Cash: Sources of additional working capital include the following: Existing cash reserves Profits (when you secure it as cash!) Payables (credit from suppliers) New equity or loans from shareholders Bank overdrafts or lines of credit. Long-term loans

If you have insufficient working capital and try to increase sales, you can easily over-stretch the financial resources of the business. This is called overtrading. Early warning signs include: Pressure on existing cash Exceptional cash generating activities e.g. offering high discounts for early cash payment

Bank overdraft exceeds authorized limit.

Seeking greater overdrafts or lines of credit Part-paying suppliers or other creditors

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 Paying bills in cash to secure additional supplies

Management pre-occupation with surviving rather than managing Frequent short-term emergency requests to the bank (to help pay

wages, pending receipt of a cheque).

CASH MANAGEMENT IN NTPC : The cash management system followed by the NTPC is mainly lock box system. Cash Management System involves the following steps: 1. The branch offices of the company at various locations hold the collection of cheques of the customers. 2. Those cheques are either handed over to the CMS agencies or bank of the particular location take charge of whole collection. 3. These CMS agencies or bank send those cheques to the clearing house to make them realized. These cheques can be local or outstation. 4. The CMS agencies or bank send information to the central hub of the company regarding realization/cheque bounced. 5. The central hub passes on the realized funds to the company as per the agreed agreements.

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6. The CMS agencies or concerned bank provides the necessary MIS to the company as per requirement. In cash management the collect float taken for the cheques to be realized into cash is irrelevant and non-interfering because banks such as Standard Chartered, HDFC and CitiBank who give credit on the basis of these cheques after charging a very small amount. These credits are given to immediately and the maximum time taken might be just a day. The amount they charge is very low and this might cover the threat of the cheque sent in by two or three customers bouncing. Even otherwise the time taken for the cheques to be processed is instantaneous. Their Cash Management System is quite efficient. Cash-Current Liability Particulars Absolute Liquid Ratio 2008 0.24: 1 2007 0.31: 1 2006 0.11:1

The absolute liquid ratio is the best for three years and the cash balances as to the current liability has improved for the firm. Firm has large resources in cash and bank balances. While large resources in cash and bank balances may seem to affect the revenue the firm could have earned by investing it elsewhere as maintenance of current assets as cash and in near cash assets and marketable

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securities may increase the liquidity position but not the revenue or profit earning capacity of the firm. Dividend Policy-Cash Particular s Dividend Policy% Shift in Sales Cash Balance Cash in Hand 2008 210 154295 4463.4 3 118.33 2007 310 199886 14582.6 5 128.97 2006 400 238136 14529.29 128.97

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The other notable feature in NTPC statements has been the growing dividend policy of the firm. The payment of dividend means a cash

55

outflow. Thus cash position is an important criterion at the time of paying dividends. There is a theory that greater the cash position and ability to pay dividends. The firm has adopted a policy of disbursing the revenue earned as profits to the shareholders as dividends as could be seen from the increasing % of dividends declared.

Particulars PBIDT Equity Dividend%

2008 1428 4 400

2007 1563 4 310

2006 14523 210

This could mean two things for the firm the amount of cash retained in the business for capital expenditure purposes are minimal or nil. But rather than investing more in plant and machine which they can at any point in time by adding on a additional line if need they would like to optimize their utilization in fixed assets at present. This also means that the percentage of cash in hand maintained by the firm as a source of liquidity could be reduced, i.e. the amount of idle cash in the business could be made to a level which the firm feels optimum. The firm feels that they should retain cash and it would be in the interest of the firm as well as the shareholders. This would
56

automatically mean as decrease in Earning/share (EPS)(Basic EPS declined from 8 in 2005 to 6.74 in 2006). It would prompt more of investors being interested in the shares of the company, which would boost the purchase of the securities and increase the market price/share thus being beneficial for the firm.

Cash Flows Cash Flows Net Cash from Operating activities Net Cash from Investing activities Net Cash from Financing activities 200 8 692 4 351 5 351 2 The firm has disposed of investments worth around 655 Crores to meet its growing needs. The other notable feature is decline is the firms inflows from operations primarily due to the reason that the cash generated from the operations is the lowest in three years. And 2007 2675.57 15661.2 9 -8217.68 -11412.1 2006 13706.34 -2169.16

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the firms growing dividend policy has contributed to the outflows in financing activities. Cash Flow in Operating Activities Working Capital Changes Working Capital Changes Trade and other receivables Inventories Trade Payables and other Liabilities The cash from the operation has been subject to considerable change due to the changes that could be adjusted towards trade receivables and trade payables. The outflows in inventory have become as low as 37% of what it was last year despite an increase in the inventory consumption by 16.64%. The resulting reduction in the cash outflows might be because of the inventories being procured more on credit. That the cash from operations has declined has affected the current liability index of the firm. Cash Flow in Investing Activities Investments in Mutual Funds Investments (year end) 13539
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2008 -14166 -5221 13026

