Corporate Finance

Working Capital Management of

Chemical Sector

By: Group 2
23PGHR076 - Astha Gaur
23PGHR084 - Gowtham M
23PGHR096 - Pulkit Khurana
23PGHR109 - Siddhartha Shukla
23PGHR125 - Khyati Gupta
23PGHR126 - Manas Srivastava
 OVERVIEW OF THE CHEMICAL SECTOR IN INDIA
•Highly diversified industry with over 80,000 commercial
products

•Broad classification into bulk chemicals, speciality chemicals,

agrochemicals, petrochemicals, polymers, and fertilisers

•6th largest producer of chemicals globally, 3rd in Asia,

contributing 7% to India’s GDP

•4th largest producer of agrochemicals globally, with a

significant share in dyestuffs and dye intermediates production
(16-18% of global production)

•Strong position in global chemical exports and imports, ranking

14th in exports and 8th in imports (excluding pharmaceuticals)

•Proximity to the Middle East provides access to petrochemicals

feedstock and economies of scale

•Opportunities amid pandemic, supply chain disruptions, and

trade conflicts, especially with China

•Fiscal incentives and policies like PCPIRs and SEZs to

encourage downstream units and enhance production
 MARKET SIZE OF CHEMICAL SECTOR
•India's chemical sector was worth US$ 220 billion in 2022 and is
projected to grow to US$ 300 billion by 2025 and US$ 1 trillion by
2040.

•Demand for chemicals is expected to increase by 9% per annum

by 2025, contributing US$ 383 billion to India’s GDP by 2030.

•Plans are underway for PLI in the chemical & petrochemical

sector, with revisions to the PCPIR guidelines by the Department
of Chemicals & Petrochemicals.

•Revenue growth in the speciality chemicals segment is

forecasted at 19-20% YoY in FY22, driven by domestic demand
recovery and higher realisations.

•The speciality chemicals market in India is expected to grow

faster than China, increasing its market share to 6% by 2026.

•A shift in the global supply chain and domestic end-user demand

resurgence will fuel significant revenue growth in the speciality
chemicals sector.
 Working Capital Management
Working capital management refers to the set of activities performed by a
company to make sure it got enough resources for day-to-day operating expenses
while keeping resources invested in a productive way.

Working capital is the difference between a company’s current assets and its
current liabilities.
Current assets include cash, accounts receivable, and inventories.
Current liabilities include accounts payable, short-term borrowings, and
accrued liabilities.

Why Working Capital Management is Important

Ensuring that the company possesses appropriate resources for its daily activities
means protecting the company’s existence and ensuring it can keep operating as
a going concern. Scarce availability of cash, uncontrolled commercial credit
policies, or limited access to short-term financing can lead to the need for
restructuring, asset sales, and even liquidation of the company.

Factors That Affect Working Capital Needs

Working capital needs are not the same for every company.
Endogenous factors include a company’s size, structure, and strategy.
Exogenous factors include the access and availability of banking services, level
of interest rates, type of industry and products or services sold, macroeconomic
conditions, and the size, number, and strategy of the company’s competitors.
 Tata Chemicals Limited
•Operates through two verticals: Basic Chemistry Products and Specialty
Products

•Strong position in crop protection business through subsidiary Rallis India

Ltd.

•Green patented technology for Highly Dispersible Silica serving industries

like high-performance tires and oral care

•Innovation centers in Pune, Mithapur, and Bengaluru with world-class R&D

capabilities

•Sustainability core to all activities, including CSR initiatives and Centers of

Excellence for Coastal and Marine Conservation

•Key products include soda ash, soda bicarbonate, cement, salt, marine
chemicals, and crushed refined soda in Basic Chemistry Products

•Material Sciences include Highly Dispersible Silica for high-performance

materials like tires and rubbers, Nano Zinc Oxide for industrial and cosmetic
use
OperatingKey Financial
Efficiency Outcomes
Ratios of different companies
 Balance
Operating Sheet
Efficiency Ratios(of different
as at March 31, companies
2023)
 Balance
Operating Sheet
Efficiency Ratios(of different
as at March 31, companies
2023)
 Ratio Analysis
Current Ratio: 2.2040 The current ratio evaluates how well a business can use its current assets to cover its
short-term commitments. In India, the chemical industry generally views a current ratio of 1.5 to 2.5 as optimal.
The current ratio of 2.2040 for Tata Chemicals is within this range, which suggests that the company has enough
liquidity.

