CONTENTS

Topic Pg. No.

1. Preface 1
2. Declaration 2
3. Acknowledgement 3
4. Introduction 4
5. Company profile 5-12
6. Problem 13
7. Objective of the study 14
8. Research methodology 15
9. Scope of the study 16
10. Data sources 17
11. Introduction of working capital 18-34
12. Inventory management 35-41
13. Conversion periods 42-47
14. Cash management 48-58
15. Receivable management 59-66
16. Managing paybless 67-72
17. Working capital and short term financing 73-82
18. Data analysis 83-94
19. Limitations 95
20. Conclusions 96
21. Suggestions 97-98
22. Bibliography 99
23. Annexure 100-
108
 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 short-
term 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 short-

term 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 short-

term 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

26
 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.

28
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.

29
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.

31
 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 2006 2005 2004

PROJECTE

D
Gross Sales/Income 3400 2833 2381 1967.3 1522.03

from Operations 7

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.

37
 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.

38
 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.

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:-

39
 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.

40
 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 2008 200 2006

n 7
Raw 6349 774 6127

Material 9
Stores and 3713 298 2622

Spares 7

41
 Finished 1337 724 6506

Goods 4 5
Work-in- 595 784 871

progress

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

43
 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.

44
 Conversion Periods

Raw Material

Particulars 2008 2007 2006

Raw Material 12107 97971.31 57775.14

Consumption 7
Raw Material 332 268.41 158.28

Consumption/da

y
Raw Material 7072 6960.275 4364.735

Inventory
Raw Material 21 25.93 27.57

Holding Days

45
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 2008 2007 2006

Cost of 19191 159651.1 113500.33

Production 1 9
Cost of 525.78 437.4 310.95

Production/da

y
Work in 689.5 827.52 679.455

progress

inventory
WIP Holding 1.31 1.89 2.19

days

46
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 2008 2007 2006

s
Cost of 22817 178438.8 124768.92

goods sold 7 5
Cost of 625 488.87 341.832

goods

sold/day
Finished 10310 6875.725 5026.505

goods

inventory
Finished 16 14.06 14.8

47
 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 200 200 2006

8 7
Inventory 38 42 45

conversion period
Average collection 70 63 66

period
Gross operating 108 105 111

cycle
Average payment 22 23 17

period

48
 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 2008 2007 2006

s
Imported 9200 70784.2 42129.63

7 7
Indigenous 2907 27187.0 15645.51

0 4
% Imports 75.99 72.25 72.92

49
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.

50
 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

51
 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.

52
 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 2008 2007 2006

Absolute 0.24: 0.31: 0.11:1

Liquid Ratio 1 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

53
securities may increase the liquidity position but not the revenue or profit

earning capacity of the firm.

Dividend Policy-Cash

Particular 2008 2007 2006

s
Dividend 210 310 400

Policy%
Shift in 154295 199886 238136

Sales
Cash 4463.4 14582.6 14529.29

Balance 3 5
Cash in 118.33 128.97 128.97

Hand

54
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 2008 2007 2006

PBIDT 1428 1563 14523

4 4
Equity 400 310 210

Dividend%

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 200 2007 2006

8
Net Cash from 692 2675.57 13706.34

Operating activities 4
Net Cash from - 15661.2 -2169.16

Investing activities 351 9

5
Net Cash from - -8217.68 -11412.1

Financing activities 351

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

57
 the firms growing dividend policy has contributed to the outflows in

financing activities.

Cash Flow in Operating Activities

Working Capital Changes

Working Capital Changes 2008 200 2006

7
Trade and other receivables -14166 -14510.69 -7106.68
Inventories -5221 -2683.92 -7221.11
Trade Payables and other 13026 6419.13 14311.5

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 200 200 2004

Mutual Funds 6 5
Investments (year end) 13539 12277.44 28059.88

58
 Purchase of Investment -65992 -53075.99 -59249.81
Disposal/Redemption 65312 65489.84 52087.36

of Investment

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

59
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.

60
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.

61
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.

