INTRODUCTION INDIAN ALUMINIUM INDUSTRY

Aluminium is a metal with the symbol Al and belonging to the Boron group of chemical elements. It is a light weight, silver-white, metallic element that makes up approximately 7% of the earths crust and is the third most abundant element (after silicon and oxygen) and the most abundant metal in the Earths crust. It makes up about 8% by weight of the earths solid surface. It is found combined in over 270 different minerals. The chief ore is bauxite. Aluminium is known for its low density and for its ability to resist corrosion due to the phenomenon of passivation. Structural components made from aluminium and its alloys are useful to the aerospace industry and are important in other areas of transportation and structural materials. India has nearly 10 per cent of the worlds bauxite reserves and a growing aluminum sector that leverages this. Demand in the domestic market is expected to grow by 8-10 per cent by 2020. India is expected to have an installed aluminum capacity of 1.7 to 2 million tons per annum. Global Aluminium production has grown at 7%: Per capita consumption of aluminum is closely related to Gross Domestic Product (GDP) of a country. The global aluminum production grew at a CAGR of 6.1%, while the consumption increased at a CAGR of 5.9% during 2002-10. Indian Aluminum Industry: India has bauxite reserve base of 1.44 bt and reserves of 0.77 bt. With production of 16 mt in 2009, India accounted for around 8.04% of global bauxite production. India's production of aluminium aggregated 1.4 mt in 2009, accounting for 3.38% of global production. Though there are more than 200 bauxite mines operating in the country. Most of these are small open cast and manually operated. Fifteen major deposits account for 75% of the country's production. These are mostly the captive bauxite mines of the major alumina producers in the country and the mines of Gujarat Mineral Development Corporation (GMDC). Among these, the Panchpatmali bauxite mine of National Aluminium Company Ltd. (Nalco) in Orissa accounts for about 40% of the country's production. Salient features of Indian Aluminium Industry: Highly concentrated industry with only five primary plants in the country Controlled by two private groups and one public sector unit Bayer-Hall-Heroult technology used by all producers Electricity, coal and furnace oil are primary energy inputs All plants have their own captive power units for cheaper and un-interrupted power supply Energy cost is 40% of manufacturing cost for metal and 30% for rolled products Plants have set internal target of 1 2% reduction in specific energy consumption in the next 5 - 8 years Energy management is a critical focus in all the plants Two plants have declared formal energy policy Each plant has an Energy Management Cell Achievements in energy conservation are highlighted in the Annual Report of the company Energy targets are based on best energy figures achieved in their sector / region and by the plant itself in the past Generally, government policies were rated as conducive to energy management Task Force formed by BEE in this sector to work as catalyst in promoting energy efficiency
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 High cost of technology is the main barrier in achieving high energy efficiency Indias share of global aluminum production is hovering around 3 per cent. The Indian aluminum industry is highly concentrated with only five primary plants in the country from three business groups. The Aditya Birla Group: Hindalco Industries Limited (Hindalco), Indian Aluminium Company Limited (Indal) Sterlite Industries: Bharat Aluminium Company Limited (Balco), Madras Aluminium Company Limited (Malco) Public Sector Undertakings: National Aluminium Company Limited (Nalco). Consumption of Aluminum: The consumption of aluminium in India of 1.2 kg per person in 2009 is very low in keeping with the countrys low GDP. However the low per capita consumption of aluminum in India is in fact an opportunity for growth in aluminium consumption against the back drop of fast growing economic conditions in India. Sector-wise aluminium consumption: Aluminium, is used in various sectors, such as, transportation, packaging, building / construction and electricity. However, the usage pattern differs significantly for Indian and rest of the world. Globally, the automotive, packaging and the construction sectors are the major end users of aluminium, while in India the power sector consumes most followed by automotive and housing sectors. Sector-wise consumption break-up: Electrical - 65% Transport - 21% Construction - 8% Packaging - 5% Industrial machinery - 4% Consumer durables - 4% Steel sweetening, powers & chemicals - 13% The Transportation sector is a major driver of aluminum consumption in the future where the onus of growing consumption lies with the industry. The automobile segment has attracted major global producers to set up their manufacturing facilities in the country. All these manufacturers are now engaged in bringing out high quality fuel efficient cars in the market for India as well as global markets. Besides cars, there are commercial vehicles which have also witnessed quantum growth over the years. Use of Aluminum as an alternative to steel has huge potential in the railways. The government has taken note of this and has started working on that. Aluminum castings are primarily used in transport and automobile sectors. The global casting in 2009 was at around 7.4 million tons, against that consumption in India as only around 110,000 tons. The countrys share in the global downstream sector is low as compared to other developed countries. Casting of aluminum alloys is a particularly versatile process and offers greater degree of flexibility than other methods of manufacture, and can be done by various methods like in sand, in metallic dies, under gravity or pressure, and cast by modern methods like low pressure die- casting (LPDC), investment casting, and squeeze casting. No other metal can be cast under such a wide range of processes and sizes varying from a few grams to 100 kg. Although, domestic aluminum production exceeds the domestic demand, India imports on an average 15-20 per cent of the total supply of aluminum. Imports are necessary, due to the shortage of domestically produced ingots. Indias imports of aluminum and products primarily comprise of unwrought items like ingots, billets, scrap, bars and rods.
