A Project Report

On

Analysis of Working Capital Management of Fact.Ltd.

for

The Fertilisers And Chemicals Travancore Limited (FACT)

By

Vijesh M V
Roll No. 15185

Submitted in partial fulfilment of the requirement of

Summer Internship Programme

Under the Guidance of

Mr. Krishnakumar.
Deputy Manager(Finance)Excise.

&

Prof. Rajendra Todalbagi.

SDMIMD, Mysore

SDM Institute for Management Development

Mysore, Karnataka, India June
2016
ACKNOWLEDGEMENT

It gives me immense pleasure to present this project report on the Analysis of Working Capital
Management of FACT.Ltd carried out at FACT.Ltd, in partial fulfilment of post-graduate course
PGDM.

No work can be carried out without the help and guidance of various persons. I am happy to take this
opportunity to express my gratitude to those who have been helpful to me in completing this project
report.

I am very grateful to my organizational guide MR. Krishna Kumar (Deputy Manager

(Finance)Excise.), Prof. Rajendra Todalbagi. (Faculty Guide), M/s Reji(Banking) Mr.Ronald(Cost
and MIS) and for timely help concerning various aspects of project.

Special thanks to FACT Ltd., Udyogamandal for giving me this wonderful opportunity.
My several well-wishers helped me directly or indirectly. Last but not the least I want to thank my
parents for their support and guidance in completion of this project.

VIJESH M V

2
EXECUTIVE SUMMARY

Business is nothing but bundle of Risks. Finance is the elixir that assists in the formation of new
businesses, and allows businesses to take advantage of opportunities to grow, employ local workers
and in turn support other businesses and local, state and federal government through the remittance
of income taxes.

Decisions relating to working capital (Current assets-Current liabilities) and short term financing are
known as working capital management. It involves the relationship between a firms short-term assets
and its short term liabilities.The goal of working capital management is to ensure that the firm is able
to continue its operation and that it has sufficient cash flow to satisfy both maturing short term debt
and upcoming operational expense

Working capital management is significant in financial management. It plays a vital role in keeping
the wheel of the business running. Every business requires capital ,without it cant be promoted.
Investment decisions is concerned with investment in current assets and fixed assets .working capital
plays a key role in a business enterprise just as the role of heart in human body . it acts as grease to
run the wheels of fixed assets .its effective provision can ensure the success of business while its
inefficient management can lead not only to loss but also to the ultimate downfall of what
otherwise might be considered as a promising concern . Efficiency of a business enterprise depends
largely on its ability to its working capital .working capital management is one of the important
facts of affirms overall financial management

The part of the organization that manages its money is the finance department. The functions of
finance department include planning, organizing, auditing, accounting, and controlling the companys
finances. The proper functioning of finance department in any company is very essential in order to
outperform its competitors and to sustain in the long run.

A project titled Analysis of Working Capital Management of Fact.Ltd was carried out in FACT
Ltd.

The Fertilizers and Chemicals Travancore Limited (FACT) incorporated in the year 1943 was one of
the first large scale fertilizer plants in India. Located at Udyogamandal, Kerala, FACT started
production in 1947. Initially in the private sector promoted by the Seshasayee Brothers, FACT

3
became a PSU in the year 1960 and towards the end of 1962, Government of India became the major
shareholder of FACT.

The project in the company was carried out by fulfilling two objectives. The first objective was to
understand the working capital management in the company which was an assignment based project.
The second objective was to bring out the financial position of the company by comparing the
companys performance with its competitors.

The major findings were that the companys working capital position was not good as compared to
its competitors and the major problem was that over the years the companys debt position has been
very poor and the debt has been increasing.
Since FACT is an organisation which sells their fertilizers on subsidy they are facing the problem of
huge working capital constraints.This is mainly because of the delay in receiving subsidy from
government.

The recommendations were given based on the analysis, which the company might use in order to
improve its working capital position over the years.

4
TABLE OF CONTENTS

Chapter Particulars Page No.