200 7 -14510.69 -2683.92 6419.13 -7106.68 -7221.11 14311.5

2006

200 6 12277.44

200 5

2004 28059.88

Purchase of Investment -65992 Disposal/Redemption 65312 of Investment

-53075.99 65489.84

-59249.81 52087.36

The investments have reduced from the last year due to the redemption of investments taken place to meet various needs such as increasing demand in stock or inventory and to ensure better credit and receivables policy. We can see that the firm has in these three years increased their cash inflow from the investing activities by way of disposal of investments when in need. That is the firm has redeemed to realize cash as to meet its expanding operations, fund the inventory procurement and meet the obligations. The investments in mutual funds are beneficial to the firm in the context that they contain interest bearing securities which add up as a source of revenue for the firm unlike cash which remains idle and unproductive when not in use. This reduction of dividend could be attributed to disposal of investments in mutual funds and subsidiary. This disposal creates a fund, which can be used by the company as and when the need arises.

Cash vs. Marketable Securities The investment in marketable securities rather than having large cash balances in something that has been given thought for by the firm. This is because while

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a firm gets revenue in the form of interests by investments, it actually has to pays certain amount money to the banks for maintaining current accounts and fixed deposits usually have a longer maturity period. That is, the problem with high investments is that the opportunity to earn is lost, thus a firm has to maintain an optimal cash balance. But the investment in mutual funds or other marketable securities might create a problem of investment, as they might not be readily realizable as say liquid cash or the amount deposited in the current account. The investments in say fixed assets say may earn a fixed rate of interest but they have a maturity period attached to them. In NTPC, Standard Chartered is the concentration bank in which all the inflows from the deposit banks are concentrated and passed on to the disbursement banks for further disbursement.

Liquid Cash Balance The liquid cash maintained in the business is only that much as is required to satisfy the daily requirements of the firm and not more. The rest of the cash is invested into mutual funds and also held in fixed deposits and current accounts. Instruments Used The instrument used here are primarily cheques comprising of around 97% of what is used in. The rest 2-3% comprise of the letters of credit.

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Thus working capital is the lifeline for every business. The main advantages of sufficient working capital are: It helps in prompt payment Ensures high solvency in the company and good credit standing. Regular supply of material and continuous production. Ensures regular payment of salaries and wages and day to day commitments.

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RECEIVABLES MANAGEMENT Cash flow can be significantly enhanced if the amounts owing to a business are collected faster. Every business needs to know.... who owes them money.... how much is owed.... how long it is owing.... for what it is owed. Late payments erode profits and can lead to bad debts. Slow payment has a crippling effect on business; in particular on small businesses whom can least afford it. If you don't manage debtors, they will begin to manage your business as you will gradually lose control due to reduced cash flow and, of course, you could experience an increased incidence of bad debt. The following measures will help manage your debtors:
1. Have

the right mental attitude to the control of credit and make sure that

it gets the priority it deserves. 2.Establish clear credit practices as a matter of company policy.
3. Make

sure that these practices are clearly understood by staff, suppliers

and customers. 4.Be professional when accepting new accounts, and especially larger ones.
5. Check

out each customer thoroughly before you offer credit. Use credit

agencies, bank references, industry sources etc.

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6.Establish credit limits for each customer and stick to them. 7.Continuously review these limits when you suspect tough times are coming or if operating in a volatile sector. 8.Keep very close to your larger customers. 9.Invoice promptly and clearly. 10.Consider charging penalties on overdue accounts. 11.Consider accepting credit /debit cards as a payment option. 12.Monitor your debtor balances and aging schedules, and don't let any debts get too old. Recognize that the longer someone owes you, the greater the chance you will never get paid. If the average age of your debtors is getting longer, or is already very long, you may need to look for the following possible defects. Poor collection procedures. Lax enforcement of credit terms. Slow issue of invoices or statements. Errors in invoices or statements. Customer dissatisfaction. Weak credit judgement.

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Debtors due over 90 days (unless within agreed credit terms) should generally demand immediate attention. Look for the warning signs of a future bad debt. For example.. 1. Longer credit terms taken with approval, particularly for smaller orders. 2. Use of post-dated checks by debtors who normally settle within agreed terms. 3. Evidence of customers switching to additional suppliers for the same goods. 4. New customers who are reluctant to give credit references. 5. Receiving part payments from debtors.

Profits only come from paid sales. The act of collecting money is one, which most people dislike for many reasons and therefore put on the long finger because they convince themselves that there is something more urgent or important that demand their attention now. There is nothing more important than getting paid for your product or service. A customer who does not pay is not a customer. Here are few ways in collecting money from debtors: Develop appropriate procedures for handling late payments.

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 Track and pursue late payers Get external help if you own efforts fail. Dont feel guilty asking for money .. its yours and you are entitled to it. Make that call now. And keep asking until you get some satisfaction. In difficult circumstances, take what you can now and agree terms for the remainder, it lessens the problem. When asking for your money, be hard on the issue but soft on the person. Dont give the debtor any excuses for not paying. Make that your objective is to get the money, not to score points or get even.