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Imports of primary aluminum products account for less than 10 per cent of domestic consumption. India also exports aluminum products such as, scrap, powder and flakes, bar rods, foil, pellets, sheets, tubes and pipes. Exports figures hovers around 82000 tons annually and the major importer countries of Indian aluminium are Bangladesh, Sri Lanka, Egypt and Iraq. Aluminium Structure: The aluminium industry in India can be classified as:(a) The primary producers who produce ingots and billets (primary form of aluminium) using bauxite.(b) The secondary producers who add value to the ingots and billets to produce semifabricated products. At present there are only five compani es in the primary aluminium market viz. Hindalco, I n d i a n A l u m i n i u m ( Indal) , M a d r a s A l u m i n i u m ( Malco), National Aluminum (Nalco) a n d B h a r a t A l u m i n i u m ( Balco) . The former three are private sector companies while the latter t w o a r e g o v e r n m e n t owned. All the primary producers have integrated forward into the manufacture of high value semi-fabricated products like rods, rolled products, extrusions and foils. Regulated till 1989: Until 1989, the Aluminum Control Order (ACO) required all domestic manufacturers to ensure that atleast 50% of their ingot p r o d u c t i o n w a s electrical grade, for use by the transmission power industry. The government fixed ingot prices on the basis of a Retention Pricing Mechanism, taking into consideration the average retention prices of all producers and a minimum return on equity. The above control resulted in a skewed product mix and s h o r t a g e s o f aluminum for other sectors. The problem was further compounded by the vulnerable financial position of State Electricity Boards (the main users of electrical grade aluminum) and high import and excise duties. The producers resorted to inflated prices for other types of aluminium to compensate for the disadvantages they suffered because of this regulation. The (ACO) was scrapped in 1989 and in 1991 the government lifted restrictions on capacity additions resulting in a free market environment. Aluminium Inputs: Bauxite: Indian bauxite reserves at 3 billion tonnes, are the 5th largest in the world, and account for 6% of total world reserves. Most alumina refineries are designed around the bauxite reserves to reduce transportation costs. Cost per ton of bauxite varies for players depending on the location of the refinery and bauxite mines. For example, Nalco has an estimated 1,600 m tonnes of bauxite reserves only 20 kms from its alumina refinery, enabling it to become one of the most economical bauxite producers in the world. Power: Power constitutes the single largest cost component for aluminium manufacturers (3540% of operating costs). Almost all the major Indian companies have captive power plants thus giving them access to cheap power. This makes India one of the most competitive low cost aluminium producers in the world. Hindalco and Nalcos production costs are amongst the lowest in the world.Both companies have the advantage of 100% captive power, vital in a power intensive industry and in a power deficit country like India.
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Aluminium Products: Aluminium products can be segregated into rolled products, extrusions, and foils. Rolled products find applications in automobiles (paneling, floors a n d windows, but are yet to find use in structural parts and bodies), construction (roofing and walls), consumer durables, engineering applications, web stock for laminated packaging (for toothpastes). A major portion of rolled products capacity is accounted for by the five integrated producers (around 82%). Extrusions include products as bars, pipes and tubes. Major users of extruded aluminium products are buildings, transportation and electrical sector Production in this segment is widely spread and the top three players control a r o u n d 31% of the market (the largest company - Hindalco commands around 14% market share in this segment). Foils are sheets having thickness of less than 0.2 mm up to 0.006 mm finding application mainly in the packaging sector. Major users of aluminium foils i n c l u d e the pharmaceutical, consumer products, cigarette and cable manufacturing industries CRUX: Supply: Supply of aluminum is in excess and any deficit can be imported at low rates of duty. Currently, domestic production comfortably meets domestic requirements. Demand: Demand for aluminium is estimated to grow at 6%-8% per annum in view of the low per capita consumption in India. Also, demand for the metal is expected to pick up as the scenario improves for user industries, like power, infrastructure and transportation. Barriers to entry: Large economies of scale. Consequently, high capital costs. Bargaining power of suppliers: Most domestic players operate integrated plants. Bargaining power is limited in case of power purchase, as Government is the only supplier. However, increasing usage of captive power plants (CPP) will help to rationalize power costs to a certain extent in the long-term. B a r g a i n i n g p o w e r o f c u s t o m e r s : B e i n g a c o m m o d i t y, c u s t o m e r s enjoy relatively high bargaining power, as prices are determined o n d e m a n d a n d supply. Competition: C o m p e t i t i o n i s p r i m a r i l y o n q u a l i t y a n d p r i c e , a s b e i n g a commodity, differentiation is difficult. However, the recent spate of consolidation has reduced the competitive pressure in the industry. Further, increasing value addition to aluminium products has helped some companies protect themselves from the high volatilities witnessed in this industry.