1. Introduction 6-25

2. Situation Analysis 26-29

3. Project Methodology 30-32

4. Key results 33-56

5. Learnings 57-58

6. Recommendations 59-60

7. Conclusion 61-62

References 63

Annexures 64

5
INTRODUCTION

6
Industry Overview
Fertilizer is defined as any substance which is organic or inorganic, natural or artificial, supplies one
or more of the chemical elements required for plant growth. One of the vital industries for the Indian
economy is the Indian Fertilizer Industry as it manufactures a very critical raw material for agriculture
which is the major occupation of the country. Fertilizers are essential plant nutrients important for
obtaining optimal yield and quality of the cultivated crop. After each harvest of crop, the soil needs
replenishment of these nutrients which primarily are nitrogen, phosphorus and potassium; denoted by
N P and K respectively.
Nitrogenous fertilizers are applied for high growth, development, yield, and colour of plants.
Phosphatic fertilizers are applied for root development, seed germination, and for countering the
acidic effect of urea and Potassic fertilizers provide protection against germs and diseases to the crops.
The industry is a highly capital and energy intensive industry and India has a total installed capacity
of 18 MTPA (million tonnes per annum) for N and P fertilizers nutrients while their consumption is
28 MTPA. The nutrients are processed into formation of the fertilizer products like Urea, DAP, SSP,
MOP, etc.; which is consumed at 57 MTPA against a production capacity of 42 MTPA.
It is clearly evident that India is short on its capacities and is highly dependent on import of input,
intermediaries and final fertilizer products to meet its growing demands. It imports almost 40-45% of
its total requirement valued at USD 6.9 billion or INR 315 billion. Also, the natural gas required as
key input for manufacture of urea, the most widely consumed fertilizer in India, is partly imported
due to availability constraints in the country. Also, the industry is highly regulated in terms of pricing,
distribution and movement of fertilizers and the Government provides subsidy to fertilizer companies
in order to ensure that the fertilizers are available to the end-users (farmers) at affordable prices for
proper agriculture growth and development.
With high investment costs, subsidised prices, high costs of production, very high capacity utilisation
and heavy import costs, the industry is characterised by low profit margins especially for the public
sector enterprises which run the older plants which manufacture urea.
Indian Fertilizer industry
India is the 3rd largest producer and consumer of fertilizers in the world. The fertilizer industry
contributes to 40-50% of agricultural productivity, and with India being a primarily agrarian economy
this industry holds prime importance in the economy.
Agriculture in India contributes to 16% of GDP and employs about 58% of Indian population. It also
contributes to 10% of Indias export earnings and is a major contributor to Indias economic
development.

7
In the context of this scenario, it is important that this sector sees high and sustainable growth, and
the factors affecting agricultural growth are higher productivity, direct/indirect subsidies,
competitive pricing in each stage of value chain, and focus on quality of production inputs, techniques
and fertilization process. Each of the above mentioned factors is directly or indirectly affected by the
fertilizers industry and hence this industry has strong drivers.

Fertilizer Production, Consumption and Import Status

The Indian Fertilizer companies produced around 32.4 million tonnes of fertilizer in the year 201213
However, the total availability was short of demand and was met through imports. Of total fertiliser
production, urea output increased to 22.6 million tonnes in FY12-13 from 22.0 million tonnes in
FY11-12 due to better capacity utilization. While production of di-ammonium phosphate (DAP)
output down 3.6 million tonne in FY12-13 from 4.0 million tones last year, output of NPK (nitrogen,
phosphate and potassium) decreased 6.2 million tonnes in FY12-13 from 7.8 million tonnes in FY11-
12

India has 30 manufacturing units of Urea with an Installed capacity of 21.6 million tonnes till 2013.
There are 12 units of DAP producing plants with a combined capacity of 8.3 million tonnes. Complex
fertilizers in the country have installed capacity of 6.4 million tonnes from 19 units. Highest number
of fertilizer units in the country belongs to SSP. India has 85 SSP units with a combined production
capacity of 7.7 million tonnes

8
India is meeting 80 per cent of its urea requirement through indigenous production but is largely
import dependent for its requirements of phosphatic and potassic (P & K) fertilizers either as finished
fertilizers or raw materials. Its entire potash requirement, about 90 per cent of phosphatic requirement,
and 20 per cent urea requirement is met through imports.

In India, complex fertilizer is produced by public sector, cooperative sector and private sector players.
Taking a closer look at the peroduction scenario of complex fertilizer in the country which has
witnessed an overall negative growth for the period from 2008-09 to 2012-13, maximum fall in
production by both cooperative and the private sector was witnessed between 2010-11 and 2012-13.

The entire requirement of around five million tonnes of potassic fertilisers would be met through
imports as India does not have commercially viable sources of potash. With a view to make the nation
self-sufficient in urea fertiliser, the Fertiliser Ministry has moved a proposal to boost investment in
the sector.

