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Chapter-1 Introduction

1.1 FOCUS OF THE PROJECT

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The report focus on working capita !anage!ent" recei#a$ e !anage!ent" in#entor% !anage!ent" sources of ong ter! & short ter! finance e!p o%ed $% the co!pan%. The report pro#ides a co!prehensi#e ana %sis of Indian construction industr% as we as of the co!pan%. It pro#ides the suggestions to the co!pan% to i!pro#e their financia position in the !arket in re ation to #arious eading construction co!panies in India. It a so gi#es suggestions on how to !a'i!i(e their cash f ow" !ini!i(e their working capita re)uire!ent" !aintain their opti!u! e#e of in#entor% and !anage their accounts recei#a$ e. 1.2 OBJECTIVES The o$jecti#e $ehind the present stud% inc udes* understanding the nature of working capita stud%ing the #arious co!ponents of working capita deter!ination if the factors which affects the !ost in deciding the working capita re)uire!ents. thorough stud% of how co!pan% can !aintain the opti!u! working capita suggestions to the co!pan% to rectif% the pro$ e!s encountered. 1. !ETHO"O#O$%

1.3.1 Economic and Competitive analysis of the construction industry

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Stud% of the current econo!ic scenario of construction industr% inc uding recession and its i!pact on construction industr% in India. Po itica . econo!ica " socia " techno ogica and seg!enta ana %sis of Indian construction industr%. 1.3.2 Industry analysis in relation to the company Se ection of co!petitors under the guidance of co!pan% !entor. reading of annua report of e#er% co!pan% ca cu ation of financia ratio with the he p of financia state!ents preparation of co!parati#e ana %sis of the co!pan% with its co!petitors 1.3.3 Working capital management of the company The o$jecti#e of working capita !anage!ent is the !anage!ent of current assets in tune with attitude of !anage!ent towards risk and arri#ing at a satisfactor% e#e of current assets that $a ances the i)uidit% and profita$i it% criteria. The !ethodo og% inc udes* preparation and ca cu ation of operating c%c e and working capita re)uire!ents in#entor% !anage!ent of the co!pan%

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creditors ana %sis and de$tors !anage!ent of the co!pan% 1.3.4 Financial ratio analysis of the company -eading of the %ears of annua report of the co!pan% Ca cu ation of financia ratio with the he p of financia state!ents Preparation of co!parati#e ana %sis of the co!pan% with its co!petitors 1.3. !ethod of data collection

Secondar% sources to $e used for this stud% inc udes* Interaction with ke% personne .nnua report of the co!pan% as we as the co!petitors Maga(ines ike infrastructure toda%" Indian infrastructure" construction week" etc /ewspapers ike 0usiness Standard and 1cono!ic Ti!es. Co!pan% data" we$sites" artic es" $ooks" thesis" e'pert co!!ents and !an% !ore. 1.& #I!IT'TIO( OF THE STU"%

The financia ana %sis of the co!pan%" a resu ts are !ost % dependent on the annua reports gi#en $% the co!pan%
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Pu$ ished data fro! #arious sources #ar% )uite significant % $ecause of difference in co#erage $% concerned agencies. Li!ited to secondar% data.

Chapter-2 Econo)ic 'na*+,i,


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The %ear +445 has co!e ha f its wa%. The Indian !arket was fu of ups and downs this %ear. Sense' touched a 13444 !ark due to a sta$ e go#ern!ent ca!e into power and it ca!e down to a 1,444 points after the dec aration of $udget fro! our finance !inister(Mr. Prana$ Mukherjee). Sti the g o$a recession affects our countr% arge %. 6e see our !arket in red when g o$a !arkets are weak. 7or the financia %ear +448945" o#era gross do!estic product (:;P) growth rate of India was <.=> whereas fisca deficit was <.+>.. The construction sector as a who e grew at =.+> during the financia %ear +448945 as co!pared to 14.1 > during financia %ear +44=948. ?owe#er" the econo!ic sur#e% suggests that worst is $ehind us and the sector is ike % to i!pro#e in financia %ear +445914. ;espite the s owdown" the Indian construction industr% is e'pected to attract 2+> of tota in#est!ent in infrastructure proposed of around @S; 344 $i ion in period +44=9+41+. Much of the in#est!ent sha $e state or pu$ ic supported.

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Lower de!and" due to sta ed projects i!pended institutiona ending and o#ercapacities are so!e of the factors that ha#e affected the e)uip!ent and !anufacturing sectors within the industr%. The key factors affecting the construction sector: o Institutiona 7inancing o 1#o ution of a !acro po ic% for the sector in Procure!ent processes Ta'ation ?-; ;ispute reso ution Ather regu ator% !easures In#est!ent po ic% of the go#ern!ent in creating infrastructure o Corporate po icies and practices o Current g o$a downturn.

2.1 -H'T IS RECESSIO(. . rece,,ion is a genera s owdown in econo!ic acti#it% o#er a sustained period of ti!e" or a $usiness c%c e contraction ;uring recessions" !an% !acroecono!ic indicators #ar% in a si!i ar wa%. Production as !easured $% :ross ;o!estic Product (:;P)" e!p o%!ent" in#est!ent spending" capacit% uti i(ation" househo d inco!es and $usiness profits a fa during recessions.
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:o#ern!ents usua % respond to recessions $% adopting e'pansionar% !acroecono!ic po icies" such as increasing !one% supp %" increasing go#ern!ent spending and decreasing ta'ation. 2.1.1 What causes it" .n econo!% which grows o#er a period of ti!e tends to s ow down the growth as a part of the nor!a econo!ic c%c e. .n econo!% t%pica % e'pands for <914 %ears and tends to go into a recession for a$out si' !onths to + %ears. . recession nor!a % takes p ace when consu!ers confidence in the growth of the econo!% and spend ess. This eads to a decreased de!and for goods and ser#ices" which in turn eads to a decrease in production" a%9offs and a sharp rise in une!p o%!ent. In#estors spend ess as the% fear stocks #a ues wi fa and thus stock !arkets fa on negati#e senti!ent. ose

2.2 Cri,i, in the US The defau ts on su$9pri!e !ortgages (ho!e oan defau ts) had ed to a !ajor crisis in the @S. Su$9pri!e is a high risk de$t offered to peop e with poor credit worthiness or unsta$ e inco!es. Major $anks had anded in trou$ e after peop e cou d not pa% $ack oans.

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The housing !arket soared on the $ack of eas% a#ai a$i it% of oans. The rea t% sector $oo!ed $ut cou d not sustain the !o!entu! for ong" and it co apsed under the gargantuan weight of cripp ing oan defau ts. 7orec osures spread ike wi dfire putting the @S econo!% on shak% ground. This" coup ed with rising oi prices at B124 a $arre " s owed down the growth of the econo!%. 2. I)pact o/ an ')erican Rece,,ion on India o#er

The ripp es of cru!$ ing @S. !arket can $e witnessed a

the wor d. Indian econo!% is no e'ception. 7inancia giants a o#er the wor d ike Leh!an 0rothers" 0ear Sterns" .I:" Merri L%nch" etc ha#e face $ankruptc%. The worst hit of the crisis are @S." 1urope and Japan. India on the other hand is far !ore fortunate. Man% factors are responsi$ e for re ati#e % ess negati#e i!pact on the Indian econo!%. The s ow pace of financia refor!s taking p ace in India" cautious approach towards per!itting foreign in#est!ent in Indian $usiness" nu!erous $ureaucratic hurd es and regu ator% constraints ha#e turned out to $e an ad#antage for India. Indian has a wa%s $een critici(e for its s ow speed in econo!ic growth $ut in hindsight its that #er% turt e speed has pro#ed to $e a $ essing in disguise. India wi $e affected in certain aspects ike ow in#est!ent $%

foreign co!panies. Man% 7IIs (7oreign Institutiona In#estors) are

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hea#i % se ing their ho dings in nu!erous Indian co!panies and that is ref ecting in g oo! and doo! scenario in stock e'change. .part" co!panies" !ain % IT and IT1S co!panies whose pri!e $usiness target is @S. are $ound to suffer.

2.3.1 !easures taken #y the government to fight recession 6ith a strong and sta$ e :o#ern!ent at the centre" the capita !arket has shown signs of so!e re#i#a which !a% foster the econo!ic !o!entu! in the co!ing few !onths. The :o#ern!ent has a read% taken !an% positi#e steps such as fisca sti!u us package of !ore than -s. , Lacs Crores" reducing custo!s and e'cise duties" reduction in ending rates $% -0I etc. which wi ha#e a cushioning effect for the econo!% and wi part % offset s ow down in pri#ate consu!ption. The in#est!ents are e'pected to increase in infrastructure and construction industr% with the strong focus of the :o#ern!ent to encourage do!estic and foreign" pri#ate and pu$ ic in#est!ent.

2.& ECO(O!IC RECESSIO( I( CO(STRUCTIO( I("USTR%

The construction sector has grown at a$out 1+> annua % for the past fi#e %ears. It has contri$uted -s ,.8 tri ion to Indian :;P
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during the %ear +44=948 co!pared to -s ,.2< tri ion in +44<94=. 1!p o%ing a tota of a$out ,+ !i ion peop e" the is the second argest e!p o%er after agricu ture. It has a !u tip ier effect on core industries such as stee " ce!ent" a u!inu! and petro eu!. .$out 32> of construction acti#it% is generated fro! infrastructure sector. Af this" pu$ ic sector acti#it% accounts for =1> share and pri#ate sector for +5>. .part fro! infrastructure" industria acti#it% accounts for a$out ,<> and the rest for residentia and co!!ercia acti#ities. In the past fi#e %ears" the sector has seen !an% new trends. Project si(es ha#e increased" e)uip!ent and !anpower are $eing ra!ped up and $etter techno og% has $een dep o%ed. $a#le 2.1 !acro%economic Indicators Cear +4419 Particu ars Construction sectorDs contri$ution to ,1.34 ,+.44 ,+.34 ,+.83 ,+.54 ,,.+4 :;P(-s. Tri ion) Tota a$or force in ,1.34 construction (!i ion) @nti the g o$a crisis" the growth rate of the construction sector was higher than the :;P growth rate. Most construction 4+ +.44 +44+9 4, +.+4 +44,9 42 +.2< +4429 43 +.=3 +4439 4< ,.44 +44<9 4= ,.2< +44=9 48 ,.8

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co!panies ha#e pushed $ack se#era projects or stopped ha f wa% due to ack of i)uidit%. -ea estate is the worst hit sector. -esidentia and co!!ercia construction acti#it% has $een ad#erse % affected $% the higher cost of $orrowing and the difficu ties faced $% co!panies in raising funds fro! the internationa !arket. There is no reason to $e ie#e that construction acti#ities in infrastructure and p ant construction suffered si!i ar %" though there is anecdota e#idence that suggests that the sharp increase in stee prices has $eco!e a factor s owing down the pace of se#era construction projects. . though output of ce!ent in the first )uarter was 12 per cent higher than in the corresponding period of ast %ear" we e'pect a s ower pace of e'pansion in the construction sector as a who e. :;P growth arising in the construction sector is esti!ated to increase $% 8.3 per cent. This is ower than in an% of the pre#ious fi#e %ears" whose a#erage co!es to 1+>. The ?ighwa% sector" which is a part of infrastructure" has a so witnessed a s owdown. .$out <4> of awarded nationa highwa% projects are %et to achie#e financia c osure. . so" /?.I has see! % dropped the nu!$er of new highwa% projects. Sectors such as ur$an infrastructure and rai wa%s ha#e re!ained !ore or ess unaffected" $ecause here" the fund !ost % is generate fro! the pu$ ic.

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The g o$a crisis has s owed down construction acti#it% and it see!s that the situation wi $egin to i!pro#e not $efore %ear +414. 0ut after the $udget speech of the finance !inister (Mr. Prana$ Mukherjee) it doesnDt see! too far. The good news for construction sector is* Indian Infrastructure 7inancia Corporation Li!ited (II7CL) is set e#o #e financing !echanis! for gi#ing increased support to infrastructure projects. It wi re9finance co!!ercia $ank oans up to <4> in critica projects through pu$ ic9pri#ate partnership to the tune of -s 1"44"444 crore" for PPP projects in critica sectors o#er ne't 13 to 18 !onths. . ocation for Jawahar a /ehru @r$an -enewa Mission

increased $% 8=> to -s1+"88= crore. . ocations for highwa%s $eing stepped up $% +,>. Centra $udget. Thus" et us hope that the positi#e features in the $udget assistance for stor!9water drainage project

increased to -s344 crore fro! -s+44 crore in the interi!

regarding the infrastructure and de#e op!ent cou d do so!e $etter to this industr%.

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ChapterIndu,tr+ 'na*+,i,

.1 I(TRO"UCTIO(

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The construction sector is a high % unorgani(ed sector. It sees an a#erage annua in#est!ent of o#er -s. +344 $i ion. .t present the sector contri$utes near % 12.=> to the Indian :;P !aking it the second $iggest contri$utor after agricu ture. The sector is a so second $iggest in ter!s of e!p o%!ent opportunities. Current % it e!p o%s direct % or indirect % a !ost ,+ !i ion workers which is appro'. 12> of the tota e!p o%a$ e popu ation of India. 7urther" the construction industr% creates a !u tip ier effect on core industries such as stee " ce!ent" a u!inu! and petro eu! etc. Traditiona %" the sector has $een do!inated $% s!a !ediu! enterprises p a%ers (SM1s). inc ude /ear % Larsen 5<> & of enterprises fa construction and

construction Jaiprakash

under the SM1 categor%. The $ig" di#ersified Tou$ro"

Industries Li!ited" ?industan Construction Co!pan% Li!ited" IE-CL Infrastructure and Projects Ltd." /agarjuna Construction Co!pan%" Si!p e' Infrastructure Ltd." @nitech Li!ited" :a!!on India Li!ited" :annon and ;unker %" Shapoorji & Pa onji etc. IndiaFs project e'ports ha#e shown a stead% growth trend. These e'ports are spread across three $road categories* Ci#i construction works" Turnke% projects and Consu tanc% ser#ices. 6hi e the Midd e 1ast has $een the $iggest !arket for project e'ports" !ajor projects ha#e a so $een initiated in South 1ast .sia" S..-C countries" CIS countries .frica and Latin .!erica.

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3.1.1 $ypes of construction The construction sector is !ade up of three ma&or types of services" i.e. infrastructure" industria " rea estate. Infrastructure segment ($ridges" f % o#er" rai wa% stations" water supp % treat!ents) constitutes near % <3> of the tota construction acti#ities fo owed $% industrial segment (factories" p ants" etc.) which is appro'.,4> and $a ance $% real%estate segment (residentia and co!!ercia $ui dings) Major construction work inc udes setting up of road and highwa% projects" power p ants" rai wa%s" airports" f %o#ers" !inera p ants" da!s" irrigation" water supp % & station and ur$an infrastructure projects. These works are undertaken through !an% entities inc uding construction contractors" e)uip!ent supp iers" !ateria supp iers and so ution pro#iders.

3.1.2 'ature of the Industry Construction industr% is high % co!petiti#e sti attracti#e to enter" reasons for that are It is an unorgani(ed sector /o :o#t. icenses G appro#a are re)uired. ow entr% G e'it $arriers

no su$stitutes are a#ai a$ e

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ow $argaining power of supp iers as co!panies go for $ackward integration

rising no. of contractors peop eDs rising e'pectation for i!pro#ed )ua it% of i#ing

3.1.3 Characteristics of a construction company

1) 0usiness in the construction industr% is !ain % tender $ased. .t ti!es there can $e negotiated contracts. +) Projects are awarded on the $asis of certain pre )ua ification criteria (Technica and co!!ercia ) and the #a ue of $ids. ,) It is a high % unorgani(ed sector. 2) Construction industr% in India is a high % co!petiti#e !arket with a arge nu!$er of s!a p a%ers. There are oca as we as internationa p a%ers. 3) There are three !ajor t%pes of seg!ents in this industr% infrastructure" rea estate and industria . <) The construction is either carried out $% the de#e oper or through a contractor in case of rea estate sector. =) 7inance here is of two t%pes* fund $ased and non9fund $ased. 8) ;e#e op!ent of infrastructure(construction industr%) eads to de#e op!ent of the econo!% and #ice #ersa. Si!i ar %"

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deterioration of econo!%

eads to deterioration of the

construction industr%. Thus" its a c%c ic process.

3.1.4 Risk Factors in the Industry.

3.1.4.1 (ro&ect )elated risks* 1) .$nor!a G unprecedented increase in prices of raw !ateria s" a$or" etc of the co!pan%. +) 7i'ed price contracts and its cost o#erruns. ,) ;e a% in co!p etion of contracts. 2) 7ai ure in joint #entures contract $% the other partner. 3) Su$9contract so!eti!es eads in de a% of co!p etion of project. . so" the co!pan% oses the contro o#er the project su$9 contracted. <) 0reakdown of !achiner% te!porari % stops the working of the co!pan%. =) Construction industr% is a capita intensi#e co!pan%. ?ere" i)uidit% is a !ajor issue of concern. 8) . co!pan% has to arge % depend on third part% for a$or re)uire!ents.

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5) @ninsured osses or part % insured osses wi affect the fir!s profita$i it%. 14) 6hen a project is entered into $% !an% parties" chances are arge that ideas conf ict. 11) Ina$i it% to o$tain or !aintain appro#a s or icenses for its operations. 1+) Change in ta' po icies. 1,) -ejection of $ids. 12) Techno ogica changes !a% ead to capita e'penditure.

3.1.4.2 Internals )isks* 1. /on renewa of contract of rent or ease $% the owner of the office pre!ise. +. ;e#iation of the actua costs fro! the esti!ated ones" especia % negati#e. ,. -estricti#e co#enants $% $anks in case of guarantee. 2. 1!p o%ee Turno#er 3. Loss and da!age to .ssets <. ;e a% in co ection

3.1.4.3 E+ternal Factors* 1) 6eather conditions and natura ca a!ities.

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+) :o#ern!ent po icies ,) interest rates 2) : o$a recession. 3) 1'change rates.

.2 I(VEST!E(T I( THE I("USTR%

The construction sector consu!es 24934 > of p anned out a%. The annua in#est!ent is e'pected to dou$ e to near % -S.<444 $i ion $% the end of the 1 e#enth 7i#e Cear P an. The transportation sector is ike % to $e the !ajor contri$utor. The !ajorit% of in#est!ents co!e fro! the pu$ ic sector. Pri#ate sector in#est!ents ha#e picked up $ut are sti we $e ow pu$ ic in#est!ent. ?owe#er" seg!ent9wise" pri#ate in#est!ent is higher than pu$ ic in#est!ent in $oth residentia and co!!ercia construction. Pu$ ic9 pri#ate partnership (PPP) projects ha#e $een identified as the !ost suita$ e !ode for the i!p e!entation of projects. .nd the tota in#est!ent in infrastructure.+4<<+.<+ $i ion is ike % to $e in#ested in the infrastructure sector o#er the ne't fi#e to ten %ears through PPPs.

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EFFECT OF RECESSIO( O( I(VEST!E(T I( THE

I("USTR%. ;espite the industria s owdown in the second ha f of +448945 fisca " there has $een an o#era rise of ,=.2 per cent in ter!s of fresh in#est!ent and +5 per cent in ter!s of nu!$er of projects as co!pared to ast %ear. .s of ,1 March +445" there were +5"<+8 projects worth -s 2+",3"282 crore(appro'. @S B834 $i ion) as co!pared to ++"88, projects worth -s ,4"8,"+<2 crore on ,1 March +448. -ef ecting the g o$a econo!ic crisis which $roke out around June +448 in the @S. and hit the Indian shores in the second ha f of the fisca +448945" projects in#est!ent acti#ities in India dec ined sharp % since Septe!$er +448.Co!pared to ="11+ new projects worth -s 3"=8"51+ crore announced in the first ha f of +448945" on % 3"2+1 new projects worth -s +"8,"=++ crore were announced in the second ha f" indicating a sharp fa of +,.8 per cent in ter!s of nu!$er and a whopping 31 per cent in en#isaged in#est!ent" according to the sur#e%.

.& PO#IC% I(ITI'TIVES B% THE $OVER(!E(T F'VOURI($ THIS I("USTR%. The $iggest policy initiative o#er the past two %ears has $een the ca$inet appro#a for 144> foreign direct in#est!ent in the

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construction de#e op!ent sector through the auto!atic route. This is ike % to ensure rapid i!pro#e!ent in infrastructure" $enefit !anufacturing and generate fresh e!p o%!ent. ?owe#er" the resu ts of the po ic% wi $eco!e apparent on % o#er three to fi#e %ears. The Eleventh year (lan en#isages a consistent :;P growth rate

of o#er 14> per annu! in the ater %ears of the p an. This wou d re)uire an infusion of su$stantia capita of o#er -s. 12"344 $i ion across infrastructure sectors o#er the ne't si' %ears. The de#e op!ent of ph%sica infrastructure" through such !assi#e in#est!ents" wou d re)uire the de i#er% potentia of the construction industr% to rise $% at east ,,>. It is crucia to correct the interna i!$a ances to !ake the construction industr% efficient and co!petiti#e.

3.4.1 (olicy Initiatives for ,udget 2--.%1-. In/ra,tructure Financin0 9 Indian Infrastructure 7inance Corporation Li!ited (II7CL) wi e#o #e a takeout financing sche!e which wi faci itate incre!enta ending to infrastructure sector. 9 II7CL wi refinance <4> of co!!ercia $ank oans I!petus for -ura ?ousing 9 . ocation for Indira .waas Cojana increased $% <, > to -s 88"444 !i ion.
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9 . su! of -s +4"444 !i ion a ocated to -ura ?ousing 7und" which wi $oost the resource $ase of /ationa ?ousing 0ank for their refinance operations in rura housing sector.

.1 B#OO!I($ OPPORTU(ITIES I( I("I'

CO!!O(-E'#TH $'!ES - 2212 in (e3 "e*hiThe Co!!onwea th :a!es 9 +414 in /ew ;e hi throws !ega opportunities for 0ui ding Materia Co!panies" Construction 1)uip!ents & Techno ogies co!panies. 4 Co!!onwea th :a!es Ei age project worth @SB 24 !n. 4 1 e#ated -ing -oad" 6idening and -edesigning of -oads in and around ;e hi. 4 More Su$wa%s and 13 9 +4 7 %o#ers. 4 Sports Specia t% ?ospita . 4 Setting up of a Cu tura Centre. 4 The ;e hi ;e#e op!ent .uthorit% (;;.) has $een asked to ear!ark eight to nine p ots for 7i#e Star ?ote s. RO'"S 4 The go#ern!ent has announced four aning of 28 new projects with an esti!ated cost of @SB 1+ $n. ;e#e op!ent and up gradation of roads wi re)uire an in#est!ent of @SB +2 $n. ti +448. Pri#ate sector participation in road projects wi grow significant %. 4 HThe :o den Iuadri atera P anH (3834 J!s.) for inking the

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four !etropo itan cities of ;e hi" Mu!$ai" Chennai and Jo kata with an esti!ated cost of @SB 3.3 $n.