NATIONAL ALUMINIUM COMPANY A NAVRATNA COMPANY

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NALCO is considered to be a stepping stone in the history of Indian Aluminium Industry. Nalco has not only addressed the need for self-sufficiency in aluminium, but also given the country an edge in producing this strategic metal to the best of world standards. After the discovery of 1000 million tons of Bauxite reserves in the Eastern Ghats, the govt. of India on the 28th March, 1978, authorized Aluminum Pechiney of France to prepare a feasibility report on the industrial exploration of bauxite for the establishment of an integrated Aluminum complex. The result of this study led to shifting of focus of attention to Panchpatmali, 30km.East of Koraput District of Orissa. Nalco was incorporated in 1981 as a public sector Unit. The newly founded NALCO signed an agreement of collaboration with aluminum Pechiney, the world leader in this field for incorporation of technical know-how to set up Asias largest integrated aluminium complex. Nalco is one of the biggest and Asias largest integrated complex, allembracing B a u x i t e m i n i n g , A l u m i n a r e f i n i n g , A l u m i n i u m s m e l t i n g a n d c a s t i n g p o w e r generation, rail and port operations. In 1981, 7263 acres of land at Damanjodi in Koraput district and 4057 acres at Angul, in Orissa, was acquired for setting up of the Asias largest aluminaaluminium complex named National Aluminium Company (NALCO). During the inception of t h e c o m p a n y , t h e r e w e r e d i s p l a c i n g o f 6 3 5 f a m i l i e s i n 5 1 v i l l a g e s - 6 0 0 f a m i l i e s i n Damanjodi sector and 35 families in A n g u l s e c t o r . F r o m t h e s e 6 3 5 d i s p l a c e d families, employment was provided to 625 nominees. Besides, 1495 families were substantially affected (i.e. parting with one third or more land) in Angul sector. Even from these, jobs have been provided to 1060 persons. Nalco has also been sponsoring ITI training to such persons and 543 have been technically trained so far. Apart from financial compensation, employment and rehabilitation packages, Nalco has also spent more than Rs. 100 crores towards various social sector development activities. Creation of infrastructure in the surrounding villages for communication, education, health care a n d d r i n k i n g w a t e r g e t s p r i o r i t y i n t h e p e r i p h e r y d e v e l o p m e n t p l a n s o f t h e company. Community participation in innovative farming, pisciculture, social forestry and sanitation programs apart, encouragement to sports, art, culture and literature are all a part of Nalco's deep involvement with the life of the community. Aluminium Smelter Plant: The 230000 tpa capacity Aluminium Smelter is located at Angul in Orissa. Based on energy efficient state-of-the-art technology of smelting and pollution c o n t r o l , t h e S m e l t e r P l a n t i s i n o p e r a t i o n s i n c e 1 9 8 7 . With the acquisition and subsequent merger of I n t e r n a t i o n a l A l u m i n i u m Products Limited (IAPL) with Nalco, the 50,000 tpa export-oriented Rolled Products Unit is all set to produce foil stock, fin stock, can stock, circles, coil stock, cable wraps, standard sheets and coils. Captive Power Plant: A Captive Power Plant of 720 MW capacity, comprising 6 x 120 MW clusters, has been established for firm supply of power to the Smelter, at Angul The water for the Plant is drawn from River Brahmani t h r o u g h a 7 k m l o n g double circuit pipeline. The coal demand is met from a mine of 3.5 million tpa capacity opened up for Nalco at Bharatpur in Talcher by Mahanadi Coal fields Limited. The Power Plant is inter-connected with the State Grid. Location:
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Registered Office: Bauxite Mine: Aluminium Refinery: Captive Power Plant: Aluminium Smelter: Port Facilities: Rolled Product Unit:

Bhubaneswar Panchpatmali Damanjodi Angul Angul Vishakhapatnam Angul

Achievements Of NALCO: 1980: Signing of Memorandum of Understanding in January, by the Government of India for technical collaboration and financing of an integrated alumina-aluminium complex with Aluminium Pechiney of France. 1981: Incorporation of the company on 7th January, as a wholly owned enterprise of Government of India. The Company manufactures aluminium hydrate, claimed alumina, aluminium ingots and aluminium wire rods. 1993: Signing of a project in co-operation agreement with Hydro Aluminium AG, N o r w a y t o c a r r y o u t a j o i n t s t u d y f o r f e a s i b i l i t y of setting up a 100% export o r i e n t e d aluminium plant of 0.9 million tonnes per annum capacity. 1994: Proposition to undertake expansion of bauxite mine from 2.4million TPA to 4.8 million TPA and alumina refinery from 800000 tpa to 1350000 tpa. 1995: Set up of Smelter plant at Angul with a capacity of 26000 TPA of strip c a s t i n g f a c i l i t y . A s p e c i a l A l u m i n a p l a n t a t D a m a n j o d i w a s u n d e r t a k e n w i t h a capacity of 20,000 TPA. A 10,000 TPA detergent grade Zeolite (Zeolite-A) plant at Damanjodi, was also set up. 1996: Approval by the government on 18/12/1996 to expand the capacities of bauxite mine at Panchpatmali from 24 l a k h t o n n e s t o 4 8 lakh tonnes and alumina refinery at Damanjodi from 8 lakh tonnes to 15.75 lakh tonnes. 1997: i. Opening of a stockyard at Bhiwandi in Thane district. National Aluminium Company (Nalco), ii. India's largest producer andex porter, got the ISO 14001 certification for e n v i r o n m e n t a l e x c e l l e n c e . iii. Signing of an agreement by NALCO, Bhubaneswar of national importance with the NRDC for licensing from the NRDC the know how to manufacture gallium from the sodium alumina plant. 1998: T h e c o m p a n y h a s b e e n f o r c e d t o c u r t a i l i t s p o w e r generation capacity due to a d r a s t i c r e d u c t i o n i n i n t a k e b y G r i d c o - t h e n o d a l p o w e r t r a n s m i s s i o n a n d distribution agency in Orissa. 1999: Setting up a plant for extraction of gallium at its aluminium refinery complex at Damanjodi.
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2000: ICRA has retained the Laaa rating for the Rs 642.58-crore Non-convertible debenture issue of the company, while it has assigned an A1 rating to the Rs 5crore CP issue of Narmada Chematur Petrochemicals. 2001: E n t e r i n g i n t o d e t e r g e n t b u s i n e s s . 2002: N a l c o ' s a l u m i n a refinery capacity increased to 15.75 lakh tonnes. 2003: Delisting of securities from stock e x c h a n g e s o f Bhubaneswar, Delhi, Kolkata & Chennai. 2004: Nalco open offer to acquire 20% stake for Ondeo Nalco India. 2005: Agreement with NMDC. 2006: 2nd Best Practice in Environment, Safety & Health in industries of Odisha award by CII-ER to CPP -2006. 2007: Best Environment Management Award to CPP for 2007. Best Performance in Accident Prevention, Safety management & communication System to CPP for 2007. 2008: Pollution Control Excellent Award 2008 to Panchpatmali Bauxite Mines from State Pollution Control Board, Bhubaneswar. 2009: 2nd Best Practice in Environment Management instituted by Confederation of Indian Industry (CII) to Alumina Refinery for 2008-09. Pollution Control Excellence Award 2009 by OSPCB to Alumina Refinery.