During this first month of 2013-14 finacial year, India imported 6.8 million tonnes of urea valued at

USD 1.92 billion. The cost of inward shipments was comparatively less during this year. Oman

India Fertilizer Company (OMIFCO) is a joint venture between Oman Oil Company, Indioa Farmers
Fertiliser Cooperative Ltd and Krishak Bharati Cooperative Ltd. In 2012-13, 1.83 MT of urea was
from imported from OMIFCO.

9
Year Consumption Production Imports

N P K TOTAL N P K TOTAL N P K TOTAL

2004-05 117.1 46.2 20.61 184 113.4 40.64 - 154 4.11 2.96 20.45 27.52

2005-06 127.2 52 24.13 203.4 113.5 42.21 - 155.8 13.9 11.2 27.47 52.53

2006-07 137.7 55.4 23.35 216.5 115.8 45.18 - 161 26.8 13.1 20.69 60.58

2007-08 144.2 55.2 26.36 225.7 109 38.07 - 147.1 36.8 13.9 26.53 77.21

10
Government Subsidies on Fertilizers
In current financial year FY 2013-14 the subsidy bill would reach to Rs 67,971 crore. The government
had increased the total fertiliser subsidy in the July budget at Rs 72,970.30 crore for the entire 2014-
15 fiscal from Rs 67,970 crore proposed in the Interim Budget. Fertiliser subsidy paid to the
companies has declined by about 41 per cent to Rs 21,300 crore as against Rs 36,000 crore paid in
the corresponding period the previous financial year.

While the subsidy is fixed by the government in case of phosphate and potassic (P&K) fertilisers like
Muriate of Potash (MoP) and Di-ammonia phosphate (DAP), companies are free to decide prices for

11
others. In case of urea, a controlled commodity, the retail price is fixed at Rs 5,360 per tonne, and the
difference between the cost of production/imported price is paid as subsidy to the companies.

Table: Government Subsidies on Fertilizer

(In crores of Rupees)

Actuals(2011-12) Actuals(2012-13) Actuals(2013-14) Actuals(2014-15)

Indigenous(urea) 20208 20000 26500 36000

Fertiliser

Imported (urea) Fertiliser 13716 15133 12044 12300

Sales of decontrolled 36089 30480 29427 24670

fertilizer with concession
to farmers

Total Fertilizer Subsidy 70013 65613 67971 72970

In addition to urea, 25 grades of P & K fertilizers namely di ammonium phosphate (DAP), muriate of
potash (MOP), mono-ammonium phosphate (MAP), triple super phosphate (TSP), ammonium
sulphate (AS), single super phosphate (SSP) and 18 grades of NPKS complex fertilizers are provided
to farmers at subsidized prices under the Nutrient Based Subsidy (NBS) Policy.

Farmers pay only 50 per cent of the delivered cost of P & K fertilizers, the rest is borne by the
Government of India in the form of subsidy. The Government has also included seven new grades of
NPKS complex fertilizers under the NBS Policy. At present 25 grades of P & K fertilizers are under
the NBS Policy.

Latest aspects in Industry

There is a lot of development going on to meet the demand of fertilizers in the country through
indigenous production, self-reliance in design engineering and execution of fertilizer projects
is very crucial
Many concepts have been developed to carry out research and development / basic research
work by mutual understanding between industry and academic institutions, and even there is
support from the Department of Fertilizers.

12
 The fertilizer plant operators are now in the position to absorb and assimilate the latest
technological developments, incorporating environmental friendly process technologies, and
are in a position to operate and maintain the plants at their optimum levels without any
foreign assistance and on international standards in terms of capacity utilization, specific
energy consumption & pollution standards.