R'I#-'%S 4 The rai wa% sector wi need an in#est!ent of @SB ++ $n. for new coaches" tracks and co!!unications and safet% e)uip!ent o#er the ne't ten %ears. 4 . 14 %ear Corporate Safet% P an of the Indian -ai wa%s en#isaging an e'penditure of @S B =.+2 $n. $esides de#e op!ent of appropriate techno og% for higher e#e of safet% in train operation. 4 Metro -ai Corporation projects worth @S B 1+.82 $n in cities ike ;e hi" 0anga ore" ?%dera$ad" Chennai" .h!eda$ad and !an% other cities are on target.

'IRPORTS 4 @p gradation and !oderni(ation of airports wi re)uire @SB ,, $n. in#est!ent in the ne't ten %ears.

SPECI'# ECO(O!IC 5O(ES 66SE5,7 4 Projects are co!ing up to de#e op Specia 1cono!ic Kones worth @S B +.3 $n.

URB'( IFR'STRUCTURE - To3n,hip 8 !a**, 8 O//ice Bui*din0, Etc. 4 India has a arge and growing !idd e c ass popu ation of ,44 !n peop e" out of which a arge section is need on new houses. It is esti!ated that there is a nationa housing storage of 21 !n. units.
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4 -etai ing is $eco!ing the $oo! industr% with organi(ed retai $eing a !arket of @SB < $n. The sector wi need a$out +3 !n. s). ft. of space $% the %ear +443. 4 /.SSCAM9McJinse% sur#e%s ha#e predicted the IT1S sector in India wi re)uire appro'i!ate % 144 !n. s). ft. of office space" which !eans a pro!ising opportunit% for the construction industr%. 4 6ater supp % and sanitation projects a one offer scope for annua in#est!ent of @SB 3.=1 $n.

PO-ER 4 The Ministr% of Power has for!u ated a $ ueprint to pro#ide re ia$ e" afforda$ e and )ua it% power to a users $% +41+. This ca s for in#est!ent of @SB =, $n. in the ne't fi#e %ears.

S'$'R !'#' 4 The HSagar Ma aH project for e'pansion and !oderni(ation of ports" in and na#igation and !ariti!e transport. This in#o #e an in#est!ent of @S B ++ $n. in a period of ten %ears. 6hi e the go#ern!ent wi take care of 13> of the in#est!ent" the rest wi co!e fro! the pri#ate sector.

.9 PEST '('#%SIS. .n organi(ation is affected $% $oth interna and e'terna factors. There are four !ajor factors that affects the organi(ation e'terna %* Po itica
JMC Projects (India) Ltd. L.J.I.M.S +3

Econo!ic Socia Techno ogica Thus" P1ST ana %sis is deri#ed fro! the initia s of these factors. It wi he p us understand hindrances and opportunities hidden in the outside wor d. 3./.1 (olitical Factors Po itica factors inc ude go#ern!ent regu ations and ega issues that defines $oth for!a and infor!a ru es under which the fir! !ust operate. So!e of these factors are* S1K .ct to $oost Infrastructura de#e op!ent SPE(Specia Purpose Eehic e) through go#ern!ent $onds and 7A-1L reser#es 7;I i$era i(ation to push the industria growth -1ITs (-ea 1state In#est!ent Trusts) to $oost rea estate $usiness PPP(Pu$ ic and Pri#ate Partnership) to increase the funding sources Increase in finance in the industr% through II7CI" as stated in the atest $udget.
JMC Projects (India) Ltd. L.J.I.M.S +<

Strict La$or aws Ta' po ic% 1n#iron!enta regu ations Trade restrictions and tariffs Po itica sta$i it% 3./.2 Economic Factors It affects the purchasing power of potentia custo!ers and the fir!Ds cost of capita . The fo owing are the factors* Inf ation rate 1'change rate -ate hike ike % to s ow down growth -ising interest rates wi ad#erse % i!pact the profita$i it% of the co!panies and it !ight reduce the capita f ow in #arious projects. Increasing housing interest rates !a% decrease the de!and of residentia houses and f ats" which is a read% seen. -ecession across the g o$e has affected the countr%Ds econo!% ad#erse %.

JMC Projects (India) Ltd.

L.J.I.M.S

+=

3./.3 0ocial Factors It inc udes de!ographic and cu tura aspects of a countr%. These factors affect the $u%erDs needs and si(e of potentia $u%ers. The% are* Career attitudes (affecting the attrition rate) -ising ur$ani(ation Popu ation growth rate Lack of ski and professiona is! in the workers and the e!p o%ees reduces the producti#it%. 1!phasis on safet% & securit% 3./.4 $echnological Factors Techno og% arge % affects the production e#e s. 0etter the techno og% higher the production e#e . The% are* -esearch & ;e#e op!ent -ate at which the techno og% is changing .uto!ation Low techno og% adoption to hinder the growth in the Industr%.

JMC Projects (India) Ltd.

L.J.I.M.S

+8

The -MC (-ead%9!i'9Concrete) is $eing e'peri!ented to reduce the ti!e of co!p etion of the projects.

Chapter-& Co)pan+ 'na*+,i,

JMC Projects (India) Ltd.

L.J.I.M.S

+5

JMC Projects (India) Ltd.

L.J.I.M.S

,4

&.1 VISIO( : !ISSIO( OF THE CO!P'(%

To

$e

eader

and

!ode

corporate

participant

in

the

de#e op!ent of the construction industr%. To $ui d" !aintain and perpetuate a o%a and continuing re ationship with e#er% custo!er through tota co!!it!ent to )ua it%" transparent dea ings" ti!e % co!p etion" there$% enhancing the #a ues for our stakeho ders

&.2 'BOUT THE CO!P'(% ;It i, a<out co))it)ent /or cu,to)er ,ati,/action throu0h en0ineerin0 e=ce**ence and >ua*it+ con,truction M

JMC Projects (India) Ltd.

L.J.I.M.S

,1

7ounded in 158+ as a construction co!pan%" JMC has successfu % defined its o$jecti#es & positioned itse f as one in of the the eading organi(ations autono!ous construction at strategic

industr%. Toda%" JMC has we e)uipped offices ocations to effecti#e % & efficient % ser#e its custo!ers spread across the nation. JMC got isted on 0S1 G /S1 in 1552. J.LP.T.-@ PA61- T-./SMISSIA/ LT;. took 31> stake of JMC in 7e$D43 . Toda% JMC is fastest growing construction co!pan% cong o!erate as a part of di#ersified J.LP.T.-@ :-A@P and na!e to reckon with in the construction industr%. JMC has to its credit !an% prestigious projects in Industria " Power" Institutiona & Infrastructure sectors and is a wa%s acknow edged as a re ia$ e & professiona construction co!pan% $% discerning & )ua it% conscious !arket. 4.2.1 1!C (ro&ects 2India3 4td. 2Working 5rea3 Indu,tria* N .groche!ica N .uto!o$i e N 1ngineering I Ce!ent N Che!ica I Petroche!ica IPaint

JMC Projects (India) Ltd.

L.J.I.M.S

,+

N 1 ectronics G Consu!er :ood N Phar!aceutica N Sugar G 7ood Products N Te'ti e Bui*din0, N Co!!ercia Co!p e' N Institutiona 0ui ding N ITPark N ?ospita s & ?ea th Centre N -esearch &;e#e op!ent Centre N ?ote & ?oste N ?ousing In/ra,tructure N -oads I ?ighwa%s N 0ridge & 7 %o#er N @nderpass N Transportation Projects N .irport N ;rainage 6ork
JMC Projects (India) Ltd. L.J.I.M.S ,,

N 6ater Supp % 6ork Po3er N Ther!a Power P ant N :as $ased Power P ant N Coa &Materia ?and ing P ant N Capti#e Power P ant

!anpo3er at a $*ance - Tota* 2&22 (o,.

Supporting Staff Administration & Managers 10% 14% commercial

18% P&M Staff

58%

Engineers & Supervisors

6ith strong workforce of professiona % )ua ified construction !anagers" engineers and super#isors $acked up with construction e)uip!ent & techno ogica % ad#anced atest work

JMC Projects (India) Ltd.

L.J.I.M.S

,2

en#iron!ent" JMC offers !ost custo!ised ser#ices to !eet the e#o #ing needs of indi#idua custo!ers. In addition to custo!er satisfaction" achie#ed $% ti!e % e'ecuting projects of desired )ua it%" we stri#e towards $ui ding ong ter! re ationships with our #a ued custo!ers. Toda%" JMC is one of the few construction co!panies certified under ISA 5441*+444 )ua it% !anage!ent s%ste! $% T@E Manage!ent Ser#ices of :er!an%. J!C?S Arder $ook as on June +448 was -s. +2+3 crore pro#iding strong re#enue #isi$i it% o#er the ne't two %ears. It has secured orders fro! 0?1L" /TPC" . sto! and -e ainceG.;.: group in the power sector and !u tip e funded orders fro! !unicipa ities of .h!eda$ad" 0hopa and Indore for 6ater & sewerage sector and fro! /?.I " MP-;C and Pune !unicipa it% in road & $ridges sector. JMC has e'e!p ari % turned around fro! $eing in osses ti 7C43. The turnaround has $een possi$ e on the $ack of an e'tre!e % strong order $ook enjo%ed $% the co!pan%. The co!pan% posted a net oss of -s.11.2 crore in 7C43 " which turned around to a profit of ,4.= crore in 7C48.

JMC Projects (India) Ltd.

L.J.I.M.S

,3

4.2.1 !516) (45'$0 7 E89I(!E'$ 5:5I45,4E 7 6W'E;

E>uip)ent 1'ca#ator & Loader -o er ;u!perGtruck GTe!po 0atching P ant Concrete Pu!p Concrete Mi'er Transit Mi'er 0ui ders ?oist Tower Crane (upto 3< M) Crane ?ot Mi' P ant 6et Mi' P ant Stone Crusher 1 ectronic Sensor Pa#er ;.:. Set

(o, . ,4 <8 88 ,< 2< 5+ 33 3= +3 ++ , 3 2 8 145

Capacit+ A.,94.5!, + 91= MT 4.3914 MT 1+9,4 !,Ghr 2< !,Ghr 141=" 12G14 29< !, 1444 kg 4.391.3 T ,9+4MT 1<4 TP? 144 TP? +44G1,4 TP? 5 M width 2 to =+3 JE.

4.2.2 FI'5'CI54 (E)F6)!5'CE

TUR(OVER
JMC Projects (India) Ltd. L.J.I.M.S ,<

(ET -ORTH

JMC Projects (India) Ltd.

L.J.I.M.S

,=

4.2.3 5W5);0 7 CI$5$I6'

.ward for H 3"44"444 accident free !anhoursH on ;upontDs sa# i II project. Citation for H 1'ce ence in construction in high rise $ui dingsH presented $% association of consu ting ci#i engineers (India) for JMC house at ah!eda$ad. .ward for HPerfection in Ti!e & Iua it%H $% .h!eda$ad Manage!ent association 9 .M.. .ward for Hachie#ing + !i ion safe !anhoursH fro! :1 capita internationa ser#ice. Citation for H1'e!p ar% Ser#icesH fro! Prestige :roup of Inte India ;esign Center. Safet% award for H 1'ceptiona 6ork ;one H $% 0o#is Land Lease.

4.2.4 45';!5)< ()61EC$0 (ir)a #td. Ci#i & Structura 6orks of 1+44 TP; Soda .sh P ant Project near 0ha#nagar.

JMC Projects (India) Ltd.

L.J.I.M.S

,8

'*,to) Pro@ect, India #td. Construction of :enera Ci#i " Structura and .rchitectura 6orks for ++8 M6 Jegurupadu Phase II Co!$ined C%c e Power P ant Project for MGs. :EJ Industries Ltd.

'rAind !i**, #td. Construction of Te'ti e 7actor% for Shirting ;i#ision at #i . Jhatraj /ear .h!eda$ad

"!RC

"e*hi

!etro

Rai*

CorporationB (e3 "e*hi Construction of Three 1 e#ated Stations 9 ,C2+. and ,C2+0 for ;M-C at /ew ;e hi

Ea,t India Hote*, #td. Main Ci#i & Site ;e#e op!ent 6orks

JMC Projects (India) Ltd.

L.J.I.M.S

,5

for = Star ?ote at @daipur.

Hindu,tan !otor, #td. Ci#i Structura and Sanitar% 6orks for OMitsu$ishiF P Lancer Car Project /ear Chennai

Indian In,titute o/ !ana0e)ent Construction of /ew Ca!pus for IIM .h!eda$ad

Indian Ra+on : Indu,trie, #td.

Construction of Co9:eneration Capti#e Power P ant of 15.3 M6 and Coa ?and ing P ant of 134 TP? at Eera#a

Indore !unicipa* Corporation ;esign & Construction of -ai wa% A#er 0ridge at Indore

JMC Projects (India) Ltd.

L.J.I.M.S

24

In/o,+, Ban0a*ore.

Techno*o0ie,

#tdB

Construction of Software co!p e' at 1 ectronics Cit%" ?osur -oad" 0anga ore

#ar,en : Tou<ro #td. - ECC 7our Laning & Strengthening of .h!eda$ad P Mehsana -oad Project P Package III & IE (JM 2=.=4 to JM =4.<4)

#ar,en : Tou<ro #td. - ECC 7our Laning & Strengthening of .h!eda$ad P Mehsana -oad Project P Package III & IE (JM 2=.=4 to JM =4.<4)

!adh+a Prade,h Hou,in0 Board Construction of -esidentia and Co!!ercia Co!p e' (P atinu! Park G

JMC Projects (India) Ltd.

L.J.I.M.S

21

P a(a) at 0hopa

!'RUTI U"%O$ #I!ITE" Construction Af Car Manufacturing @nit for Maruti @d%og Ltd.

!ini,tr+ o/ Hea*th : Fa)i*+ -e*/areB !ini,tr+ BhaAanB (e3 "e*hi Construction of Eardh!an Maha#ir Medica Co ege and Li$rar% 0ui ding (Package P I) at Safdarjung ?ospita Co!p e'" /ew ;e hi

Sie)en, #td. !u)<ai. Industria Tur$ine Manufacturing 7actor% of Sie!ens Ltd. at Eadodara" :ujarat

S+nte* Internationa* PAt. #td. Construction of Software : o$a ;e#e op!ent Centre at Pune

JMC Projects (India) Ltd.

L.J.I.M.S

2+

&.

STRE($HT OF THE CO!P'(%

4.3.1 =9!5' )E069)CE

JMC is professiona % !anaged construction co!pan% with e!p o%!ent po icies and s%ste!s radiate fro! a sing e princip e Q0e ie#e in peop eM. Peop e are our !ost #a ued asset & strength. JMC" therefore" created a Ocu tureF" which is distincti#e in industr%. 1!p o%ees gain a e#e of freedo!" which pro#ides securit%" satisfaction" and" !ost i!portant %" a sense of jo$ satisfaction. .t JMC" earning is a continuous process. Aur Training ;epart!ent offers training progra!s for e!p o%ees right through their career. . good $ end of ski de#e op!ent" $eha#iora and core progra!s pro#ide e'ce for our growth. Courses are designed to keep e!p o%ees in touch with the atest trends in !anage!ent. 1!phasis is aid on creati#it%" inno#ation" achie#e!ent !oti#ation for e'ce ence" e!power!ent" aug!enting co!!unication and interpersona ski s" de#e oping initiati#e and eadership )ua ities and pro#iding know edge of co!puter app ications.

JMC Projects (India) Ltd.

L.J.I.M.S

2,

4.3.2 8954I$> JMC has $ui t its i!age on the strong foundation of QIua it%M construction. The Manage!ent rea i(ed i!portance of )ua it% construction and i!p e!ented a d%na!ic and #i$rant )ua it% assurance progra! at #er% ear % stage. Iua it% Manage!ent S%ste! in the co!pan% is now upgraded as per the re)uire!ent of ISA 5441 * +444. MCFs satisfied C ient ist inc udes we known M/Cs" /ationa giants and PS@s. JMC has $agged !an% awards for de i#ering $est )ua it% constructions. 4.3.3 05FE$> strong wi ed dri#e to continuous % i!pro#e safet% i!p e!entation at work sites" keep incident indices to we $e ow the industr% indices. Aur we constituted safet% po ic% and ru es shows right direction to e#er% indi#idua in the co!pan%. Manage!ent sees each !inor incident a so as a scope for i!pro#e!ent in the safet% nor!s i!$i$ed in the po ic%. Safet% standard in the co!pan% is !oti#ationa rather than puniti#e which needs constant super#ision and enforce!ent. .s a Safet% cu ture of the co!pan%" a workers are pro#ided with necessar% (persona protecti#e e)uip!ent) PP1 and with the training to adhere to standard safet% nor!s and ru es. 4.3.4 (45'$ 5'; !5C=I'E)>

JMC Projects (India) Ltd.

L.J.I.M.S

22

.t JMC" !echani(ed construction is the essence of its operations. It owns & operates a arge f eet of the $est & the atest construction p ants & e)uip!ent. These inc ude 1arth Mo#ing 1)uip!ent" Concrete 0atching P ants" Crushing P ants" Transit Mi'ers" Concrete Pu!ps" Tower Cranes" Co!pactors and other road construction e)uip!ent. These p ants are procured fro! the $est construction e)uip!ent !anufacturers ike Schwing Stetter" 1r!ent .po o" Eo #o" Shirke9Potain" Ingerso 9-and" L& T" 0o!eg :#ea#es and Ma'o!i'. Logistic !anage!ent of these e)uip!ent is done in the !ost scientific wa% to ensure a#ai a$i it% of the pertinent e)uip!ent for the task.6ith its high % co!petent technica personne and e'perience" JMC has successfu % co!p eted !an% prestigious assign!ents with its pertinent e)uip!ents $% gi#ing due i!portance to custo!er de!and" functiona re)uire!ent and site conditions on jo$ to jo$ $asis. .part fro! a$o#e strengths " fo owing are few strengths on which $asis" co!pan% gains the co!petiti#e ad#antage Custo!er focused approach. 1'ce ent track record of co!p eting projects within agreed ti!e schedu e . we esta$ ished )ua it% s%ste! and a strong $e ief in a safe working en#iron!ent at worksites.

JMC Projects (India) Ltd.

L.J.I.M.S

23

In#o #e!ent of Top Manage!ent G Pro!oters in the projects undertaken. 6ide e'perience and a strong infrastructure to e'ecute projects throughout india. capa$i it% & co!petence to transfor! the c ientDs #ision into rea it%"Ea ue addition to the designs" specification & project re)uire!ents using our strong project p anning & e'ecution ski s. f e'i$ e project specific working st% es considering

/eed of contract /eed of c ient /eed of 1PC contractor Ather #endors

&.& OPPORTU(ITIES

India has $een one of argest growing econo!% o#er ast few %ears and it has grown at increasing rate especia % in the ast three %ears. Pri!ar% and Secondar% capita !arkets ha#e witnessed significant increase in !arket capita i(ation and ha#e

JMC Projects (India) Ltd.

L.J.I.M.S

2<

pro#ided !ajor $oost to fresh capita in#est!ent in industria as we as ser#ice sectors. Increase in per capita inco!e and i!pro#e!ent in i#ing standards of peop e ha#e inf uenced de!and for !ore housing" educations" and other ur$an infrastructure faci ities which in turn ha#e prope ed construction acti#ities. The inf ow of funds in ter!s of foreign in#est!ent has $een consistent % i!pro#ing which is going to contri$ute to the further de#e op!ent of Indian econo!%. Construction and !oderni(ation of airports" water !anage!ent s%ste!s" Mass rapid transit s%ste! (M-TS) in a !etro G !ega cities" upco!ing Power projects etc. are a so ike % to open up #ast opportunities for Construction Industr%.

&.1 CO(CER(S Man% issues affect s!ooth functioning of this industr%. Contracting issues" financing issues" stiff co!petition eading to price9cuts and ow operating !argins" high #o ati it% in prices of !ajor inputs such as stee " ce!ent" $ui ding !ateria s and petro eu! products" stringent adherence to safet%" )ua it% consciousness" adapting to techno ogica changes" de#e oping and using new construction !ateria s and disparities and a!$iguities in indirect ta' structure in respect of E.T G Ser#ice

JMC Projects (India) Ltd.

L.J.I.M.S

2=

ta' etc. are the ke% issues G concerns to pose !ajor threats in the growth of Construction Industr%. The sudden increase in the interest rate in recent few !onths and !ounting inf ation are ike % to ha#e so!e ad#erse i!pact on new in#est!ent acti#ities. Pro$a$ %" the $iggest $ott eneck facing the industr% toda% is ack of ski ed and unski ed !anpower. ?igh attrition rate of e!p o%ees is another !ajor concern. The gap $etween de!and and supp % of re)uired !anpower is ike % to ha#e se#ere i!pact at east in the near future considering e'ponentia growth opportunities in this sector. -oads and highwa%s are prone to !ajor ti!e and cost o#er9runs. Land ac)uisition and re!o#a of encroach!ents continue to $e !ajor constraints in project co!p etion.

&.9 SO!E !'JOR O($OI($ PROJECTS

4./.1 I';90$)I54 7 (6WE) (45'$ ()61EC$0 Pro@ect C*ient Contract Va*ue 6R,. in 1. Construction of 0asic Structure P6; 9 #ac,7 14,5<

JMC Projects (India) Ltd.

L.J.I.M.S

28

for Mu tipurpose .ir9conditioned Indoor Stadiu! with re)uired & Training Eenue) and 244 ! L 8 ane S%nthetic .th etic Track with re)uired faci ities (Training Eenue) at Th%agaraj Sports Co!p e' at Th%agaraj /agar" /ew ;e hi +. ;esign & construction of co!p ete Ci#i Package re)uired for Coa ?and ing P ant (C?P) (@P) (+ ' 254 M6)

-eha$i itatio n& ;i#ision" C69 1,, /ew ;e hi

faci ities for /et$a (Co!petition -etrofitting

1 econ 1ngineering Co. Ltd. Eidh%anagar" :ujarat.

5444

Package for /TPC" Stage9II" ;adri Ea a$h

,.

:enera Ci#i 6orks9 Package I (:C61) & Package IE (C?P Ci#i 6orks) for +L<44M6 ?issar Ther!a Power Project ?issar" ?ar%ana

@ti it% 1nerg%tech and 1ngineers Pri#ate Ltd" -e iance 1nerg% Centre" Mu!$ai

<1,,

JMC Projects (India) Ltd.