NALCO Products: Aluminium Metal: i. Ingots ii. Sows iii. Billets iv. Wire Rods v. Alloy Wire Rods vi. Cast Strips Alumina & Hydrate: i. Calcined Alumina ii. Alumina Hydrate Zeolite A

3 Years Performance Highlights: (all the following figures for sales, exports, net profits & production are in rupees crore)

SALES
6600 6400 6200 6000 5800 5600 5400 5200 5000 4800 4600 2008-09 2009-10 2010-11

EXPORTS
2250 2200 2150 2100 2050 2000 1950 2008-09 2009-10 2010-11

NET PROFIT
1400 1200 1000 800 600 400 200 0 2008-09 2009-10 2010-11

EPS
12 10 8 6 4 2 0 2008-09 2009-10 2010-11

WORKING CAPITAL
Investment is required to procure fixed assets by every business, which is on a long term basis and is called Long term Funds or Fixed Capital. Funds are also needed for short-term purposes to finance the day-to-day working of the business and are termed as Short-term Funds or Working Capital. The management of the working capital is equally important as the management of long-term investments. E v e n a b u s i n e s s w h i c h i s f u l l y equipped with all types of fixed assets needed will shut down without adequate supply of raw materials for processing; cash to pay for wages, power and other costs; creating a stock of finished goods to feed the market demand regularly; and, The ability to grant credit to its customers. Working capital is thus like the heart of a business without which the business cannot sustain. Working capital cycle involves conversions and rotation of various constituents or components of the working capital. Initially cash is converted into raw materials. Along, with the usage of fixed assets resulting in value additions, the raw materials also get converted into work in progress and then into finished products. When sold on credit, these finished goods assume the form of debtors who give the business cash on due date. Thus cash assumes its original form again at the end of one such working capital cycle but in the course it passes through various other forms of c u r r e n t a s s e t s t o o . T h i s i s h o w v a r i o u s c o m p o n e n t s o f c u r r e n t a s s e t s k e e p o n changing their forms due to value addition. As a result, this cycle is repeated and business operations continue. Thus, the working capital cycle involves rotation of various constituents of the working capital. While managing the working capital; two characteristics of current assets should be kept in mind viz. (i) short life span, and (ii) swift transformation into other form of current asset. The constituents of current assets have comparatively very short life span. The life span of current assets depends upon the time required in the activities of production, sales and collection and degree of synchronization within them. A very short life span of current assets results into swift transformation into other form of current assets for a running business. Characteristic Implications: D e c i s i o n s h a v e t o b e t a k e n repeatedly and frequently. Components are closely related and m i s m a n a g e m e n t o f any one component can negatively affect the o t h e r components too. Insignificance in the difference between the present value and the book value of profit. Components: Stock of Cash Stock of Raw Material Stock of Finished Goods Value of Debtors Miscellaneous current assets Concepts: The total of all current assets is termed as Gross Working Capital and the difference between current assets and current liabilities is called as Net Working Capital.
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Constituents Of Current Assets And Current Liabilities: Current Assets i. Inventories Raw materials and components, Work in progress, Finished goods and others, ii. Trade debtors iii. Loans and advances iv. Cash and bank balance Current Liabilities i. Sundry creditors ii. Trade advances iii. Borrowings iv. Provisions Factors: Nature of Enterprise: The nature and the working capital requirements of an enterprise are inter related. A m a n u f a c t u r i n g i n d u s t r y h a s a l o n g c yc l e o f o p e r a t i o n o f t h e w o r k i n g capital whereas a firm providing services has a short cycle of operation of the working capital . T h e amount required also varies as per the nature; an e nterprise i n v o l v e d i n production would require more working capital than a service sector enterprise. Manufacturing/Production Policy: The working capital varies according to the production policy of the enterprise, some follow the policy of uniform production even if the demand varies from time to time, and others may follow the principle of 'demand-based production' in which p r o d u c t i o n i s b a s e d o n t h e demand during that particular phase of time. Working Capital Cycle: In manufacturing concern, working capital cycle starts with the purchase of raw materials and ends with realization of cash from the sale of finished goods. The cycle involves purchase of raw materials and stores, its conversion in to stock of finished goods through work in progress with progressive increment of labor and service cost, conversion of finished stock into sales and receivables and ultimately realization of cash and this cycle continuous again from cash to purchase of raw materials and so on. Operations: In case of seasonal businesses the requirement of working capital fluctuates. The working capital needs of such businesses may increase considerably during the busy season a n d d e c r e a s e d u r i n g t h e s l a c k s e a s o n . A i r c o n d i t i o n e r s a n d c o o l e r s h a v e a g r e a t demand during summers, while in winters the sales are negligible. Market Condition: If there is high competition in the chosen product category, then it becomes a necessity to o f f e r f a c i l i t i e s l i k e c r e d i t , i m m e d i a t e d e l i v e r y of goods, etc. for which the wo rking capital requirement will be h i g h . O t h e r w i s e , i f t h e r e i s n o c o m p e t i t i o n o r l e s s competition in the market then the working capital requirements will be low. Credit Policy: The credit policy is concerned in its dealings with debtors and creditors considerably affecting of the working capital requirements. An organization which purchases its r a w m a t e r i a l s o n c r e d i t a n d s e l l s i t s p r o d u c t s / s e r v i c e s o n c a s h r e q u i r e s l e s s e r amount of working capital. On the other hand a business buying its requirements for cash and allowing credit to its customers, shall need larger amount of funds and is bound to be tied up in debtors or bills receivables. Business Cycle: Alternate expansion and contraction in general business activities are referred to as business cycle. In a period of boom i.e. when the business is prosperous there is a need for larger amount of working capital due to increase in sales, rise in
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prices, optimistic expansion of business etc. On the contrary at the time of depression i.e. when there is a down swing of the cycle, business contracts, sales decline, difficulties are faced in collections from debtors and firms may have a large amount of working capital lying stagnant. Availability of Raw Material: If there is abundant and instant availability of raw materials, then the business need not maintain a large stock of the same, thereby reducing the working capital investment in raw material stock. On the other hand, if raw material is not readily available then a large inventory or stock needs to be maintained, thereby calling for substantial investment in the same. Growth and Expansion: Enhancement of the working capital requirement is a result of the growth and expansion of the business . As business grows and expands, it needs a larger amount of working capital. Normally, the need for increased working capital funds precedes growth in business activities. Earning Capacity and Dividend policy: D u e t o c e r t a i n f a c t o r s l i k e t h e q u a l i t y o f products, monopoly conditions etc; some firms have more earning capacity than others . Such firms may generate cash profits from operations and contribute it to their capital. The requirements of the working capital are also influenced by the dividend policy of a concern. A firm that maintains steady high rate of cash dividend irrespective of its generation of profits needs more capital than the firm retains larger part of its profits and does not pay high rate of cash dividend. Price Level Changes: Generally, rising price level requires a higher investment in the working capital. With increasing prices, the same level of current assets needs enhanced investment. Manufacturing Cycle: The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. The longer period the manufacturing cycle, the more would be the need for working capital. F o r proper control and management the business needs to estimate the requirement for working capital in advance . Other Factors: C e r t a i n o t h e r f a c t o r s s u c h a s o p e r a t i n g e f f i c i e n c y , m a n a g e m e n t a b i l i t y , irregularities in supply, import policy, asset structure, importance of labour, banking f a c i l i t i e s e t c . also influences the requirement of working capital.