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RECEIVABLES MANAGEMENT IN NTPC :

PARTICULARS DEBTORS TURNOVER RATIO AVERAGE COLLECTION PERIOD

2008 5.21 70

2007 5.80 63

2006 5.53 66

2005 6.62 55

A better turnover ratio implies for the firm, more efficiency in converting the accounts receivable to cash. A firm with very high turnover ratio can take the freedom of holding very little balances in cash, as their debtors are easily realizable. In case of NTPC, the collection period for the firm is 70 days.

PARTICULARS PROVISION FOR DOUBTFUL DEBTS(CASH FLOW) DEBTS DOUBTFUL(EXCEEDING 6 MONTHS)

2008 3 47

2007 49.85 134.09

2006 25 69.8

The debts doubtful have doubled but their percentage on the debts has almost become half. This implies a sales and collection policy that get along with the receivables management of the firm.

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COLLECTION POLICIES: It refers to the collection procedures such as letters, phone calls and other follow up mechanism to recover the amount due from the customers. It is obvious that costs are incurred towards the collection efforts, but bad debts as well as average collection period would decrease. Further, a strict collection policy of the firm is expensive for the firm because of the high cost is required to be incurred by the firm and it may also result in loss of goodwill. But at the same time it minimizes the loss on account of bad debts. Therefore, a firm has to strike a balance between the cost and benefits associated with collection policies. The steps usually followed in collection efforts are: Sending repeated letters and reminders to the customers

Personal visits

Using agencies involved in collection process

Making telephonic reminders

Initiating legal actions

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 Real Time Gross Settlement (RTGS) Real Time Gross Settlement as such is a concept new in nature and though the firm uses the system with all the members of the consortium, it is still in its primal stage and will take time before all of the clients of the firm are willing to accept it. The firm has made a proposal to the consortium of the banks during appraisal for faster implementation of internet based banking facility by all the banks and adoption of RTGS payment system through net. The debtors turnover ratio is completely dependent upon the credit policy followed by the firm. The credit policy followed by the firm should be such that the threat of bad debts and the default rate involved should be terminated.

PARTICULARS 2008 CREDITORS TURNOVER RATIO PAYMENT PERIOD 22 16.44

2007 15.68

2006 21.29

2005 21.14

23

17

16

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That the creditors turnover ratio has declined and payment period has increased indicate that the company has got a leeway in making the payment to the creditors by way of increased time. With creditors they are having pre-agreements and have undertaken arrangements with them, which they believe to be the best in the business and these are fixed. (NOTE: Acceptances are not included in the computation of creditors turnover)

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MANAGING PAYABLES (Creditors)

Creditors are a vital part of effective cash management and should be managed carefully to enhance the cash position. Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidity problems. Consider the following: Who authorizes purchasing in your company - is it tightly managed or spread among a number of (junior) people? Are purchase quantities geared to demand forecasts?

Do you use order quantities, which take account of stock holding

and purchasing costs? Do you know the cost to the company of carrying stock? Do you have alternative sources of supply? If not, get quotes from major suppliers and shop around for the best discounts, credit terms as it reduces dependence on a single supplier. How many of your suppliers have a return policy?

Are you in a position to pass on cost increases quickly through

price increases to your customers? If a supplier of goods or services lets you down can you charge
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back the cost of the delay?

Can you arrange (with confidence!) to have delivery of supplies

staggered or on a just-in-time basis? There is an old adage in business that "if you can buy well then you can sell well". Management of your creditors and suppliers is just as important as the management of your debtors. It is important to look after your creditors- slow payment by you may create ill feeling and can signal that your company is inefficient (or in trouble!). Remember that a good supplier is someone who will work with you to enhance the future viability and profitability of your company.

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Financing Current Assets The firm has to decide about the sources of funds, which can be availed to make investment in current assets. Long term financing: It includes ordinary share capital, preference share capital, debentures, long term borrowings from financial institutions and reserves and surplus. Short term financing: It is for a period less than one year and includes working capital funds from banks, public deposits, commercial paper etc. Spontaneous financing: It refers to automatic sources of short-term funds arising in normal course of business. There is no explicit cost associated with it. For example, Trade Credit and Outstanding Expenses etc. Depending on the mix of short and long term financing, the company can follow any of the following approaches. Matching Approach In this, the firm follows a financial plan, which matches the expected life of assets with the expected life of source of funds raised to finance assets. When the firm follows this approach, long term financing will be used to finance

72

fixed assets and permanent current assets and short term financing to finance temporary or variable current assets. Conservative Approach In this, the firm finances its permanent assets and also a part of temporary current assets with long term financing. In the periods when the firm has no need for temporary current assets, the long-term funds can be invested in tradable securities to conserve liquidity. In this the firm has less risk of facing the problem of shortage of funds. Aggressive Approach In this, the firm uses more short term financing than warranted by the matching plan. Under an aggressive plan, the firm finances a part of its current assets with short term financing. Relatively more use of short term financing makes the firm more risky.