Porters Five Forces Analysis on Indian Fertilizer Industry

13
THREAT OF NEW ENTRANTS: - LOW
Entry barriers are high
1. Supply side economies of scale- Present fertilizer industries both public and private sector enjoy
the benefit of scale economies of scale. The cost per unit is low.
2. Demand side benefits of scale-the buyers i.e. farmers are having faith on the fertilizers they are
using. They communicate to each other the results of fertilizers. Hence always has tendency to buy
what others are buying. Hence for new entrant it is difficult to break this attachment.
3. Customer switching costs- It is high. When farmers are using any fertilizer, they are well known
about the results, also for that fertilizers they have tie up with the Co-operative societies, they can get
it on credit basis also.
INDUSTRY RIVALRY MODERATE
High fixed costs
Negligible perceived differences between the brands
Prices fixed price competition impossible
FFBL has sole DAP production facility
Engro imports and sells DAP
A little competition between these two firms.
POWER OF SUPPLIERS-LOW
Gas subsidies given by government
Long term agreements
Firms cant influence market prices
Hence supplier power is very low
THREAT OF SUBSTITUTES-MODERATE/LOW
No proper substitutes
Natural fertilizers can be used but not as effective
Animal manure not suitable for commercial production
BARGAINING POWER OF BUYERS- LOW
No alternate for urea have to buy it irrespective of prices
Urea used as an alternate for DAP
When DAP prices increase, urea sales increase and DAP sales fall

14
Porters Diamond Model on Indian Fertilizer industry

DEMAND CONDITIONS
A large population, agriculture dependency, and strong export demand are the key growth
drivers for fertilizers and chemicals.
Per-capita consumption of chemicals and fertilizers in India is lower relative to Western peers
and there is a large latent demand.
Rise in GDP and purchasing power.
Huge growth potential of domestic market.
From April 2000 to November 2012, total FDI inflows into the Indian chemicals industry
(excluding fertilisers) was USD8.75 billion

FACTOR CONDITIONS
Skilled science professionals and English speaking workforce
World class engineering and strong R&D capabilities

GOVERNMENT

15
 100 per cent FDI is permissible in the Indian chemicals sector
Manufacturing of most chemical products are de-licensed
The government has been encouraging R&D in the sector
Setting up of PCPIRs
FIRM STRATEGY, STRUCTURE AND RIVALRY.
Competition exists from both private and public sector companies.
57 large fertilizer plants and 57 large-sized and 64 medium and small sized chemical fertilizer
production units in India.
Most of the fertilizers company have been working for more than 40 years and FACT is the
oldest among them.
RELATED AND SUPPORTING INDUSTRIES
India has developed expertise for fabrication and supply of major and critical equipment such
as high-pressure vessels, static and rotating equipment, Distributed Control System (DCS),
heat exchangers and hydrolyser for fertilizer projects.
The most significant development/advancement made by the Industry is in the field of
manufacturing of catalysts of various ranges by catalyst-manufacturing Organisations like
PDIL. PDIL helps in implementing the schemes for enhancement of capacity and
technological up gradation in their existing catalyst plant and other utilities at Sindri to
compete in the International market.
Existence of good IT/Services sector all over the India.

Key success factors

Based on the detailed understanding and analysis of the industry, the following key success factors
were identified:

availability and prices

About the company

The Fertilizers and Chemicals Travancore Limited (or FACT Ltd), a fertilizer and chemical
manufacturing company in Kochi, Kerala, India, was incorporated in 1943, by Maharajah Sree
Chithira Thirunal Balarama Varma.In 1947 FACT started production of ammonium sulphate with an

16
installed capacity of 50,000 MT per annum at Udyogamandal near Cochin. It is the first fertilizer
manufacturing company in independent India and also the largest Central public Sector Undertaking
(CPSU) in the State of Kerala. The company has 2 production units - Udyogamandal Complex (UC)
at Eloor, Udyogamandal, and Cochin Division (CD) at Ambalamedu. The Caprolactam plant in
Udyogamandal was commissioned in 1990. Main products of the company include
Ammonia,Sulphuric Acid, Ammonium Phosphate-Sulphate (FACTAMFOS), Ammonium Sulphate,
Zincated Ammonium Phosphate, Caprolactam, and also complex fertilizers. Gypsum, Nitric acid,
Soda Ash and coloured Ammonium Sulphate are major byproducts.
Company history
The factory commenced production of ammonium sulphate in 1947 at the dawn of Indian
independence using wood as the raw material for production of ammonia. With the effect of time,
wood gasification became uneconomic and was replaced with naphtha reforming process. Through a
series of expansion programmes, FACT soon became the producer of the widest range of fertilizers
suited for all crops and all soil types in India. It became a Kerala State public sector enterprise in 1960
and in 1962, it came under the Government of India. Diversification to full-fledged engineering
services (FEW) in the fertilizer field and allied areas followed. The next major step forward was the
diversification of petrochemicals, an important milestone in the growth of the company. FACT has
formed a Joint Venture Company with Rashtriya Chemicals & Fertilizers Limited, named FRBL
(FACT RCF Building Products Ltd) for manufacturing load bearing panels and other building
products using phosphogypsum.FRBL PREFAB RAPIDWALL is a revolutionary, low cost,
prefabricated, load bearing cellular walling product suitable for use in residential, commercial, and
industrial building construction.
Description of the main activities, functions and units.
Fertiliser Plants
FACT Udyogamandal Plant, the oldest of FACT, which started production of Ammonium Sulphate
in 1947 using the firewood gasification process, has during the last few decades undergone several
stages of expansion and diversification, giving up old and obsolete technology and installing new and
sophisticated plants making use of naphtha as raw material. Today, the Udyogamandal Plants has an
installed capacity of 76,050 tonnes of N and 29700 tonnes of P2O5. Apart from fertilisers like
Ammonium Sulphate and Ammonium Phosphate Sulphate (FACTAMFOS 20:20:0:13) FACT
Udyogamandal Plants also manufactures chemicals as intermediate products like Sulphuric Acid,
Anhydrous Ammonia, Phosphoric Acid, Sulphur Dioxide, Oleum, etc.Ammonium Sulphate liquor
obtained as a by-product from the Caprolactam Plant is converted as a useful fertiliser product in a
New Ammonium Sulphate Plant, 2,25,000 TPA capacity put up in October 1990, at a cost of Rs.35