L.J.I.M.S

25

2.

Ci#i " Structura and .rchitectura works for (Main power $ ocks" 0oi er" 1SP & 1SP Contro -oo!) + ' 1+3 M6 Surat Lignite Power P ant at /ani /aro i" Surat

0?1L" Power Sector" 6estern -egion" /agpur

3+,4

3.

Construction of .ggregate o#erhau " .greegate Testing 0ui dings and Storage space for .7L1 inc uing 1 ectrica and Mechanica Ser#ices

?industan .eronautics Ltd." 1ngine ;i#ision" Arissa

2<<+

<.

Ci#i " Structura and .rchitectura works for 152 M6 CPP for IACL /aphtha Cracker @nit" Panipat" ?ar%ana.

Larsen & Tu$ro Li!ited" 1&C 0usiness :roup" 1PC Power" 0aroda

,2+4

=.

Construction 6orks for 6ea#ing" Spinning & 6arehouse 0ui dings for the !anufacturing faci it% for
JMC Projects (India) Ltd.

(. unit of Maha#ir Spinning


L.J.I.M.S

,4=4

34

Spinning" wea#ing" Processing & Carn ;%eing at 0udhni" ;istt. Sehore" M.P. Eardh!an 7a$rics"

Mi s Ltd) /ew ;e hi

4./.2 ,9I4;I'? ()61EC$0 Pro@ect C*ient Contra ct Va*ue 6R,. in 1. Ci#i 6orks for the project Pritech Park Phase +" Marathaha i 9 Sarjapura Auter -ing -oad" 0anga ore MGs -:. Software S%ste!s P#t. Ltd." 0anga ore #ac,7 1<,25

+.

Proposed Ci#i and Structura park PEisua Soft

MGs.0hag%ana Ltd Secundera$ad .darsh Pri!e Projects P#t. Ltd." 0anga ore

5<34

work for Infor!ation techno og% gar Infrasture

,.

Construction of .darsh Shangri a -etreat ?ote on Auter -ing -oad at 0anga ore

=<84

2.

Ci#i 6orks of Town Centre

Ja%pee :reens <544

JMC Projects (India) Ltd.

L.J.I.M.S

31

(Phase9I) & Star Courts (Phase9 II) at Ja%pee :reens" :reater /oida (@.P.)

(. ;i#ision of Ja%prakash .ssociates Ltd.) /oida

3.

Ci#i 6orks at Sa arpuria S%!phon% Sur#e% /o 8G+" 0etrana .gara Ei age

Saturn :riha /ir!an P#t. Ltd. 0anga ore

381<

<.

Construction of O0.:M./1 L.@-1LF .T 0ag!ane Tech ParkC.E.-.M./ /.:.- " 0./:.LA-1

MGs. 0ag!ane :roup P#t Ltd 0anga ore MGs -uchi Ma s P#t. Ltd. /ew ;e hi

33+2

=.

Ci#i " Structure & 1'terna ;e#e op!ent 6orks of Shopping Ma at Eastrapur" .h!eda$ad.

23+2

8.

Proposed Ci#i and Structura work for co!!ercia and soft ware tech park 99Erinda#an Tech #i age

Eikas Te eco! 2228 Ltd. 0anga ore J.LP.T.-@ CA/ST-@CTIA / P@/1 2455

5.

construction of Su$structure" Superstructure and other Ci#i work for -esidentia 0ui ding.

14.

construction of Su$structure"
JMC Projects (India) Ltd.

E0P" ;i#ision
L.J.I.M.S

,8<=
3+

Superstructure and other Ci#i work for -esidentia 0ui ding. 11. CIEIL & ST-@CT@-.L 6A-JS A7 T?1 P-APAS1; ;.0.M.LLS .T 0?AP.L.

III" P6; (:/CT;) /ew ;e hi ;. 0. Ma s P#t. ,+54 Ltd. (;ainik 0haskar :roup) 0hopa

1+.

Proposed Construction of residentia apart!ent Q Mantri 7 oraM

S@-.J ;1E1LAP1-S 9 Mantri :roup 0anga ore MGs. Prestige 1states Projects (P) Ltd" Chennai

,+,3

1,.

Structura and Ci#i finishing works for QPrestige C%$er TowerM at Chennai

+558

12.

Construction of /ew Maharashtra Sadan on Sir!ur P ot" .t Jastur$a :andhi -oad" /ew ;e hi

MGs J. S. C?.M./J.1/T1-P-IS1S Mu!$ai

+5,4

4./.3 I'F)50$)9C$9)E ()61EC$0 Pro@ect C*ient Contra

JMC Projects (India) Ltd.

L.J.I.M.S

3,

ct Va*ue 6R,. in 1. Construction of /ew 7our Lane .gra 0%pass connecting k! 1=<.84 of /?9+ to k! 1,.4, of /?9, in the state of @ttar Pradesh in JE with MGs Sad$ha# 1ngineering Ltd" .h!eda$ad (-oad Lenghe* ,+.84 k!s" 0ridge* 1+ nos" -A0 G 7 %o#er* 5 nos" @nderpass* 11 nos" 0o +. 7our aning and strengthening of the e'isting two ane /ationa ?ighwa% /o. 2390 fro! To#arankuchi to Madurai (fro! J!. <4.53 to J!. 1+282) in Ta!i /adu (Package /o. EII P 0) in JE with MGs ;.-. .ggarwa Infraco! P#t. Ltd." :ujarat. ,. our aning and strengthening of the e'isting two ane /ationa ?ighwa% /o. 2390 fro! Trich% 0%pass end to To#arankuchi (fro! J!. o to J!. <4.53) in
JMC Projects (India) Ltd. L.J.I.M.S 32

/?.I /ew ;e hi

#ac,7 ,+<=4

/?.I /ew ;e hi

+1258

/?.I /ew ;e hi

+4258

Ta!i /adu (Package /o. EII P .) in JE with MGs ;.-. .ggarwa Infraco! P#t. Ltd." :ujarat. 2. 6ater Supp % Pip e ine 6orks (, packges) at Indore in JE with MGs T.?1- .LI I/;@ST-I1S & P-AJ1CTS 3. State ?ighwa%s -oad 6orks at Madh%a Pradesh 9Mand eshwar9 Jasrawad (S?9,1) Jasrawad9 Jhargone -oad (S?9,1) 0anher Package9," Length* 114 J!s (two ane) <. -eha$i itation and Strengthening of 0adnawar P Thand a Section of S?918 (Project -oad /o P +1) (.;0 7unded) of Madh%a Pradesh -oad ;e#e op!ent Corporation (MP-;C). =. Supp %ing" La%ing" Jointing" Testing and Co!!issioning of Sanitar% Sewers Kone91 inc uding a ied works in 0hopa (Contract Package /o* 0PL9669
JMC Projects (India) Ltd. L.J.I.M.S 33

Indore Mun. Corp.

13<38

Madh%a Pradesh -oad ;e#e op!en

54=1

to Maharashtra 0order (S?9,1) 9 t Corporation

M.P. -oad ;e#p.Corp.Lt d 0hopa

221+

0hopa Municipa Corp.

,32,

4,) 8. Stor! 6ater ;rainage Project .h!eda$ad Mun. Corp. 5. Construction of 7 %o#er at CST .irport Junction" Santacru( " /ear Centaur ?ote on 6estern 1'press ?ighwa%" Mu!$ai" Maharashtra (State). 14. Construction of -etaining 6a " -einforced anchor s a$ and specia fi $ehind retaining wa for +=44 ! ength on 1ast $ank fro! Su$hash 0ridge to :andhi 0ridge and pier protection works for Su$hash 0ridge on ri#er Sa$ar!ati for Sa$ar!ati -i#er 7ront ;e#e op!ent Corp. Sa$ar!ati -i#er 7ront ;e#p.Corp.Lt d. .h!eda$ad +=54 MS-;C Mu!$ai ,4=5 ,,2<

JMC Projects (India) Ltd.

L.J.I.M.S

3<

Chapter-1 Contract 'na*+,i,

1.1 I(TRO"UCTIO( Contract is the !ost i!portant docu!ent in the construction industr%. It is a docu!ent $inding the owner and the contractor. The contractor" who actua % does the construction work" has to fo ow the conditions aid down in the contract. It is the first step in the project as it fra!es the o#era e'ecution and the !ethod. The contract contains a ist of conditions negotiated and agreed $% the parties in#o #ed. The conditions ike the f ow of e'ecution" pa%!ent ter!s" )uantit% of !ateria s to $e used an its rates" etc.
JMC Projects (India) Ltd. L.J.I.M.S 3=

.1.1 'ature of contract ($ased on T%pes of Pa%!ent in the contract) 1#er% contract is a different contract. Thus e#er% contract wou d $e a different t%pe in itse f. 0ut" there are two !ajor t%pes of contract in ter!s of pa%!ent. 1 #u)p ,u) Aa*ue contractC It is a #er% risk% and rewarding contract. The contractor is the one who has to !ake !ajor decisions. The owner is concerned on % with the end resu t. Mi estones are set for pa%!ent to the contractor. 1.g. 0ridges" $ui ding" power projects" etc. are genera % of such t%pe. In u!p su! pa%!ent contract the owner gi#es $road specifications to the contractor and the contractor has to $ui d detai s fro! the specifications gi#en. 2 Ite) rate contractC here" the contractor is gi#en each and e#er% acti#it% specifications as to how to do the project. -ates of each acti#it% are a#ai a$ e to the contractor in the for! of 0i of Iuantities. The pa%!ent to contractor is done on 0AI $asis !onth %. Ite! rate is further $ifurcated into three su$ t%pes* 1 'ormal Contract* In this the contractor c ai!s the a!ount of e'penses !onth % for a!ount of work done. The ac)uiring of !ateria and assi!i ation of a$or for the work is done $% the contractor at his own cost first" then at the end of the !onth he c ai!s it fro! the owner. ?ere" the

JMC Projects (India) Ltd.

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38

owner wi !ake pa%!ent on the $asis of the rates pro#ided in the 0i of Iuantities. Thus" for a the !ateria s and a the acti#ities the contractor has to fo ow the rates gi#en in the 0AIs of the contractor. It is further $ifurcated into two t%pes 1 (A)With ,asic )ate* here the contract defines the rate at which the contractor shou d $u% !ateria s or carr% on the acti#ities. The owner wi rei!$urse the cost with the sa!e $asic rate. If there is an% increase or decrease in the prices of the !ateria s then it wou d $e $orne $% the contractor un ess" a price esca ation c ause is gi#en.( It states that the rise in price of stee " ce!ent" etc wi not $e $orne at the cost of the contractor) 2 (B)With formula* This t%pe is genera % seen in go#ern!ent contracts. . for!u a is gi#en to ca cu ate the present rate of an% !ateria taking the price of a %ear as a $ase. The ca cu ation is si!i ar to the price inde' ca cu ation. ?ere" the owner wi pa% the $a ance e'ceeding su! at the end of the project. 0AIs with for!u a is an ad#antage to the contractor as the go#ern!ent projects ast for ong period for e.g. ,92 %ears. .nd after such period genera % the price of stee and ce!ent has inf ated. If no co!pensation is gi#en on price esca ation then the co!pan% can incur a huge oss.

2 (art of material provided #y the o@ner free of cost * ?ere"


JMC Projects (India) Ltd. L.J.I.M.S 35

the owner pro#ides so!e !ateria s for free such as stee " ce!ent" etc. It is supp ied free of cost to the contractor. .nd the cost of !ateria is thus deducted fro! the contract su!. This situation genera % occurs when the owner fee s the a!ount )uoted $% the contractor on such !ateria s is high. The re!aining pa%!ent s%ste! wi re!ain as nor!a .

! !aterial supplied #y the o@ner @ith chargea#le prices* In this t%pe the owner supp ies the gi#en !ateria s to the contractor. 0ut" he charges the contractor with sa!e a!ount gi#en in the 0AI of the contract. This is in a wa% a profit to the owner as at one instance he $eco!es the supp ier of the !ateria s to the contractor and at second he acts as the owner.

1.2 DE% CO!!ERCI'# TER!S I( THE CO(TR'CT

These are co!!ercia ter!s and conditions that fra!e the e'ecution of the contractor for a gi#en project. Though e#er% project is a different one $ut these ter!s are seen in a !ost a the projects. This ke% ter!s and conditions are e'tracted fro! two ongoing projects of JMC projects(India) P#t. Ltd. na!e % (1) -uchi Ma at Eatrspur" .h!eda$ad" :ujarat and (+) Construction of part of

JMC Projects (India) Ltd.

L.J.I.M.S

<4

Co!!onwea th :a!es +414" Tha%agaraj /agar" /ew ;e hi.

.2.1 ,ill of 8uantity Its a $i in which a the !ateria s are isted with the precri$ed rate $% the owner and negotiated $% the contractor. Ance agreed upon the contractor has to fo ow these 0AI rates to put up the running account $i s.

.2.2 Contract 0um It !eans the su! reffered to in the docu!ent for the contractors perfor!ance of work. The contract su! is inc usi#e of a ta'es" #i( sa es ta'"ro%a ties road per!its & ta'es" octroi" works contract ta'" Turn o#er ta'" ser#ice ta'" E.T" 1SI" P7 contri$ution and a other statutor% ta'es as app ica$ e to the contractorGworkers etc. .nd the owner sha not $e responsi$ e whatsoe#er to pa% for the sa!e.

.2.3 Contract :alue It !eans the cu!u ati#e #a ue of work as per the 7ina 0i du % certified & appro#ed $% the owner.

.2.4 ;efect 4ia#ility (eriod


JMC Projects (India) Ltd. L.J.I.M.S <1

It sha $e a period after the #irtua co!p etion of the work and an% period e'tended as a resu t of rectification of the work order. It is a period $etween #irtua co!p etion and fina co!p etion of the work. ;uring this period the conractor sha $e $ound to rep ace andGor rectif% and !ake good a defcti#e !ateria s" e)uip!ents andGor work!anship which arise in 6orks or co!e in notice su$se)uent to the #irtua co!p etion.

.2. ;ra@ings D;rawingsD are a drawings" detai s and sketches a ong with technica infor!ation pro#ided $% the architect of the construction project.

.2./ Earnest !oney It is the a!ount deposited to the owner during the ti!e of tender.

.2.A Final Completion 7ina co!p etion wi $e dee!ed to ha#e $een achei#ed when at the end of the ;efects Lia$i it% Period a certificate has $een issued $% the architectG consu tant and the owner. It !eans a the re)uire!ents of the contract ha#e $een !et and co!p ied with and a the defects ha#e rep aced.

JMC Projects (India) Ltd.

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<+

.2.B 0u#%contractors The% are an% persons" fir!s" co!panies or agencies who after appro#a of the owner" ha#e entered into a direct contract with the contractor in respect of an% part of the work.

.2.. :irtual Completion It is when the work has $een co!p eted according to the drawings ans specifications of the architect of the owner. . certificate if #irtua co!p etion is then certified to the contractor and thus starts the defect ia$i it% period.

.2.1- )unning account ,ills This $i s are su$!itted to the owner $% the contractor on !onth % $asis to get the pa%!ent on the work done.

.2.11 )etention !oney It is the a!ount of the $i retained $% the owner to $e paid at the end of the project. It is kept as a for! of securit%. .nd the retention a!ount is re eased part after #irtua co!p etion and part after fina .

JMC Projects (India) Ltd.

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<,

.2.12 Final ,ill It is su$!itted to the owner within one !onth of the #irtua co!p etion and the pa%!ent is !ade to the contractor $% deduct a the da!ages and oss !ade.

.2.13 4iCuidity ;amages .re deductions !ade $% the owner fro! the running $i s of the contractor if there is an% de a% in the e'ecution of the work or if the gi#en !i estones are not achei#ed.

.2.14 E+tra Items The% are those ite!s which are not inc uded in the 0AI of the contract $ut are used at the project site and which are counted necessar% for the e'ecution of the work. It can $e so!eti!es for opting a $etter )ua it%.

.2.1 ?uarantee to perform Its sa!e as guaranteeing for a product. 7or eg. in -uchi Ma contract the contractor $inds on the ter! to ser#ice for the

JMC Projects (India) Ltd.

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<2

treat!ent of ter!ites for 14 %ears fro! the co!p etion. . perfor!ance guarantee $ond is to $e signed $% the $ank on $eha f of the contractor.

.2.1/ !o#iliDation 5dvance It is and ad#ance recei#ed fro! the owner to start up the project. It inc udes the e'penses of setting up the siteR gathering the a$or" !ateria s" etc. If !o$i i(ation is not pro#ided then it affects the working capita of the co!pan% at arge $ecause it takes a !ost two !onths to set up the site.

1.

F#O- OF !O(E% I( THE CO(TR'CT OF ' PROJECT*

5.3.1 Contractors are invited for filling the contract. 5.3. $he contractors fill the tenders @ith their cost estimates.

5.3.3 E!; 2earnest money deposit3 is given through cash or #ank guarantee along @ith the tender. 1. .& Then a work order or Letter of Intent is gi#en to the contractor. The c ock starts ticking fro! the da% when work order is recei#ed. The date of LAI G 6ork order is !ost i!portant as the duration of the projects starts fro! this date. 1. .1 Mo$i i(ation ad#ance is recei#ed fro! the owner to he p the contractor initiating the project(working capita ). 1)uip!ent

JMC Projects (India) Ltd.

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<3

ad#ance is recei#ed to purchase new e)uip!ent for the project. In $oth the cases $ank guarantee is needed. 1. .9 Perfor!ance guarantee is needed fro! the $ank on $eha f of the contractor. This wi assure the owner that the work gi#en to the contractor wi $e co!p eted du %. 1. .E Interi! pa%!ent to the contractor is done once the $i s (running aGc $i ) are su$!itted. If it is an Dite! rate contractD the -. $i is su$!itted !onth % $ased on actua ph%sica !easure!ent of work done. In D u!p su! contractD pa%!ent is done on !i estone $asis (percentage of work done). The pa%!ent is done $% the owner once the !onth % $i s are certified. Ar e se an adhoc pa%!ent is !ade (if the certification takes ti!e) for a part of the a!ount. 0ut" !ost of the ti!es the owner retains so!e percentage of the $i a!ount ti the ast sett e!ent i.e. after the co!p etion of the project. 1. .F 7ina %" after the co!p etion of the project the owner !akes the fu pa%!ent to the contractor. ?e deducts a the da!ages and oss due to the contractor and pa%s the $a ance a!ount.

JMC Projects (India) Ltd.

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<<

1.& F#O- OF EGECUTIO( I( PROJECT

.:M

PM 1'ecuti#e Staff (Technica ) Store (,) P anning (1) Safet% (1)

Support Staff

.ccount (1)
.d!in (+) 0i ing (+)

This f ow define how project is $eing e'ecuted on the site. The !ain head of the project at the site is assistance genera !anager(.:M). The !ajor p anning & contro is guided $% the .:M. The Project !anager (PM) has to report to the .:M. PM hand es the who e project at site" he needs to $e present on the site during construction process" and he is answera$ e to the .:M. .:M and PM decides the $udget of the project and the f ow of e'ecution. The% de egate the work to their su$9ordinates. 1'ecuti#e staff and support staffs are guided $% PM. 1'ecuti#e

JMC Projects (India) Ltd.

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staff contro s the technica feasi$i it% of the work and the% decide the !ateria needed and !achines to $e used. Support staff is supposed to work to support the e'ecuti#e staff with the purchase" store" $i ing" accounting" safet%" etc. This a depart!ents office are esta$ ished at the site and an% conf ict $etween the e'ecuti#e dept. & support dept. wi go to the Project Manager. 7or fina appro#a dispute !atter wi go to the .:M.

.4.1 5ccountant This depart!ent hand es the fo owing issues at arge*

La$our .dhoc pa%!ent Jharchi 0i pa%!ent Purchase Loca (Sand" Jhapchi" ;iese " ce!ent) 0% ?A(hardware" e ectronics) .d!inistration Lero'" Stationer%" #ehic e" !ess" securit%" !isc. :enera cash

.4.2 0tores
JMC Projects (India) Ltd. L.J.I.M.S <8

This depart!ent contro s the fo owing issues*

Loca purchase Stock Maintain Indent

-e)uire!ent Purchase Cha an MIS M-0/Stock state!ent .ssets report

The fo owing chart e'p ains the f ow right fro! the re)uire!ent raised to its fina procedure. M-0/- !eans O!ateria recei#ed $ut $i not recei#edF it !eans no origina $i is gi#en $% the supp ier. 0ut" the cha an is gi#en the !ateria s are sent. .4.3 5dministration La$our report La$our co on%
JMC Projects (India) Ltd. L.J.I.M.S <5

Pantr% .4.4 (lanning 1#er% $udget starts fro! (ero fo owing the (ero $ased $udgeting. 7o owing are the points kept in !ind whi e p anning Target Manpower re)uired Materia .ssets Manage!ent(Staff" profita$i it%" K00) .4. ,illing* .s per drawing C ient certified Pa%!ent .ccount .4./ 0afety . safet% depart!ent is set up to pro#ide first aid to the workers at the site. .nd keep a track record of the injuries occurred at the site thus" in a wa% an ai! to reduce the case of the injuries.

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Chapter-9 Financia* State)ent 'na*+,i,

JMC Projects (India) Ltd.

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=1

Ratio 'na*+,i, is the !easure of interre ationship $etween different sections of the financia state!ents which then is co!pared with the $udgeted or forecasted resu ts" prior %ear resu ts and or the industria resu t to $e !ost i!portant ratio !ust inc ude stud% of under %ing data. -atio shou d $e taken as guides that are usefu in e#a uating a co!pan%Ds financia position and operation and !aking co!parisons with the prior %ear or with other co!panies. the pri!ar% purpose of area needing further in#estigations. reasoning if !eaningfu $usiness there -atio is to point out wi no not carr% is supporting -ation

)uantitati#e and financia infor!ation. .part fro! ratios other infor!ation which shou d $e ooked at inc udes*

The contents of an% acco!pan%ing co!!entar% on the accounts 1. The age and nature of the industr% +. Content and future de#e op!ent in the co!pan%Ds !arkets" at ho!e and o#erseas" recent ac)uisitions and disposa s of a su$sidiar% $% the co!pan%. ,. 1'traordinar% ite!s in the inco!e state!ents 2. The auditor opinion on the financia state!ents 3. Ather infor!ation in the oca papers a$out the co!pan%

These ratios can a$ % $e c assified according to the target group of the stakeho ders

JMC Projects (India) Ltd.