Current asset to fixed asset ratio: The financial manager should determine the optimum level of current assets so that the wealth of shareholders is maximized. A firm needs fixed and current assets to support a particular level of output.

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The level of current assets can be measured by relating current assets. Dividing current assets by fixed assets gives CA/FA ratio. Assuming a constant level of fixed assets, a higher CA/FA ratio indicates a conservative current assets policy and a lower CA/FA ratio means an aggressive current assets policy assuming other factors to be constant. A conservative policy i.e. higher CA/FA ratio implies greater liquidity and lower risk; while an aggressive policy i.e. lower CA/FA ratio indicates higher risk and poor liquidity. The current assets

policy of the most firms may fall between these two extreme policies. The alternative current assets policies may be shown with the help of the following figure.

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In this figure the most conservative policy is indicated by alternative A, where as CA/FA ratio is greatest at every level of output. Alternative C is the most aggressive policy, as CA/FA ratio is lowest at all levels of output. Alternative B lies between the conservative and aggressive policies and is an average policy.

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WORKING CAPITAL & SHORT-TERM FINANCING CONSORTIUM BASED FINANCING Current Working Capital Limits NAME OF THE BANK STATE BANK OF INDIA ICICI BANK HDFC BANK STANDARD CHARTERED BANK STATE BANK OF SAURASHTRA STATE BANK OF PATIALA CANARA BANK SOCIETE GENERALE HSBC BANK TOTAL FUND BASED 3600 1282 1200 1200 715 1300 1203 1000 1000 12500 NON-FUND BASED 46000 19000 10000 19000 7500 7700 6000 4000 18300 137500

In order to finance the working capital needs of the firm in the form of Working Capital Demand Loan, there is a consortium of nine banks. The consortium if banks provide a fund based limit of 125 Crores which comprises of cash credit and working capital demand loans and non-fund based limits which has bank gurantee and letter of credit subject to a limit of 1375 Crores. The Lead Bank in this consortium of banks is State Bank of India and the second lead bank is

76

ICICI. It is SBI, which fixes the limit on the basis of consortium. They, in consultation of the company decide the allocation of limit to various member banks. The allocation cannot be higher than the limits fixed by it. SBI is the biggest contributor in the consortium for both fund and non-fund based limits with about 31.30 in funds and 34.02 in non-fund limits. The ratio of both limits for the year 2006 is 0.23:0.77

It is on the basis of the accounts receivable that the banks come to an agreement with regards to the limits imposed. Though it is the fund based limits that finance the working capital requirements, the non-fund based limits are important for the management of the working capital as there might be clients who are not willing to sell on open credit and might be demanding letters of credit before any advances.

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RENEWAL OF LIMITS LIMITS FUND BASED NON FUND BASED TOTAL 60000 50000 40000 2008 11500 48500 2007 11500 38500 2006 11500 28500

All banks sanction the limits for a period of one year. Thereafter it is to be renewed every year. SBI appraises the limit on the basis of consortium. The individual banks appraise for their own individual limit. The non fund based limits of the firm in consortium financing has been subjected to change for the past two years as per the requirements of the firm and the consent of the lead bank to its proposal. It was around 385 Crores in 2005 and had been risen to around 485 Crores in 2006. A proposal has been made by the firm to further appraise the limits by 100 Crores to 585 Crores in view of the growing operations of the firm with full interchangeability between letter of credit and bank guarantee limits for operational flexibility. Allocation of the fund based and non based limits among the banks based on operational convenience rather than allocating the fund

78

based and non fund based on the same ratio is also among the proposals made by the firm. The company needs to provide the following information to bank for appraisals: Credit Monitoring Appraisal

Write Up on company

Share holding pattern

List of the directors

CONSORTIUM MEETING : All the members of the consortium are required to meet to discuss various issues relating to the working facilities. As per RBI guidelines, the lead bank, i.e., SBI should ensure that one consortium meeting is held every quarter snd this meeting has to be arranged by NTPC.

DOCUMENTATION and JOINT DOCUMENTATION: There are various documents that need to be signed at the time of renewal or inducting any bank to the consortium. The various documents are as follows:

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 Loan agreement

Hypothecation agreement for movable machinery

Hypothecation agreement for movables and book debts

Counter Indemnity The above are the standard agreements asked for by the banks. The common seal has to be witnessed by the company secretary and one of the directors of the company. As of 2005, no additions or deletions were made to the consortium of the banks. But over the years the number of banks in the consortium have been reduced. Indian Banks and State Bank of Hyderabad are the two banks which were earlier a part of the consortium. Joint Documentation is executed between the company and the consortium of banks for the working capital facilities extended by the consortium to the company. The joint documentation is valid for three years. The documents comprising joint documentation are: Working Capital consortium agreement

Joint deed of documentation

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 Inter se agreement between bankers

Letter of authority to lead bank by other consortium banks

Letter of authority to second lead bank by other consortium banks

Undertaking to create charge on the assets of the company. ALLOCATION OF LIMIT BY LEAD BANK SBI appraises the limit on behalf of the consortium. It in consultation with the company decided the allocation of the limit to various member banks. The allocation of any member bank cannot be higher than the limit sanctioned by it. The drawing power for it fund based limits out of the consortium are determined on the basis of the stock statement submitted by the company. NTPC is required to submit the stock statement to all member banks in consortium for every month.

