CF PRESENTATION

WORKING CAPITAL
MANAGEMENT

Group-9
| Ashutosh 23P077 | Harshil Bansal 23P088 | Monaal Kaushal 23P094 |
| Pratyush Raj 23P098 | Saloni Garg 23P107 | Shikhar Agrawal 23P111 |
Problem Statement
• Analysing two companies having negative and positive Working Capital and their implication
• We have taken Hotel Sector and 2 companies are
• The Indian Hotels Company
• Mahindra Holidays & Resorts India Ltd
 WORKING CAPITAL
• Working capital means the firm's holding of current or short-term assets such as cash, receivables, inventory and marketable securities.
• These items are also referred to as circulating capital.
• Corporate executives devote a considerable amount of attention to the management of working capital.

CONCEPTS OF WORKING CAPITAL

Gross working capital (GWC) Net working capital (NWC)

GWC refers to the firm's total investment in current assets.
Current assets are the assets that can be converted into cash
within an accounting year (or operating cycle) and include cash,
short-term securities, debtors, (accounts receivable or book
debts) bills receivable and stock (inventory).
NWC refers to the difference between current assets and current
liabilities.
(CL) are those claims of outsiders that are expected to
mature for payment within an accounting year and include creditors
(accounts payable), bills payable, and outstanding expenses.
NWC can be positive or negative.
• Positive NWC: CA > CL
• Negative NWC: CA < CL
 CASH CONVERSION CYCLE
CASH CONVERSION CYCLE = (Inventory Period + Receivables Period) – Accounts Payable Period

The period between firm’s payment for materials and collection on its sales

• Inventory Period = Average Inventory / [Cost of Goods Sold / 365]

• Receivables Period = Average Accounts Receivables / [Sales / 365]

• Payable Period = Average Payable / [Sales / 365]

 Indian Hotels Company
• Also known as the Taj Group, is India's largest hospitality company.
• Established in 1903, IHCL is a pioneer in Indian hospitality.
• Taj Hotels are known for their world-class service and luxurious stays.
WORKING CAPITAL MANAGEMENT

• IHCL has over 178 hotels across 4 continents and 11 countries

• They manage a variety of brands including:
• Taj - Iconic luxury hotels
• SeleQtions - Unique collection of hotels
• Vivanta - Upscale modern hotels
Revenue Sources • Ginger - Budget-friendly hotels
3.5 • Others - They also manage wellness resorts, palaces, and in-flight catering
services.
7.14
• IHCL emphasizes a blend of traditional Indian hospitality with modern amenities.
• Cater to a wide range of travellers, from budget-conscious to luxury seekers.
Purpose: To create values by the operating best-in-class portfolio of hospitality brands in
India and select overseas destinations.

12 125+ 188 75
89.36

Rooms & F&B

Management & maintennace services
Countries Locations Operational Hotels Hotels in Pipeline
Others
 Mahindra Hotels
Mahindra Hotels
• Mahindra Hotels, a subsidiary of the Mahindra Group, operates in the hospitality, tourism, and
leisure industry.
• Founded in 1996 by Mr. Arun Nanda, it offers vacation ownership plans under the brand "Club
WORKING CAPITAL MANAGEMENT

Mahindra," with headquarters in Mumbai, India.

• Led by CEO Mr. Kavinder Singh, the company provides holiday experiences through a network of
resorts across India and internationally.
• Its extensive resort network spans popular tourist destinations domestically and abroad,
including Thailand, Malaysia, Austria, and Spain.
• Known for its commitment to customer satisfaction, the company offers personalized service
and memorable holiday experiences.
 Indian Hotels Mahindra Holiday
Market Cap 80438 7719
Profitability Ratios
Operating Profit Margin 40.40% 32.45%
Net Profit Margin 22.80% 13.25%
ROCE 13.83% 10.22%
ROA 7.30% 2.50%
ROE 9.95% 15.71%

Quantitative Liquidity Ratios

Current Ratio 1.27 1.99

Analysis Quick Ratio

Valuation Ratio
1.23 1.99

P/E 69 87
P/B 9.1 -15.9
EV/EBIDTA 30.57 13.65
Working Capital Metric
Debtor Days 28 148
Inventory Days 84 592
Days Payable 368 413
Cash Conversion Cycle -256 327
Working Capital Days -51 103
 FINANCING POLICIES OF WORKING CAPITAL​
• Working capital financing policies are crucial for a business's health as they dictate how the company manages
its short-term assets (inventory, receivables) and liabilities (payables, short-term loans) to fund day-to-day
operations.
• Working Capital management can be conservative, aggressive or matching policy (hedging).​

Aggressive Working Capital Policy Industry Defensive Working Capital Policy Industry
Quantitative
• Technology • Manufacturing
Analysis
• FMCG
• Consulting Service
• Automobiles
• Oil & Gas

MHRIL has debt to equity of 6.1 while INDHOTEL has 0.33.