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=+

Pro/ita<i*it+ 7or shareho ders" e!p o%ees" creditors" in#estors" !anage!ent #i>uidit+ creditors and E//icienc+ co!petitors $earin0 in#estors InAe,t)ent !anage!ent 7or shareho ders" potentia in#estors" 7or shareho ders" enders" creditors and potentia 7or shareho ders" !anage!ent" supp iers" co!petitors 7or shareho ders" !anage!ent" creditors and

9.1 #i>uidit+ Ratio Li)uidit% refers to the a$i it% of the fir! to !eet its short9ter! financia o$ igations when and as the% fa due. The !ain concern of the fir!s to !eet their short ter! !aturing o$ igations. 7ai ure to do this wi resu t in the tota fai ure of the $usiness" as it wou d $e forced into i)uidation. /.1.1 Current )atio The current ratio is a popu ar financia ratio used to test a co!pan%Ds i)uidit% (a so referred to as its current or working capita position) $% deri#ing the proportion of current assets a#ai a$ e to co#er current ia$i ities.

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=,

The concept $ehind this ratio is to ascertain whether a co!pan%Ds short9ter! assets (cash" cash e)ui#a ents" !arketa$ e securities" recei#a$ es and in#entor%) are readi % a#ai a$ e to pa% off its short9ter! ia$i ities (notes pa%a$ e" current portion of ter! de$t" pa%a$ es" accrued e'penses and ta'es). In theor%" the higher the current ratio" the $etter.

LIQUIDITY RATIO OF JMC


1 50 1 00 0 50 0 00
Current Ratio
1 25 1 15 1 05 1 11 0 "" 0 81 0 #" 0 58 0 4$

Quick & Ratio

u Financial Year
2008%0" 200#%08 200$%0#

Bank fin to w orking cap gap

Li)uidit% is one of the !ost i!portant indicators to !easure the current financia hea th of a co!pan% and if we see a!ong these four co!panies" JMC had a good track record of !aintain the a#erage figures shown $% the co!pan%.

Conc*u,ionC
JMC Projects (India) Ltd. L.J.I.M.S =2

The current ratio

is 1.+3 "

1.43

"

1.13

in

the %ear

+44="+448"+445 respecti#e %" indicates that short ter! financia position and po ic% of the co!pan% is sound good and it can pro!pt % !eet its short ter! ia$i ities. $ut its ow in +44=948 due to increase in current ia$i ities and short ter! $ank finance which represents increase in #o u!e and as we as onger credit ter!s negotiated $% the co!pan% and ad#anced taken fro! c ients.

Current Ratio
2 00 1 50
Ratio

1 $0 1 05

1 $0

1 $2

1 00 0 50 0 00 'M( )*+ ,(( -((


Co pan! "#$$%&$'(

7igure current ratio of peer co!pan%

.s we see fro! the $a ance sheet that the tota assets of the co!pan% has $een constant % growing and net fi'ed assets stands 2+> of the tota assets in +448. . significant portion of assets growth has $een contri$uted $% rising current assets. /et ia$i it% contri$utes around ==> of tota assets and that is

JMC Projects (India) Ltd.

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=3

worriso!e figure. this show co!pan% is financing its assets $% $orrowings or short ter! credits. . four co!panies !aintaining a current ratio $etween 1 to 1.5 that is ess co!pare to the reco!!ended #a ue of + that is $ecause arger turno#er periods and working capita c%c e. Su00e,tionC The co!pan% shou d pa% their creditors on ti!e so that the current ia$i ities decreases which wi increase the current ratio. The co!pan% shou d increase their work9in9progress so that the co!pan% cou d generate read% cash which resu ts in increase in cash & $ank $a ance and decrease in ad#ance fro! c ients. The co!pan% shou d work on reducing the ia$i it% pa%a$ e under etter of credit of -s.1=3 acs in the %ear +44=948 as co!pared to 1= acs in %ear +44<94= which increases the current ia$i ities. /.1.2 89IC< )5$I6 The )uick ratio 9 or the )uick assets ratio or the acid9test ratio 9 is a i)uidit% indicator that further refines the current ratio $% !easuring the a!ount of the !ost i)uid current assets there are to co#er current conser#ati#e than the ia$i ities. The )uick ratio is !ore current ratio $ecause it e'c udes

in#entor% and other current assets" which are !ore difficu t to turn into cash. Therefore" a higher ratio !eans a !ore i)uid current position. .nother $eneficia use is to co!pare the )uick ratio with the current ratio. If the current ratio is significant %

JMC Projects (India) Ltd.

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=<

higher" it is c ear indication that the co!pan%Ds current assets are dependent on in#entor%.
Quick Ratio 1 50 1 00 0 50 0 00 'M( )*+ ,(( -(( Co pan!"#$$%&$'( 0 81 1 11 0 !4 1 !4

7igure 1 Iuick ratio of peer co!pan%

Conc*u,ionC The )uick ratio is 4.55"4.81 & 1.14 in the %ear +445"+448"+44= respecti#e %. ?ere the current ratio is not significant % higher co!pared to )uick ratioR it is c ear indication that the co!pan%Ds current assets are not pure % dependent on in#entor%. If we take a ook on )uick ratio JMC has $een in co!forta$ e (one e'cept the %ear +448 that is $ecause of the raise in the in#entor%. Su00e,tionC The co!pan% shou d reduce further their co ection period so that !ore cash is a#ai a$ e" which wi i!pro#e the i)uidit% position of the co!pan% which in turn increases the )uick ratio. The in#entor% turno#er shou d $e )uick so that ess in#entor%

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==

re!ains in the co!pan% which wi a so reduce the ho ding costs re ated to in#entor% which in turn resu ts in !ore cashG i)uidit%.

/.1.3 ,5'< FI'5'CE $6 W6)<I'? C5(I$54 ?5( )5$I6 The ratio shows us the degree of the co!pan%Ds re iance on short9ter! $ank finance for financing the working capita gap. The $ank finance gearing ratio is 4.38" 4.=5 & 4.2< in the %ear +445"+448 & +44= respecti#e %" indicates the co!pan% has increased their re iance on short ter! $ank finance fro! +44= to +448 & then again decreased in the %ear +445.
Bank Finance To )orking Capital *ap Ratio 1 0 0 0 0 0 00 80 $0 40 20 00 0 #" 0 !8 0 0! 'M( Co )*+ ,(( 0 1! -((

Ratio

pan! "#$$%&$'(

7igure + $ank finn to working cap ratio of peer co!pan%

Su00e,tionC The co!pan% shou d keep in !ind that increase in short ter! $ank finance wi increase in the ia$i ities which in turn reduce the current ratio

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=8

9.2 #EVER'$E R'TIO

L+,+RA*+ RATIO OF JMC


! 50 ! 00 2 50 2 00 1 50 1 00 0 50 0 00
De-t&+.uit! 0 "# 0 $$ 0 51 1 8$ ! 00 2 #0

0 4" 0 !" 0 !4 De-t o/0 lia-ilitie0 to net wort1

Financial Year 2008%0" 200#%08

200$%0#

/.2.1 ;e#t%ECuity ratio

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=5

De-t&+.uit! Ratio 2 00 1 50 1 00 0 50 0 00 'M( )*+ ,(( Co pan!"#$$%&$'( -(( 0 $$ 0 2" 1 84

0 5#

7igure , de$t ratio of peer co!pan%

This is a !easure!ent of how !uch supp iers" enders" creditors and o$ igors ha#e co!!itted to the co!pan% #ersus what the shareho ders ha#e co!!itted. To a arge degree " the de$t9e)uit% ratio pro#ides another #antage point on a co!pan%Ds e#erage position" in this case co!paring tota ia$i ities to shareho derDs e)uit%" as opposed to tota assets in the de$t ratio. Si!i ar to the de$t ratio" a ower the percentage !eans that a co!pan% is using ess e#erage and has a stronger e)uit% position.

Conc*u,ionC The de$t to e)uit% ratio is 4.5=" 4.<< & 4.31 in the %ears +445"+448 & +44= respecti#e %. The ratio thus" indicates that the proportion of de$ts is ess in the shareho derDs funds ac)uired $% the co!pan% which is due to the issue of preference

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shares and high reser#es & surp us which ead to the increase in the shareho ders fund . 6e can a so conc ude that financia structure of the co!pan% is strong. Su00e,tion,C . ratio $e ow 144> indicates a ow geared co!pan% and an% prudent ender wi $e wi ing to e'tend oan finance to such oan and e'pand their $usinesses. So co!pan% shou d increase their de$ts $% taking oan in for! of securedGunsecured $usiness.

/.2.2 ;e#t )atio ;e$t -atio used to !easure the e'tent of the co!pan%Ds financing with de$t re ati#e to e)uit% and its a$i it% to co#er interest and other fi'ed charges. It address the co!pan%Ds ong9 ter! a$i it% to !eet its financia e#erage. The higher the ratios" the !ore inde$tedness the co!pan% owes" which signa s the possi$i it% the co!pan% wi its de$t o$ igations. $e una$ e to earn enough to satisf%

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De-t Ratio 0 80 0 $0 0 40 0 20 0 00 'M( )*+ ,(( -(( Co pan!"#$$%&$'( 0 !" 0 2! 0 $5 0 !$

7igure 2 de$t ratio of peer co!pan%

/.2.3 6utstanding 4ia#ility $o 'et Worth )atio Tota ia$i ities di#ided $% /et 6orth. This ratio he ps to c arif% ong9ter! de$t" which can $e seen $% ia$i it% e#e s e'ceed /et 6orth. JMC is

the i!pact of oGs the e'tent that tota

co!paring this ratio with /et 6orth. Creditors are concerned to ha#ing itt e $it higher ratio than desired.

O/2 Lia-ilit! to 3et )ort1 Ratio


4 ! 2 1 0 00 00 00 00 00 Ratio 2 #0 1 58 2 "# 1 #0

'M( Co

)*+

,((

-((

pan!"#$$%&$'(

7igure 3 oGs ia$i it% to net worth ratio of peer co!pan%

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Conc*u,ionC The de$t to e)uit% ratio is ,.4" +.= & 1.8= in the %ears +445"+448 & +44= respecti#e %. The ratio thus" indicates that the proportion of outstanding ia$i ities is !ore.

Su00e,tion,C The co!pan% shou d ad#ise to reduce their outstanding ia$i ities.

9.

'CTIVIT% R'TIO

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ACTI,ITY RATIO OF JMC


15 00 10 00 5 00 0 00
45$% 9$599 4546 <567 %597 <59# 9549 In=entor! t/o 958' 9578 )orking cap t/o '5%8 75'% <59% 754$ 75'4 8544

Fi;e: a00e0t t/o

total a00et0 t/o .inancial /ear

Capital + ploe: t/o

2008%0"

200#%08

200$%0#

/.3.1 I':E'$6)> $E6 )5$I6


In=entor! T/O Ratio
4546 759$ #5<4 $5<$

8 00 $ 00 4 00 2 00 0 00

'M(

)*+

,((

-((

Co pan! "#$$%&$'(

7igure < in#entor% tGo ratio of peer co!pan%

The ratio !easures the stock in re ation to turno#er in order to deter!ine how often the stock turns o#er in the $usiness. It indicates the efficienc% of the fir! in se ing its product . -atio showing how !an% ti!es a co!pan%Ds in#entor% is so d and rep aced o#er a period . . ow turno#er i!p ies poor sa es and therefore" e'cess in#entor%. . high ratio i!p ies either strong sa es or ineffecti#e $u%ing.

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Conc*u,ionC In#entor% turno#er ratio is <.4<"<.<5 & 14.11 in the %ear +445"+448 & +44= which shows a re ati#e % high stock turno#er in +44= which !eans co!pan% is dea ing in fast !o#ing goods $ut its has $een decreased during +448 & +445 re)uires carefu attention. The co!pan% turned o#er stock e#er% ,< da%s in +44= & in +445 it took <4da%s.the trend shows !argina increase in da%s which indicates a s owdown of stock turno#er.

Su00e,tionC Apti!u! uti i(ation of the a#ai a$ e resources shou d $e po ic% of the co!pan%" which wi he p the! in reducing the in#entor%. The reduction of the in#entor% wi he p the co!pan% in reducing the ho ding costs re ated to the in#entor% which wi increasing the o#era profits. he p in

/.3.2 FIFE; 500E$0 $E6 )5$I6


JMC Projects (India) Ltd. L.J.I.M.S 83

Fi;e: A00et0 T/O Ratio 14 00 12 00 10 00 8 00 $ 00 4 00 2 00 0 00 12 21 $ $8 ! 2$

Ratio

4 8#

'M(

)*+

,((

-((

Co pan!"#$$%&$'(

7igure= fi'ed assets tGo ratio of peer co!pan%

This ratio is a rough !easure of the producti#it% of a co!pan%Ds fi'ed assets 0propert%" p ant and e)uip!ent
or PP&E1 2it3 respect to generating sales 43is annual turnover ratio is designed to reflect a compan56s efficienc5 in managing t3ese significant assets Simpl5 put7 t3e 3ig3er t3e 5earl5 turnover rate7 t3e 8etter 43ere is no e9act num8er t3at determines 23et3er a compan5 is doing a good :o8 of generating revenue from its investments in fi9ed assets

Conc*u,ionC The fi'ed assets turno#er ratio is 3.52"2.8= & 3.1+ in the %ear +445"+448 & +44=. It appears that the acti#it% of the $usiness is re ati#e % constant i!pro#e!ent which indicates that i!pro#e!ent in uti i(ation of fi'ed assets of the co!pan%. here we ha#e 8+.54> increase in contract receipts and a 5+> increase in fi'ed assets fro! 7C+44=948. This !eans is that co!pan% has in#ested in new fi'ed assets" turno#er has a so increased enough to ref ect the new in#est!ents and co!pan% can to see a !ajor i!pro#e!ent in this ratio ne't %ear.

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Su00e,tion,C The co!pan% shou d increase the contract receipts $% adopting custo!er focused approach"e'ce ent track record of projects co!p etion in ti!e & we esta$ ished )ua it% & safet% s%ste! in p ace e'ce ent project p anning & !onitoring and contro s%ste! in p ace" capa$i it% & co!petence to transfor! the c ientDs #ision into rea it% & #a ue addition at e#er% stage fro! designs" specification & project re)uire!ents using project p anning & e'ecution ski s etc. /.3.3 $6$54 500E$0 $E6 )5$I6
Total A00et0 T/O Ratio 2 00 1 50 Ratio 1 00 0 50 0 00 'M( )*+ ,(( -(( Co pan!"#$$%&$'( 1 4! 1 $0 0 #" 0 "5

7igure 8 tota assets tGo ratio of peer co!pan%

The tota assets turno#er indicates the efficienc% with which the fir! uses a $een uti i(ed. Conc*u,ionC its assets to generate sa es. :enera %" the higher the fir!Ds tota asset turno#er" the !ore efficient its assets ha#e

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The fi'ed assets turno#er ratio is 1.<1"1.2, & 1.,8 in the %ear +445"+448 & +44=. It appears that the acti#it% of the $usiness is re ati#e % constant upward trend which indicates that i!pro#e!ent in uti i(ation of tota assets of the co!pan%. here we ha#e 8+.54> increase in contract receipts and a =8> increase in tota assets fro! 7C+44=948. This !eans is that co!pan% has in#ested in new tota assets" turno#er has a so increased enough to ref ect the new in#est!ents and co!pan% can to see a !ajor i!pro#e!ent in this ratio ne't %ear. Su00e,tion,C The co!pan% shou d increase the contract receipts $% adopting custo!er focused approach"e'ce ent track record of projects co!p etion in ti!e & we esta$ ished )ua it% & safet% s%ste! in p ace e'ce ent project p anning & !onitoring and contro s%ste! in p ace" capa$i it% & co!petence to transfor! the c ientDs #ision into rea it% & #a ue addition at e#er% stage fro! designs" specification & project re)uire!ents using project p anning & e'ecution ski s etc.

/.3.4 W6)<I'? C5(I$54 $E6 )5$I6 . !easure!ent co!paring the dep etion of working capita to the generation of sa es o#er a gi#en period. This pro#ides so!e usefu infor!ation as to how effecti#e % a co!pan% is using its working capita to generate sa es.

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. co!pan% uses working capita

(current assets 9 current

ia$i ities) to fund operations and purchase in#entor%. These operations and in#entor% are then con#erted into sa es re#enue for the co!pan%. The working capita turno#er ratio is used to ana %(e the re ationship $etween the !one% used to fund operations and the sa es generated fro! these operations. In a genera sense" the higher the working capita turno#er" the $etter $ecause it !eans that the co!pan% is generating a ot of sa es co!pared to the !one% it uses to fund the sa es.
)orking Capital T/O Ratio 10 8 $ 4 2 0 00 00 00 00 00 00 8 #! 4 #" 1 #4 2 54

Ratio

'M(

)*+ Co

,((

-((

pan!"#$$%&$6(

7igure 5 working cap tGo ratio of peer co!pan%

Conc*u,ionC The working capita turno#er ratio is=.12 ti!es" 8.=, ti!es" 3.1= ti!es in the %ear +445" +448 & +44=. The ratio is growing steadi % in ter!s of turno#er and its asset $ase. ?owe#er" the #er% high net assets turno#er ratio #a ues ca!e when the turno#er and asset #a ues ca!e when the turno#er and asset

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#a ues were ow" so !athe!atica % this can often !ean that the ratio is #er% ike % to $e high. So its not a wa%s $ad when a ratio fa s9it shou d reco#er" though" as the additiona assets start to generate !ore sa es and profit in the co!ing !onths. Su00e,tion,C The co!pan% shou d reduce the current assets so that the profita$i it% increases as the reduction in the i)uidit% resu ts in the incre!ent in profita$i it% $ut a so consider the opti!u! e#e of i)uidit% ratio n. The co!pan% shou d increase the sa es $% adopting custo!er focused approach"e'ce ent track record of projects co!p etion in ti!e & we s%ste! in p ace esta$ ished )ua it% & safet% e'ce ent project p anning & !onitoring and

contro s%ste! in p ace" capa$i it% & co!petence to transfor! the c ientDs #ision into rea it% & #a ue addition at e#er% stage fro! designs" specification & project re)uire!ents using project p anning & e'ecution ski s etc. /.3. C5(I$54 E!(46>E; $E6 )5$I6 The capita e!p o%ed turno#er ratio te s us the state of the re ationship $etween the shareho dersD in#est!ent in the $usiness and the turno#er that the !anage!ent of the $usiness ha#e $een a$ e to generate fro! it. Conc*u,ion C The working capita turno#er ratio is 2.8< ti!es" 2.<4 ti!es" ,.<< ti!es in the %ear +445" +448 & +44=.Capita 1!p o%ed Turno#er

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ratio has gone up fro! ,.<< to 2.8< ti!es in a %ear" which is a good thing and co!pan% e'pect a further i!pro#e!ent in this ratio ne't %ear.
Capital + plo!e: T/O Ratio 5 4 ! 2 1 0 00 00 00 00 00 00 4 $0 2 "# 0 "4 1 41

Ratio

'M(

)*+ Co

,((

-((

pan!"#$$%&$'(

7igure14 cap e!p o%ed tGo ratio of peer co!pan%

/.3./ ;E,$6)0 $E6 )5$I6


De-tor0 T/O Ratio of JMC "8 8 88 $ "0 #

100 0 "5 0 "0 0 85 0 80 0

200"

2008 Year

200#

De-tor0 T/O Ratio"in :a!0( 100 0 80 0 $0 0 40 0 20 0 00 88 $ 58 8 #$ 2

0! 'M(
Co pan!"#$$%&$'(

)*+

,((

-((

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7igure 11 de$tors tGo ratio of peer co!pan%

The a#erage co ection period !easures the )ua it% of de$tors since it indicates the speed of their co ection. The shorter the a#erage co ection period" the $etter the )ua it% of de$tors" as a short co ection period i!p ies the pro!pt pa%!ent $% de$tors. .n e'cessi#e % ong co ection period i!p ies a #er% i$era and inefficient credit and co ection perfor!ance. The de a% in co ection of cash i!pairs the fir!Fs i)uidit%. An the other hand" too ow a co ection period is not necessari % fa#ora$ e" rather it !a% indicate a #er% restricti#e credit and co ection po ic% which !a% curtai sa es and hence ad#erse % affect profit. The ratio thus" indicates the efficienc% to co ect the de$ts in the %ear +445 as co!pared to the pre#ious %ear and the %ear +44=" indicates that de$ts are $eing co ected ess )uick % and this pro!pt co ection of $ook de$ts wi not re ease funds which can not $e put to so!e other use as co!pared to the pre#ious %ear.

Su00e,tion,C The co!pan% shou d $e efficient to co ect the de$ts on ti!e which wi he p the! in using the a!ount in so!e other use. The co!pan% shou d i!pro#e their credit po icies i.e. credit standards" co ection progra!s which wi capita re)uire!ents. a so he p the! in

reduction of $ad de$ts which resu ts in decrease in working

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/.3./ ?)6W$= I' 054E0

Conc*u,ionC The growth in contract receipts is 2,.4<>" 8+.5+> & =<.12> in the %ear +445"+448 & +44=. .s we can see sharp growth in contract receipts for JMC in 7C48 co!pare to 7C4= and its $ecause of aggressi#e $idding in the a ied sectors in the construction industr%. 0ut in the 7C45 that growth !o!entu! is not sustained $ecause of rising co!petition" econo!ic recession " increase in price of raw !ateria s and wages" higher e'penses etc. /e't %ear is e'pected to perfor! we as new refor!s taken $% go#ern!ent to $oost up construction industr%. 9.& I(TERSET COVR'$E R'TIO

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Intere0t Co=erage ratio of JMC


8 00 Ratio $ 00 4 00 2 00 0 00 200" 2008 Year 200# ! 52 $ 12 4 1$

. ratio used to deter!ine how easi % a co!pan% can pa% interest on outstanding de$t. The ower the ratio" the !ore the co!pan% is $urdened $% de$t e'pense. 6hen a co!pan%Ds interest co#erage ratio is on % 1.3 or ower" its a$i it% to !eet interest e'penses !a% $e )uestiona$ e. The a$i it% to sta% current with interest pa%!ent o$ igations is a$so ute % critica for a co!pan% as a going concern. 6hi e the non9pa%!ent of de$t principa is a serious % negati#e condition" a co!pan% finding itse f in financia Goperationa difficu ties can sta% a i#e for )uite so!e ti!e as ong as it is a$ e to ser#ice its interest e'penses. Interest e'penses affect a co!pan%Ds profita$i it%" so the cost9$enefit ana %sis dictates that $orrowing !one% to fund a co!pan%Ds assets has to ha#e a positi#e effect. .n a!p e interest co#erage ratio wou d $e an indicator of this circu!stance" as we capacit% Conc*u,ionC Interest co#erage ratio is ,.3+" <.1+ & 2.1< in the %ear +445" +448 & +44= 6hich shows positi#e sign for co!pan%. The
JMC Projects (India) Ltd. L.J.I.M.S 52

as indicating su$stantia additiona de$t

interest co#erage ratio has dropped for JMC that is $ecause co!pan% has taken !ore operation.
Intere0t Co=erage ratio 15 00 Ratio 10 00 5 00 0 00 'M( )*+ Co ,(( -(( pan!"#$$%&$'( 11 8! $ 12 2 02

ong ter!

oans to e'pand its

4 41

7igure 1+ interest co#erage ratio of peer co!pan%

9.1 PROFITIBI#IT% R'TIO

>ROFITABILITY RATIO OF JMC


10 00 8 00 $ 00 4 00 2 00 0 00
Operating >rofit 3et >rofit Ratio Financial Year #5'9 8584 85#9 '5%8 '586 '574

2008%0"

200#%08

200$%0#

Profit !argin ana %sis uses the percentage ca cu ation to pro#ide a co!prehensi#e !easure of a co!pan%Ds profita$i it%.0asica %"
JMC Projects (India) Ltd. L.J.I.M.S 53

it is the a!ount of profit (at the gross" operating" preta' or net inco!e e#e ) generated $% the co!pan% as a percent of the sa es generated. The o$jecti#e of !argin ana %sis is to detect consistenc% or positi#eGnegati#e trends in a co!pan%Ds earnings. Positi#e profit !argin ana %sis trans ates into positi#e

in#est!ent )ua it%. To a arge degree" it is the )ua it%" and growth" of a co!pan%Ds earnings that dri#e its stock price. /. .1 6perating (rofit )atio
Operating >rofit Ratio 20 00 15 00 10 00 5 00 0 00 'M( )*+ ,(( -((
Co pan!"#$$%&$'(

15 5" 8 !"