FINANCIAL FOLLOW UP REPORTS ( FFRI & FFRII): Every quarterly and half quarterly intervals, the firm submits Financial Follow Up Reports I and II. FFR I is an extract of the balance sheet. In this report, the company is required to submit the details of sales, current assets and current liabilities for the quarter and the estimates for the current year. FFR II the
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company is required to prepare P&L, B/S and Cash Flow in a different format. The information is to be provided for the last year (actual), current year half yearly results (actual) and the estimates for the next year.

SHORT TERM FINANCING Other than the investment in current assets, the firm also has to be concerned with short-term to long-term debt as this plays a very important role in determining the amount of risk undertaken by the firm. That is , the firm not only has to be concerned about current assets but also the sources through which they are financed. A firm before financing in either of the two, has to take into consideration various aspects. While short term might seem the ideal way to finance your assets than the long term due to shorter maturity period and also less of costs are involved, there is an inherent risk in short term financing due to fluctuating interest rates and due to the reason that the firm might be unable to reay the amount in a shorter span of time. SECURED LOANS SHORT TERM LONG TERM TOTAL %SHORT TERM 2006 3849 0 3849 100 2005 4991.28 530.07 5521.35 90.4 2004 6903.7 0 6903.7 100 2003 4987.52 3461.36 8448.88 59.03

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Under secured loan cash credit, along with non fund based facilities, foreign currency term loan from banks are secured by way of hypothecation of stock-intrade, book debts as first charge and by way of second chanrge on all the immovable and movable assets of the parent company. Term loan in Indian rupees from a bank is subject to a prior charge in favour of companys bankers on book debts and stock in trade for working capital facilities. UNSECURED LOANS SHORT TERM LONG TERM TOTAL % SHORT TERM 2008 15104 11 15115 99.93 2007 2593.39 17 2610.39 99.348 2006 63.94 169.51 233.45 27.38 2005 76.84 3261.42 3338.26 2.3

Here NTPC has a major portion of their financing done through short term financing than long term financing. The preference of short term financing to long term as such is not the part of any policy employed by the firm but it was due to the reason that the interest rates in short term were more investor friendly and the cost involved in them were also low. At present, we can see that the firm is moving more towards long term financing as the interest terms in the long term has reduced compared to the short term.

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YEAR- END COMMERCIAL PAPERS PARTICULARS COMMERCIAL PAPERS The credit rating by ICRA continued at A1+indicating highest safety to companys commercial paper program of Rs. 75 Crores. It acts as an effective tool in reducing the interst cost and is used for financing inventories and other receivables. As and when the firm issues commercial papers, it sends a letter to the leader of the consortium, i.e., SBI to reduce from the fund based limits the amount it has issued in the form of the commercial papers. Suppose the firm issues 30 Crores as commercial papers and the fund based limits are say 115 Crores. Then firm sends a letter to SBI to reduce the existing fund based limits from 115 to 85 Crores. 2008 4000 2007 2500 2006 --2005 3000

In terms of desirability, the commercial papers are cheaper and advantageous to the firm compared to the consortium financing. The main advantage being the interest rate which is lower than the bank rates existing under consortium financing. But the firm depends on both and for working capital financing, it is dependent on the banks for funds sich as working capital demand loans and cash credits. There is no point in the firm not making use of the fund based

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limits in the consortium banking as their commercial papers are restricted to 75 Crores.

MERITS OF COMMERCIAL PAPERS: It is an alternative source of raising short-term finance, and proves to be handy during periods of tight bank credit.

It is a cheaper source of finance in comparison to the bank credit.

DEMERITS OF COMMERCIAL PAPERS: It is an impersonal method of financing.

It is always available to the financially sound and highest rated companies.

The amount of lonable funds available in the commercial paper market is limited to the amount of excess liquidity of the various purchasers of commercial paper.

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ANALYSIS
DATA ANALYSIS
CURRENT RATIO
3 2 .5 2 1 .5 1 0 .5 0 2 6 7 00 -0 2 7 00 -08 20 8-09 0

2.66 2 .21 2 3 .0

Inference: The above diagram shows that in the year 2006-07 is 2.66%, in year 2007-08 is 2.21and in year 2008-09 is 2.03, These ratios of liquidity indicate the over capitalization of current assets.

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QUICK RATIO

1 .8 1 .6 1 .4 1 .2 1 0 .8 0 .6 0 .4 0 .2 0

1.68 1 .44 1.3 6

20 6-07 0

2007 8 -0

2 -09 008

Inference: The above data shows the quick ratio of the company in year 2006-07, 2007-08 and 2008-09 is 1.68%, 1.44% and 1.36% respectfully. The ratios show the company enjoys the high liquidity position; it is good however too much liquidity is not beneficial for the company

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CASH RATIO

0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0

0.36 0.27

0.36

2006-07

2007-08

2008-09

Inference: In the above data it shows that the cash ratio of company is in 2006, 2007 and 2008 is 0.36, 0.27 and 0.36 respectfully .It is below the standard and it is not good for company.