Components: Stock of raw material Purchase cost of raw materials Stock of work in process At cost or market value, whichever is lower Stock of finished goods Cost of production Debtors Cost of sales or sales value Cash Working expenses Each constituent of the working capital is valued on the basis of valuation. The assessment of the working capital should be accurate even in the case of small and micro enterprises where business operation is not very large. Negligence in proper assessment of the working capital, can affect the day-to-day operations severely. It may lead to cash crisis and ultimately to liquidation. An inaccurate assessment of the working capital may cause either under-assessment or over-assessment of the working capital and both of them are dangerous.

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WORKING CAPITAL MANAGEMENT

Working Capital Management refers to management of current assets and liabilities. Working Capital Management is a significant fact of financial management. Its importance stems from two reasons:a. I n v e s t m e n t in current assets represents a s u b s t a n t i a l p o r t i o n o f total investment. b. Investment in current assets and the level of current liabilities have to be geared quickly to change in sales. The importance of working capital management is affected in the fact that financial management spends a great deal of time in managing current a s s e t s a n d c u r r e n t liabilities. The problem of working capital management is one of the best utilization of a scarce resource. Thus the job of efficient working capital management is a formidable one, since it depends upon several variables such as character of the business, the lengths of the merchandising cycle, rapidity of turnover, scale of operations, volume and terms of purchase & sales and seasonal and other variations. Consequences Of Over Assessment: R e s u l t s i n u n n e c e s s a r y a c c u m u l a t i o n o f inventories. Offers too liberal credit terms to buyers and very poor recovery system and cash management. Leads to inefficiency. Reduces return on investment. Consequences Of Under Assessment: Difficult for the enterprise to undertake projects due to unavailability of working capital. Implementation of plans may become difficult and the goals may not be achieved. Emergence of cash crisis. Incapability to achieve optimum capacity utilization of fixed assets. May lead to business closure for not achieving business goals in time. The business may be compelled to buy raw materials on credit a n d s e l l finished goods on cash. In the process it may end up with increasing cost of p u r c h a s e s a n d r e d u c i n g s e l l i n g p r i c e s b y o f f e r i n g d i s c o u n t s . B o t h t h e s e situations would affect profitability adversely. Non-availability of stocks due to non -availability of funds may r e s u l t i n production stoppage. Classification: Initial working capital: In i t i a l w o r k i n g c a p i t a l i s t h e c a p i t a l required at the time of commencement of business . T h e s e a r e t h e promotional expenses incurred at the earliest stage of formation of the enterprise. Regular working capital: This type of working capital remains always in the enterprise for the successful operation. It supplies the funds necessary to meet the current working expenses i.e. for purchasing raw material and supplies, payment of wages, salaries and other sundry expenses. Fluctuating working capital: Seasonal working capital is the capital is needed to meet the seasonal requirements of the business. It is used to raise the volume of production by improvement or extension of machinery. It may be acquired from
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any financial institution which can, of course, be met with short term capital. It is also known as variable working capital. Reserve margin working capital: Reserve margin working capital represents the amount utilized at the time of contingencies. These unpleasant events may occur at any time in the life of the business such as inflation, depression, slump, flood, fire, earthquakes, strike, lay off and unavoidable competition etc. In this case greater amount of capital is required for maintenance of the business.

Financing Working Capital: Working capital needs to be financed through shortterm funds due to their nature of changing forms. The following are major sources of raising short-term funds. Suppliers Credit: At times, business gets raw material on credit from suppliers. The cost of raw material is paid after sometime that is upon the completion of the credit period. Thus, without an outflow of cash the business is in a position to use raw materials and continue its activities. The credit given by the suppliers of raw materials is for a short period and is considered as a current liability. These funds should be used for creating current assets like stock of raw material, work-inprocess, finished goods, etc. Bank Loan For Working Capital: This is a major source for raising short-term funds. Banks extends loans to businesses to help them create necessary current assets as to achieve the required business level. The loans are available for creating the following current assets: i. Stock of raw materials ii. Stock of work in process iii. Stock of finished goods iv. Debtors Banks provide short-term loans against these assets, keeping some security margin. The advances given by banks against some current assets are short-term in nature and banks have the right to ask for immediate repayment if they consider doing so. Thus banks loans for creation of current assets are also current liabilities. Promoters Funds: It is advisable to finance a portion of current assets from the promoters funds. They are long term funds and therefore do not require immediate repayment. These funds increase the liquidity of the business.