15 #8

1! "8

7igure 1, operating profit ratio of peer co!pan%

The ratio a$o#e shows the increasing trend in the operating profit since the ratio has i!pro#ed fro! 8.,5 in +448 to 8.=, in +445. This indicates that the rate in increase in cost of goods so d are ess than the rate of increase in sa es" hence the increased efficienc%.

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/. .2 'et (rofit )atio


3et >rofit Ratio 8 00 $ 00 4 00 2 00 0 00 # 48 ! !$ 4 0# 4 $$

'M(

)*+
Co pan!"#$$%&$'(

,((

-((

7igure 12 net profit ratio of peer co!pan%

The net profit ratio shows that the !argin is not fair % sta$ e o#er ti!e. To know how fir! is perfor!ing one has to co!pare this ratio with the industr% a#erage or a fir! dea ing in a si!i ar $usiness. JMC has co!parati#e % ow profit !argin due to high operating e'penses (high fi'ed cost). JMC has in#ested ots of !one% in construction e)uip!ents and that at a fi'ed interest cost and depreciation which is pressuri(ing on their !argin.. so there was a rise in wage $i s " indirect ta'es and financia charges $ut rise in these e'penses cou d $e justifia$ e on $ack of rising co!petiti#eness and shortage of ski ed personne . Su00e,tionC Co!pan% shou d put !ajor e!phasis on reducing the e'penses of cost of !ateria s and construction e'penses. Co!pan% shou d a so consider assets of the co!pan% as we as interest and ta'

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structure of the co!pan%. 0% considering a

these aspects"

co!pan% can increase their gross profit as we as net profit. 9.9 RETUR( O( I(VEST!E(T R'TIO

Return On In=e0t ent Ratio OF JMC


40 00
895<6

!0 00
#9596 #95$4

89578

#%5'6 965$9

20 00 10 00 0 00
9$58' 6579 65'9

Return on Total A00et0 2008%0"

Return on Cap e plo!e: .inancial /ear 200#%08 200$%0#

Return On A=e53et )ort1

/./.1 )E$9)' 6' $6$54 500E$0


Return On Total a00et0 "? (
!0 00 Ratio 20 00 10 00 0 00 'M( )*+ ,(( -(( Co pan!"#$$%&$'( " 41 1" #4 " 1$ 8 $5

7igure 13 return on tota assets ratio of peer co!pan%

This ratio indicates how profita$ e a co!pan% is re ati#e to its tota assets. The return on assets (-A.) ratio i ustrates how we !anage!ent is e!p o%ing the co!pan%Ds tota assets to !ake a

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profit. The higher the return" the !ore efficient !anage!ent is in uti i(ing its asset $ase.

Conc*u,ionC The return on tota assets is 14.,8" 5.21 and 5.81 in the %ear +445" +448 & +44=.It appears that the acti#it% of the $usiness is re ati#e % constant" with a s ight upward trend. The ratio" thus indicates that efficient !anage!ent in the uti i(ation of tota assets of the co!pan% during the three %ears. Co!pan% can to see a !ajor i!pro#e!ent in this ratio ne't %ear. Su00e,tionC Co!pan% shou d increase the sa es and reduce the e'penses which in turn increase 10IT which resu ts in the increase in return on tota assets.

/./.2 )E$9)' 6' C5(I$54 E!(46>E;


Return On Captail + plo!e: "? (
40 00 !0 00 20 00 10 00 0 00 !$ #1 21 0$ 10 8! 12 8$

Ratio

'M(

)*+

,((

-((

Co pan!"#$$%&$'(

7igure 1< return on cap e!p o%ed ratio of peer co!pan%

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The return on capita e!p o%ed (-AC1) ratio" e'pressed as a percentage" co!p e!ents the return on e)uit% (-A1) ratio $% adding a co!pan%Ds de$t ia$i ities" or funded de$t" to e)uit% to ref ect a co!pan%Ds tota Hcapita e!p o%edH. This !easure narrows the focus to gain a $etter understanding of a co!pan%Ds a$i it% to generate returns fro! its a#ai a$ e capita $ase.0% co!paring net inco!e to the su! of a co!pan%Ds de$t and e)uit% capita " in#estors can get a c ear picture of how the use of e#erage i!pacts a co!pan%Ds profita$i it%. 7inancia ana %sts consider the -AC1 !easure!ent to $e a !ore co!prehensi#e profita$i it% indicator $ecause it gauges !anage!entDs a$i it% to generate earnings fro! a co!pan%Ds tota poo of capita . Conc*u,ionC The return on capita e!p o%ed is +1.15" +1.4< & 15.41 in the %ear +445"+448 and +44= respecti#e %. The ratio thus" indicates that co!pan% has effecti#e % use a the sources entrusted with it has earned !ore profit $efore interest" ta' and di#idend which !ini!i(e the increase in the capita e!p o%ed i.e. ong ter! funds and shareho derFs fund in the %ear +44=948. Su00e,tionC Co!pan% shou d pa% its creditors on ti!e due to which the capita e!p o%ed decreases which in turn increases the return on capita e!p o%ed. Co!pan% can to see a !ajor i!pro#e!ent in this ratio ne't %ear.

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/./.3 )E$9)' 6' 5:E)5?E 'E$ W6)$=


Return On +.uit! "? (
$0 00 Ratio 40 00 20 00 0 00 'M( )*+ ,(( -(( Co pan!"#$$%&$'( !1 5" 1# 24 50 0# 20 0# Series1

7igure 1= return a#e net worth ratio of peer co!pan%

-eturn on /et 6orth (-A/6) is used in finance as a !easure of a co!pan%Fs profita$i it%. It re#ea s how !uch profit a co!pan% generates with the !one% that the shareho ders has in#ested. Therefore" it is a so ca ed Oreturn on e)uit%F(-A1). This !eans tat for each rupee in#ested $% shareho ders" > was returned in the for! of earrings. So" -A/6 !easures how !uch return the co!pan% !anage!ent can generate for its e)uit% shareho ders. -A/6 is a !easure for judging the returns that a shareho der gets on his in#est!ent. Conc*u,ionC The return on a#e. net worth is in the %ear +445"+448 &+44=.The ratio " thus" indicates that efficient and effecti#e

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uti i(ation of funds $% !anage!ent. Co!pan% can further i!pro#e!ent in ne't %ear.

9.E E'R(I($ PER SH'RE

1arnings per share is genera % considered to $e the sing e !ost i!portant #aria$ e in deter!ining a shareDs price. It is a so a !ajor co!ponent used to ca cu ate the price9to9earnings #a uation ratio. JMC has good track record of 1PS & sows co!pan%Fs contant growth.

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Chapter-E -orHin0 Capita* !ana0e)ent

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.n understanding of working capita is crucia to understanding and ana %(ing the financia position of construction contractors. The )uestions posed when e'a!ining this su$ject are* 6h% ana %(e working capita S 6hat is working capita S 6hat are the co!ponents of working capita S 6hat are the factors affecting working capita S 6hat is the significance of working capita S ?ow does the co!pan% i!pro#e their working capita position or financia ratioS ?ow !uch working capita deter!inedS Is there a consistent !anner of co!puting working capita S ?ow does a co!pan% enhance working capita S
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is enough" and how is that

6h% ana %(e working capita S 6orking capita " and current ratio ana %sis" are considered to $e !easures of i)uidit%. Li)uidit% is one of the ke% financia state!ent ana %sis !easures. The ke% financia state!ent ana %sis !easures are genera % considered to $e as fo ows* N Profita$i it% N .sset uti i(ation and efficienc% N Li)uidit% N Capita structure N -eturn on in#ested capita Li)uidit% refers to a co!pan%Fs a$i it% to !eet its short9ter! o$ igations. It is i!portant that a co!pan% ha#e sufficient working capita or access to funds to !eet its short9ter! o$ igations.

E.1 -ORDI($ C'PIT'# !'('$E!E(T- '( I(TRO"UCTIO( 7inancia !anage!ent does perfor! !ajor aspects #i(" necessar% procure!ent at !ini!u! cost of capita and effecti#e and judicious uti i(ation of the fund so procured" in the process of e'ecution of econo!ics acti#ities of a fir!. More specia % procured fund is uti i(ed for financing working capita and fi'ed assets. The principa o$jecti#e of the write up is to portra% #arious issues re ating to the process of working capita !anage!ent of a $usiness entit%.

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The ke% difference $etween ong ter! financia !anage!ent and short ter! financia !anage!ent (a so referred to as working capita !anage!ent) is in ter!s of the ti!ing of cash. 6hi e ong ter! financia decisions ike $u%ing capita e)uip!ents or issuing de$entures in#o #e cash f ows o#er an e'tended period of ti!e (3 to 13 %ears" or e#en !ore) short ter! financia decisions t%pica % in#o #e cash f ows within a %ear or within the operating c%c e of the fir!. A.1.1 C6'CE($0 6F W6)<I'? C5(I$54 $here are t@o concepts of @orking capital* ?ross Working Capital* ?ross @orking capital is the total of all current assets. 'et Working Capital* 'et @orking capital is the difference #et@een current assets and current lia#ilities. !anagement of @orking capital refers the management of current assets as @ell as current lia#ilities. $he ma&or thrustG of course is on the management of current asset. $his is understanda#le #ecause current lia#ilities arise in the conte+t of current assets. Working capital management is a significant facet of financial management. Its importance stems from t@o reasons* Investment in current assets represents a su#stantial portion of total investment. .

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In#est!ent in current assets and the

e#e

of current

ia$i ities ha#e to $e geared )uick % to changes in sa es. To $e sure" fi'ed asset in#est!ent and ong ter! financing are a so responsi#e to #ariation in sa es. ?owe#er" this re ationship is not as i!!ediate as it is in the case of working capita co!ponents. The goa of working capita !anage!ent is to ensure that the fir! is a$ e to continue its operations and that it has sufficient cash f ow to satisf% $oth !aturing short9ter! de$t and upco!ing operationa e'penses. It is $asica % associated with deter!ining the opti!a e#e s of in#est!ent in #arious current assets. It is to ensure that neither e'cessi#e nor under esti!ate working capita forecast. 1ach e e!ent of working capita shou d $e periodica % e'a!ined and it shou d ensure that the intrinsic #a ue of a e e!ents of current assets is !aintained intact. Manage!ent wi use a co!$ination of poiic*es and techni)ues for the !anage!ent of working capita . These po icies ai! at !anaging e)ui#a ents" the current assets and (genera % and cash the and short cash ter! in#entories de$tors)

financing" such that cash f ows and returns are accepta$ e. Ca,h )ana0e)ent* Identif% the cash $a ance which a ows for the $usiness to !eet da% to da% e'penses" $ut reduces cash ho ding costs. InAentor+ )ana0e)ent* Identif% the e#e of in#entor% which a ows for uninterrupted production $ut reduces the in#est!ent in
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raw !ateria s 9 and !ini!i(es reordering costs 9 and hence increases cash f ow. Short ter) /inancin0* Identif% the appropriate source of financing" gi#en the cash con#ersion c%c e* the in#entor% is idea % financed $% credit granted $% the supp ierR howe#er" it !a% $e necessar% to uti i(e a $ank oan (or o#erdraft)" or to Hcon#ert de$tors to cashH through HfactoringH. E.2 -ORDI($ C'PIT'# The ter! working capita working capita is co!!on % used for the capita

re)uired for da%9to9da% operations of a $usiness. . positi#e net arises when current assets e'ceed current Lia$i ities and a negati#e net working capita arises when current Lia$i ities e'ceed current assets. 0oth aspects ha#e e)ua i!portance for !anage!ent 9 the first focuses the attention on the opti!u! in#est!ent in and financing of the current assets whereas the second indicates the i)uidit% position of the fir! and suggests the e'tent to which working capita needs !a% $e financed $% per!anent sources of funds. A.2.1 $>(E0 6F W6)<I'? C5(I$54 6orking capita can $e c assified on the $asis of its concept or on the $asis of periodicit% of its re)uire!ents. On the <a,i, o/ ConceptC 6orking capita !a% $e di#ided into gross working capita and net working capita . :ross working

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capita is represented $% the tota current assets and /et working capita is the e'cess of current assets o#er current Lia$i ities. On the <a,i, o/ Periodicit+ o/ Re>uire)ent,C 6orking capita can a so $e c assified into 7i'ed or Per!anent 6orking Capita and Te!porar% or Earia$ e 6orking capita . a7 Per)anent or Fi=ed -orHin0 Capita* It represents that part of working capita which is per!anent % ocked up in the current assets to carr% out the $usiness s!ooth % and efficient %. This in#est!ent in current assets is of a per!anent nature and wi increase as the si(e of the $usiness e'pands. 1'a!p es are the in#est!ents re)uired to !aintain the !ini!u! stock of raw !ateria s" work in progressGfinished products" oose too s and e)uip!ents. It a so re)uires !ini!u! cash $a ance to $e kept in reser#e for the pa%!ent of wages" sa aries and a other current e'penditure throughout the %ear. The per!anent fi'ed working capita can again $e su$di#ided into -egu ar working capita and -eser#e Margin or Cushion 6orking Capita . Re0u*ar 3orHin0 capita* is the !ini!u! a!ount of i)uid

capita needed to keep up the circu ation of the capita fro! cash to in#entories" to recei#a$ e and again to cash. This wou d inc ude sufficient !ini!u! $ank $a ance to discount a ade)uate supp % of raw !ateria s" etc. $i s" !aintain

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Re,erAe !ar0in or Cu,hion 3orHin0 capita* is the e'cess o#er the needs or regu ar working capita that shou d $e kept in reser#e for contingencies that !a% arise at an% ti!e. These contingencies inc ude rising prices" $usiness depression" strikes" e'peri!ents with new products" etc. <7 Te)porar+ or Varia<*e -orHin0 Capita* Earia$ e working capita changes with the increase or decrease in the #o u!e of $usiness. It can a so $e su$9di#ided into Seasona and Specia . The working capita re)uired to !eet the seasona i)uidit% of the $usiness is seasona working capita . An the other hand" specia working capita is that part of the #aria$ e working capita which is re)uired for financing the specia operations such as e'tensi#e !arketing ca!paigns" e'peri!ents with products or !ethods of production" specia jo$s" etc.

E.

CO!PO(E(ETS OF -ORDI($ C'PIT'#

The working capita is !ade up of the current assets net of the current ia$i ities. It is #er% i!portant to a co!pan% to !anage its working capita carefu %. This is particu ar % true where there is a su$stantia ti!e ag $etween co!p eting the project and recei#ing the !one% for it. In this situation the co!pan% has paid out a the

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costs associated with !aking the product ( a$our" raw !ateria s and so on) $ut not %et got an% !one% for it. The% !ust therefore ensure the% ha#e enough cash to do this. .ssets are an%thing which the co!pan% owns or has tit e to (in other words ownership of). Co!pan% !a% ha#e fi'ed assets which are ong9ter! assets 9 p ant" !achiner% and e)uip!ent" $ut the% wi a so ha#e assets which can $e rea i(ed (cashed9in) in the short9ter!. This is genera % taken in accounting ter!s to $e ess than a %ear. The current assets are therefore ones that can $e )uick % rea i(ed and change fre)uent %. . ia$i it% is so!ething which a fir! owes to a person or co!pan%. It !a% $e in the for! of creditors 9 peop e or co!pan% who ha#e so d %ou goods which %ou ha#e not %et paid for" or it !a% $e !one% $orrowed fro! a financia institution 9 oans or o#erdrafts. .s the tit e of the #aria$ e suggests" we are ooking in this case for ia$i ities that are owed in the short9ter!. This is genera % taken in accounting ter!s to $e ess than a %ear. .n% !one% that is owed in !ore than a %earDs ti!e is considered to $e a ong9ter! ia$i it%. The i)uidit% position of co!pan% is dependent on the in#est!ent in current assets. In !anaging current assets" the ti!e fra!e of current assets is on % one accounting period therefore the ti!e #a ue of !one% is ess significant. .n% short run" i!!ediate need of the co!pan% whether that is need for cash or adjust!ents to f uctuations in sa es can $e !ade on % through adjusting the

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e#e s of the #arious co!ponents of current assets. This ca s for efficient !anage!ent of current assets which for!s part of !anage!ent of working capita . E. .1 CO(STITUE(TS OF CURRE(T 'SSETS '(" CURRE(T #I'BI#ITIES Part 'C Current ',,et, . In#entories . -aw !ateria s and co!ponents . 6ork in process I 7inished :oods . Sundr% de$tors . Loans and ad#ances . Cash and $ank $a ances Part BC Current #ia<i*itie, . Sundr% creditors Trade ad#ances . 0orrowing (short ter!) . Co!!ercia $anks . Pro#isions

E.& SI$(IFIC'(CE OF -ORDI($ C'PIT'# !'('$E!E(T

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In#est!ent in fi'ed assets on % is not sufficient to run the $usiness. 6orking capita or in#est!ent in current assets is a !ust for purchase of raw !ateria s" and for !eeting the da%9to9 da% e'penditure on sa aries" wages" rents" ad#ertising etc." and for !aintaining the fi'ed assets. 6orking capita is just ike a heart of industr% if it is weakR the $usiness cannot prosper and sur#i#e" a though there is a arge $od% (in#est!ent) of fi'ed assets. Moreo#er" not on % the e'istence of working capita is a !ust for the industr%" $ut it !ust $e ade)uate a so. .de)uac% of the working capita is the ife$ ood and contro ing ner#e center of a $usiness. Inade)uate as we as redundant working capita is dangerous for the hea th of industr%. It is said" DInade)uate working capita is disastrousR whereas redundant working capita is a cri!ina wasteD. 0oth situations are not warranted in a sound organi(ation. The current assets of a t%pica Construction fir! account for around ha f of its tota assets. 1'cessi#e e#e s of current assets can easi % resu t in a fir! rea i(ing a su$standard return on in#est!ent. ?owe#er" fir!s with too few current assets !a% incur shortage and difficu ties in !aintaining s!ooth operations. 7or s!a co!panies" current ia$i ities are the principa source of e'terna financing. These do not ha#e access to the onger ter! capita !arkets" other than to ac)uire a !ortgage on a $ui ding. The fast growing $ut 1arger co!pan% a so !akes use of current ia$i it% financing. 7or these reasons" the financia !anager and staff de#ote a considera$ e portion of their ti!e to working capita
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!atters.

