Professional Documents
Culture Documents
partial fulfillment of the requirement for the degree Of Master of Business Administration
(2011-13)
GUIDE CERTIFICATE
This is to certify that SANJEEV KUMAR from M.B.A. 3 rd semester bearing university roll number -611012023 has completed his summer training project under my guidance.
Acknowledgement
Modern organizations are highly complex ad dynamics systems. They operate under very turbulent social economic and political environment. They are required to reconcile several incompatible goals. Conflicting roles and divergent interest they are also fraught with the use risk and uncertainties, hence tactful management of such organization to plan to execute guide, coordination and control the performance of people to achieve predetermined goals. Management has to keep the organization vibrant moving and in equilibrium. It has to achieve goal which themselves are changing it is therefore a problem highly complex and ticklish. This information will be asset to the manager in making effective decision. This research is used to acquire to analyze information and to make suggestion to management as to how marketing problems should be solved. The marketing research is the process which links to individuals through information in important part of the curriculum of MBA programme is project taken by the students to institute under which he or she is studying, after completion of the second semester of the programme. The objective of this project is to enable the students to understand the application of the academics in the real life. I am fully confident that this project report will be extremely useful to the management. We would also like to thank the faculty members and the staff members of HCL Info systems Ltd. for their kind support and help during the project.
SANJEEV KUMAR
TABLE OF CONTENTS
i ii
Page No.
Introduction Review of literature Formulate hypothesis Research methodology Conceptual framework Concluding analysis Limitation of the study Suggestion and recommendation Bibliography Appendices
LIST OF TABLES
Table No. 1.1 1.1 1.1 1.1 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 1.13 1.14 1.15
Working capital cycle Working capital Carrying cost Raw material Work in progress Finished good Operating cycle Raw material consumption Cash current liability Receivable management Secured loans Unsecured loans Commercial paper
CHAPTER-1
INTRODUCTION OF THE PROJECT
The project undertaken is on WORKING CAPITAL MANAGEMENT IN HCL INFOSYSTEMS LIMITED. 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 HCL Infosystems.
INTRODUCTION OF HCL
Hindustan Computers Limited, also known as HCL Enterprise, is one of India's
largest electronics, computing and information technology company. Based in Noida, near Delhi, the company comprises two publicly listed Indian companies, HCL Technologies and HCL Infosystems. HCL was founded in 1976 by Shiv Nadar, Ajay Choudhary and four of their colleagues. HCL was focused on addressing the IT hardware market in India for the first two decades of its existence with some sporadic activity in the global market. In 1981, HCL seeded a company focused on addressing the computer training industry, NIIT, though it has currently divested its stake in the company. In 1991, HP took minority stake in the company (26%) and the company was known as HCL HP for the five years of the joint venture. On
termination of the joint venture in 1996, HCL became an enterprise which comprises HCL Technologies (to address the global IT services market) and HCL Infosystems (to address the Indian and APAC IT hardware market). HCL has since then operated as a holding company.
www.hcl.in
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services. HCL Infosystems specializes in IT hardware (PC's and servers, as well as networking, imaging and communications products), and system integration services serving the domestic Indian market. In addition to its consumer products, the company provides commercial IT products, facilities management, network services, and IT security services for clients in such industries as government, financial services, and education. HCL Corporation owns significant stakes in HCL Infosystems (about 44%) and sister company HCL Technologies. HCL Infosystems Ltd, a listed subsidiary of HCL, is an India-based hardware and systems integrator. It claims a presence in 170 locations and 300 service centre. Its manufacturing facilities are based in Chennai, Pondicherry and Uttarakhand .Its headquarters is in Noida. HCL Peripherals (A Unit of HCL Infosystems Limited) Founded in the year 1983, has established itself as a leading manufacturer of computer peripherals in India, encompassing Display Products, Thin Client solutions, Information and Interactive Kiosks. HCL Peripherals has two Manufacturing facilities, one in Pondicherry (Electronics) and the other in Chennai (Mechanical) .The Company has been accredited with ISO 9001:2000, ISO 14001, TS 16949 and ISO 13485.