MANAGEMENT OF INVENTORY
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Inventories constitute the most significant part of current assets of a large majority of companies in India. On an average, 60% of current assets of public limited companies in India are inventories. A considerable amount of funds is required to be committed to inventories as they are maintained in large sizes by the firms. In order to avoid unnecessary investments it is very important to manage inventories very effectively and efficiently. Negligence in the management of inventories will have a negative impact on the long run profitability of the business. The main purpose of inventory management is to ensure availability of materials in sufficient quantity as and when required and also to minimize investment in inventories at considerable degrees, without any adverse effect on production and sales, by using simple inventory planning and control techniques. Need To Hold Inventories: There are three general motives for holding inventories. Transaction Motive emphasizes the need to maintain inventories to facilitate smooth production and sales operation. Precautionary Motive necessities of holding inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors. Speculative Motive influences the decision to increase or decrease the inventory levels to take advantage of price fluctuations and also for saving in re-ordering costs and quantity discounts, etc. Objective Of Inventory Management: The main objectives of inventory management are operational and financial. The operational objective means that the materials and spares should be available in sufficient quantity so that work is not disrupted for the shortage of inventories. The financial objective states that the investments in inventories should not remain idle and minimum working capital should be locked in it. The following are the objectives of inventory management: To ensure continuous supply of materials, spares and finished goods. To avoid both over stocking and under stocking of inventory. To maintain inventory and investments at the optimum level as required by operational and sale activities. To keep material cost in control so that they contribute in reducing cost of production as well as the overall purchase cost. To eliminate duplication in ordering or replenishing stocks. This is possible with the help of centralizing purchases. To minimize losses caused due to deterioration, pilferage, wastages and damages. To design proper organization for inventory control. To set distinct and clear accountability at various levels of the organization. To ensure perpetual inventory control so that materials shown in stock ledgers should be actually lying in stores. To ensure right quality of prices at reasonable prices. To facilitate furnishing of data for short-term and long-term planning and inventory control.

MANAGEMENT OF CASH
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Cash is the most important current asset for the operation of the business. It is also referred as the life blood of the business. It is the basic input needed to keep the business running on a continuous basis, it is also the ultimate output expected to be realized by selling a product manufactured by the firm. The firm should keep apt amount of cash. Cash shortage will be an obstacle in the firms manufacturing operations where as excessive cash will simply remain idle without contributing anything towards the firms profitability. Thus, the main function of a financial manager is to maintain a sound financial position. Cash is the money that a firm can pay-out immediately without any restriction. The term cash includes coins, currencies and cheques held by the firm and balances in its bank accounts. Sometimes near cash items such as marketable securities and bank term deposits are also included in cash. Generally, when a firm has excess cash it invests in marketable securities. This kind of investment contributes to the profit of the firm. Need To Hold Cash: The firms need to hold cash may be attributed to the following three motives. Transaction Motive: The transaction motive requires a firm to hold cash to carry on its business in the ordinary course. The firm primarily needs cash to make payments for purchases, wages and salaries, other operating expenses, taxes, dividends, etc. Precautionary Motive: According to the precautionary motive the firm is required to keep cash for meeting various contingencies. Though cash flows are anticipated but there may be variations to these estimates. Speculative Motive: The speculative motive needs to hold cash for investing in profit making activities as and when they arise. Calculation Of Components Of Working Capital: Raw Material Storage Period: Average stock of raw materials / Average cost of raw material consumption per day. W-I-P Holding Period: Average W-I-P in inventory / Average cost of production per day. Stores And Spares Conversion Period: Average stock of stores and spares / Average consumption per day. Finished Goods Conversion Period: Average stock of finished goods / Average cost of goods sold per day. Debtors Collection Period: Average book debts / Average credit sales per day. Creditors Payment Period: Average trade creditors / Average credit purchases per day.

MANAGEMENT OF RECEIVABLES
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A sound managerial control requires proper management of liquid assets and inventory. These assets are a part of working capital of the business. An efficient use of financial resources is necessary to avoid financial resources. Receivables result from credit sales. A firm allows credit sales in order to expand its sales volume. When other firms carrying out the same business allow credit sales, it is not possible to avoid credit sales without adversely affecting the sales. The increase in sales increases profitability. After a certain level of sales the increase in sales will not lead to proportionate increase in production costs and after this level any increase in sales contributes to additional profit. Receivables constitute a significant portion of current assets of a firm, but, for investment in receivables a firm has to ensure on certain costs as there might be a risk of bad debts also to be borne by the organization. It is therefore extremely necessary to have a proper control and management of receivables. Need To Hold Cash: Receivables management is the process of devising decisions relating to investment in trade debtors. Certain investments in receivables are essential to add to the sales and profits of the organization. But simultaneously investment in this asset involves cost consideration also. Further, there is always a chance of bad debts too. Thus, the aim of receivable management is to arrive at an intelligent decision as regard to investments in debtors. In the words of Bolton S.E., the motive of receivable management is, to promote sales and profits until that point is reached where the return of investment in further funding of receivables is less than the cost of funds raised to finance that additional credit.

IMPORTANT TERMS
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 Working Capital Cycle: Working capital cycle is the cash flows in a cycle into, around and out of a business. It is the life and blood for the business and every managers primary chore is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should in theory, generate cash surpluses. If it doesnt generate surpluses, the business will eventually run out of cash and expire. The sooner a business expands the more cash it will require for its working capital and investment. The cheapest and best source of cash exists within the business. Good management of working capital generates cash which helps in improving profits and reducing risks. The cost of providing credit to customers and holding stocks can represent a substantial proportion of firms total profits. There are two elements in business cycle that absorbs cash Inventory and Receivables. The main sources of cash are Payables and Equity and Loans.