The

!anage!ent

of

cash"

!arketa$ e

securities"

accounts recei#a$ e" accounts pa%a$ e" accrua s" and other !eans of short9ter! financing is the direct responsi$i it% of the financia !anagerR on % the !anage!ent of in#entories is not. Moreo#er" these !anage!ent responsi$i ities re)uire continuous da%9to9da% super#ision. Thus" working capita the co!pan%Ds risk" return" and share price. A.4.1 (rofita#ility and )isk @nder %ing funda!enta sound working capita !anage!ent ie two !anage!ent is i!portant $ecause i!pact of working capita decisions ha#e on

decision issues for the co!pan%. The% are the

deter!ination of" The opti!a e#e of in#est!ent in current assets. The appropriate !i' of short9ter! and ong9ter! financing used to support this in#est!ent in current assets. In turn" these decisions are inf uenced $% the trade9off that !ust $e !ade $etween profita$i it% and risk. Lowering the e#e of in#est!ent in current assets wou d ead to an increase in the return on the tota assets. To the e'tent that the e'p icit costs of short9ter! financing are ess than those of inter!ediate and the ong9ter! financing" the greater the proportiona of short9ter! de$t to tota de$t" the higher is the profita$i it% of the fir!. .4.2 5;:5'$5?E0 6F W6)<I'? C5(I$54

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The ad#antages of working capita or ade)uate working capita !a% $e enu!erated as $e ow* 1. Ca,h "i,count* If a proper cash $a ance is !aintained" the $usiness can a#ai the ad#antage of cash discount $% pa%ing cash for the purchase of raw !ateria s and !erchandise. It wi resu t in reducing the cost of production. 2. It create, a Fee*in0 o/ Securit+ and Con/idenceC The proprietor or officia s or !anage!ent of a concern are )uite carefree" if the% ha#e proper working capita arrange!ents creates a $ecause the% need not worr% for the pa%!ent of $usiness e'penditure or creditors. .de)uate working capita sense of securit%" confidence and o%a t%" not on % throughout the $usiness itse f" $ut a so a!ong its custo!ers" creditors and $usiness associates. . I!u,tI /or )aintainin0 So*Aenc+ and Continuin0

ProductionC In order to !aintain the so #enc% of the $usiness" it is $ut essentia that the sufficient a!ount of fund is a#ai a$ e to !ake a the pa%!ents in ti!e as and when the% are due. 6ithout a!p e working capita " production wi suffer" particu ar % in the era of cut throat co!petition" and a $usiness can ne#er f ourish in the a$sence of ade)uate working capita . &. Sound $ood3i** and "e<t Capacit+C It is co!!on

e'perience of a

prudent $usiness!en that pro!ptness of and increases the de$t of

pa%!ent in $usiness creates goodwi

the capacit% of the $usiness. . fir! can raise funds fro! the
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!arket" purchase goods on credit and $orrow short9ter! funds fro! $ank" etc. If the in#estor and $orrowers are confident that the% wi get their due interest and pa%!ent of principa in ti!e. 1. Ea,+ #oan, /ro) the BanH,C .n ade)uate working capita i.e. e'cess of current assets o#er current ia$i ities he ps the co!pan% to $orrow unsecured oans fro! the $ank $ecause the e'cess pro#ides a good securit% to the unsecured oans" 0anks fa#or in granting seasona oans" if $usiness has a good credit standing and trade reputation. . 9. "i,tri<ution o/ "iAidendC If co!pan% is short of working capita " it cannot distri$ute the good di#idend to its shareho ders in spite of sufficient profits. Profits are to $e retained in the $usiness to !ake up the deficienc% of working capita . An the other contrar%" if working capita is sufficient" a!p e di#idend can $e dec ared and distri$uted. It increases the !arket #a ue of shares. E. E=p*oitation o/ $ood Opportunit+C In case of ade)uac% of capita in a concern" good opportunities can $e e'p oited e.g." co!pan% !a% !ake off9season purchases resu ting in su$stantia sa#ings or it can fetch $ig supp % orders resu ting in good profits. F. Hi0h !ora*eC The pro#ision of ade)uate working capita i!pro#es the !ora e of the e'ecuti#e $ecause the% ha#e an en#iron!ent of certaint%" securit% and confidence" which is a great ps%cho ogica " factor in i!pro#ing the o#era efficienc% of

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the $usiness and of the person who is at the he co!pan%.

of fairs in the

J. Increa,ed Production E//icienc+C . continuous supp % of raw !ateria " research progra!!e" inno#ations and technica de#e op!ent and e'pansion progra!!es can successfu % $e carried out if ade)uate working capita $usiness. It wi is !aintained in the increase the production efficienc%" which wi " in

turn increases the efficienc% and !ora e of the e!p o%ees and ower costs and create i!age a!ong the co!!unit%. E.1 F'CTORS 'FFECTI($ -ORDI($ C'PIT'# The need of working capita is not a wa%s the sa!e. It #aries fro! %ear to %ear or e#en !onth to !onth depending upon a nu!$er of factors. There are no set ru es or for!u ae to deter!ine working capita needs of the fir!. . fir! shou d ha#e neither ow nor high working capita . Low working capita in#o #es !ore risk and !ore returns" high working capita in#o #es ess risk and ess returns. -isk here refers to technica inso #enc% whi e returns refer to increased profitsGearnings. The a!ount of working capita is deter!ined $% a wide #ariet% of factors. 1ach factor has its own i!portance and the i!portance of factor changes for a fir! o#er ti!e. In order to deter!ine the

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proper a!ount of working capita of a concern" the fo owing factors shou d $e considered carefu %* E.1.1 (ature o/ <u,ine,,C The a!ount of working capita is $asica % re ated to the nature and #o u!e of the $usiness. In concerns where the cost of raw !ateria s to $e used in the !anufacture of a product is #er% arge in proportion to its tota cost of !anufacture" the re)uire!ents of working capita wi assets re)uire esser a!ount of working capita . E.1.2 SiKe o/ the <u,ine,, unitC Si(e of the $usiness unit is a so a deter!ining factor in esti!ating the tota $igger the si(e" the arger wi a!ount of working capita . The genera princip e in this regard is that the $e the a!ount of working capita re)uired since the arger $usiness units are re)uired to !aintain arger in#entories for the f ow of the $usiness. E.1. Sea,ona* Variation,C Strong seasona !o#e!ents create $e arge. An the contrar%" concerns ha#ing arge in#est!ents in fi'ed

specia pro$ e!s of working capita in contro ing the financia swings. . great !an% co!panies ha#e to carr% out seasona $usiness such as sugar !i s" oi !i s or woo en !i s" etc. and therefore the% re)uire arger a!ount of working capita in the season to purchase the raw !ateria s in arge )uantities and uti i(e the! throughout the %ear. E.1.& Production C+c*e* The ter! production c%c e refers to the ti!e in#o #ed in the !anufacture of goods. It co#ers the ti!e span $etween the procure!ent of the raw !ateria s and the
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co!p etion

of

the

!anufacturing

process

eading

to

the

production of goods. .s funds are necessari % tied up during the production c%c e" the production c%c e has a $earing on the )uantu! of working capita . The production c%c e" the arger wi onger the ti!e span of $e the funds tied up and

therefore the arger the working capita needed and #ice #ersa. E.1.1 TurnoAer o/ Circu*atin0 Capita* * Turno#er !eans the ratio of gross annua sa es to a#erage working assets. In si!p e words" it !eans the speed with which circu ating capita co!p etes its rounds or the nu!$er of ti!es the a!ount in#ested in working assets ha#e $een con#erted into cash $% sa e of the finished goods and re9in#ested in working assets during a %ear. The faster the sa es" the arger the turno#er. Con#erse %" the greater the turno#er" the arger the #o u!e of $usiness to $e done with gi#en working capita . E.1.9 #a<our !"s Capita* Inten,iAe Indu,trie,C In La$our intensi#e industries" arger working capita is re)uired $ecause of regu ar pa%!ent of hea#% wage $i s and !ore ti!e taken in co!p eting the !anufacturing process. The capita hea#% in#est!ent in fi'ed assets and shorter intensi#e periAd in industries re)uire esser a!ount of working capita $ecause of the !anufacturing process. E.1.E (eed to StocHpi*e Ra3 !ateria* and Fini,hed $ood, * In industries" where it is necessar% to stockpi e the raw !ateria s and finished goods" it increases the a!ount of working capita

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tied up in stocks and stores. In certain ines of $usiness where the !ateria s are $u k% and $est purchased in arge )uantities such as ce!ent" stockpi ing is usua . Such concerns re)uire arger working capita . E.1.F Ter), o/ Purcha,e and Sa*e * Ter!s (cash or credit) of purchase and sa es a so affect the a!ount of working capita . If a co!pan% purchases a goods in cash and se s its finished re)uire arger a!ount of product on credit a so natura %" it wi

working capita . An the contrar%" a concern ha#ing credit faci ities and a owing no credit to its custo!ers wi re)uire esser a!ount of working capita . Ter!s and conditions of purchase and sa e are genera % go#erned $% pre#ai ing trade practices and $% changing econo!ic conditions. E.1.J ConAer,ion o/ Current ',,et, into Ca,h* The need of ha#ing cash in hand to !eet the da%9to9da% re)uire!ents" e.g. pa%!ent of wages and sa aries" rents" rates" etc. has an i!portant $earing in deciding the ade)uate a!ount of working capita . The greater the cash re)uire!ents" the higher wi $e the need of working capita . E.1.12 $ro3th and E=pan,ionC :rowing concerns re)uire !ore working capita than those which are static. It is ogica to e'pect arger a!ount of working capita in a growing concern to !eet its growing needs of funds for its e'pansion andGor di#ersification progra!!es though it #aries with econo!ic conditions and corporate practices.

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E.1.11 Bu,ine,, C+c*e F*uctuation,* 0usiness c%c es affect the re)uire!ent of working capita . .t ti!es" when the prices are going up and $oo! conditions pre#ai " the tendenc% is to pi e up a arge stock of !ateria s and to !aintain a arge stock of finished goods with an e'pectation to earn !ore profits. The other t%pe of $usiness c%c e" i.e. depression in#o #es in ocking up of a $ig a!ount in working capita as the in#entories re!ain unso d and $ook de$ts unco ected. E.1.12 Pro/it 'ppropriation* So!e fir!s enjo% do!inant position in the !arket due to )ua it% product or good !arketing. An the other hand" a fir! facing e'tre!e % tough co!petition !a% earn ow !argins of profits. . high net profit !argin $e esti!ated on how the contri$utes towards working capita pro#ided it is earned in cash. The working capita re)uire!ent wi cash a#ai a$ e is used rightfu %. The contri$ution towards working capita is affected $% the wa% in which profits are appropriated and therefore it is affected $% ta'ation" depreciation" reser#e po ic%" etc. E.1.1 Price #eAe* Chan0e,C The financia !anager shou d a so

anticipate the effect of price e#e changes on working capita re)uire!ents of the fir!. :enera %" rising price e#e s wi re)uire higher a!ount of working capita since to !aintain the sa!e e#e of current assets" higher in#est!ent wi $e re)uired. The effects of rising price e#e s wi $e different for different fir!s depending upon their price po icies" nature of the product" a$i it% to pass on the increase to the custo!er" etc.
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E.1.1& "iAidend Po*ic+C There is a we esta$ ished re ationship $etween di#idend and working capita in co!panies where conser#ati#e di#idend po ic% is fo owed. The changes in working capita position $ring a$out an adjust!ent in the di#idend po ic%. . shortage of cash !a% induce the !anage!ent for reducing cash di#idend. An the other hand" strong cash position !a% justif% higher cash di#idend. E.1.11 Credit Po*ic+C The e#e of the working capita is a so deter!ined $% the credit po ic%" as the fir!Ds credit po ic% deter!ines the a!ount of recei#a$ es. If the fir! has a i$era credit po ic%" then the fir! needs high working capita and the fir! needs ow working capita if the co!pan%Ds credit po ic% does not a ow it to e'tend credit to the $u%ers. E.1.19 !arHet Condition,C The working capita re)uire!ents are a so deter!ined $% the !arket conditions. In case of the high degree of co!petition pre#ai ing in the !arket the fir! has to !aintain arger in#entories as custo!ers are not inc ined to wait for the product. This needs higher working capita re)uire!ents. If there is good de!and for the product and the co!petition is weak" a fir! can !anage with s!a er in#entor% of finished goods" as custo!ers can wait for the product if it is not a#ai a$ e in the !arket. Thus" a fir! can !anage with ow in#entor% and wi need ow working capita re)uire!ents. E.1.1E Condition, o/ Supp*+C The a#ai a$i it% of raw !ateria s and spares a so deter!ine the e#e of working capita . If there is

JMC Projects (India) Ltd.

L.J.I.M.S

1++

read% a#ai a$i it% of raw !ateria s and spares" a fir! can !aintain !ini!u! in#entor% and need ess working capita . If the supp % of raw !ateria s is unpredicta$ e" then the fir! has to ac)uire stocks as and when the% are a#ai a$ e for ensuring continuous production. Thus" the fir! needs to !aintain arger in#entor% a#erage and needs arger re)uire!ent of working capita . E.1.1F Other Factor,C In addition to the a$o#e" there are a nu!$er of other factors which affect the re)uire!ent of working capita . So!e of the! are the production and distri$ution po icies" a$sence of specia i(ation in the distri$ution of products" !eans of transportation and co!!unication infrastructure" ha(ards and contingencies inherent in a particu ar $usiness" etc. E.9 -ORDI($ C'PIT'# C%C#E The o$jecti#e of financia !anage!ent is to !a'i!i(e the

shareho ders wea th. So it is needed to generate sufficient profits. The profits generated depend !ain % on sa es #o u!e. 6hen the goods are $eing so d on credit as is the nor!a practice of $usiness fir!s toda% to cope with increased co!petition" the sa e of goods cannot $e con#erted into cash instant % $ecause of ti!e ag $etween sa es and rea i(ation of cash. .s there is a ti!e ag $etween sa es and rea i(ation of recei#a$ es there is a need for sufficient working capita to dea with the pro$ e! which arises due to ack of i!!ediate rea i(ation of cash against goods so d. The operating c%c e is the ength of ti!e re)uired for con#ersion of non9cash assets into cash. This
JMC Projects (India) Ltd. L.J.I.M.S 1+,

operating c%c e refers to the ti!e taken for the con#ersion of cash into raw !ateria " raw !ateria s into work9in9progress" work9in9 progress into finished goods" finished into recei#a$ es into cash and this c%c e repeats. The 6orking Capita C%c e is a so known as operating c%c e. It refers to the duration $etween the fir!Ds pa%!ent of cash for raw !ateria s" entering into production and inf ow of cash fro! de$tors and rea i(ation of recei#a$ es. Si!p % speaking" operating c%c e is the duration $etween outf ow of cash and this !a% $e e#idenced fro! the working capita c%c e. If a fir! has ength% production process or a fir! has i$era credit po ic% the ength of
Site Infor!ation and e'tent Mo$i credit i(ation 1'penses

operating c%c e wi $e !ore. An the other hand" if a fir! does not or the
-aw Materia s" fir!Co!ponents" is not a !anufacturing Stores etc. 6ork9In concern Process i.e.

where

cash wi

$e con#erted into in#entor% direct % then the ength of


.ccount Pa%a$ e 6ages" Sa aries and Construction '!O($ CO!PO(E(ETS Transfer OF Costs of Propert% in :oods

operating c%c e wi $e reduced to a greater e'tent. E.9.1 I(TER "EPE("E(CE

-ORDI($

C'PIT'#

Interdependence a!ong the #arious co!ponents of working


Marketing Costs" :enerafro! the figure 1 capita of co!pan% can $e easi % understood

gi#en $e ow. 0ased on that" operating Costs c%c e period is to $e ca cu ated.


Cash Sundr% ;e$tors A.ccounts -ecei#a$ e

.d!inistration & 7inancia

Mo$i i(ation .d#ance fro! C ient JMC Projects (India) Ltd. L.J.I.M.S 1+2

The a$o#e network diagra! !a% offer a c ear picture of a co!p ete working capita . In the diagra!" -aw !ateria stock refers to !ateria s" co!ponents etc." on %. In 6IP" co!ponents in#o #e are raw !ateria s" wages" o#erheads9 !ore specifica % construction o#erhead. Transfer of Propert% in :oods consists of co!ponent of !ateria " wages" construction o#erhead" !arketing cost" genera ad!inistration and financia costs. ;e$tors represent contract re#enue" recei#a$ e fro! c ients.

JMC Projects (India) Ltd.

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1+3

Creditors in#o #e accounts pa%a$ e" construction e'penses and other genera & ad!inistrati#e o#erheads against work e'ecuted $% the co!pan%. The diagra! a$o#e shows in a si!p ified for! the chain of e#ents in a construction fir!. 1ach of the $o'es in the diagra! can $e seen as a tank through which funds f ow. These tanks" which are concerned with da%9to9da% acti#ities" ha#e funds constant % f owing into and out of the!. The chain starts with the co!pan% recei#ing the !o$i i(ation ad#anced fro! the c ient. The a!ount of !o$i i(ation ad#ance #aries fro! 3> to 14> of contract #a ue. In due course" this !o$i i(ation ad#ance wi $e used in the !o$i i(ation and set up of site infrastructure which inc udes setting up of site office" a$our co on%" stores" $ore we " securit% office" e ectrica fittings etc. The chain continues with the co!pan% $u%ing raw !ateria s" co!ponents etc." on a cash or credit $asis. In due course this raw !ateria production" work wi contractors" and it wi stock wi $e used in

$e carried out through #arious a$our $eco!e part of the fir!Ds work in continue on the 6IP unti it

progress (6IP). 6ork wi

e#entua % e!erges as the Transfer of Propert% in :oods. 7or this purpose" the co!pan% has to !ake pa%!ents towards wages" sa aries and construction cost.
JMC Projects (India) Ltd. L.J.I.M.S 1+<

Af course at so!e stage trade creditors wi need to $e paid depending upon respecti#e pa%!ent ter!s. The co!pan% is a so re)uired to pa% ad#ance to creditors on so!e specia ser#ices of $ack to $ack nature. .s construction progresses" these raw !ateria s wi $e

con#erted into propert% in goods after undergoing the stage of work in progress. 7or this purpose" the co!pan% has to !ake pa%!ents towards !arketing costs" genera " ad!inistrati#e costs and non9operating costs descri$ed as financia costs (interest and $orrowed capita ). /or!a %" co!pan% su$!its running account $i in the first

week of !onth after the !onth in which the work is e'ecuted. This $i is certified $% either PMC of the c ient or $% the c ient hi!se f which takes nor!a % + to , weeks. In so!e cases" co!pan% recei#es ad9hoc pa%!ent within 8 to 14 da%s fro! the date of su$!ission of $i and the $a ance a!ount wi recei#e after certification of $i . @sua % it takes 13 to 23 da%s to recei#e the fu a!ount of $i fro! the date of su$!ission of $i . .s per industr% practice" the c ient deducts 3> to 14> of certified #a ue towards retention a!ount. This a!ount is re eased after the period of 1+ to 18 !onths fro! the date of co!p etion of project. So" this is one of the !ajor co!ponents of working capita . C ient a so ho ds so!e of the a!ount for the reason of inco!p ete status" )ua it%" fu fi !ent of so!e of the contractua

JMC Projects (India) Ltd.

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1+=

condition etc. There is a so working capita re)uired for non9 de#iated" e'tra and non9tendered ite!s as we of contract. Ance again the cash wi repeats itse f. 1ach of the areas 9 stocks (raw !ateria s" work in progress and transfer of propert% in goods)" trade de$tors" cash (positi#e or negati#e) and trade creditors 9 can $e #iewed as tanks into and fro! which funds f ow. 6orking capita is c ear % not the on % aspect of a $usiness that affects the a!ount of cash. Ather aspects are as fo ows* The $usiness wi ha#e to !ake pa%!ents to go#ern!ent for ta'ation 7i'ed assets wi $e purchased and so d Shareho ders (e'isting or new) !a% pro#ide new funds in the for! of cash So!e shares !a% $e redee!ed for cash ;i#idends !a% $e paid $e used for the purchase of as for insurance po icies and $ank guarantees as per the conditions

!ateria s andGor pa%!ent to supp iers and the who e c%c e

Long9ter! oan creditors (e'isting or new) !a% pro#ide oan finance" oans wi need to $e repaid fro! ti!e to ti!e" and
JMC Projects (India) Ltd. L.J.I.M.S

1+8

Interest o$ igations wi ha#e to $e !et $% the $usiness. @n ike !o#e!ents in the working capita ite!s" !ost of these Dnon9working capita D cash transactions are not e#er% da% e#ents. So!e of the! are annua e#ents (e.g. ta' pa%!ents" ease pa%!ents" di#idends" interest and" possi$ %" fi'ed asset purchases and sa es). Athers (e.g. new e)uit% and oan finance and rede!ption of o d e)uit% and oan finance) wou d t%pica % $e rarer e#ents.

The operating c%c e consists of the fo owing e#ents which continue throughout the ife of a fir! re!aining engaged in co!!ercia acti#ities* Con#ersion of cash into raw !ateria s. . Con#ersion of raw !ateria s in 6IP . Con#ersion of 6IP into Transfer of Propert% in :oods Con#ersion of Transfer of Propert% in :oods into account recei#a$ e and ;e$tors through sa es. Con#ersion of .ccounts recei#a$ e into cash. E.E OPTI!U! -ORDI($ C'PIT'#C It is i!portant to re!e!$er that the opti!u! a!ount of working capita prefera$ % wou d $e (eroT 0ut actua % it doesnDt see! to $e possi$ e. If a co!pan% cou d structure its finances so that the i)uidit% risk was so!ehow reduced to (ero" there wou d $e no

JMC Projects (India) Ltd.

L.J.I.M.S

1+5

need for working capita . 7unds in#ested in working capita are not as producti#e as operating assets. If %ou can !ini!i(e working capita " %ou can !a'i!i(e cash f ow. The a#ai a$ e cash can then $e !ore profita$ % in#ested in the $usiness. ?owe#er" the fact re!ains that working capita is needed to !eet current o$ igations. So the )uestion $eco!es" how !uch working capita does a co!pan% need to account for the i)uidit% risk" $ut at the sa!e ti!e" not in#est e'cess funds in the processS E.E.1 C'#CU#'TIO( OF -ORDI($ C'PIT'# C%C#E This i)uidit% !etric e'presses the ength of ti!e (in da%s) that a co!pan% uses to se in#entor%" co ect recei#a$ es and pa% its accounts pa%a$ e. The cash con#ersion c%c e (CC:) !easures the nu!$er of da%s a co!pan%Ds cash is tied up in the construction and sa es process of its operations and the $enefit it gets fro! pa%!ent ter!s fro! its creditors. The shorter this c%c e" the !ore i)uid the co!pan%Ds working capita position is. The CCC is a so known as the HcashH or HoperatingH c%c e. The cash con#ersion c%c e is #ita for two reasons. 7irst" itDs an indicator of the co!pan%Ds efficienc% in !anaging its i!portant working capita assetsR second" it pro#ides a c ear #iew of a co!pan%Ds a$i it% to pa%off its current ia$i ities. It does this $% ooking at how )uick % the co!pan% turns its in#entor% into sa es" and its sa es into cash" which is then used to pa% its supp iers for goods and ser#ices.

JMC Projects (India) Ltd.

L.J.I.M.S

1,4

The onger the duration of in#entor% on hand and of the co ection of recei#a$ es" coup ed with a shorter duration for pa%!ents to a co!pan%Ds supp iers" !eans that cash is $eing tied up in in#entor% and recei#a$ es and used !ore )uick % in pa%ing off trade pa%a$ es. If this circu!stance $eco!es a trend" it wi reduce" or s)uee(e" a co!pan%Ds cash a#ai a$i ities. Con#erse %" a positi#e trend in the cash con#ersion c%c e wi co!pan%Ds i)uidit%. .s a who e" a shorter CCC !eans greater i)uidit%" which add to a

trans ates into ess of a need to $orrow" !ore opportunit% to rea i(e price discounts with cash purchases for raw !ateria s" and an increased capacit% to fund the e'pansion of the $usiness into new product ines and !arkets. Con#erse %" a onger CCC the positi#e increases a co!pan%Ds cash needs and negates a i)uidit% )ua ities just !entioned. So far we ha#e discussed a$out nature and scope of working capita c%c e. /ow we !ust ha#e to know the e'act period of operating c%c e as $ecause we ha#e to p an for ensuring i)uidit% and profita$i it% of the concern. State!ent of Cost for the .ccounting Cear +44=948 is as shown $e ow. State!ent of Cost for the .ccounting Cear +44= 48
P'RTICU#'RS Apening stock of -aw Materia s" Stores and Spares" etc. '!OU(T (Lac) '!OU(T (Lac) 1==2.14

JMC Projects (India) Ltd.

L.J.I.M.S

1,1

.dd* Purchase .dd* Co!posite work charges Less* C osing stock of -aw Materia s" Stores and Spares" etc. !'TERI'# CO(SU!PTIO( Construction 1'penses .dd* Apening stock of 6ork9In Process G 7inished :oods Less* C osing stock of 6ork9In Process G 7inished :oods COST OF PRO"UCTIO( ;epreciation Pa%!ent to 1!p o%ees Ather 1'penses COST OF S'#ES

28854.2+ ==8+.3, <2=+.<, 315=2.2+ +,,42.,2 11+5.88

,3+<.,8 =+88+.+< 1<32.55 <4<5.+5 283,.3, 832<4.4=

Co!ponent wise working capita c%c e9period can $e ascertained as $e ow* I. -aw !ateria ho ding period U .#erage stock of -aw Materia s 999999999999999999999999999999999999999999999 .#erage Cost of Consu!ption per da% (1==2.45 V <2=+.<,) G+ U 99999999999999999999999999999999999999999999 (315=2.2+) G,<3 U +8.5< da%s

JMC Projects (India) Ltd.

