Comparative Analysis of Working Capital Management

of Public and Private Sector of Steel Industry in India

Lakshay Kataria
11067234080
ABSTRACT
Working Capital Management has its impact on liquidity
as well profitability. The impact on effectiveness and
profitability of working capital is tried to be found out by
analyzing various working capital ratios. For this study,
data from 2009 to 2013 of two major companies in public
and private sector of steel industry i.e., Steel Authority of
India and Jindal Steel and Power Limited., is taken. It is
also tried to find out correlation of working capital with
their liquidity, efficiency and profitability. Multiple
regression tests confirm a lower degree of association
between the working capital management and
profitability.

OBJECTIVE OF THE STUDY
The main objective of the present study is to examine the overall
efficiency of the management of working capital in terms of short-
term liquidity in selected private sector steel companies. More
specifically it seeks to dwells upon mainly the following issues:
To compare the performance of working capital between Jindal
Steel and Power Limited and Steel Authority of India Ltd.
To compare the liquidity position of JSPL and SAIL and areas of
weaknesses, if any.
To search the liquidity profitability relationship of both the
companies and compare with each other.
To give some suggestions and recommendations for
improvement of the liquidity position.

HYPOTHESES OF THE STUDY
The study has pursued to test the following null hypothesis with
reference to steel industry in India:
1. H0: There is no relationship between working capital
management and profitability.
H1 There is a relationship between working capital
management and profitability
2. H0: There is no significant impact of working capital cycle on
profitability.
H1: There is a significant impact of working capital cycle on
profitability
3. H0: Liquidity position has no impact on profitability.
H1: Liquidity position has a significant impact on profitability.

Method of Data Collection

For the purpose of study only secondary data have been
used. The study is based on the secondary data obtained
from the
Audited balance sheets and profit & loss accounts
Annual reports of the respective companies.
Facts, figures and findings advanced in similar earlier
studies and the government publications are also used to
supplement the secondary data

RESEARCH METHODOLOGY
Sample 2 Steel Manufacturing firms.
Time period 5 years viz. 2009-2013
Data Sources Audited Balance sheets, Annual Reports,
Publications
Data collected Facts and figures required for calculation of
Working Capital Ratios, Working Capital
Cycle and Profitability ratios like Net Profit
Margin and Return on Capital employed.
Research
Methods
For calculating Average Ratios of Industry ,
weighted mean of ratios of 8 major steel
companies have been taken. Weights have
been assigned on the basis of Market
Capitalization of these companies
Statistical
Techniques
A.M., S.D., C.V., multiple correlation and
multiple regression analysis, co-efficient of
determination (R2) and linear regression
equations.
FINDINGS
0
0.5
1
1.5
2
2.5
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
JSPL
INDUSTRY AVERAGE
SAIL
1. Current Ratio
2. Quick Ratio
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
JSPL
Industry Average
SAIL
3. Inventory Turnover Ratio
0
1
2
3
4
5
6
7
8
9
10
Inventory Turnover Ratio
SAIL JSPL
2009 2010 2011 2012 2013
C.V. JSPL = 35.34
S.D. JSPL = 2.12
C.V. SAIL = 31.76
S.D. SAIL = 1.47
4. Debtors Turnover Ratio
14.43
12.46
11.11
10.39
9.71
22.62
14.49
14.09
16.24
12.83
0
5
10
15
20
25
Debtors Turnover Ratio
SAIL JSPL
2009 2010 2011 2012 2013
S.D. SAIL = 1.872351

S.D. JSPL = 3.867962

5. Debt Collection Period
24.95
28.89
32.4
34.65
37.08
15.92
24.84
25.55
22.17
28.06
0
5
10
15
20
25
30
35
40
Debt Collection Period
SAIL JSPL
2009 2010 2011 2012 2013
S.D. SAIL = 4.783809
C.V. SAIL = 15.14151
S.D. JSPL = 4.632296
C.V. JSPL = 19.87428
6. Working Capital Ratios
-10 0 10 20 30 40 50 60 70 80 90
Current Ratio
Quick Ratio
WC TO SALES
RecievableDays
InventoryDays
PayableDays
Inventory Ratio
Debtor Ratio
Working Capital Ratios
SAIL JSPL
7. Correlation Analysis
JSPL