MHRIL needs higher current assets to obligate its debt and short-term needs.
Due to this MHRIL has higher liquidity ratios, making their working capital policy defensive.
While INDHOTELS has low debt which requires low liquidity and has an aggressive working capital policy.
 Relationship Between Profitability and Liquidity

• There's a trade-off between profitability and liquidity in working capital management.

• Both liquidity and profitability are related to the current assets and working capital of a company.
• When a company uses a more temporary working capital to meet the needs of the operations, it is usually
highly liquid but not profitable. When the company takes enough risk and invests in high-return funds, it is
looking for more profitability.
• High liquidity can reduce profitability: Holding excess cash or inventory (current assets) can tie up resources
that could be used for more profitable investments. Companies may earn lower returns on these excess
assets compared to investing them elsewhere.

MHRIL is a company which is in expansion While Indian Hotels is a company which

stage. They have prioritize liquidity to requires less liquidity as they have
fund expansion, even if it slightly reduces cashflow form operation which can be
profitability in the short term. used for their expansion.
 Use of bank finance, public deposits in working capital financing
Bank Finance
Bank offers variety of short-term financing options, including:
Public Deposit
WORKING CAPITAL MANAGEMENT

• Cash Credit: A flexible line of credit companies can draw on

Companies raise working capital by accepting deposits
as needed.
directly from the public for a fixed term and interest rate.
• Overdraft Facilities: Allows temporary exceeding of current
• Advantages:
account balance.
• Potentially Cheaper: Companies can offer
• Working Capital Loans: Short-term loans to finance specific
competitive interest rates, potentially lower than
needs like inventory purchase.
bank loans.
• Advantages:
• Simpler Process: Application process can be less
• Readily Available: Banks are a familiar source of funds.
complex compared to bank loans.
• Relatively Quick Access: Loan approvals can be faster
• Direct Access to Funds: Bypasses intermediary bank
than public deposits.
fees.
• Competitive Rates: Interest rates can be attractive,
• Disadvantages:
especially for companies with good credit.
• Uncertainty of Amount: There's no guarantee of
• Disadvantages:
raising the targeted amount.
• Fluctuating Rates: Interest rates can change, impacting
• Regulatory Limits: Regulations restrict the amount a
borrowing costs.
company can raise through public deposits.
• Creditworthiness Requirement: Companies need a
• Shorter Maturities: Public deposits typically have
good credit history to secure favorable terms.
shorter maturities compared to bank loans.
• Covenants & Restrictions: Banks may impose limitations
on how funds are used.
• Here's a breakdown of how loans can affect the CCC components:
• Days Inventory Outstanding (DIO): Increased access to capital might lead to higher inventory levels,
potentially extending the DIO. However, if the loan is used to improve inventory management practices (e.g.,
implementing JIT), it could shorten the DIO.
• Days Sales Outstanding (DSO): Loan repayments might create pressure to collect customer payments faster,
potentially leading to a shorter DSO.
• Days Payable Outstanding (DPO): The ability to secure a loan might allow companies to negotiate longer
payment terms with suppliers, potentially extending the DPO. However, this needs to be weighed against
potential discounts for early payments.
 Inventory Management, Inventory Techniques Employed
• It's the process of balancing the amount of stock you hold with customer demand.
• Too little inventory can lead to stockouts and lost sales, while too many ties up capital and create storage
costs..
• Inventory Valuation techniques can be FIFO, Weighted Average and LIFO. (LIFO is not allowed in IFRS).
• In a rising price scenario, the FIFO method gives low inventory cost leading to less COGS, and higher
profitability.
• In the Hotel Industry, we do not have inventory as you can use unused rooms of yesterday to today. From a
quantitative point view, we can see that there is very little or no difference between the current ratio and the
quick ratio.
Sectors Prioritizing Faster Inventory Turnover (Shorter CCC
• Technology:
• High product innovation and shorter product
lifecycles often lead to just-in-time (JIT) inventory
practices.
• Companies may hold lower finished goods
inventory and rely on efficient supply chains to
minimize holding costs and convert inventory
quickly.
• Consumer Staples (Short Shelf Life):
• Predictable demand for fast-selling products like
groceries or beverages allows for lower inventory
levels.
• Companies prioritize fresh products and efficient
logistics to minimize spoilage and wasted
inventory.
• E-commerce:
• Many e-commerce businesses operate with drop-
shipping models, holding minimal inventory and
relying on third-party warehouses. This minimizes
investment in inventory and shortens the CCC.
Sectors with Longer Inventory Holding Periods (Potentially
Longer CCC)
•Manufacturing (Durable Goods):
• Production of durable goods often requires
holding larger inventories of raw materials and
finished products.
• Longer lead times and potential for fluctuations in
demand necessitate higher inventory levels,
potentially extending the CCC.
•Automobiles:
• Car dealerships typically hold a significant
inventory of vehicles, requiring a larger
investment in working capital.
• The CCC might be longer due to the higher
inventory holding costs associated with
dealerships.
•Oil & Gas:
• Volatile commodity prices and complex supply
chains require holding inventory buffers to
mitigate risks.
• Companies might prioritize maintaining sufficient
reserves, potentially leading to a longer CCC.
 Cash Position and Surplus Cash
Investment in Working Capital
Management
• Cash position refers to the amount of liquid assets readily available to your company
• Measured through your cash and cash equivalents in the current assets section of your balance sheet
• When your cash position exceeds your operational needs, we have surplus cash, which can be either kept idle
to maintain liquidity or can be invested.
• Indian Hotels have not taken any debt and has reduced its debt from its balance sheet considerably in FY 23.
All the future expansions were sponsored by the retained earnings.
• This effective management of working capital has led to a reduction of their debt to equity to 0.33, which is
much less than its peer group, making them an attractive company to invest.
• On the other hand, MHRIL has very less retained earnings, which makes their future expansion dependent on
external debt.
• This has led to their debt-to-equity ratio to 6.17, making their debt level very high.
• It is a negative sign for upcoming investors and the company needs high liquidity to service their future debt
obligations, which can act as a brake in their future expansion plans.
 (Lower Cash Holding):
• Consumer Staples (Fast-Selling Goods):
• Prioritize fresh products and efficient
logistics to minimize spoilage and wasted
inventory.
• May hold lower cash reserves due to faster
inventory turnover, freeing up cash for
investment.
• Technology:
• Just-in-Time (JIT) inventory practices
minimize holding costs and free up cash for
research and development or strategic
acquisitions.
• E-commerce (Drop-Shipping Model):
• Hold minimal inventory, relying on third-
party warehouses. This minimizes
investment in inventory and potentially
leads to higher cash positions.
Higher Cash Holding:
•Manufacturing (Durable Goods):
• Production often requires larger inventories of
raw materials and finished products, leading to
higher cash needs.
• May invest surplus cash in short-term securities
to maintain liquidity while managing larger
inventories.
•Automobiles:
• Car dealerships typically hold a significant
inventory of vehicles, requiring a larger
investment in working capital.
• Cash management strategies may involve
balancing inventory needs with potential
investment opportunities for surplus cash.
•Oil & Gas:
• Volatile commodity prices and complex supply
chains necessitate holding inventory buffers to
mitigate risks.
• Cash positions might be higher to ensure
operational continuity and potentially invest in
exploration or refining projects.
Receivables Management & Credit Management in Working Capital Management