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1,+

II.

6IP G finished :oods ?o ding period U .#erage 6IP G 7inished :oods 999999999999999999999999999999999999999 .#erage Cost of Production per da% (11+5.88 V ,3+<.,=) G+ U 9999999999999999999999999999999999 (=+88+.+<) G,<3 U 11.<3 da%s

III.

-ecei#a$ eG -ecei#a$ e

;e$tors

Co ection

period

.#erage

9999999999999999999999999999999999999 .#erage sa e per da%

(+=<81.32 V 1<=23.3,) G + U 99999999999999999999999999999(51258.1=) G ,<3

JMC Projects (India) Ltd.

L.J.I.M.S

1,,

U 88.<1 da%s IE. .#erage Trade CreditorsU Credit period a owed $% Sundr% Creditors 9999999999999999999999999999999999999999999999 .#erage purchase per da% U (1+818.=4 V ==+5.24) G + 9999999999999999999999999999999999999999 (3<<=+.52) G ,<3 U <<.1= da%s

In the for! of a si!p e e)uation" working capita c%c e can $e represented as $e ow* 66C U (I) V (II) V (III) 9 (IE) 6here" 66CU 6orking Capita C%c e (I) U -aw Materia ho ding period (II) U 6ork in progress G 7inished :oods ho ding period (III) U -ecei#a$ e and ;e$tors co ection period (IE) U Credit period a owed $% sundr% creditors 66C U +8.5< V 11.<3 V 88.<1 9 <<.1= U <,.43 da%s" Sa% <2 da%s

JMC Projects (India) Ltd.

L.J.I.M.S

1,2

/o. of Aperating C%c e per %ear U ,<3G<2 U 3.=4 C%c es G %ear 6orking Capita -e)uire!ent U .nnua Cost Af sa es 9999999999999999999999999999999 /o. Af operating c%c e per %ear U U 832.<4G 3.=4 -s.134 crore

E.F I(VE(TOR% !'('$E!E(T A.B.1 I'$)6;9C$I6' In#entor% !anage!ent is pri!ari % a$out specif%ing the si(e and p ace!ent of stocked goods. In#entor% !anage!ent is re)uired at different ocations within a faci it% or within !u tip e ocations of a supp % network to protect the regu ar and p anned course of production against the rando! distur$ance of running out of !ateria s or goods. The scope of in#entor% !anage!ent a so concerns the fine ines $etween rep enish!ent ead ti!e" carr%ing costs of in#entor%" asset !anage!ent" in#entor% forecasting" in#entor% #a uation" in#entor% #isi$i it%" future in#entor% price

JMC Projects (India) Ltd.

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1,3

forecasting" ph%sica

in#entor%" a#ai a$ e ph%sica

space for

in#entor%" )ua it% !anage!ent" rep enish!ent" returns and defecti#e goods and de!and forecasting. Manage!ent of the in#entories" with the pri!ar% o$jecti#e of deter!ining contro ing stock e#e s within the ph%sica distri$ution function to $a ance the need for product a#ai a$i it% against the need for !ini!i(ing stock ho ding and hand ing costs. In#entor% can $e defined as an id e resource which has an econo!ic #a ue. It is howe#er" co!!on % used to indicate #arious ite!s of stores kept in stock in order to !eet future de!ands. In JMC" there !a% $e fo owing four t%pes of in#entor%* (a) -aw !ateria s & parts99 These !a% inc ude a raw !ateria s" co!ponents and asse!$ ies used in the construction ($) Consu!a$ es & Spares 99 These !a% inc ude !ateria s re)uired for !aintenance and da%9to9da% operation (c) 6ork in progress 99 These are ite!s under #arious stages of construction not %et con#erted as finished goodsR (d) 7inished Products P 7inished goods not %et so d or put into use.

A.B.2 'EE; F6) I':E'$6)> !5'5?E!E'$ Man% of the ite!s co!pan% need for da%9to9da% !aintenance and operation are re)uired to $e specia % !anufactured for the Construction. The ti!e to procure these !ateria s" therefore" is
JMC Projects (India) Ltd. L.J.I.M.S 1,<

onger due to #arious reasons and it is not possi$ e to procure these !ateria s when instantaneous % re)uired. It is" therefore" necessar% to keep stocks of such ite!s. 1#en for those ite!s which are readi % a#ai a$ e in the !arket" it !a% not $e econo!ica to $u% these ite!s e#er% ti!e as $u%ing in piece!ea in#o #es additiona costs to the ad!inistration. Therefore" co!pan% !a% find it cheaper to $u% in $u k and to stock so!e of these ite!s and supp % indenters through such stocks. There are a wa%s so!e f uctuations in de!and as we as f uctuations in the ti!e within which !ateria can $e procured. It is therefore" not possi$ e to forecast our re)uire!ents e'act % and ti!e the purchases in such a wa% so that the !ateria s wi necessar% to !aintain stocks of these ite!s. In the era of industria i(ation and g o$a i(ation in#entories co#er a #er% wide range. The range of in#entor% has $eco!e arger and !ore di#ersified. There are three !oti#es for ho ding in#entories. Transaction Moti#e e!phasi(es on faci itating s!ooth arri#e just when the% are ph%sica % re)uired. It" therefore" $eco!es

construction and operations. Precautionar% Moti#e protects against risk of unpredicta$ e changes in de!and and supp % forces and other factors. Specu ati#e Moti#e inf uences the decision of !o#e!ent of in#entor% e#e s to take the ad#antage of price f uctuation. A.B.3 6,1EC$I:E E(9)(60E 6F I':E$6)> !5'5?E!E'$

JMC Projects (India) Ltd.

L.J.I.M.S

1,=

The purpose of ho ding in#entories is to a ow the co!pan% to separate the processes of purchasing" construction and !arketing of projects The pri!e o$jecti#e of !aintaining proper in#entor% is to !anage in#entories effecti#e % and efficient % in order to a#oid unnecessar% in#est!ent" oss of sa es and oss of profit. It can further reduce the chances of oss of i)uidit%. In#entor% faci itates transit" hand ing and $u k purchasing which wi he p in reduction of costs. In#entor% ser#es to iso ate the supp ier" the producer and the consu!er. In short" in#entor% ser#es as a ink $etween the production and consu!ption of goods. In#entor% pro#ides $etter ser#ices to custo!er" !ini!i(ing wastages" econo!% in purchasing" opti!u! in#est!ents and effecti#e use of capita .nother purpose of ho ding in#entories is to reduce !ateria hand ing costs" ordering costs and carr%ing costs. Materia hand ing cost can $e reduced $% accu!u ating parts $etween operations" 7ina %" in#entories are he d to o$tain an opti!u! uti i(ation of peop e" p ace" ti!e and e)uip!ents. A.B.4 )64E 6F I':E'$6)> I' W6)<I'? C5(I$54 !5'5?E!E'$

JMC Projects (India) Ltd.

L.J.I.M.S

1,8

In#entories are co!ponent of co!pan%Ds working capita and represent a current asset. The fo owing are so!e characteristics of in#entor% which are i!portant in working capita !anage!ent. 1) Current .sset* In#entories wi $e con#erted to cash in the current operating c%c e which is nor!a % one %ear. +) Le#e of Li)uidit%* In#entories are #iewed as source of near cash. The i)uidit% aspect of in#entor% $eco!es high % i!portant to the !anager of working capita in the case of econo!ic s owdown and changes in the !arket trend. The in#entories are to $e considered as the east i)uid of current assets. ,) Circu ating .cti#it%* In#entories are in a rotating pattern with other current assets. The% get con#erted in to recei#a$ es which generate cash and in#ested again in in#entor% to continue operating c%c e.

A.B. F5C$6)0 ;E$E)!I'I'? 6($I!9! 4E:E4 6F I':E'$6)> The a!ount of in#entor% is deter!ined $% a wide #ariet% of factors. 1ach factor has its own i!portance and the i!portance of factor changes for a co!pan% o#er ti!e. In order to deter!ine the proper a!ount of in#entor% of a concern" the fo owing factors shou d $e considered carefu %* /ature of 0usiness .nticipated #o u!e of sa es . Aperations Le#e .#ai a$i it% of funds
JMC Projects (India) Ltd. L.J.I.M.S 1,5

.ttitude of Manage!ent Length and Technica /ature of Construction process Ter!s of Purchase . Supp % Conditions Price e#e #ariations . Ti!e factor Loan faci it% Manage!ent po icies A.B./ ,E'EFI$0 6F I':E'$6)> !5'5?E!E'$ 7 C6'$)64 In#entor% !anage!ent is gi#en such an i!portance $ecause of high costs in#o #ed in in#entor%. It is a so treated as s%non%! with DMateria s !anage!entD. InAentor+ )ana0e)ent in#o #es the de#e op!ent and

ad!inistration of po icies" s%ste!s and procedures" which wi !ini!i(e tota costs re ati#e to in#entor% decisions and re ated functions such as custo!er ser#ice re)uire!ents and production schedu ing. InAentor+ contro* ho ds narrower sense and pertains pri!ari % to the ad!inistration of esta$ ished po icies" s%ste!s and procedures. In#entor% contro ensures an ade)uate supp % of !ateria s and stores !ini!i(es stock outs and storages and a#oids cost % interruptions in operations.

JMC Projects (India) Ltd.

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124

It keeps down in#est!ent in in#entories" in#entor% carr%ing costs and o$so escence osses to the !ini!u!. It faci itates purchasing econo!ies through the

!easure!ent of re)uire!ents onthe $asis of recorded e'perience. It e i!inates dup ication in ordering or in rep enishing stocks $% centra i(ing the source fro! which purchase re)uisition e!anate. It pro#ides a check against the oss of !ateria s through care essness or pi ferage.

A.B.A I':E'$6)> !5'5?E!E'$ 5$ 1!C Schedu ing of the re)uire!ents which !eans how !uch in#entor% is needed for construction as per p anning. Purchasing the needed in#entor%. -ecei#ing the purchased in#entor% against the purchase order. Inspecting the in#entor% $% app %ing the a$orator% test and gi#ing the )ua it% certificates as per ISA nor!s. Maintaining stock records.

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Stock contro !anage!ent.

ana %sis" stock

e#e " hand ing and space

@se of Integrated software iPMS for a functions of in#entor% !anage!ent. Co9ordination $etween construction" indent" purchasing" recei#ing" testing" storage" hand ing" issue and scrap sa e. Centra i(ed purchasing under direction and authorit% of co!petent procure!ent authorit%. . for!s of indent" Purchase order" Materia receipt note etc. are unifor! for a co!petent Co!!unication $etween p anning depart!ent" site" sites under direction and authorit% of

purchasing and #endors regarding a inf uence !ateria re)uire!ents. Proper storage and ph%sica supp ies.

changes which !a%

#erification of !ateria s &

-ecord a transactions re ated to purchase process and consu!ption" site transfer" scrap sa e etc. :enerating reports regu ar %. A.B.B I':E'$6)> !5'5?E!E'$ C>C4E

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The In#entor% Manage!ent C%c e de!onstrates the f ow and re ationship $etween the #arious !odu es and app ications that affect In#entor% Manage!ent.

Project Manage!e nt ;ept.

.B.B.1 ()61EC$ !5'5?E!E'$ ;E(5)$!E'$ The c%c e starts with the sa es and consu!ption projection" which is done $% the Project Manage!ent depart!ent e#er% !onth for its e'isting and new !ateria s & supp ies. It is done after considering the fo owing factors ike de!and of the !ateria s & supp ies" financia aspects" econo!ic en#iron!ent" consu!ption of pre#ious !onth and current !onth" project progress etc.
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.fter considering a these factors" PM depart!ent con#e%s the sa es and consu!ption projection to the PMC depart!ent. A.B.B.2 (!C ;E(5)$!E'$ The PMC stands for P anning and Materia Contro which refers to the p anning of !ateria s & spares" ac)uisition etc. The need for this depart!ent e'ists in order to ana %(e the specific categor% of !ateria s" to deter!ine the !ini!u! stock to $e !aintained and to deter!ine the re)uire!ents as per project progress" for which raw !ateria has to $e ac)uired we in ad#ance. It ca cu ates the re)uire!ent of the raw !ateria on the $asis of the sa es projection and consu!ption done and p aces an order to the purchasing depart!ent.

A.B.B3 (9)C=50E ;E(5)$!E'$ Purchase depart!ent p aces an order to the e'isting supp iers on the $asis of the credit ter!s as we as ti!e % de i#er% of the raw !ateria . If the depart!ent thinks to dea with the new supp iers whose credit ter!s are !ore fa#ora$ e to the e'isting ones then it first takes the per!ission fro! the top !anage!ent
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and p aces a s!a order to the! and if satisfied" the% gradua % increase the )uantu! of the order. =.8.8., T1STI/: .fter recei#ing the order fro! the purchase depart!ent" the supp ier dispatches the !ateria to the store depart!ent at the construction site. /ow the testing process is conceded on the raw !ateria in order to check whether the raw !ateria is as per the )ua it% and specification prescri$ed $% the co!pan% and Gor the c ient at the ti!e of p acing an order. A.B.B. 8954I$> 5009)5'CE 5'; C6'$)64 The construction site is di#ided in to #arious jo$s and Jo$ codes are assigned to respecti#e jo$s. So that" if an% pro$ e! occurs during the construction or an% ater stage then" the fau t can $e easi % detected. Iua it% .ssurance depart!ent is used to check the )ua it% when the construction is going on so that the wastage of !ateria and energ% is a#oided. Iua it% contro depart!ent is used to e'a!ine whether the )ua it% of construction is as per the standards or not. E.F.J COSTS RE#'TE" TO I(VE(TOR% !'('$E!E(T

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7ro! the a$o#e discussions" it wi $e seen that on the one hand in#entories are id e and #a ua$ e resource I.e. capita re!ains ocked up in the in#entories which can $e used for other producti#e purposes $ut on the other hand" the% are desira$ e to satisf% construction re)uire!ent of the co!pan%. ?ence $asic pro$ e! of in#entor% !anage!ent is to opti!i(e the stock e#e s of different !ateria s so that their stocks are !aintained at opti!u! e#e s without affecting the da%9to9da% operation. Three $asic pro$ e!s associated with this opti!i(ation of stocks areR (a) 6hen to initiate purchase of the !ateria s ($) ?ow !uch )uantities are to $e purchased at a ti!e and (c) 6hat shou d $e the stock e#e s of different ite!s. 7or getting answers to these )uestions" we ha#e to in#estigate #arious t%pes of costs re ated to in#entor% !anage!ent. =.8.5.+ C60$0 6F 6);E)I'? 6) C60$0 6F 5cCuisition 7or a arge co!pan%" it $eco!es necessar% to ha#e a separate purchase office to purchase thousands of ite!s. The de!ands recei#ed are technica % scrutini(ed and for purchasing the!" in)uiries are issued" tenders are recei#ed and e#a uated" orders are progressed" !ateria s are recei#ed and inspected and ast %" the pa%!ents are arranged. . these !ean additiona costs to the organi(ation. . these costs together constitute what is ca ed cost of ordering or cost of acCuisition.

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=.8.5.+ I':E'$6)> C5))>I'? C60$0 The #er% fact that the ite!s are re)uired to $e kept in stock !eans additiona e'penditure to the co!pan%. The different e e!ents of costs in#o #ed in ho ding in#entor% are as fo ows* 6a7 Intere,t on capita* " co,t o/ capita*8opportunit+ co,t,C 6hen !ateria s are kept in stock !one% representing the #a ue of !ateria s is $ ocked. In a de#e oping econo!%" capita is e'tre!e % scarce and as such" the rea #a ue of capita is !uch higher than the no!ina rate of interest which the co!pan% !a% $e pa%ing. The !one% which is $ ocked up is not a#ai a$ e to the co!pan% to do !ore $usiness or to use it for a ternati#e producti#e in#est!ent. This opportunit% to earn !ore profits which we ose can $e e'pressed as opportunity cost. 6hi e working out the in#entor% carr%ing cost in an organi(ation" the higher of the three factors #i(." interest" cost of capita or opportunit% cost shou d" $e taken into consideration. 6<7 O<,o*e,cence and depreciation* The costs $ecause of o$so escence and depreciation are #er% i!portant e#en though the% are #er% difficu t to assess. This factor is re ati#e % higher for spare parts in#entor% as against raw !ateria in#entor%. Larger the stock we keep !ore the risk of o$so escence and as such" the costs are e'pressed as the percentage costs to the a#erage in#entor% ho ding. 6c7 The co,t o/ ,tora0e" hand ing and stock #erification* There are additiona costs $ecause of the c erica work in#o #ed in

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hand ing of !ateria s in the ward" in stock #erification" in preser#ation of !ateria s as we as the costs $ecause of #arious e)uip!ents and faci ities created for the purpose of !ateria s. . part of this cost is of a fi'ed nature. The !ajor portion of the cost inc uding the cost of staff" howe#er" can $e treated as #aria$ e costs at east in the ong run. (d7 In,urance Co,t,* Materia s in stocks are either insured against theft" fire etc." or we !a% ha#e to e!p o% watch & ward organi(ation and a so fire fighting organi(ations. The a#erage in#entor% carr%ing costs can" therefore" $e as fo ows* InterestGcosts of capita Gopportunit% cost A$so escence and depreciation cost Storage" hand ing etc. Insurance costs Tota A.B...3 0=6)$5?E 6) 0$6C< 69$ C60$0 6hene#er an ite! is out of stock and as such cannot $e supp ied" it !eans that so!e work or the other is de a%ed and this" in turn" eads to financia oss associated with such stoppage or de a% of work. Stock out costs can #ar% fro! ite! to ite! and fro! situation to situation depending upon the e!ergenc% action possi$ e. /o atte!pt therefore" is nor!a % !ade to e#a uate a * 13 to +3> * + to 3> * , to 3> * 1 to +> * +1 to ,=>

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stock out cost of an ite!. /e#erthe ess" if is i!portant to understand the concept of stock out costs" e#en though the actua )uantification is not possi$ e. 6e shou d ha#e a rough grading of the ite!s depending upon the possi$ e stock out costs. A.B...4 0>0$E!0 C60$0 These are the costs which are associated with the nature of the contro s%ste!s se ected. If a #er% sophisticated !ode of the re ationship $etween stock out costs" in#entor% ho ding cost and cost of ordering is used and operated with the he p of a co!puter" it !a% gi#e the theoretica !ini!u! of the other costs $ut the cost of such contro s%ste! !a% $e sufficient % high to offset the ad#antages achie#ed. E.F.12 I(VE(TOR% !'('$E!E(T - CO(STR'I(S : PROB#E!S Pro$ e!s of in#entor% !anage!ent #ar% fro! co!pan% to co!pan% depending upon #arious #aria$ es. So!e of the! are as under* a) 6hether the de!and for the goods is one ti!e (static) or of repetiti#e nature (d%na!ic). In construction" a the non9stock ite!s are treated of static nature and stock ite!s of d%na!ic nature. $) In case of de!ands of d%na!ic (repetiti#e) ite!s" whether future re)uire!ents can $e assessed with certaint% or uncertaint%

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or under risk (pro$a$i it%). . so" whether the de!and is fi'ed o#er a ti!e or is #aria$ e. c) 6hether the !ateria is !anufactured in house or is to $e purchased through outside supp iers. d) 6hether the ead ti!e during which !ateria can $e arranged is fi'ed or is #aria$ e. E.F.12 I(VE(TOR% CO(TRO# In#entor% Contro is the art and science of !aintaining the stock e#e of a gi#en group of ite!s" incurring the east tota cost" consistent with other re e#ant targets and o$jecti#es set $% the !anage!ent. A.B.11.lI':E'$6)> C6'$)64 $EC='I89E0 Earious techni)ues e!p o%ed for contro ing stock e#e s areR =.8.11.1.1 .0C .na %sis In this techni)ue" #arious ite!s of stores are c assified in #arious c assifications depending upon their consu!ption" #a ue" unit price" and critica it% for the co!pan%" source of supp %" purchasing pro$ e!s" and rate of withdrawa fro! stores" seasona it% and stores $a ances on a particu ar date. This ana %sis is $ased upon (areto (rinciple according to which in !an% situations" !ajorit% of the acti#it% (=4 to 84>) is go#erned $% #er% few (14 to +4) attri$utes.

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?ence if a the stock ite!s are ana %(ed in ter!s of their annua consu!ption #a ue" !ajor part of tota consu!ption #a ue (a$out =4984>) is of on % few high consu!ption #a ue ite!s (sa% 14 to +4>). These ite!s !a% $e c assified as 5 category. 13 to +4> of tota consu!ption is represented $% another 13 to +4> ite!s which !a% $e c assified as B category. -e!aining 3 to 14> consu!ption is represented $% a arge no. of s!a consu!ption #a ue ite!s which !a% $e c assified as C category. .ctua .0C c assification depends upon !anage!ent decision. In JMC" we ha#e decided that .. high consu!ption #a ue ite!s which represent =4> of tota issues" wi $e c assified as . categor%" . Ite!s which represent +4> of tota issue wi $e c assified as 0 categor%. . . re!aining ite!s wi $e C categor%. This ana %sis is done on the co!puter as e'p ained $e ow* (a) 7irst of a annua issue #a ues of a the ite!s which were issued fro! a the supp iers are added together to find tota issues (in rupees) of the JMCR ($) Then a the ite!s are sorted in descending se)uence of their issue #a ue on the entire JMC (i.e. after adding issues of indi#idua supp iers)R (c) Then we go on counting the ite!s adding issue #a ue of the ite! to a Dcu!u ati#e issue #a ueD counter. 6hen the #a ue in this counter represents =4> of tota issue #a ue worked out in step

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(a)" after reading a particu ar ite!" a the ite!s fro! top to this ite! are c assified as D.D categor% ite!sR (d) The reading of ite!s is further continued when after reading a particu ar ite! and adding its issue #a ue to Dcu!u ati#e issue #a ueD counter" #a ue in the counter is e)ua to 54> of tota issues" we !ark a ite!s fro! ite! ne't to ast . categor% ite! to this ite! as 0 categor% ite!R (e) . re!aining ite!s are c assified as C categor% ite!s. 7or the purpose of in#entor% Contro " . categor% ite!s are !ost i!portant. Therefore" the% are c ose % !onitored at highest e#e at #er% fre)uent inter#a s. In JMC" Stock #erification of . categor% ite!s is carried out e#er% si' !onthsR for 0 categor% ite!s e#er% %ear and once in two %ears for C categor% ite!s. To achie#e $etter in#entor% turno#er ratio" we intend to keep a#erage stocks of , !onths" < !onths and 1+ !onths of ." 0and C categor% ite!s respecti#e %. =.8.11.1.+ E919; C assification .909C C assification is on the $asis of consu!ption #a ue of an ite! and does not gi#e an% i!portance to the critica it% of the ite! and therefore" on % .909C C assification is not ade)uate. Classification done on the #asis of criticality of the item is kno@n as :%E%;G where the ite!s are c assified as Eita " 1ssentia and ;esira$ e. Eita ite!s are those ite!s which are #er% critica for the operations and do not per!it

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an% correcti#e ti!e i.e. the% cannot $e procured off the she f if the% are not a#ai a$ e. 1ssentia ite!s are co!parati#e % ess #ita and work without the! cannot $e !anaged for few da%s. . re!aining ite!s are known as ;esira$ e ite!s. E.J RECEIV'B#E !'('$E!E(T

E.J.1 I(TRO"UCTIO( Transfer the propert% in goods on credit is the !ost pro!inent force of the construction $usiness. The co!pan% adopts this !ethod of transferring the propert% in goods to protect it fro! the co!petitors and to attract the custo!ersGc ients to dea with co!pan% at fa#ora$ e ter!s. 6hen co!pan% transfers the propert% in goods or ser#ices on deferred pa%!ent $asis" it is said that the co!pan% has granted trade credit to custo!ersGc ients. Trade credit" in other words" is known as recei#a$ es or $ook 9 de$t. The $ook de$t has three characteristics 1) it in#o #es an e e!ent of risk" +) it is $ased on econo!ic #a ue. It 9 !eans" goods or ser#ices passed on to the c ient ha#e econo!ic #a ue and the co!pan% wi recei#e the e)ui#a ent in future" ,) the cash pa%!ent or e)ui#a ent wi $e !ade in the future. The $ook de$ts are a so ca ed de$tors and represent the co!pan%Ds c ai! or asset.