Quick Ratio: 1.3149 A more conservative way to gauge liquidity is the quick ratio, which separates current
assets from inventory. In the chemical industry, 0.8 to 1.2 is regarded as an acceptable fast ratio. With a quick
ratio of 1.3149, Tata Chemicals appears to have a comparatively high amount of liquid assets.

Super Quick Ratio: 0.1582 The most conservative liquidity ratio is the super quick ratio, which only counts trade
receivables and cash and cash equivalents as liquid assets. In general, the chemical industry considers a super
fast ratio of 0.2 to 0.5 to be optimum. Tata Chemicals may need to strengthen its cash and cash equivalents
position as seen by its super fast ratio of 0.1582, which is marginally below the optimal range.

Receivables Turnover Ratio: 25.7441 This ratio measures the efficiency of a company's credit collection
process. A higher ratio is generally better, as it indicates a faster collection of receivables. For the chemical
industry, a receivables turnover ratio between 8 to 12 is considered optimal. Tata Chemicals' ratio of 25.7441 is
significantly higher, suggesting an efficient collection process but also the possibility of overly strict credit
policies.
 Ratio Analysis
Ratio of Payables Turnover: 3.9293 This ratio evaluates a company's speed at repaying its trade debtors. An optimal
payables turnover ratio for the chemical sector is between 4 and 6. With a ratio of 3.9293, which is marginally below the
optimal range, Tata Chemicals may be paying its debtors a little too rapidly, which could put a pressure on its cash flow.

Ratio of Debt Turnover: 2.6002 This ratio assesses how well a business can make money off of its debt. In general,
the chemical sector considers a debt turnover ratio of two to three to be appropriate. The ratio of 2.6002 for Tata
Chemicals is within this range, indicating a respectable ability to make money off of its debt.

Inventory Turnover Ratio: 2.3785 The effectiveness of an organization's inventory management is gauged by this
ratio. A ratio of 4 to 6 for inventory turnover is thought to be ideal for the chemical sector. Tata Chemicals' ratio of 2.3785
is below the optimal range, suggesting that inventory management may be inefficient and that it needs to be improved.

Suggestions for Improvement:

1.Achieve the optimal range of 0.2 to 0.5 for the super quick ratio by strengthening the position of cash and cash
equivalents.
2.Examine credit policies and contemplate easing them a little in order to get the ratio of receivables turnover closer to
the industry average of 8 to 12. To get the payables turnover ratio closer to the optimal range of 4 to 6, assess the terms
of payment with creditors and think about extending them a little.
 Cash
Operating Flows
Efficiency Ratios
(as of different
at March companies
31, 2023)
 Cash
Operating Flows
Efficiency Ratios
(as of different
at March companies
31, 2023)
 Analysis
Operating of Cash
Efficiency Flows
Ratios Statement
of different companies
Operating Cash Flow: The company reported strong operating cash flows of ₹2,971 crore, an
increase from the previous year's ₹1,645 crore. This indicates robust operational performance,
which is commendable given the challenging market conditions faced by the chemical industry
during this period. The Russia-Ukraine conflict disrupted global supply chains, leading to rising
input costs, particularly for energy and raw materials. Additionally, inflationary pressures and
fluctuating demand in domestic and international markets posed challenges for the industry.
Tata Chemicals' ability to generate strong operating cash flows in this environment highlights
its operational efficiency and cost management strategies.