17
crore.As a replacement to the existing high energy consuming old Ammonia plants at Udyogamandal,
a new 900 TPD capacity Ammonia Plant at a cost of Rs.642 crore was put up in March 1998. FACT
Udyogamandal plants received ISO 14001 certification in March 2000 for conforming to the
Environmental Management System standard.
Petrochemical Plants
FACT manufactures Caprolactam, the raw material for Nylon-6 which is extensively used for the
production of tyre-cord, textile filament yarn and engineering plastics.FACT, one of the only two
manufactures of this product in India, has the capacity to produce 50,000 tonnes of Caprolactam in a
year. FACT's Caprolactam exported to various countries including in USA, not only earns precious
foreign exchange, but also appreciation on account of its excellent quality.The Caprolactam Plant
also produces 2,25,000 tonnes of Ammonium Sulphate per year as co-product and small quantities of
Soda Ash and Nitric Acid as by products.The plant has been certified ISO 9001:2002 since April
1996 by RWTUV, Germany and ISO-14001 since December 1999 by DNV, Netherlands.
Cochin Division
FACT Cochin Division has set up in the 1970's at Ambalamedu 30 km from Udyogamandal and
adjacent to the Cochin Refineries. The factory site is well connected by rail, road and waterways
which facilitate easy movement of raw materials and products. The present production facility
includes manufacture of 4,85,000 TPA of Complex Fertiliser (FACTAMFOS 20:20:0:13), 3,30,000
TPA of Sulphuric Acid and 1,15,200 TPA Phosphoric Acid. The Complex has a well-designed
effluent treatment and waste water recycle system. There is facility to import and store raw materials
required for FACT at Willingdon Island installation. The facility includes ship unloading system and
storage for raw materials like Sulphur, Rock Phosphate and Ammonia.Cochin Division is an ISO
14001:2004 certified company for Environment Management System by M/s DNV and ISO
9001:2008 certified organisation for manufacture of complex fertiliser by M/s TUV.
FACT Engineering and Design Organization (FEDO)
Established in 1965, FEDO has been evolved into an Engineering Power House with capability that
encompasses every facet of Project Engineering and Management. Maintaining international standard
in design practices, exposed to state-of-the-art professional values, safety and environmental
protection, FEDO's expertise ranges from pre-project surveys, project implementation leading to
project commissioning and plant operation, in diversified fields of operation.FEDO has, over the
years, acquired the technological edge for the production of Ammonia, Sulphuric Acid, Phosphoric
Acid, Hydrogen, Fertilisers like Urea, Ammonium Sulphate, Single Super Phosphate, Ammonium
Chloride, Complex Fertilisers, etc. The expertise in the field of Petrochemical industry has been
proven internationally by successful commissioning of complex projects like Caprolactam, Methanol,