Each component of working capital has two dimensions Time and Money. When it comes to managing working capital Time is Money. If the business can get enough money to move faster around the cycle or reduce the amount of money tied up, the business will generate more cash or will need to borrow less money to fund its working capital. As a result, the business can reduce the bank interest or will have additional free money available to support additional sales, growth or investment. It can be alluring to pay available cash for fixed assets, but after it is paid it would no longer be available for working capital. Therefore, if cash is tight other ways of financing capital investment (equities, loans, leasing, etc) should be considered. The increase in cash outflows removes liquidity from the business. Sources Of Additional Working Capital: Existing cash reserves Profits (when secured as cash) Payables (credit from suppliers) New equity or loans from shareholders Bank overdrafts or lines of credit Long term loans The financial resources of the business can easily be over-stretched if there is insufficient working capital and sales are increased. This is termed as overtrading. Early cautionary signs include:
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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 Paying bills in cash to secure additional supplies Management pre-occupation with surviving rather than managing

Handling Receivables (Debtors): The enhancement of cash flows depends upon the time period required for collection of amounts the business owes to the outsiders. The faster the collection the more the enhancement. Every business needs to keep record regarding: i. who owes them money ii. how much it is owed iii. how long it is owing iv. for what it is owed Late payments from debtors lead to erosion of profits and even slow payments largely affect particularly the small businesses. They also increase the chance of bad debts. Managing Debtors: i. Right attitude towards the control of credit. ii. Establish clear credit practices as a matter of company policy iii. Confirmation about understandability of credit practices by staffs, suppliers and customers. iv. Professionalism in accepting new larger accounts. v. To check the previous records or background of each customer thoroughly. vi. Establishing credit limits for each customer. vii. Reviewing these limits continuously when operating in volatile sectors. viii. Invoice promptly and clearly. ix. Charging penalties on overdue accounts. x. Consider payment through credit or debit cards. xi. Supervise the debtor balances and ageing schedules. Weaknesses in Debtor Management: i. Weak credit judgment ii. Poor collection procedures iii. Lax enforcement of credit terms iv. Slow issue of invoices or statements v. Errors in invoices or statements vi. Customer dissatisfaction Signs of Future Bad Debts: i. Longer credit terms, taken with approval especially for smaller orders. ii. Use of post-dated cheques by debtors who normally settle within agreed terms. iii. Evidence of customers switching to additional suppliers for the same goods. iv. New customers who are reluctant to give credit references. v. Receiving part payments from debtors. Managing Payables (Creditors): Creditors play a vital role in effective cash management and should be managed cautiously to heighten or raise the cash position. Cash outflows are initiated by purchasing and fanatic purchasing function can create liquidity problems.
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Management of creditors or suppliers is as crucial as the management of debtors. Slow payment to creditors creates ill feeling and also indicates that the company is inefficient.

IMPORTANT RATIOS
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RATIO Stock Turnover Ratio Receivables Turnover Ratio Payables Turnover Ratio Current Ratio

FORMULAE Average stock*365 Cost of goods sold Net credit sales Average receivables Total supplier purchases Average payables Total current assets Total current liabilities Total current assetsInventory Total current liabilities Inventory+ReceivablesPayables Sales Operating income Net sales Net income Net sales Net profit after tax Net worth Net profit after tax Capital employed

RESULT = X Days

= X Times

= X Times

= X Times

Quick Ratio

= X Times

Working Capital Ratio Operating Profit Margin Net Profit Margin

= As % of Sales

= As % of Sales

= As % of Sales

Return on Net Worth Return on Capital Employed

Note :

= As % of Net Worth = As % of capital Employed

Net Worth= Shareholders Equity + Reserves and Surplus Outsiders Liabilities Capital Employed= Total Assets Current Liabilities

DATA ANALYSIS AND INTERPRETATION

CALCULATION OF WORKING CAPITAL OF 3 YEARS:
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Rupees in crores

2008-09 A: CURRENT ASSETS Inventories: Sundry Debtors: Cash & Bank Balance: Other Current Assets: Loans & Advances: 873.50 26.50 2869.04 175.35 616.02

2009-10

2010-11

944.92 181.78 3152.35 145.00 785.59

1058.47 112.40 3795.23 163.84 915.23

Total:

4560.41

5209.64

6045.17

B: CURRENT IABILITIES Sundry Creditors: On capital a/c: On others: Other Liabilities: Security Deposit: Book Overdraft: Provisions: 148.67 1147.97 0.62 306.14 -329.84 92.92 1493.23 2.35 252.84 8.61 369.98 183.66 1878.13 0.63 292.04 -386.49

Total:

1933.24

2219.93

2740.95

Working Capital (A-B):

2627.17

2989.71

3304.22

IMPORTANT RATIO CALCULATION:

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Operating Profit Margin: (In %) 2008-09 35.32 2009-10 21.80 2010-11 26.60

Operating Profit Margin

40 35 30 25 20 15 10 5 0 2008-09 2009-10 2010-11 In %

Net Profit Margin: (In %) 2008-09 24.90 2009-10 16.11 2010-11 17.96

Net Profit Margin

30 25 20 15 10 5 0 2008-09 2009-10 2010-11

In %

Return On Capital Employed: (In %) 2008-09 2009-10 2010-11

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19.19

10.39

12.16

Return On Capital Employed

25

20

15 In % 10

0 2008-09 2009-10 2010-11

Return On Net Worth: (In %) 2008-09 13.02 2009-10 7.83 2010-11 9.58

Return On Net Worth

14 12 10 8 6 4 2 0 2008-09 2009-10 2010-11 In %

Receivables Turnover Ratio: (In Times) 2008-09 2009-10 2010-11

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126.621

51.002

43.306

Receivables Turnover Ratio

140 120 100 80 60 40 20 0 2008-09 2009-10 2010-11 In Times

Payables Turnover Ratio: (In Times) 2008-09 0.688 2009-10 0.591 2010-11 2.897

Payables Turnover Ratio

3.5 3 2.5 2 1.5 1 0.5 0 2008-09 2009-10 2010-11 In Times

Current Ratio: (In Times)