HISTORY
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HCL Infosystems Ltd is one of the pioneers in the Indian IT market, with its origins in 1976. For over quarter of a century, we have developed and implemented solutions for multiple market segments, across a range of technologies in India. We have been in the forefront in introducing new technologies and solutions. The highlights of the HCL saga are summarized below:
Y E AR H I G H L I G H T S - Foundation of the Company laid - Introduces microcomputer-based programmable calculators with wide acceptance in the scientific / education community - Launch of the first microcomputer-based commercial computer with a ROM -based Basic interpreter - Unavailability of programming skills with customers results in HCL developing bespoke applications for their customers - Formation of Far East Computers Ltd., a pioneer in the Singapore IT market, for SI (System Integration) solutions - HCL launches an aggressive advertisement campaign with the theme ' even a typist can operate' to make the usage of computers popular in the SME (Small & Medium Enterprises) segment. This proposition involved menu-based applications for the first time, to increase ease of operations. The response to the advertisement was phenomenal. -HCL develops special program generators to speed up the development of applications - Zonal offices of banks and general insurance companies adopt computerization - Purchase specifications demand the availability of RDBMS products on the supplied solution (Unify, Oracle). HCL arranges for such products to be ported to its platform. - HCL assists customers to migrate from flat-file based systems to RDBMS - HCL enters into a joint venture with Hewlett Packard - HP assists HCL to introduce new services: Systems Integration, IT consulting, packaged support services ( basic line, team line ) - HCL acquires and executes the first offshore project from IBM Thailand - HCL sets up core group to define software development methodologies - Starts execution of Information System Planning projects
1976
1977
1980
1983
1986
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- Execution projects for Germany and Australia - Begins Help desk services 1996 - Sets up the STP ( Software Technology Park ) at Chennai to execute software projects for international customers - Becomes national integration partner for SAP - Kolkata and Noida STPs set up - HCL buys back HP stake in HCL Hewlett Packard - Chennai and Coimbatore development facilities get ISO 9001 certification - Acquires and sets up fully owned subsidiaries in USA and UK - Sets up fully owned subsidiary in Australia - HCL ties up with Broadvision as an integration partner - Sets up fully owned subsidiary in Australia - Chennai and Coimbatore development facilities get SEI Level 4 certification - Bags Award for Top PC Vendor In India - Becomes the 1st IT Company to be recommended for latest version of ISO 9001 : 2000 - Bags MAIT's Award for Business Excellence - Rated as No. 1 IT Group in India -Launched Pentium IV PCs at below Rs 40,000 -IDC rated HCL Infosystems as No. 1 Desktop PC Company of 2001 -Declared as Top PC Vendor by Dataquest -HCL Infosystems & Sun Microsystems enters into a Enterprise Distribution Agreement - Realigns businesses, increasing focus on domestic IT, Communications & Imaging products, solutions & related services - Became the first vendor to register sales of 50,000 PCs in a quarter - First Indian company to be numerous Uno in the commercial PC market - Enters into partnership with AMD - Launched Home PC for Rs 19,999 - 1st to announce PC price cut in India, post duty reduction, offers Ezeebee at Rs. 17990 - Maintains No.1 position in the Desktop PC segment for year 2003 - Becomes the 1st company to cross 1 lac unit milestone in the Indian Desktop PC market - Partners with Union Bank to make PCs more affordable, introduces lowest ever EMI for PC in India - Registers a market share of 13.7% to become No.1 Desktop PC company for
2000
2001
2002
2003
2004
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year 2004 - Crosses the landmark of $ 1 billion in revenue in just nine months - Launch of HCL PC for India, a fully functional PC priced at Rs.9,990/- Rated as the No.1 Desktop PC company by IDC India -Dataquest - 'Best Employer 2005' with five star ratings by IDC India -Dataquest. - 'The Most Customer Responsive Company 2005' -IT Hardware Category by The Economic Times -Avaya Global Connect. -Top 50 fastest growing Technology Companies in India' & 'Top 500 fastest Growing Technology Companies in Asia Pacific' by 'Deloitte & Touche'. by 'Deloitte & Touche' -'7th IETE -Corporate Award 2005' for performance excellence in the field of Computers & Telecommunication Systems by IETE. -India 's 'No.1 vendor' for sales of A3 size Toshiba Multi Functional Devices for the year '04 -'05 by IDC. -Toshiba 'Super Award 2005 towards business excellence in distribution of