18
etc. In the Refinery sector also FEDO in not a name to be bypassed like the oil industry players of the
Country and in Gulf.FEDO has been in technical association with world-renowned consultants and
technology suppliers like Haldor Topsoe (Denmark), Kellog Brown Root (USA), Stamicarbon
(Netherland), BASF (GermanY), Lurgi/Monsanto (France), Toyo Engineering Corporation (Japan)
Outokumpu (Finland), Coppee Lavalin (Belgium), Technimont (Italy), etc.In June 1995, FEDO
became the first Engineering Consultancy Organisation in India to be awarded ISO 9001:1994
certification for quality standards of our systems relating to the various aspects of engineering and
execution of projects. The above certification comes from Det Norske Veritas Quality Assurance
Ltd, United Kingdom.
FACT Engineering Works (FEW)

FACT Engineering Works (FEW), the Fabrication and Engineering Division of FACT was
established in the year 1966. FEW is one of the leading contracting firms in the Country offering
services through the manufacturing wing with modern fabrication and testing facilities and the project
wing undertaking project construction works. To expand its shop activities, FEW acquired the assets
of M/s Giovanola Binny at Palluruthy, Cochin and is operating at Palluruthy from February 1989
onwards.Present range of equipment fabricated by FEW include items like Class I Pressure Vessels,
Heat Exchangers in Carbon Steel, Alloy Steel and Stainless Steel, Chemical Process Equipments,
Penstock Pipes, Coloumns, Towers, etc. Since 2006 FEW has also been producing ship building
components such as Hatch Covers, Bulk Storage Tanks, Spud Pipes, Crane Posts, Hull Blocks,
etc.Project wing of FEW undertakes design engineering fabrication and erection of plant piping &
off-site piping for process industries; design, fabrication and erection of large sixe Storage Tanks
including Ammonia Storage Tanks, Vessels and other items for process industries; laying of cross
country pipelines for water supply schemes/oil terminals on turnkey basis. The quality system of
Manufacturing Wing as well as Project Wing has been certified to ISO 9001 since 1998.

Marketing Division
FACT has been a pacesetter in fertilizer marketing. The marketing network of FACT is spread over
the southern states of Kerala, Tamilnadu, Pondichery, Karnataka and Andhra Pradesh. The
distribution network consists of 100 Agro Service Centres, 50 field storage points and over 7900 retail
selling points in these states, and serves the farmers by supply of fertilizers and agronomy advice.
Through innovative farmer education and fertilizer promotion programmes, FACT has created
awareness about scientific cultivation and fertilizer use.

FACT-RCF Building Products Limited

19
FACT-RCF BUILDING PRODUCTS LIMITED is a Joint Venture Undertaking of The Fertilisers
And Chemicals Travancore Limited, Udyogamandal Kerala and Rashtriya Chemicals and Fertilisers,
Mumbai. Both above are Public Sector Undertakings manufacturing chemical fertlisers. Gypsum is a
by product of fertilizer manufacturing. Rapid Building Systems Pty Ltd., Australia who is the world
leader in making large size load bearing building panels from Gypsum is the technology provider for
the venture. FRBL Prefab GYPWALL is a single panel walling system developed with the technical
knowhow from Rapid Building Systems (RBS), Australia. Readymade smooth finish load bearing
wall panels are made out of Gypsum and High Strength Glass fibre. GYPWALL panels are strong
as well as light and can be used as wall or roof panels as required. The technology has worldwide
acceptance and has been approved by Building Material technology Promotion council (BMPTC)
India. SHINE Wall putty and SILKY Wall Plaster produced by FRBL through a unique process from
Gypsum are characteristic by their extra smooth finish and ease of application.
Research and Developments
The Research and Development Centre functions with the aim of carrying out in-depth research to
new fertilizer formulations and value addition of existing product lines in the Organization. R&D is
carrying out the following research study and specialized services to the benefit of the organization.
Research projects on Coir pith: Coir pith is the organic matter left behind after the extraction of coir
bibre from the coconut husk. On an average coconut husks consists of 70% pith and 30% fibre on dry
weight basis. India produces 2.8 lakh metric tonne of coir fibre per year, which generates 5-6 lakh
metric tonne of coir pith. This coir pith has an excellent property of water holding and contains rich
organic matter along with nutrient values. But it cannot be used as farmyard manure directly due to
various reasons. The natural composting of coir pith will not only take away nutrients from the soil
but also releases some harmful chemicals in to it. Hence composting of coir pith is essential before
applying as manure. In order to address the issues, FACT R&D has submitted Research proposal with
Coir Board and a MOU has been signed between FACT and COIRBOARD. The salient feature of
the project is converting coir pith into organic manure as per FCO guidelines.