• Receivables management and credit management are intertwined functions within working
capital management that focus on optimizing the collection of payments from customers..
• Benefit of effective receivable management is improved cashflow, reduced bad debt and
lower financing cost.
• Credit management assess the creditworthiness of potential customers before extending
credit. Benefit of effective credit management is reduced risk of bad debt, improved
profitability and optimal uses of working capital.
• Indian hotels has a very less debtor day (28) in comparison to MHRIL (148),which shows that
Indian Hotels have more efficient collection and lower working capital needs.
 Conclusion
Aspect Company with Positive Net Working Capital (NWC) Company with Negative Net Working Capital (NWC)
Conservative. Focuses on self-financing through retained Aggressive. Prioritizes rapid growth and may use short-term debt or
Financing Policy earnings and avoids excessive reliance on external debt. trade credit to finance working capital needs.
Typically maintains a strong balance between profitability and May prioritize profitability over immediate liquidity. Negative NWC
liquidity. Positive NWC indicates sufficient current assets to suggests difficulty covering current liabilities with current assets,
Profitability & cover current liabilities, ensuring short-term financial potentially impacting debt repayment and operational continuity.
Liquidity obligations can be met.
Uses bank loans cautiously and strategically, often for larger May rely heavily on bank loans or short-term credit lines to bridge
Bank Finance investments or seasonal fluctuations. the gap between current liabilities and current assets.
May heavily utilize trade credit to extend payment terms and free up
May utilize public deposits like trade credit to a moderate cash flow for other purposes, potentially straining supplier
Public Deposits extent, balancing supplier relationships with payment terms. relationships.
Focuses on efficient inventory management to minimize May hold higher inventory levels to meet immediate customer
holding costs and avoid stockouts. Employs techniques like demand or take advantage of bulk discounts. Risk of stockouts or
Inventory just-in-time (JIT) inventory or ABC analysis to optimize obsolescence is higher.
Management inventory levels.
Employs techniques like just-in-time (JIT) inventory, ABC May rely on simpler inventory management methods or lack a
Inventory analysis, and forecasting to optimize inventory levels based on
dedicated strategy, potentially leading to inefficiencies.
Techniques demand and lead times.
Maintains a healthy cash reserve to cover unexpected
May have minimal cash reserves or a negative cash flow. Potential
expenses and meet operational needs. May invest surplus
reliance on borrowing to meet short-term obligations.
Cash Position cash in low-risk, liquid instruments.
Implements effective credit control policies to minimize bad May have looser credit control practices or struggle to collect
Receivables debts and collection delays. Offers clear payment terms and payments promptly, leading to higher bad debts and reduced cash
Management may incentivize prompt payments through discounts. flow.