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WORKING CAPITAL RATIO

0.8 0.8

0.8 0.798 0.796 0.794 0.792 0.79 0.788 0.786 0.784

0.79

2006-07

2007-08

2008-09

Inference:

In the above data it shows that the Working capital ratio of company is in 2006, 2007 and 2008 is 0.80, 0.79 and 0.80 respectfully. Ratio shows the liquidity position of the company is good.

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TOTAL CAPITAL TURNOVER

5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 4.77 3.89 2.73

2006-07

2007-08

2008-09

Inferences:

In the above graph it shows that the Gross Profit ratio of company is in 2006, 2007 and 2008 is 2.73, 3.89 and 4.77 times respectfully .It shows that the performance of business is better and all the available resources are well utilized.

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WORKING CAPITAL TURNOVER

6 5 4 3 2 1 0 2006-07 2007-08 2008-09 3.26 4.92 5.96

Inferences:

In the above graph it shows that the working capital turnover of company is in 2006, 2007 and 2008 is 3.26, 4.92 and 5.96 respectfully .It shows the better utilization of the working capital incurred in the operation.

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FIXED ASSETS TURNOVER

25 20 15 10 5 0 16.76 18.55

23.88

2006-07

2007-08

2008-09

Inferences:

In the above graph it shows that the Fixed Assets turnover of company is in 2006, 2007 and 2008 is 16.76, 18.55 and 23.88 times respectfully .It shows the better utilization of the Fixed Assets, which incurred in the operation.

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DEBATORS TURNOVER

7 6 5 4 3 2 1 0 2006-07 2007-08 4.1 5.22

6.39

2008-09

Inferences: In the above graph it shows that the Debtors Turnover of company is in 2006, 2007 and 2008 is 4.18, 5.22 and 6.39 times respectfully. It shows that the collection policy of the company is too liberal.

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GROSS PROFIT RATIO

4 0 72

39

2 -0 006 7

2 07 0 -08

2 8-09 00

Interfaces: In the above graph it shows that the Gross Profit ratio of company is in 2006, 2007 and 2008 is 40%, 39% and 72% respectfully. It shows good sign, which is 72%. This indicates the efficiency in stock control and an adequacy of the selling price.

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CREDITORS TURNOVER

3.66

2.79

3.2

2006-07

2007-08

2008-09

Inferences:

In the above graph it shows that the Gross Profit ratio of company is in 2006, 2007 and 2008 is 2.79, 3.20 and 3.60 respectfully. It shows good sign, which is in increasing trend, which shows that the company enjoys good credit in market.

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NET PROFIT RATIO

3% 5%

3%

2006-07

2007-08

2008-09

Inferences:

In the above graph it shows that the Gross Profit ratio of company is in 2006, 2007 and 2008 is 3%, 3% and 5% respectfully .It is the increasing in trend the operation expenses, is in desired parameters.

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LABOUR COST RATIO

3 5

2006-07

2007-08

2008-09

Inferences:

In the above graph it shows that the Gross Profit ratio of company is in 2006, 2007 and 2008 is 3%, 3% and 5% respectfully .It is the increasing in trend, which is not good for the company future.

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LIMITATION

The study is limited to three years only. Price level changes are not considered. Time is short for deep research. Separate records of the all units are not available. No comparison made with other firms ratio while during the study period and making conclusion time. The readjusted and regroup figure slightly affects the ratio figures.

Study is limited with the one unit of NTPC.

The data is used in the project have been taken from annual report only. Hence, grouping and sub grouping and annuliasation of data may slightly affect the results.

98

99

CONCLUSION If these ratios are properly followed the capital investment in the current assets is above the standard ratio and the cash position of the company would substantially improve.

The Turnover Ratio give good sign of the success but in the debtors turnover ratio shows that company provided more credit period of payment to its customer, which is not beneficial for it.

The Profitability Ratio all indicates good sign but increase in the operating and financial expenses of the company, which is not good sign for the company future.

Return on Investment ratio is satisfactory, it indicate the overall performance of the company is good and they enjoy a good position of profitability.

100

RECOMMENDATIONS S UG G E S T I O N Although NTPC, DADRI has satisfied the ratios. The following are the suggestion being made out by me as observed during study of the performance through ratio analysis: Company should increase its sales of all the production units with increase in the sales of the company that can be able to increase its financial position. Company should decrease the operating expenses to increase its operating profit. Maximize the production capacity. Maintain the amount of current sales level and try to increase it. Maximize the utilization of fixed assets and working capital. All other management, personal and administrative suggestion to be incorporated. To follow the strict credit collection policy. Reduce the current assets and quick assets ratio to maintain the standard ratio. Cash ratio performance is poor. So make policies to improve it.

