Financial Management - II

Workingcapital management in
agriculturtal industry

Tea industry
Introduction

The total turnover of the industry is around Rs. 10,000 crores. Since
independence, tea production has grown over 2505, while land area has
grown by 40%.Total net foreign exchange earned per annum is around
Rs.1847 crores. Industry is labour intensive and employs over 1.1 million
workers and generates income for 10 million people indirectly. Women
constitute 50% of the workforce. 802 M.Kgs or about 82% of total
production of 981 M.Kgs of tea went for domestic consumption.

Big players in India

Leaders in the Indian domestic branded teas market:
1. Hindustan Lever Ltd.
2. Tata Tea Ltd. – 21% share.
Hindustan Lever got 33.4% of the total tea sold at the Guwahati tea
auction, while Tata Tea bought 12.9%. Hindustan Lever claims to be also
India’s largest tea exporter and the world’s largest packet tea marketer. Of the
top ten tea brands in India, 7 are from Hindustan Lever: Red Label, Taaza A1, 3
Roses, Super Dust, Top Star and Ruby Dust.
Tata Tea has 54 tea estates in India: 21 in Assam, 4 in West Bengal, 24 in
Kerala and 5 in Tamil Nadu. In 2000 it held 4 th/5th place in India’s branded tea
sector, but was aiming for 3rd place, after Hindustan Lever and Tata Tea.
Exports:

India exports around 203.86 million kilograms of tea per year (including
21.9 million kilograms of imports from other countries which are re-exported).
The biggest buyers of Indian tea are CIS countries (49.11 m.kgs), Iraq (41.3
m.kgs), United Kingdom (23.21 m.kgs), and the UAE (21.88 m.kgs).

Domestic Market:

India is still the largest consumer of Black Tea in the world, with
domestic consumption accounting for almost 80 per cent of the country's total
tea production. The pattern of domestic consumption has shown a steady and
positive growth since 2000. From a mere 73 million kilograms in 1951,
domestic consumption has 165 See next section of import and re-export from
India. Sustainability Issues in the Tea Sector 72 increased to 757 m.kgs
(2005) and 771 m.kgs (2006). Despite a steady growth rate in domestic
consumption, the per capita consumption in India is still one of the lowest in the
world at 0.65 grams per head per year. The major tea-consuming states in India
include Maharashtra (87 million kilograms), Uttar Pradesh (82 million
kilograms), Gujarat (64 million kilograms), Rajasthan (58 million kilograms)
and Madhya Pradesh (42 million kilograms). The Indian domestic tea market is
Predominantly a loose tea market, constituting around 60 per cent of the total
tea consumption, while the rest is served by packaged tea..

SOUERCES OF FUNDS

Sources of funds
Year Mar 09 Mar 08 Mar07 Mar 06 Mar05
Sharecapital 2.04 1.98 2.17 3.30 3.75
Reserves 5.18 55.67 54.51 64.87 64.46
total
Secured 14.66 17.33 9.07 13.77 11.65
loans
Unsecured 10.19 6.87 20.19 0.40 0.78
loans
Current 10.22 8.37 8.37 10.26 11.70
liabilities
Provisions 4.91 8.89 4.65 5.73 5.57

APPLICATION OF FUNDS:
Application
of funds
Fixed assets 3.43 3.13 9.05 14.69 36.26
Investments 68.25 70.10 75.12 64.97 0.00
Sunddry 3.02 2.03 2.38 2.95 5.55
debtors
Cash and 1.50 0.45 0.79 0.39 10.15
bank
advances 13.30 16.87 4.43 6.47 39.05
Deffered tax 0.68 0.64 0.69 0.36 0.33
assets
Miscellaneous 0.25 0.52 0.92 1.98 4.14
expenses not
written off
TOTAL 100 100 100 100 100

REPORTS ON TATA COMPANY:

 While the net profit before tax and extraordinary items has been cited as INR
229 crores, the net cash flow from operations has been given as (for tata tea
company)INR 5.91 crores. In comparison to the previous year’s figure of INR
88.12 crores, the cash flow from operations has decreased by 93%. As
mentioned earlier, the profit after tax has declined from INR 312.86crores to
INR 159.06 crores as well. this loss is attributable to the profit on the sale of
Tata Tea in year08.However, Industry has substantially increased its purchases
of raw materials in FY09, which is partially reflected in its increasein sales and
increase in closing inventories.
“I infer that the difference in cash flow due to operating activities has been
due to the sale of TataTea increase in its purchase of raw materials.”
There has been a significant increase in Industry investment income due to
substantial sales of current and long-term investments. Apart from making some
modest new investments and spending on new business initiatives, Industryhas
also drastically decreased its outlay insubsidiaries. These actions indicate that
the industry as a whole is following a strategy of reducing its investments,
which is not a positive sign for the future. In case of financing activities, the
industry has had a higher cash outflow in FY09 than FY08 due to lack of
issuance of shares, lack of proceeds from long-term borrowings, and a
significant increase in the proposed dividend to its shareholders.

INVENTORIES:
Inventories are present at three different levels in the company: -

a)Raw material Inventory.

b)Work in Process Inventory.
c) Finished Inventory.

a)Raw material inventory

In Tea industry. once the raw material reaches the factory, the raw
material is kept in the storage area where the proper care. Tea catches any type
of smell at very fast rate. So certain steps are necessary to be taken so that the
quality of raw material remains the same. The total amount of raw material bags
that reaches the factory by is noted by the warehouse incharge and then it is
unloaded in the godown The following steps are taken by the company to
ensure the quality of the materials:-
1.The storage area is made completely weather proof so that tea does not catch
any smell.
2.The cleaning of storage area is done every morning.
3.The human touch is avoided from all the process that starts from keeping the
raw material till packaging is done.
b)Work in Process Inventory
During the process of production of tea special care is taken to maintain
the proper quality of the product. Whenever the blending of tea is required the
raw material are safely taken to the blending machine and while putting the raw
material in themachine any kind of human touch is avoided. After the
completion of the blending process the material is taken out from that machine
and is kept in trolley and during this process also human touch is avoided. Now
in packaging process also the material those are used in pouch packing and even
in box packing are all odourless and virgin. This type of packing material helps
as tea does not catches any smell from it. The packaging material ensures that
the tea does not get wet or catches any types of odour.
c)Finished Goods Inventory
This consists of those packed tea packs which are ready for sales in the
market. They arethe most important part of the whole inventory as they lead to
sales. After packaging this tea bags are packed in boxes which are used to
transport this tea bags to the dealers. The regular cleaning of the finished good
warehouse ensures the hygiene of the finished product. During monsoon this
whole boxes are covered with the plastic type material and then are disposed to
various outlets through transport system.
conclusion:

I therefore deduce that while the industry has decreased its investments, it
has had an overall outflow of cash from its financing activities.Further, Industry
has utilized most of its cash flow from investments in paying dividends to its
shareholders and to fund financing operations.The overall decrease in cash flow
due to operating activities can be attributed to the sale of Industry’s and increase
in purchase of rawmaterials. Since the purchase of raw materials will result in
extra sales next year, I anticipate that the cash flow from operations in next year
willbe higher than the current value.