Toshiba Multifunctional products, -Strategic Partners in Excellence' Award by In focus Corporation for projectors. -'Most valued Business Partner' Award for projectors by In focus Corporation in 2005 - 75, 000+ machines produced in a single month - HCL Infosystems in partnership with Toshiba expands its retail presence in India by unveiling 'shop Toshiba' - HCL Infosystems & Nokia announce a long term distribution strategy - HCL the leader in Desktops PCs unveils India's first segment specific range of notebooks brand - 'HCL Laptops' - IDBI selects HCL as SI partner for 100 branches ICT infrastructure rollout - HCL Infosystems showcases Computer Solutions for the Rural Markets in India - HCL Support wins the DQ Channels-2006 GOLD Award for Best After Sales Service on a nationwide customer satisfaction survey conducted by IDC - HCL Infosystems First in India to Launch the New Generation of High Performance Server Platforms Powered by Intel Dual - Core Xeon 5000 Processor - HCL Forms a Strategic Partnership with APPLE to provide Sales & Service Support for iPods in India
2005
2006
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CHAPTER-2
REVIEW OF LITERATURE
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CHAPTER-3
NEED, SCOPE AND OBJECTIVE OF THE STUDY
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This will show the liquidity position of the company and also how do they maintain a particular liquidity position.
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FORMULATE HYPOTHESIS
Types of Hypothesis
1. Null Hypothesis 2. Alternative Hypothesis 3. Working Hypothesis
Null Hypothesis
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There is no difference between M one and M two. In which hypothesis tested for possible rejection is known as null hypothesis.
Alternative Hypothesis
It is denoted by Ha. It is desirable to formulate several hypothesis in beginning and then to select one that explain the phenomena.
Working Hypothesis
It is hypothesis which is provisionally adopted to explain certain facts and to guide a researcher in the investigation of other. I used null hypothesis for preparing my research report working capital management of HCL Infosystems LTD.
CHAPTER-4
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 HCL Infosystems, what are the different ways in which the financing of working capital is done in the company.
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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.
DATA COLLECTION
Primary Data: The information is collected through the primary sources like: Talking information with the employees of the department.
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Getting information by observations e.g. in manufacturing processes. Discussion with the head of the department.
Secondary Data: The data is collected through the secondary sources like:
Annual Reports of the company. Magazines, Reports of the company. Policy documents of various departments. Internet
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Introduction Significance of working capital management Classification of working capital Types of working capital needs Financing of working capital Factors determining working capital requirements Working capital cycle Sources of working capital Working capital position Inventory management Cash management Receivables management Financing current assets Working capital & short-term financing
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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.
There are two major concepts of working capital: Gross working capital Net working capital
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CLASSIFICATION OF WORKING CAPITAL Working capital can be classified as follows: On the basis of time On the basis of concept
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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.
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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.
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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There are many factors that determine working capital needs of an enterprise. Some of these factors are explained below:
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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.
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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. 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.
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HCL Infosystems 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. Society General 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 commercial paper include banks, insurance companies, unit trusts, and companies with surplus funds to invest for a short period with minimum risk. HCL issues Commercial Papers and had 4000 commercial papers in the year 2011.