101

 Return on investment is in satisfactory position and they try to maintain it in future. Try to start those companies, which are closed due to nonavailability of funds. Try to best utilization of the available resources. Try to maintain the standard ratio in the financial ratios.

102

BIBLOGRAPHY
M.Y.KHAN AND P.K. FINANCIAL MANAGEMENT (Tata McGraw- Hill Publishing Company Limited, NEW DELHI) LK NARANG AND SP JAIN FINANCIAL MANAGEMENT (KALYANI PUBLISHERS,NEW DELHI),2000. ANNUAL REPORTS OF THE NTPC. Financial Management I.M Pandey Inventory Record Accuracy Roger B. Brooks & Larry W. Wilson Management Accounting N. Vinayakam, I.B. Sinha. www.ntpc.com www.ntpc.in www.google.com

103

ANNEXURE
FINANCIAL STATEMENTS FOR NTPC LTD. Last 4 year Balance Sheet: Although debt as a percent of total capital increased at NTPC Ltd. over the last fiscal year to 21.53%, it is still in-line with the IT Services industry's norm. Additionally, even though there are not enough liquid assets to satisfy current obligations, Operating Profits are more than adequate to service the debt. Accounts Receivable are among the industry's worst with 28.44 days worth of sales outstanding. This implies that revenues are not being collected in an efficient manner. Last, inventories seem to be well managed as the Inventory Processing Period is typical for the industry, at 21.29 days.
Currency in Millions of Indian Rupees

Jun 30 2004
Restate d

Jun 30 2006
Reclassified

Jun 30 2007

Assets Cash and Equivalents

1,452.3

2,149.2

1,976.5

Short-Term Investments

114.8

3,137.7

2,939.9

TOTAL CASH AND SHORT TERM INVESTMENT S

1,567.1

5,286.9

4,916.4

Accounts Receivable

4,390.4

7,691.4

10,520.0

Other Receivables

228.2

468.1

593.4

104

TOTAL RECEIVABLE S

4,618.7

8,159.5

11,113.4

Inventory

2,804.2

4,696.1

7,918.8

Prepaid Expenses

107.0

146.0

287.8

Other Current Assets

23.8

86.8

84.8

TOTAL CURRENT ASSETS

9,120.8

18,375.3

24,321.2

Gross Property Plant and Equipment

1,406.1

1,731.9

2,431.0

Accumulated Depreciation

-749.1

-852.4

-966.5

NET PROPERTY PLANT AND EQUIPMENT

657.0

879.5

1,464.5

Goodwill

--

0.2

0.8

Long-Term Investments

2,190.9

--

--

Deferred Tax Assets, Long Term

59.1

--

--

Other Intangibles

--

32.4

30.9

Other LongTerm Assets

--

71.8

16.0

TOTAL ASSETS

12,027.9

19,359.2

25,833.4

105

LIABILITIES & EQUITY Accounts Payable

3,390.6

5,964.8

8,298.5

Accrued Expenses

100.4

140.4

209.8

Short-Term Borrowings

--

784.9

1,182.4

Current Portion of Long-Term Debt/Capital Lease

690.4

0.4

892.5

Current Income Taxes Payable

30.1

77.4

252.8

Other Current Liabilities, Total

2,914.6

4,687.9

5,216.6

Unearned Revenue, Current

536.4

557.9

775.2

TOTAL CURRENT LIABILITIES

7,662.6

12,213.7

16,827.8

Long-Term Debt

15.8

60.1

284.0

Deferred Tax Liability NonCurrent

109.0

107.6

124.8

Other NonCurrent Liabilities

13.9

1.0

--

TOTAL LIABILITIES

7,801.3

12,382.4

17,236.6

106

Common Stock

328.9

337.5

338.3

Additional Paid in Capital

673.9

1,044.5

1,087.9

Retained Earnings

3,193.2

5,565.2

7,141.4

Comprehensiv e Income and Other

30.6

29.6

29.2

TOTAL COMMON EQUITY

4,226.6

6,976.8

8,596.8

TOTAL EQUITY

4,226.6

6,976.8

8,596.8

TOTAL LIABILITIES AND EQUITY

12,027.9

19,359.2

25,833.4

107

FINANCIAL STATEMENTS FOR NTPC LTD. Last 4 year Cash Flow Statement: In 2007, cash reserves at NTPC Ltd. fell by 172.7M. However, as a percent of revenues, this change was similar to the industry median. By looking at the Cash Flow Statement, analysts can easily see the sources and use of cash generated throughout the year.

