DETERMINANT OF WORKING CAPITAL FOR THE

SAW PIPE INDUSTRY

1. Small or Large Demand

Nature of demand also absolutely affects the working capital need. Some product
can be easily sold by businessman, in that business; you need small amount of
working capital because your earned money from sale can easy fulfill the shortage of
working capital. But, if demand is very less, it is required that you have to invest
large amount of working capital because your all fixed expenses must be paid by
you. For paying fixed capital you need working capital. The finished product i.e.
SAW pipe have a large demand in near future which is evident from vigorous
infrastructure development in various countries. That’s a reason that companies
require higher working capital in order to remain in the line of business.

2. Production Policy

Production policy is also main determinant of working capital requirement. Different

company may different production policy. Some companies stop or decrease the
production level in off seasons, in that time, company may also reduce the number
of employees or decrease the purchasing of new raw material, so, it will certainly
decrease the amount of working capital but on the side, some company may
continue their productions in off season, in that case, they need definitely large
amount of working capital. Being a capital intensive industry, the companies require
investing their capital on a regular basis and hence with a fluctuating raw material
prices they require to keep on producing the finished material.

3. Credit Policy

Credit policy is relating to purchasing and selling of goods on credit basis. If

company purchases all goods on credit and sells on cash basis or advance basis,
then it is certainly company need very low amount of working capital. But if in
company, goods are purchased on cash basis, and sold on credit basis, it means,
 our earned money will receive after sometime and we require large amount of
working capital for continuing our business. With a heavy industry scenario the
goods are more sold on credit basis and the same is been purchased on credit as
well, along with the use of trade financing instruments, which also add to working
capital use of the companies in the industry.

4. Working Capital Cycle

Working capital cycle shows all steps which starts from cash purchasing of raw
material and then this converted into finished product, after this it is converted into
sale, if it is credit sale, debtors will also the part of working capital cycle and when
we gets money from our debtors, it is the final part of working capital cycle. If we
receive fastly from our debtors, we need small amount working capital. Otherwise,
for purchasing new raw material, we need more amount of working capital. With the
working capital cycle evident in SAW pipe industry, the industry uses a large amount
of working capital to continue daily processing and keep on having the raw material
availability. Though, the cycle is not as large as present in other industries, due to
the fact that mostly governments are included in the buying of these pipes with
infrastructure developments, still there is a need of having a good amount at your
disposal in working capital limits.

5. Manufacturing Cycle

Manufacturing cycle means the process of converting raw material into finished
product. Long manufacturing cycle will create the situation in which we require large
amount of working capital. Suppose, we have to construct the building, for
constructing colony of buildings, it may consume the time more than 5 years, so
according to this we need working capital. With the inducement of new technology in
the industry the manufacturing cycle is getting shorter day by day; however still the
process to get the finished good takes times and that is the reason companies within
the industry require a good amount of working capital at their disposal.
6. Business Cycle

There are two main part of business cycle, one is boom and other is recession. In
boom, we need high money or working capital for development of business but in
recession, we need only low amount of working capital. With growing need of
infrastructure development in many of the developing nations and underdeveloped
nations, the business cycle for the industry is expected to remain in growing stage of
lifecycle and hence it requires a growing capital need.

7. Price Level Changes

If there is increasing trend of products prices, we need to store high amount of

working capital, because next time, it is precisely that we have to pay more for
purchasing raw material or other service expenses. Inflation and deflation are two
major factors which decide the next level of working capital in business. With a huge
raw material cost, this impacts a great deal for deciding the working capital
requirement in the industry.

8. Effect of External Business Environmental Factors

There are many external business environmental factors which affect the need of
working capital like fiscal policy, monetary policy and bank policies and facilities.
 DETERMINANT OF WORKING CAPITAL FOR THE
JINDAL SAW LIMITED
1. Slowdown in Economies and Low Demand:

Slowdown in economy may result in low investment in hydrocarbon sector. Limited

amount of capital investment may result in low exploration and production activities
and hence low demand for new pipeline. Recent global meltdown has seen delay in
investment and projects in oil and gas sector, resulting into almost low demand for
pipe. This in turn affected the working capital requirement of the company a great
deal.

2. Raw Material Prices and Availability:

The availability of steel and at the budgeted price is a key risk to the pipe
manufacturers. High volatility in the input prices and leading to volatility in steel
plates/ Coil prices is affecting the profitability and the working capital cycle. This is
affecting the requirement of working capital requirement at the company.

3. Overcapacity Resulting in Pressure in Margins:

Capacity expansion by players worldwide, or by new entrants leading to oversupply

coupled with economic slowdown, may put pressure on realizations and margins. In
a rising steel prices scenario, a large number of players or oversupply could
increase the bargaining power f buyers and the manufacturers may not be able to
pass on the increased costs to buyer. These factors could put pressure on margins
and profitability of the company and affects the working capital requirement, as to
remain in business the company has to decrease its margins and provide regular
supply of the product.

4. Increasing Supply Cost:

 Freight costs are approximately 5 to 7% of the SAW pipe operating costs. A high
volatility in these costs are putting the pressure on working capital arrangement by
the company and also affecting the profitability.

5. Credit Availability:

The credit crunch or adverse liquidity situation can force the pipe buyers to default
in payment for pipe supplies, delay or deferment in project execution etc. This is
giving a hand to increase in the working capital cycle of the company and affecting
the working capital requirement of the company. As to continue operations regularly
the company is requiring more cash at their disposal then what is coming back to
them after the completion of the cycle.

6. Foreign Exchange:

Due to high imports and exports, the company is also exposed to foreign exchange
risk. Delay in payments, delay in transit, and buyer’s requirements of getting the
deliveries at their own prescribed places, is also adding to the woes of the company,
which is increasing the total cost of finished product and reducing the margins. This
is affecting the company’s working capital needs.

7. Government Regulations:

Any adverse change in Government of India regulations also affect the company’s
buying or selling power a great deal. Changes in fiscal policy, monetary policy,
interest charges all impact the requirement of working capital by the company.
Ratio Analysis for Jindal SAW limited:

As on 31-Mar-10 31-Dec-08 31-Dec-07

Liquidity
Current Ratio (x) 1.6 2.1 2.6
Quick Ratio (x) 0.96 1 1.6
Cash Ratio (x) 0.16 0.1 0.3
   
Working Capital
Working Capital to Sales (x) 0.08 0.3 0.3
Working Capital Days (days gross sales) 41.12 121.4 90.9
Receivables (days gross sales) 33.92 86.9 59.5
Creditors (days cost of sales) 13.84 24.8 20.4
FG Inventory (days cost of sales) 16.72 22.9 8
RM Inventory (days consumption) 20.32 94.1 56.7
   
Profitability
Gross Margin (%) 19.84 18.2 14.2
Operating Margin (%) 12.08 9.3 6.6
Net Profit Margin (%) 9.04 7.1 13.5
Adjusted Net Profit Margin (%) 9.04 7.1 4.4
Asset Turnover(x) 1.2 1.3 4