Investing Activities: The company incurred significant capital expenditures of ₹1,578 crore
for property, plant, and equipment, and intangible assets. This aligns with the Indian
government's emphasis on promoting domestic manufacturing and self-reliance through
initiatives like the Production Linked Incentive (PLI) scheme. The chemical industry is one of
the sectors targeted for incentives under the PLI scheme, encouraging investments in capacity
expansion and technological upgradation.
However, global supply chain disruptions and geopolitical tensions may have impacted the
timely execution of these capital projects, leading to potential delays or cost overruns.
 Analysis
Operating of Cash
Efficiency Flows
Ratios Statement
of different companies

Financing Activities: Tata Chemicals raised new borrowings of ₹3,892 crore and repaid
borrowings of ₹5,087 crore, resulting in a net decrease in borrowings. This reflects the
company's efforts to maintain liquidity and finance its operations and investments. The
Reserve Bank of India's accommodative monetary policy stance during this period, with
relatively lower interest rates, may have facilitated the company's borrowing activities.

International Trade Policies: The chemical industry's trade dynamics were influenced by
global developments, such as the Russia-Ukraine conflict and ongoing trade tensions between
major economies. Disruptions in the supply of critical raw materials and energy from Russia,
coupled with shifts in trade patterns, may have impacted Tata Chemicals' import and export
activities. The company's foreign exchange (gain)/loss adjustments in the cash flow statement
indicate its exposure to currency fluctuations, which could be influenced by these geopolitical
events.

Additionally, changes in international trade policies, tariffs, and non-tariff barriers implemented
by various countries may have impacted the company's global operations and supply chains.
 Business
Operating Efficiency RatiosStrategy
of different companies

Strategic Objective 1 Strategic Objective 2 Strategic Objective 3

Grow Capacities to Maintain Invest to Attain Leadership in Embed Sustainability Across
Leadership in Core Products Specialty Products Segments

Strategic Objective 4 Strategic Objective 5

Drive Operational Excellence in Achieve Functional Excellence
Manufacturing and Supply Chain through Innovation, Digitalization
Management and People
 Pidilite
•Pidilite has been pioneering products for small to large applications, both at
home and in industries.

•It is a market leader in adhesives and has a strong presence in other

segments like sealants, waterproofing solutions, and construction chemicals

•Pidilite has a robust and growing network that makes its products accessible
across demographics and geographies.

•The company also embraces its social responsibility through initiatives in

rural development, education, and healthcare.

•Diverse Product Portfolio: Pidilite's extensive product portfolio caters to a

wide range of applications, from household to industrial use.

•Innovation and Quality: Pidilite is committed to innovation and quality in its

products.

•Strong Distribution Network: Pidilite has a robust and growing distribution

network that ensures its products are accessible across different
demographics and geographies.
OperatingKey Financial
Efficiency Outcomes
Ratios of different companies
 Balance
Operating Sheet
Efficiency Ratios(of different
as at March 31, companies
2023)
 Balance
Operating Sheet
Efficiency Ratios(of different
as at March 31, companies
2023)
 Ratio Analysis
Current Ratio: 1.8557 In India, the chemical industry's optimal current ratio usually falls between 1.5 and 2.5.
With a current ratio of 1.8557, Pidilite is within this range, demonstrating a respectable degree of liquidity.

Quick Ratio : 1.0645 For the chemical sector, the quick ratio should ideally fall between 0.8 and 1.2. With a
quick ratio of 1.0645, Pidilite is within the ideal range and appears to have a suitable amount of liquid assets
without having an excessive amount of inventory.

Super Fast Ratio: 0.7391 For the chemical sector, a super fast ratio of 0.2 to 0.5 is often ideal. With a super fast
ratio of 0.7391, Pidilite is above the ideal range and has a comparatively high amount of trade receivables and
cash and cash equivalents.