Curren cy in Million s of Indian Rupee s

A s o f :

Jun 30 2004
Restat ed

Jun 30 2005
Restate d

Jun 30 2006
Reclassifie d

Jun 30 2007

NET INCOME

1,751.1

2,277.0

2,803.6

3,15 9.5

Depreciation & Amortization

180.1

152.4

124.3

144. 0

Amortization of Goodwill and Intangible Assets

--

--

--

4.1

DEPRECIATION & AMORTIZATION, TOTAL

180.1

152.4

124.3

148. 1

(Gain) Loss from Sale of Asset

-0.4

-1.6

0.5

0.6

(Gain) Loss on Sale of Investment

-79.6

-84.9

-61.5

-55.2

Asset Writedown & Restructuring Costs

0.0

0.5

--

--

Other Operating Activities

292.8

31.2

79.6

271. 8

108

Provision & Write-off of Bad Debts

14.8

14.4

7.2

9.2

Change in Accounts Receivable

-1,593.4

-1,993.4

-1,724.7

3,15 8.8

Change in Inventories

-423.3

-689.7

-1,202.2

3,22 2.7

Change in Accounts Payable

1,471.8

1,561.6

2,759.5

3,11 2.2

CASH FROM OPERATIONS

1,614.0

1,267.5

2,786.3

264. 7

Capital Expenditure

-180.7

-267.8

-424.3

674. 5

Sale of Property, Plant, and Equipment

3.5

10.7

80.3

1.6

Investments in Marketable & Equity Securities

73.7

841.4

-1,453.6

289. 0

CASH FROM INVESTING

30.8

622.4

-1,683.3

231. 9

Short-Term Debt Issued

41.1

169.5

--

--

Long-Term Debt Issued

200.8

231.3

200.5

1,83 7.2

TOTAL DEBT ISSUED

241.9

400.8

200.5

1,83 7.2

Short Term Debt Repaid

--

--

-172.3

-74.7

Long Term Debt Repaid

-707.9

-302.7

--

250. 0

109

TOTAL DEBT REPAID

-707.9

-302.7

-172.3

324. 7

Issuance of Common Stock

283.3

215.2

163.9

44.2

Common Dividends Paid

-866.2

-1,047.4

-1,526.6

1,54 6.1

TOTAL DIVIDEND PAID

-866.2

-1,047.4

-1,526.6

1,54 6.1

Other Financing Activities

-98.9

-95.4

-132.0

216. 1

CASH FROM FINANCING

-1,147.8

-829.5

-1,466.5

205. 5

NET CHANGE IN CASH

497.1

1,060.4

-363.5

172. 7

110

FINANCIAL STATEMENTS FOR NTPC LTD. Last 4 year Income Statement: Year over year, NTPC Ltd. has seen revenues remain relatively flat (113.7B to 116.9B), though the company was able to grow net income from 2.8B to 3.2B. A reduction in the percentage of sales devoted to cost of goods sold from 93.21% to 92.53% was a key component in the bottom line growth in the face of flat revenues.

Currenc y in Millions of Indian Rupees

A s of:

Jun 30 2004
Restate d

Jun 30 2005
Restated

Jun 30 2006
Reclassified

Jun 30 2007

Revenues

43,064.4

77,478.9

113,683.1

116,853. 0

Other Revenues

--

-35.7

61.6

63.8

TOTAL REVENUES

43,064.4

77,443.2

113,744.7

116,916. 8

Cost of Goods Sold

38,701.3

71,496.1

105,964.4

108,121. 4

GROSS PROFIT

4,363.1

5,947.1

7,780.3

8,795.4

Selling General & Admin Expenses, Total

2,268.8

3,305.9

3,764.3

4,527.1

Depreciation & Amortization, Total

180.6

152.4

124.3

148.1

Other Operating Expenses

--

-84.0

84.8

91.2

111

OTHER OPERATING EXPENSES, TOTAL

2,449.4

3,374.3

3,973.4

4,766.4

OPERATING INCOME

1,913.7

2,572.8

3,806.9

4,029.0

Interest Expense

-82.8

-77.6

-132.6

-214.6

223.8 Interest and Investment Income 132.1 146.1 208.0

NET INTEREST EXPENSE

49.4

68.5

75.4

9.2

Currency Exchange Gains (Loss)

37.9

145.0

-144.4

189.6

Other Non-Operating Income (Expenses)

32.0

--

--

--

EBT, EXCLUDING UNUSUAL ITEMS

2,033.0

2,786.3

3,737.9

4,227.8

Gain (Loss) on Sale of Investments

79.6

85.0

61.5

55.2

Gain (Loss) on Sale of Assets

0.4

1.6

-0.5

-0.6

Other Unusual Items, Total

2.3

87.2

4.0

4.7

Insurance Settlements

2.3

3.7

4.0

4.7

Other Unusual Items

--

84.0

--

--

EBT, INCLUDING UNUSUAL ITEMS

2,115.1

2,960.1

3,802.9

4,287.1

Income Tax Expense

364.0

683.1

999.3

1,127.6

Earnings from Continuing Operations

1,751.1

2,277.0

2,803.6

3,159.5

112

NET INCOME

1,751.1

2,277.0

2,803.6

3,159.5

NET INCOME TO COMMON INCLUDING EXTRA ITEMS

1,751.1

2,277.0

2,803.6

3,159.5

NET INCOME TO COMMON EXCLUDING EXTRA ITEMS

1,751.1

2,277.0

2,803.6

3,159.5

113