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The financia !anage!ent" in !anaging the recei#a$ e is concerned with !aintaining the recei#a$ es at the opti!u! e#e and re#iew the credit po ic% and producers according %. #.$. %&T&R'I(A(T) *F T+& )I,& *F I(-&)T'&(T

R&.&I-AB/&) In JMC" in#est!ents in accounts recei#a$ e for! a !ajor part of their assets. .ccounts recei#a$ es are one of the !ajor co!ponents of working capita . The financia s e'ecuti#es" shou d" therefore" pa% due attention to the !anage!ent of recei#a$ es so that each rupee in#ested in accounts recei#a$ es !a% contri$ute to the network of the organi(ation. The pro$ e! of !anage!ent of recei#a$ es is $asica % a pro$ e! of $a ancing profita$i it% and i)uidit%. Soft credit ter!s are attraction for contract receipts and so the onger the ti!e a co!pan% a ows to pa% to its custo!ersGc ients" the greater the contract receipts and higher the profits. ?owe#er" on the other hand" the onger the period of credit the greater the risk" the greater the e#e of de$t and greater the strains on the i)uidit% of the co!pan%. ?ence it is a #er% #ita issue for the financia !anage!ent. The Le#e of in#est!ent in recei#a$ es is deter!ined $% the fo owing factors*

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17 Vo*u)e o/ Credit Contract Receipt,* Eo u!e of credit contract receipts is the !ain deter!inant of the e#e of recei#a$ es. Ather things $eing e)ua " accounts recei#a$ es #ar% direct % with the #o u!e of contract receipts. If contract receipts increase" recei#a$ es e'pand. .s contract receipts dec ine" in#est!ent in recei#a$ es a so dec ine. 27 Ter), o/ Contract* It is the !ost i!portant #aria$ e in deter!ining the e#e of in#est!ent in recei#a$ es. If a co!pan% takes a decision not to transfer of propert% in goods on credit in order to a#oid $ ocking up of funds in recei#a$ es and risk of $ad de$ts" this ite! sha not appear in the $a ance sheet. So!e arge construction co!pan% !a% take such decisions. 0ut so!e decisions cannot $e enforced $% a $usiness enterprise. Trade custo!s" co!petitions" and $usiness practices force the co!pan% to transfer the propert% in goods on credit otherwise their e'istence wi $e threatened. The co!pan%" therefore" shou d esta$ ish a sound credit po ic% to suit it needs. 7 Po*ic+ o/ Credit Contract Receipt,C Po ic% of credit contract receipts a so deter!ines the si(e of in#est!ent in recei#a$ es. If credit is a owed on % for the short ter!" its ratio with contract receipts sha re!ain at ower e$$. If ong 9 ter! credit is a owed" its ratio with contract receipts !a% $e higher. Moreo#er" the present #a ue of !one% wi a wa%s $e higher henceR e#er% co!pan% ikes to co ect the !one% as ear % as possi$ e.

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&7 Sta<i*it+ o/ Contract Receipt,C In the $usiness of seasona character" tota contract receipts and the credit contract receipts wi go up in the season and therefore #o u!e of recei#a$ es wi a so $e arge. An the other hand" if a co!pan% transfers the propert% in goods on insta !ent $asis" its $a ances in recei#a$ es wi $e high. 17 SiKe and Po*ic+ o/ Ca,h "i,count. It is a so an i!portant #aria$ e in deciding the e#e of in#est!ent in recei#a$ es. Cash discount affects the cost of capita and the in#est!ent in recei#a$ es. If cost of capita of the co!pan% is ower in co!parison to the cash discount to $e a owed" in#est!ent in recei#a$ es wi $e ess. If $oth are e)ua " it wi not affect the in#est!ent at a . If cost of capita is higher than cash discount" the in#est!ent in recei#a$ es wi $e arger. 97 Credit and Co**ection Po*ic+. Credit and co ection po ic% of the co!pan% affects to a arge e'tent the a!ount of in#est!ent in recei#a$ es. The $usiness de#e op!ent and tender depart!ent of the concern to who! credit shou d $e granted shou d decide it. If credit po ic% of the concern is i$era " the in#est!ent in recei#a$ es wi $e arger $ecause credit wi $e e'tended e#en to those custo!ersGc ients whose credit worthiness is not known or dou$tfu . If credit po ic% is stringent the credit wi $e e'tended on % on se ecti#e $asis to those whose credit worthiness is pro#en hence the si(e of recei#a$ es in this account wi $e ower. Moreo#er" if co ection is !ade within stipu ated ti!e or a sound

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co ection po ic% is enforced" the in#est!ent in recei#a$ es wi natura % $e ower. E7 Bi** "i,countin0 and Endor,e)ent. If co!pan% has an% arrange!ent with the $anks to get the $i s discounted or if the% are endorsed to third parties" the e#e of in#est!ent in this asset wi $e auto!atica % ow. If $i s are not honored on due date" the in#est!ent wi $e arger. E.J. S%STE! OF CO(TRO# OF RECEIV'B#ES It is in the interest of the co!pan% to keep the in#est!ent in recei#a$ es in a contro a$ e i!it. The financia !anage!ent shou d consider the fo owing four factors" which contro the recei#a$ es !anage!ent cost at a !ini!u! point. a) "ecidin0 accepta<*e *eAe* o/ Ri,H* The first consideration in this regard is to decide to who! the credits are a owing $earing in !ind the risk in#o #ed price credit e'tension in#o #es costs ike $ad 9 de$t oses" construction costs" ad!inistrati#e costs" cash discounts and opportunit% cost. 0ecause e#er% transaction carries risk e e!ent" the financia !anage!ent shou d consider the credit capacit% of e#er% custo!erGc ient $efore a owing an% credit to hi!. Capacit% is a su$jecti#e $ut fi#e CDs of credit Wcharacter" capacit%" capita " co atera (securit%) and conditions (ter!s of asset sa e) represent a fair esti!ate of it. There are a nu!$er of sources to get the infor!ation regarding the credit worthiness of potentia c ients" such as trade references" $ank references" and credit 0ureau reports.

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$) Ter), o/ Credit Sa*e,* ?a#ing decided to a ow the credit to a custo!erGc ient" the co!pan% has ne't to decided on the credit ter!s and the e#e of discount. The credit pro$ e! is just ike an in#est!ent pro$ e!. The e'tension of credit represents an in#est!ent ha#ing resu ting in arger profits. In deciding upon the credit ter!s to $e offered to its custo!ersGc ients" the co!pan% shou d think o#er certain $asic issues in#o #ed in it such as cost of capita " cash discounts" contract receipts" period of credit contract receipts" i)uidit% of funds etc. The financia !anager shou d workout costs and $enefits of a ternate credit ter!s to find out the !ost desira$ e credit ter!s. Dn deciding the credit ter!s" the co!pan% shou d a so take care of the co!petitorDs reactions to the co!pan%Ds credit ter!s. c7 Credit Co**ection Po*ic+C ;uring and after the co!p etion of project" the co!pan% wi ike to get the a!ount co ected fro! its custo!ersGc ients as ear % as possi$ e to a#oid $ad 9 de$t osses. It needs fo owing a sound and strict co ection po ic% to keep the $ad 9 de$t osses at the !ini!u!. . certain proportion of de$ts wi run into $ad in spite of the $est efforts. So the co!pan% !ust pro#ide for reser#es for $ad de$ts. JMC pro#ide 3> or => of sundr% de$tors for this purpose. The co!pan% shou d fo ow a co ection procedure in a c ear 9 cut se)uence i.e. po ite etter" regressi#e % strong 9 worded re!inders" persona #isits and then ega action. Ather i!portant too to contro the credit co ection is

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the record of age of outstanding de$ts. The !anage!ent shou d stress to co ect the o dest de$t first. d7 'na*+Kin0 the InAe,t)ent in ReceiAa<*e,C The ast $ut not the east i!portant step in the process of !anage!ent of recei#a$ es is to ana %(e their si(e fro! ti!e to ti!e with the he p of certain rations such as ca cu ation of a#erage co ection period" de$torDs turno#er ratio" ratio of recei#a$ es to. tota current assetsGnet current assets etc. . periodic ana %sis of recei#a$ es wi he p the !anage!ent in keeping the a!ount of recei#a$ e within reasona$ e i!its and is assessing the effecti#eness of the !anage!ent of recei#a$ es.

1* +445" +*+448" ,*+44=


Chart =. 1 )eceiva#le !anagement )atio of 1!C

;ata co ection period is nothing $ut the period re)uired to co ect the !one% fro! the custo!ersGc ients after the credit contract receipts. . speed% co ection reduces the ength of operating c%c e and #ice #ersa. 7ro! the chart 3.1 it can $e inferred that
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the de$tors turn o#er ratios showing !ore or ess constant trend. In the %ear +44< it is 5<.3< da%s and reduced in the %ear +44= to 54.<< da%s then reduced further in the %ear +448 to 88.<1 da%s. 7ro! the chart 3.1 it can a so $e inferred that the .#g. creditorDs turno#er ratio showing f uctuating trend. In the %ear +44< it is 11+.<4 da%s and then sharp % reduced in the %ear +44= to ==.13 da%s then reduced further in the %ear +448 to <<.1=. -ecei#a$ es to Tota Current .ssets ratio showing a s ight downward trend. In %ear +44< it is 4.<8 and reduced to 4.<1 in %ear +448. In order to reduce the a!ount of working capita re)uire!ents" co!pan% shou d !anage the recei#a$ e in such a wa% that the a#g. co ection period shou d reduced further and a#g. pa%!ent period shou d increase. E.12 -ORDI($ C'PIT'# FOREC'ST 6orking capita represents funds re)uired to !eet short9ter! co!!ercia operation of a $usiness. It is an i!portant task of !anage!ent accountant to forecast the re)uire!ent of working capita in judicious and prudent !anner. 6orking capita forecast in the process of deter!ining an opti!u! e#e of in#est!ent in working capita . It is to keep in !ind that working capita is forecast on an a#erage $asis and not on an% specific points of ine. 6orking capita forecast in#o #es esti!ation of current assets and current ia$i ities. The degree of efficienc% of working capita can $e understood with the he p of current ratio"

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)uick ratio" ;e$tors to sa es" working capita to sa es" credit pa%!ent period and so on. . of these can $e he pfu as per de!and of the situation. It is i!portant to note that no co!ponent of current assets re!ain id e in the $usiness and si!i arit% short ter! oan ike $ank o#erdraft" co!!ercia paper" sundr% creditor as we as outstanding ia$i ities shou d not $e kept #er% high e#e $ut the% shou d $e kept at such e#e which is just re)uired to !atch de!and of the fir!. 6hi e forecasting the re)uire!ent of working capita " the !anage!ent accountant !ust $e we con#ersant with the nor!s of Tandon and chore co!!ittee for working financing. E.11 HU!'( 'SPECTS I( -ORDI($ C'PIT'# !'('$E!E(T 6orking capita !anage!ent can $e effecti#e % $e initiated $% finance !anager with the necessar% assistance of a the !e!$er of the tea! which is nor!a % headed $% an e'pert sa% the finance !anager. It is tea!work and e#er%$od%Ds contri$ution !ake possi$ e to !anage the working capita in efficient and effecti#e !anner. Moti#ation is the ke%" which !akes e#er%$od% work for achie#ing the goa of s!ooth !anage!ent of working capita . . participati#e perspecti#e is essentia . The head of working capita !anage!ent tea! is he p ess if he does not recei#e who ehearted co9operation and sincere support of the tea! !e!$ers. .s we know" working capita !anage!ent

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inc udes in#entor% !anage!ent" de$tors contro " cash and $ank !anage!ent" short9ter! in#est!ent !anage!ent" trade creditor !anage!ent etc. The pri!ar% o$jecti#e of e#er% for! of current assets is to ena$ e the $usiness to carr% on the co!!ercia operation s!ooth % and to increase the sca e of operation and thus it can earn $etter $usiness !anage!ent. It needs no !ention that current assets !ust $e uti i(ed as producti#e as p ant" !achiner% and other e)uip!ents.

Chapter F
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Findin0, : Conc*u,ion,

Indian

econo!%

has

$een

growing

)uite

i!pressi#e %

as

co!pared to !an% of its counterparts across the g o$e. ;espite so!e i!pedi!ents such as stagnanc% in de#e oped countries" soaring prices of crude and oi " !ounting inf ation etc." India is certain % poised for aggressi#e growth in ne't few %ears. Containing inf ation without ad#erse % affecting f ow of in#est!ent and growth !o!entu! wi $e the ke% cha enge and top priorit% for the :o#ern!ent. The $iggest $eneficiar% of the econo!ic growth has $een the construction industr%. In#est!ent in construction industr% accounts for near % 13> of IndiaDs :;P and it has !ade significant
JMC Projects (India) Ltd. L.J.I.M.S 1<,

contri$ution

in

sustaining

growth

too.

So

far"

the

!ain

contri$utors to the growth of construction industr% and the infrastructure sector ha#e $een roads" highwa%s" rea estate and airports $ut it is e'pected that other sectors ike power" S1Ks" !etros" ports and ur$an infrastructure wi a so $e the ke% dri#ers for the co!ing %ears. So!e of the !ajor achie#e!ents of the co!pan% during the %ear are for the second consecuti#e %earR the turno#er and profit $efore ta' ha#e increased $% !ore than 84> o#er the pre#ious %ear. .s per the specia edition of 0usiness Toda% of June +448" JMC has $een ranked as <th fastest growing S!a Co!panies of India. In#est!ent of -s. +44 $i ion is e'pected in Power sector $% the %ear +41+. Ane of the !ajor achie#e!ents during the %ear was conso idation of our $usiness in Power sector. 6e recei#ed projects for a !ajor c ients such as /TPC" 0?1L" -e iance" 1 econ and . sto!. Infrastructure sector continue to grow steadi %. It has $een successfu in getting !ajor orders in water G drainage to pipe ines during the %ear. 7or the first ti!e" it has successfu % co!!issioned -CC pipe !anufacturing p ant near 0hopa enhance #ertica strength for pipe ine projects. It is a so focusing on other areas such as 0AT projects" 1PC for de#e opers" rai wa%s" airports" ur$an infrastructure etc. which are going to $e !ajor thrust in co!ing %ears. ?a#ing a reasona$ % good order $ack og of near % -s. +3"444 !i ion and few !ore orders e'pected" the

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Co!pan% is poised to achie#e su$stantia and hea th% growth in the co!ing %ear. Cha**en0e,C In the co!ing %ear" it wi ha#e !ajor cha enge of

achie#ing ti!e $ound e'ecution of critica projects despite of acute shortage of !anpower and de a%s in a#ai a$i it% of work fronts. It is ooking for wa%s and !eans to reduce dependence on !anua work and increase producti#it% $% adopting atest techno ogies and !echani(ation of ke% acti#ities. Financia* I,,ue,* 6orking Capita In order to !eet additiona funding re)uire!ents for growth" the Co!pan% has increased its fund9$ased working capita i!its fro! -s. 5"344 Lacs to -s. 12"344 Lacs and non9fund $ased i!its fro! -s.<+"344 Lacs to 55"344 Lacs in current %ear. The Co!pan% has incurred Capita e'penditure of -s. <",=8 Lacs" which ha#e !ain % financed through ter!s oans and interna accrua s.

Aperating Margin Aperating !argin i.e. Profit $efore ;epreciation" Interest and Ta'es (P0;IT) as a > of Contract -eceipts has !argina % i!pro#ed and stood at 8.=,> for 7C +448945 as co!pared to 8.,5> during the pre#ious %ear. Is due to so!e reduction in !ateria cost in the ast two )uarters of the %ear

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/et 6orth The /et 6orth of the Co!pan% has increased fro! -s. 1="43,.32 Lacs as on ,1st March" +448 to -s. +4"153.++ Lacs as on ,1st March" +445. The increase in a!ount of /et 6orth is !ain % on account of interna accrua to the tune of -s. ,"4+<.45 Lacs. 0orrowings The tota $orrowings as on ,1st March" +445 stood at -s. 15"<2,.8+ Lacs as against -s.11"+=5.<4 Lacs as on ,1st March" +448. The increase in $orrowing was !ain % on account of increase in 6orking Capita uti i(ation and ter! Loans. There has $een a reduction in ?ire Purchase Loans" 7i'ed ;eposits and Inter Corporate ;eposits due to repa%!ent. ;uring the current %ear" the fund $ased 6orking Capita i!its ha#e increased fro! -s. 5"344 Lacs to -s. 12"344 Lacs whereas" the non fund $ased i!its in respect of 0ank :uarantees G LCs etc. ha#e increased fro! -s. <+"344 Lacs to -s. 55"344 Lacs due to growing $usiness needs. The tota ;e$t91)uit% -atio has gone up fro! 4.<3 as on ,1st March" +448 to 4.5= as on ,1st March" +445. This is !ain % due to increase in 6orking Capita uti i(ation and Ter! Loans. Concerns There are !an% constraints that affect the s!ooth functioning of this industr%. Contracting issues" financing issues" stiff co!petition eading to price9cuts and ow operating !argins" high #o ati it% in prices of !ajor inputs such as stee " ce!ent" $ui ding

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!ateria s and petro eu! products" stringent adherence to safet%" )ua it% consciousness" adapting to techno ogica changes" de#e oping and using new construction !ateria s and disparities and a!$iguities in indirect ta' structures in respect of E.TG Ser#ice Ta' etc. are the ke% issuesG concerns that pose !ajor threats in the growth of Construction Industr%. Pro$a$ %" the $iggest $ott eneck facing the industr% toda% is ende!ic !anpower shortages in $oth ski ed and unski ed categories. ?igh attrition rate of e!p o%ees is another !ajor concern. The gap $etween de!and and supp % of re)uired !anpower is ike % to ha#e se#ere i!pact at east in the near future considering growth opportunities in this sector. -oads and highwa%s are prone to !ajor ti!e9cost o#er9runs. Land ac)uisition and re!o#a of encroach!ents continue to $e !ajor constraints in project co!p etion. The i)uidit% crunch in the -ea 1state and ?ousing Sector is a !atter of serious concern which cou d aggra#ate the crisis.

REFERE(CES P-.S.//. C?./;-." +442. 7inancia Manage!ent Theor% and Practice./ew ;e hi* Tata Mc:raw9?i i Pu$ ishing Co. Ltd
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I.M.P./;1C +44=. 7inancia Manage!ent. /ew ;e hi* Eikas Pu$ ishing ?ouse. S.-EIS?6./.T?" +44=. Corporate 7inancia " Theor% and Practice. /ew;e hi* Sage Pu$ ications Inc. J.C.E.-S?/1C" +44=. 7inancia and Manage!ent .ccounting. /ew ;e hi* 6isdo! Pu$ ications. 7-1; S?1LTA/" +44+. 6orking Capita and Construction Industr%. 1ournal of Construction 5ccounting & $a+ation. /o#e!$er. pp. +,9+=. ;.L.;1S.I" +448. Construction Industr% 9 a changing scenario. Indian Construction. /o#e!$er +448. pp. =912. SCATT ?.K1LTA/" +448. /ot to $e o#er ooked. ?lo#al Insight )eport S ower growth in +445. World 6utlook 1LIK.01T? MA/T:AM1-C" +448. Infrastructure in India* . #ast and of construction opportunit%. ()ICEW5$E)=690E C66(E)0 Construction Li)uidit% crunch 9 an i!pact ana %sis" +448. Edel@eiss 0ecurities 4td. /o#e!$er 15" +448 Maga(ines ike HInfrastructure Toda%H" HConstruction 6eekH" HIndian InfrastructureH" 6or d ?ighwa%sH" HConstruction Techno og%H" HIndian ConstructionH etc. Co!pan% -eport on 0imple+ Infrastructure 4td. $% .sit C. Mehta" In#est!ent Interr!ediates Ltd.

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Li)uidit% Crunch 9 an I!pact .na %sis $% 1dei wess A#er#iew of Construction Industr% in India $% the I/;A9IT.LI./ Cha!$er of CAMM1-C1 and I/;@ST-C .nnua -eport of JMC Projects (India) Ltd. for 7C +44<94=" 7C +44=948 and 7C +448945 .nnua -eport of ?industan Construction Co!pan% for 7C +44<9 4=" 7C +44=948 and 7C +448945 .nnua -eport of /agarjuna Construction Co!pan% for 7C +44<9 4=" 7C +44= 48 and 7C +448945 .nnua -eport of 0.L.Jash%ap & Sons Ltd. for 7C +44<94=" 7C +44=948 and 7C +448945 /ewspapers ike H0usiness StandardH" H1cono!ic Ti!esH" H7inancia 1'pressH etc. http*GGwww.india$ud)etnic.in .

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http*GGwww.theecono!icti!es.co! . http*GGwww.topnews.co!

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