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PARTICULARS CURRENT ASSETS CURRENT LIABILITES % CURRENT ASSETS INCREASE %CURRENT LIABILITES INCREASE
The 16.12% increase in Net Current assets despite of the fact that there has been an increase in the Current Assets by 23.84% and increase in Current Liability has been by 29.57% over that of the previous year has to be attributed to the fact that in 2009, the company showed such a high increase in CA, that it is still being offset. This is an indication as to the expanding operations of the firm. HCL has increased its current assets in order to meet the increasing sales. The firms level of liquidity being high, we need a check on whether it affects the return on assets. In 2011 there has been a rapid expansion in current assets (938.21) which have been off set to an extent by current liabilities (371.89%). There has been a marginal increase in current assets of 2012 (15.6%) and in case of liabilities there has been a significant increase of 79.39%
INVENTORY MANAGEMENT
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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. Finished Goods: Inventories are those completely manufactured products which are ready for sale. Stocks of raw materials and work-in-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.
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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:
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.
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
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inventory size. The economic size of inventory would thus depend on trade-off between carrying costs and ordering cost.
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 HCL retail expansion. HCL 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 HCL sign ages and more are in the pipeline 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.
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JIT: The relevance of JIT in HCL 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.
Conversion Periods
Raw Material
Particulars
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2012
2011
2010
Raw Material Consumption Raw Material Consumption/day Raw Material Inventory Raw Material Holding Days
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/day Work in progress inventory WIP Holding days 2012 191911 525.78 689.5 1.31 2011 159651.19 437.4 827.52 1.89 2010 113500.33 310.95 679.455 2.19
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
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Particulars Cost of goods sold Cost of goods sold/day Finished goods inventory Finished 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. HCL 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 Operating cycle 2012 38 70 108 22 86 2011 42 63 105 23 82 2010 45 66 111 17 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
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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 Particulars Imported Indigenous % Imports 2012 92007 29070 75.99 2011 70784.2 7 27187.0 4 72.25 2010 42129.63 15645.51 72.92
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 HCL 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.
CASH MANAGEMENT
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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 overstretch the financial resources of the business. This is called overtrading.
CASH MANAGEMENT IN HCL INFOSYSTEMS: The cash management system followed by the HCL Infosystems 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.
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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. 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.
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Cash-Current Liability Particulars Absolute Liquid Ratio 2012 0.24:1 2011 0.31:1 2010 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 securities may increase the liquidity position but not the revenue or profit earning capacity of the firm.
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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. 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.
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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 judgment.
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.
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HERE ARE FEW WAYS IN COLLECTING MONEY FROM DEBTORS: Develop appropriate procedures for handling late payments. 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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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 HCL, the collection period for the firm is 70 days.
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 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.
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2012 16.44 22
2011 15.68 23
2010 21.29 17
2009 21.14 16
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)
Spontaneous financing:
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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 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.
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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. 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.
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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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-in-trade, 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.
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Here HCL 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.
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 interest 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.
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 such as working capital demand loans and cash credits. There is no point in the firm not making use of the fund based limits in the consortium banking as their commercial papers are restricted to 75 Crores.
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CHAPTER-6
SUGGESTIONS AND RECOMMENDATIONS
The management of working capital plays a vital role in running of a successful business. So, things should go with a proper understanding for managing cash, receivables and inventory. HCL Infosystems is managing its working capital in a good manner, but still there is some scope for improvement in its management. This can help the company in raising its profit level by making less investment in accounts receivables and stocks etc. This will ultimately improve the efficiency of its operations. Following are few recommendations given to the company in achieving its desired objectives: The business runs successfully with adequate amount of the working capital but the company should see to it that the cash should not be tied up in excessive amount of working capital. Though the present collection system is near perfect, the company as due to the increasing sales should adopt more effective measures so as to counter the threat of bad debts. The over purchasing function should be avoided as it could lead to liquidity problems. The investment of cash in marketable securities should be increased, as it is very profitable for the company.