62
 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.

63
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.

64
 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.

65
 RECEIVABLES MANAGEMENT IN NTPC :

PARTICULARS 2008 2007 2006 2005

DEBTORS TURNOVER 5.21 5.80 5.53 6.62

RATIO
AVERAGE COLLECTION 70 63 66 55

PERIOD

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 2008 2007 2006

PROVISION FOR DOUBTFUL 3 49.85 25

DEBTS(CASH FLOW)
DEBTS DOUBTFUL(EXCEEDING 6 47 134.09 69.8

MONTHS)

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.

66
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

67
 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 2007 2006 2005

CREDITORS 16.44 15.68 21.29 21.14

TURNOVER

RATIO
PAYMENT 22 23 17 16

PERIOD

68
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)

69
 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

70
 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.

71
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.

73
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.

74
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.

75
 WORKING CAPITAL & SHORT-TERM FINANCING

CONSORTIUM BASED FINANCING

Current Working Capital Limits

NAME OF THE BANK FUND BASED NON-FUND

BASED
STATE BANK OF INDIA 3600 46000
ICICI BANK 1282 19000
HDFC BANK 1200 10000
STANDARD 1200 19000

CHARTERED BANK
STATE BANK OF 715 7500

SAURASHTRA
STATE BANK OF 1300 7700

PATIALA
CANARA BANK 1203 6000
SOCIETE GENERALE 1000 4000
HSBC BANK 1000 18300
TOTAL 12500 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.

77
RENEWAL OF LIMITS

LIMITS 2008 2007 2006

FUND 11500 11500 11500

BASED
NON 48500 38500 28500

FUND

BASED
TOTAL 60000 50000 40000

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:

79
 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

80
 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

81
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 2006 2005 2004 2003

LOANS
SHORT TERM 3849 4991.28 6903.7 4987.52
LONG TERM 0 530.07 0 3461.36
TOTAL 3849 5521.35 6903.7 8448.88
%SHORT TERM 100 90.4 100 59.03

82
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.

UNSECURED LOANS 2008 2007 2006 2005

SHORT TERM 15104 2593.39 63.94 76.84
LONG TERM 11 17 169.51 3261.42
TOTAL 15115 2610.39 233.45 3338.26
% SHORT TERM 99.93 99.348 27.38 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.

83
 YEAR- END COMMERCIAL PAPERS

PARTICULARS 2008 2007 2006 2005

COMMERCIAL 4000 2500 --- 3000

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.

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

84
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.

85
ANALYSIS

DATA ANALYSIS

CURRENT RATIO

3
2.66
2.5 2.21
2.03
2

1.5

0.5

0
2006-07 2007-08 2008-09

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.

86
 QUICK RATIO

1.8 1.68
1.6 1.44
1.4 1.36
1.2
1
0.8
0.6
0.4
0.2
0
2006-07 2007-08 2008-09

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

87
 CASH RATIO

0.4
0.36 0.36
0.35
0.3 0.27
0.25
0.2
0.15
0.1
0.05
0
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.

88
 WORKING CAPITAL
RATIO

0.8 0.8 0.8

0.798
0.796
0.794
0.792
0.79
0.79
0.788
0.786
0.784
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.

89
 TOTAL CAPITAL
TURNOVER
5 4.77
4.5
4 3.89
3.5
3 2.73
2.5
2
1.5
1
0.5
0
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.

90
 WORKING CAPITAL
TURNOVER

6 5.96

4.92
5

4
3.26
3

0
2006-07 2007-08 2008-09

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.

91
 FIXED ASSETS
TURNOVER

25 23.88

20 18.55
16.76
15

10

0
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.

92
 DEBATORS TURNOVER

7 6.39
6
5.22
5
4.1
4
3
2
1
0
2006-07 2007-08 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.

93
 GROSS PROFIT RATIO

40

72

39

2006-07 2007-08 2008-09

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.

94
 CREDITORS
TURNOVER

2.79
3.66

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.

95
 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.

96
 LABOUR COST RATIO

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.