SAIL

A) Among the Components of Working Capital
Inventory Days Receivable days
Debtor Turnover -0.95* -0.908*
Receivab
le days
WC to
Sales
Inventory
Turnover
Debtor
Turnover
Inventory
Days
.932* .911* -.893* -.903*
B) Components of Working Capital with Profitability (Net Profit Margin)
JSPL
No statistically significant correlation of working capital ratios with Net
Profit Margin was found this case.
SAIL

Inventory
Turnover
Ratio
Current
Ratio
Quick Ratio
NPM .980* .930* .927*
8. Multiple regression analysis
Formula for the purpose of research was:
Profitability = a + b1Xreceivable days + b2Xpayable days + b3Xinventory days
SAIL


JSPL


A) Working Capital Cycle and Profitability (Net Profit Margin)
R R Square Adjusted R
Square
Sig.
.992 .984 .937 .160
R R Square Adjusted R
Square
Sig.
.836 .699 -.205 .662
B) Working Capital Ratios and Liquidity (Return on Capital Employed)
In this study, current ratio, liquid ratio, have been
taken as the explanatory variables and return on
capital employed has been used as the dependent
variable.
SAIL

R R Square Adjusted R
Square
Sig.
.855 .731 .462 .029
Unstandardized
Coefficients
Standardized
Coefficiencts
Sig
(Constant) -7.188 .554
Current Ratio 16.039 .866 .264
Quick Ratio -.268 -.014 .982
JSPL







ROCE= 9.018+ 32.539 CR 20.600 QR.


R R Square Adjusted R
Square
Sig
.992 .985 .970 .038
Unstandardize
d Coefficients
Standardized
Coefficients
Sig
(Constant) 9.018 .015
Current Ratio 32.539 1.005 0.008
Quick Ratio -20.600 -.643 0.020
Conclusions
According to the observation of Working Capital Ratios, JSPL is better off if Debtor
turnover ratios, Inventory turnover ratio, Inventory days, and Receivable days are
considered whereas SAIL is better in Payable days, Working capital to sales ratio,
quick ratio and current ratio observations. These indicate better operating policies in
JSPL while SAIL will be able to meet its short term obligations in a better way.
In our study of Multiple Regression Analysis to determine the relationship between
Working Capital Cycle and Profitabilty i.e. Net Profit Margin, none of the tests in any
of the cases of companies were statistically significant to determine a relationship.
the impact of liquidity on profitability i.e. Return on Capital Employed in this
case, we observed that in case of SAIL the proportion of Return on Capital
employed explained by current and quick ratio is 73.1% but t-statistics tests
show that there is no significant impact of liquidity ratios on profitability. In
the case of JSPL, the proportion of ROCE explained by quick ratio and
current ratio is 98.5% and we also observe that there is a significant impact
of working capital ratios on profitability i.e. ROCE in this case. The linear
regression equation in the case of JSPL is
ROCE= 9.018 + 32.539 CR 20.6 QR

LIMITATIONS
This study suffers from certain limitations which are mentioned as follows:
This comparative study has been based on one private sector steel company and one
public sector steel company as sample but not considered all private sector and
public sector operating units. Hence it will reflect only a partial view of the overall
liquidity position of private sector and public sector steel companies.
Study is solely based on secondary data and published financial statements of the
selected company, which may leave some grounds of error.
This study is related with financial variables and some of the financial variables are
not considered due to unavailability of data.
The different agencies which are providing the information on Iron & Steel sector
units is contradictory therefore it is very difficult to find authenticity.
The financial performance covering a large period say 20 years or 30 years can give
a much clear picture of management practices of financial performance. Our study
covering a period of 5 years can touch only a part of the problem.
The main source of information is annual reports. They represent financial
information/position on particular date. What happened between such two dates
cannot easily be presumed or predicated.

Thank You!