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Holding of excessive and insufficient stock must be avoided as it creates a burden on the cash resources of a business and results in lost sales, delays for customers, etc respectively.
CHAPTER-7
BIBLIOGRAPHY
Following sources have been sought for the preparation of this report:
Corporate Intranet Financial Statements (Annual Reports) Direct interaction with the employees of the company Internet ----www.hclinfosystems.in Textbooks on financial management I.M.Pandey Khan and Jain Prasanna Chandra HCL TECHNOLOGIES LIMITED
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APPENDICES
CONSOLIDATED BALANCE SHEETS (Thousands of US Dollars except per share data and as stated otherwise)
Current assets
$88,049
$108,154
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Short term deposit with banks Restricted cash Accounts receivables, net of allowances Unbilled revenue Investment securities, available for sale Due from related parties Inventories Employee receivables Deferred income taxes Other current assets Total current assets Employee receivables Deferred income taxes Investment securities, held to maturity Investments in affiliates Property and equipment, net Intangible assets, net Goodwill Other assets Total assets
73,295 645 265,445 33,933 396,610 2,003 11,074 9,008 21,948 146,275 1,048,285 870 7,690 2,946 2,356 257,606 8,011 189,857 34,738 $1,552,359
125,505 936 364,303 72,994 335,564 2,815 17,668 13,958 13,384 156,520 1,211,801 304 70,027 2,788 2,354 309,453 8,472 214,246 47,323 1,866,768
HCL TECHNOLOGIES LIMITED CONSOLIDATED BALANCE SHEETS (Thousands of US Dollars except per share data and as stated otherwise)
As of June 30,
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2011
Current liabilities
Current portion of capital lease obligations Accounts payable Due to related parties Short term loans Accrued employee costs Deferred revenue Deferred income taxes Taxes payable Other current liabilities Total current liabilities Long term debt Capital lease obligations, excluding current portion Deferred income taxes Other liabilities Total liabilities Commitments and Contingencies (refer note 26)
$2,029 28,264 2,944 8,681 39,016 22,133 2,208 76,611 104,207 286,093 8,123 54 23,544 317,814
$2,393 43,607 1,446 4,962 63,953 45,074 1,255 128,187 222,318 513,195 1,390 4,040 3,272 131,138 653,035
Minority interest
3,566
1,313
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Issued and outstanding 663,683,116 and 666,340,272 Shares as of June 30, 2007 and 2008 respectively Additional paid-in capital Share application money pending allotment Retained earnings Accumulated other comprehensive income / (loss) Total stockholders' equity Total liabilities, minority interest and stockholders' equity $1,552,359 $1,866,768 33,036 516,466 581,204 100,273 1,230,979 33,166 548,072 397 682,627 (51,842) 1,212,420
The accompanying notes are an integral part of these consolidated financial statements.
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decreases from $3,566 to $1,313. The total stockholders equity decreases from $1,230,979 to $1,212,420.
2011 $1,389,577
2012 $1,878,865
Cost of revenues (exclusive of depreciation and amortization shown separately below) Selling, general and administrative expenses
622,915
874,915
1,163,144
151,837
230,265
323,573
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Depreciation and amortization Income from operations Other income, net Income before income taxes, share of equity in Earnings of affiliates and minority interest Income taxes Income before share of equity in earnings of affiliates and minority interest Equity in earnings/(losses) of affiliates Minority interest Net income
13,403
32,939
29,453
Earnings per equity share Basic Diluted $0.22 $0.21 $0.45 $0.43 $0.39 $0.38
Weighted average number of equity shares used in computing earnings per equity share Basic Diluted 642,788,960 684,311,714 652,626,782 664,424,330 675,290,388 682,748,596
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The accompanying notes are an integral part of these consolidated financial statements.
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