97
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 non-

availability 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 Jun 30 Jun 30 Jun 30

Millions of 2004 2006 2007
Indian Restate Reclassified
Rupees d

Assets

Cash and
1,452.3 2,149.2 1,976.5
Equivalents

Short-Term
114.8 3,137.7 2,939.9
Investments

TOTAL CASH
AND SHORT
TERM 1,567.1 5,286.9 4,916.4
INVESTMENT
S

Accounts
4,390.4 7,691.4 10,520.0
Receivable

Other
228.2 468.1 593.4
Receivables

104
TOTAL
RECEIVABLE 4,618.7 8,159.5 11,113.4
S

Inventory 2,804.2 4,696.1 7,918.8

Prepaid
107.0 146.0 287.8
Expenses

Other Current
23.8 86.8 84.8
Assets

TOTAL
CURRENT 9,120.8 18,375.3 24,321.2
ASSETS

Gross
Property Plant
1,406.1 1,731.9 2,431.0
and
Equipment

Accumulated
-749.1 -852.4 -966.5
Depreciation

NET
PROPERTY
657.0 879.5 1,464.5
PLANT AND
EQUIPMENT

Goodwill -- 0.2 0.8

Long-Term
2,190.9 -- --
Investments

Deferred Tax
Assets, Long 59.1 -- --
Term

Other
-- 32.4 30.9
Intangibles

Other Long-
-- 71.8 16.0
Term Assets

TOTAL
12,027.9 19,359.2 25,833.4
ASSETS

105
LIABILITIES
& EQUITY

Accounts
3,390.6 5,964.8 8,298.5
Payable

Accrued
100.4 140.4 209.8
Expenses

Short-Term
-- 784.9 1,182.4
Borrowings

Current
Portion of
Long-Term 690.4 0.4 892.5
Debt/Capital
Lease

Current
Income Taxes 30.1 77.4 252.8
Payable

Other Current
Liabilities, 2,914.6 4,687.9 5,216.6
Total

Unearned
Revenue, 536.4 557.9 775.2
Current

TOTAL
CURRENT 7,662.6 12,213.7 16,827.8
LIABILITIES

Long-Term
15.8 60.1 284.0
Debt

Deferred Tax
Liability Non- 109.0 107.6 124.8
Current

Other Non-
Current 13.9 1.0 --
Liabilities

TOTAL
7,801.3 12,382.4 17,236.6
LIABILITIES

106
Common
328.9 337.5 338.3
Stock

Additional
673.9 1,044.5 1,087.9
Paid in Capital

Retained
3,193.2 5,565.2 7,141.4
Earnings

Comprehensiv
e Income and 30.6 29.6 29.2
Other

TOTAL
COMMON 4,226.6 6,976.8 8,596.8
EQUITY

TOTAL
4,226.6 6,976.8 8,596.8
EQUITY

TOTAL
LIABILITIES 12,027.9 19,359.2 25,833.4
AND EQUITY

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 A Jun Jun 30 Jun 30 Jun 30

cy in s 30 2005 2006 2007
Million o 2004 Restate Reclassifie
s of d d
f Restat
Indian ed
Rupee :
s

3,15
NET INCOME 1,751.1 2,277.0 2,803.6
9.5

Depreciation & 144.

180.1 152.4 124.3
Amortization 0

Amortization of
Goodwill and -- -- -- 4.1
Intangible Assets

DEPRECIATION &
148.
AMORTIZATION, 180.1 152.4 124.3
1
TOTAL

(Gain) Loss from Sale

-0.4 -1.6 0.5 0.6
of Asset

(Gain) Loss on Sale of

-79.6 -84.9 -61.5 -55.2
Investment

Asset Writedown &

0.0 0.5 -- --
Restructuring Costs

Other Operating 271.

292.8 31.2 79.6
Activities 8

108
Provision & Write-off
14.8 14.4 7.2 9.2
of Bad Debts

-
Change in Accounts
-1,593.4 -1,993.4 -1,724.7 3,15
Receivable
8.8

-
Change in Inventories -423.3 -689.7 -1,202.2 3,22
2.7

Change in Accounts 3,11

1,471.8 1,561.6 2,759.5
Payable 2.2

CASH FROM 264.