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2008-09 2.844

2009-10 2.816

2010-11 2.567

Current Ratio
2.9 2.85 2.8 2.75 2.7 2.65 2.6 2.55 2.5 2.45 2.4 2008-09 2009-10 2010-11 In Times

Quick Ratio: (In Times) 2008-09 2.299 2009-10 2.305 2010-11 2.117

Quick Ratio
2.35 2.3 2.25 2.2 2.15 2.1 2.05 2 2008-09 2009-10 2010-11 In Times

Working Capital Ratio: (In %)

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2008-09 14.735

2009-10 20.401

2010-11 16.556

Working Capital Ratio

25

20

15 In % 10

0 2008-09 2009-10 2010-11

CONCLUSION
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After studying and analyzing the components of working capital management system of National Aluminium Company (NALCO), the following can be inferred: An increase in working capital means that the business is able to pay off its short-term liabilities. Also, a high working capital can be a signal that the company might be able to expand its operations. An increase in working capital indicates that the business has either increased current assets (that is has increased its receivables, or other current assets) or has decreased current liabilities, for example has paid off some short-term creditors. The operating profit margin is a measurement of managements efficiency. In comparison to three years the operating profit margin of 2008-09 is the highest that is 35.32% but it drastically fell to 21.80% in 2009-10 and in 2010-11 it has revived to 26.60%. This means that the business operations have improved from 2009-10 to 2010-11 as it has a higher operating profit margin. Net profit margin measures how much of each rupee earned by the company is translated into profits. A low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss. Net profit margin provides clues to the company's pricing policies, cost structure and production efficiency. Different strategies and product mix cause the net profit margin to vary among different companies. It is an indicator of how efficient a company is and how well it controls its costs. The higher the margin is, the more effective the company is in converting revenue into actual profit. Even though the net profit margin has increased in the year 2010-11 as compared to 2009-10, but still it is low as compared to the year 2008-09. Therefore, the company should put more efforts on controlling costs, converting revenue into actual profits & increasing efficiency. The Return on Capital Employed ratio (ROCE) tells us how much profit we earn from the investments the shareholders have made in their company. ROCE should always be higher than the rate at which the company borrows; otherwise any increase in borrowing will reduce shareholders' earnings. The ROCE Ratio is just one factor to help find quality stocks. The companys ROCE for the year 2010-11 is better than that of 2009-10 but not as compared to that of 2008-09. Return on Net Worth (RONW) is an indicator of company's profitability by measuring how much profit the company generates with the money invested by common stock owners. It is also known as Return on Equity. RONW aims to measure the earnings that the company manages to generate through such efficient use of resources. The companys RONW states that among the three compared years the year 2008-09 has the highest RONW as compared to that of 2009-10 & 2010-11. This means that the company should aim more on managing its resources properly, even if it has improved as compared to the year 2009-10. Receivables Turnover Ratio is one of the efficiency ratios and measures the number of times receivables are collected, on average, during the fiscal year. A high receivables turnover ratio implies either that the company operates on a cash basis or that its extension of credit and collection of accounts receivable are efficient. Also, a high ratio reflects a short lapse of time between sales and the collection of cash, while a
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low number means collection takes longer. The lower the ratio is the longer receivables are being held and the risk of bad debt increases. A low receivables turnover ratio implies that the company should re-assess its credit policies in order to ensure the timely collection of credit sales that is not earning interest for the firm. A ratio that is low by industry standards will generally indicate that your business needs to improve its credit policies and collection procedures. Accounts payable turnover is important because it measures how a company manages paying its own bills. High accounts payable turnover may be a signal that a firm isn't receiving very favourable payment terms from its own suppliers. All else equal, lower payable turnover is better. The companys payables turnover shows us that among the three consecutive years 2009-10 had the lowest payable turnover and 2010-11 the highest. Therefore, the company should check its payment policies and procedures. The current ratio reflects its ability to pay its upcoming bills in the unlikely event of all creditors demanding payment at once. The higher the ratio, the more liquid the company. A current ratio of less than 1 suggests pressing liquidity problems, specifically an inability to generate sufficient cash to meet upcoming demands. Higher the current ratio, a company is more capable of paying off its liabilities. A decline in current ratio warns against increase in short term debts or decrease in assets. This is something that investors need to be aware of. Regardless of any other issue, a declined trend of current ratio means a reduced ability to generate cash. The companys current ratio has been continuously declining since 2008-09, though it has not declined much in the three years but the company should take necessary steps to maintain its liquidity. Quick Ratio is an indicator of company's short-term liquidity. It measures the ability to use its quick assets. Quick ratio specifies whether the assets that can be quickly converted into cash are sufficient to cover current liabilities. A quick ratio higher than 1 indicates that the business can meet its current financial obligations with the available quick funds on hand. A quick ratio lower than 1 may indicate that the company relies too much on inventory or other assets to pay its short-term liabilities. The companys though has fallen down to 2.117 and is the lowest in the three years; still it has been able to maintain its short-term liquidity. The management should keep in mind that the ratio should not fall below 1. A company's working capital ratio is a measure of its short-term ability to cover its financial liabilities. Potential investors and lenders will be alarmed by a declining working capital ratio as this could be an early warning sign of more serious problems, such as falling sales volumes, which will ultimately result in falling profits. The companys working capital ratio rose from 14.735 to 20.401 in the year 2009-10 but has again fallen down to 16.556 in the year 2010-11.The company should take proper decisions to maintain its ability to cover its liabilities. The above inferences on various working capital components of the company as a whole tells us that though the company has recovered since 2009-10 but still the management and the authorities should adopt much more effective and strict policies for the better working, efficiency and performance of the company thereby leading to its prosperity and maintaining the status of a NAVRATNA company.

BIBLIOGRAPHY
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 Annual Report Of NALCO

Financial Management Financial Management www.google.co.in www.nalco.co.in www.scribd.com

I.M. Pandey

Prasanna Chandra

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