Receivables Turnover Ratio: 8.3804 For the chemical sector, a receivables turnover ratio of 8 to 12 is ideal.
The Pidilite ratio of 8.3804 is within this range, indicating that the credit collection mechanism is effective.

Payables Turnover Ratio: 6.5199 For the chemical business, a payables turnover ratio of four to six is ideal.
Pidilite may be paying creditors a little too soon, which could put a burden on its cash flow, as indicated by its
ratio of 6.5199, which is marginally higher than the ideal range.
 Ratio Analysis

Debt Turnover Ratio: 4.1202 The ideal debt turnover ratio for the chemical industry is generally between 2 to 3.
Pidilite's ratio of 4.1202 is higher than the optimal range, suggesting an ability to generate revenue from its debt,
but potentially indicating a high level of debt.

Inventory Turnover Ratio: 4.0900 The ideal inventory turnover ratio for the chemical industry is between 4 to 6.
Pidilite's ratio of 4.0900 falls within this range, indicating efficient inventory management.

Suggestions for Improvement:

1.In order to get the super fast ratio closer to the desired range of 0.2 to 0.5 while retaining appropriate liquidity,
think about lowering the amount of cash and cash equivalents as well as trade receivables.
2.In order to get the payables turnover ratio closer to the optimal range of 4 to 6, which could enhance cash flow
management, evaluate the terms of payment with creditors and consider extending them.
3.Examine the debt levels and look for ways to cut debt if necessary to get the debt turnover ratio closer to the 2
to 3 industry standard.
4.To keep the inventory turnover ratio between the desired range of 4 and 6, continue to use effective inventory
management techniques.
Cash Flows (as at March 31, 2023)
 Cash
Operating Flows
Efficiency Ratios
(as of different
at March companies
31, 2023)
 Analysis
Operating of Cash
Efficiency Flows
Ratios Statement
of different companies
Operating Activities: The net cash generated from operating activities increased from Rs. 1,305.86
crores in the previous year to Rs. 1,830.93 crores in the current year. This significant increase of around
40% indicates that the company's core operations were performing well, generating strong cash flows
despite potential challenges in the market. This increase could be attributed to:
1.Increase in profit before tax from Rs. 1,590.24 crores to Rs. 1,667.72 crores, suggesting improved
profitability.
2.Effective working capital management, with decreases in trade receivables and inventories, indicating
better collection and inventory management.
3.Increase in trade payables, potentially due to better credit terms or extended payment cycles with
suppliers.

Investing Activities: The net cash used in investing activities increased from Rs. (539.88) crores in the
previous year to Rs. (753.52) crores in the current year. This increase could be attributed to:
4.Higher capital expenditure on property, plant, and equipment, indicating an increase in expansion or
new projects.
5.Proceeds from the sale of investments and disposal of assets.
The increase in investing cash outflows could be a conscious strategy to capture opportunity during
uncertain economic conditions.
 Analysis
Operating of Cash
Efficiency Flows
Ratios Statement
of different companies

Financing Activities: The net cash used in financing activities increased from Rs. (435.60) crores in the
previous year to Rs. (672.69) crores in the current year.
This increase was primarily due to:
1.Higher repayment of loans, potentially due to improved cash flows or a strategic decision to reduce debt
levels.
2.Increase in dividend payments to equity shareholders, suggesting a confident payout policy.

Cash flow statement reflects a company that has maintained strong operational performance, generating
robust cash flows from operations. The reduced investing activities could be a tactical move to preserve
cash during challenging economic conditions or a temporary pause in expansion plans. The increased
financing outflows indicate a focus on debt reduction and rewarding shareholders through higher dividend
payouts.
 Business
Operating Efficiency RatiosStrategy
of different companies

Strategic Objective 1 Strategic Objective 2 Strategic Objective 3

Focus on operational efficiency Strategic asset management Prudent capital allocation
and cost optimization

Strategic Objective 4 Strategic Objective 5

Debt reduction and financial Achieve Functional Excellence
discipline through Innovation