1,614.0 1,267.5 2,786.3
OPERATIONS 7

-
Capital Expenditure -180.7 -267.8 -424.3 674.
5

Sale of Property,
3.5 10.7 80.3 1.6
Plant, and Equipment

Investments in
289.
Marketable & Equity 73.7 841.4 -1,453.6
0
Securities

-
CASH FROM
30.8 622.4 -1,683.3 231.
INVESTING
9

Short-Term Debt
41.1 169.5 -- --
Issued

Long-Term Debt 1,83

200.8 231.3 200.5
Issued 7.2

TOTAL DEBT 1,83

241.9 400.8 200.5
ISSUED 7.2

Short Term Debt

-- -- -172.3 -74.7
Repaid

-
Long Term Debt
-707.9 -302.7 -- 250.
Repaid
0

109
 -
TOTAL DEBT
-707.9 -302.7 -172.3 324.
REPAID
7

Issuance of Common
283.3 215.2 163.9 44.2
Stock

-
Common Dividends
-866.2 -1,047.4 -1,526.6 1,54
Paid
6.1

-
TOTAL DIVIDEND
-866.2 -1,047.4 -1,526.6 1,54
PAID
6.1

-
Other Financing
-98.9 -95.4 -132.0 216.
Activities
1

-
CASH FROM
-1,147.8 -829.5 -1,466.5 205.
FINANCING
5

-
NET CHANGE IN
497.1 1,060.4 -363.5 172.
CASH
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 A Jun 30 Jun 30 Jun 30 Jun 30

y in s 2004 2005 2006 2007
Millions of: Restate Restated Reclassified
of Indian d
Rupees

116,853.
Revenues 43,064.4 77,478.9 113,683.1
0

Other Revenues -- -35.7 61.6 63.8

116,916.
TOTAL REVENUES 43,064.4 77,443.2 113,744.7
8

108,121.
Cost of Goods Sold 38,701.3 71,496.1 105,964.4
4

GROSS PROFIT 4,363.1 5,947.1 7,780.3 8,795.4

Selling General & Admin

2,268.8 3,305.9 3,764.3 4,527.1
Expenses, Total

Depreciation &
180.6 152.4 124.3 148.1
Amortization, Total

Other Operating
-- -84.0 84.8 91.2
Expenses

111
OTHER OPERATING
2,449.4 3,374.3 3,973.4 4,766.4
EXPENSES, TOTAL

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
132.1 146.1 208.0
Income

NET INTEREST
49.4 68.5 75.4 9.2
EXPENSE

Currency Exchange
37.9 145.0 -144.4 189.6
Gains (Loss)

Other Non-Operating
32.0 -- -- --
Income (Expenses)

EBT, EXCLUDING
2,033.0 2,786.3 3,737.9 4,227.8
UNUSUAL ITEMS

Gain (Loss) on Sale of

79.6 85.0 61.5 55.2
Investments

Gain (Loss) on Sale of

0.4 1.6 -0.5 -0.6
Assets

Other Unusual Items,

2.3 87.2 4.0 4.7
Total

Insurance Settlements 2.3 3.7 4.0 4.7

Other Unusual Items -- 84.0 -- --

EBT, INCLUDING
2,115.1 2,960.1 3,802.9 4,287.1
UNUSUAL ITEMS

Income Tax Expense 364.0 683.1 999.3 1,127.6

Earnings from Continuing

1,751.1 2,277.0 2,803.6 3,159.5
Operations

112
NET INCOME 1,751.1 2,277.0 2,803.6 3,159.5

NET INCOME TO
COMMON INCLUDING 1,751.1 2,277.0 2,803.6 3,159.5
EXTRA ITEMS

NET INCOME TO
COMMON EXCLUDING 1,751.1 2,277.0 2,803.6 3,159.5
EXTRA ITEMS

113