Quality Control Cell:

It is constituted for efficiently monitoring the quality of finished chemical fertilizers both in
manufacturing unit and field godowns, distributors and dealers for evaluating the quality as per the
director of Ministry of Agriculture, GOI.

The scientific personals in R & D Centre are carrying out the quality assurance activities periodically
covering four southern states and manufacturing plants. The complete analysis reports with findings

20
are submitted to Director (Technical). This is also a part of company's commitment to ensure the
quality till the products reaches the beneficiaries.

Bio fertilisers: Production:

R&D produces Bio fertilisers such as Rhizobium, Azospirillum and Phosphate Solubilising Bacteria
(PSB), from its 150 TPD plant, which is established with partial assistance of one time grant in aid
from Ministry of Agriculture, GOI. During the year 2010-11, R&D has achieved fifty percent of
installed capacity of the Bio fertilisers, as well as assessing the suitability of locally available material
as carrier that favours the growth of microorganisms used in Bio fertilisers production.

Computer Services Centre

FACT is a pioneer in the industry for adopting information technology and has the unique distinction
of having implemented IT enabled enterprise business systems way back in 1965 to meet the growing
need for management information, engineering and commercial applications. IT systems have since
then been kept constantly upgraded so as to keep pace with the rapid technological advancements.

The latest in the chain of enhancements is the FACT>>FORWARD enterprise resource planning
system (ERP) implemented in November, 2009 in-house core group along with implementation
partners M/s SAP, the world leader in ERP segment.

FACT Computer Services Centre (CSC), the in-house IT department performed a key role in
implementation of FACT>>FORWARD system including feasibility analysis, securing management
approval, selecting/managing core group members from different functional groups, coordinating
project management during project preparation, blueprinting, realization, final preparation and golive.

CSC is equipped with around 25 numbers of centrally located virtualized servers for hosting SAP
system and the corporate IT network, FACTNET, which encompasses around 600 connected PCs, a
Citrix based virtual private network (VPN) that connects via Internet around 150 sales points spread
across the 4 southern states, 2 Mbps leased line from CSC to FACT Cochin Division, 4 Mbps Internet
leased line for hosting Citrix VPN, 64 Kbps leased lines from CSC to FACT Engineering Works &
FACT offices in Willingdon Island and around 15 Km of optical fibre network that links FACT
offices in Udyogamandal complex & nearby locations.

Functional modules of ERP system including FInance, COsting, Materials Management, Sales &
Distribution, Production Planning, Quality Management, Plant Maintenance, Project Systems,
Human Capital Management, Supplier Relationship Management are maintained by the in-house
21
Centre of Excellence consisting of members from functional groups. Technical modules including
Enterprise Portal, Business Intelligence and ABAP based custom software are maintained by the
inhouse IT team.

Besides functioning as a central hub for IT support in the organisation, CSC has an important role to
play in ensuring compliance to enterprise wide standard, business rules and best practices, keep
management abreast of fast paced technological changes and recommending timely enhancements of
IT resources in the enterprise.

CSC is geared up to augment its infrastructure with state-of-the-art data centre, disaster recovery site,
optic fibre network for FACT Cochin Division, access control system for sensitive areas, e-kiosks for
extending enterprise portal to employee work-spots and to explore IT enabled sectors such as mobile
computing, e-commerce/e-payment/payment gateway, B2B systems and so on.

Fertiliser Petrochemical
Cochin
Plants Plants FEDO
Division

Marketing
Division
FEW

FACT

22
 FACT-
R&D
RCF

Bio
QCC
Fertilisers CSC

PRODUCTS
Straight Fertilisers
AMMONIUM SULPHATE:
Ammonium Sulphate is a nitrogenous fertiliser containing 20.6% nitrogen, entirely in ammonical
form. It has excellent physical properties; non-hygroscopic, crystalline and free flowing. It is ideal as
a straight nitrogenous fetiliser and also as an ingredient in fertiliser mixtures. It is the most widely
preferred nitrogenous fertiliser for top dressing on all crops. Another unique advantage is that it
contains 24% sulphur, an important secondary nutrient.
Complex Fertilisers
FACTAMFOS (AMMONIUM PHOSPHATE SULPHATE):
FACTAMFOS 20:20:0:13 is a chemical blend of 40 parts of ammonium phosphate and 60 parts of
ammonium sulphate. It contains 20% N and 20% P2O5. The entire N is in ammonical form and P is
completely water soluble. In addition, FACTAMFOS contains 13% sulphur, a secondary plant
nutrient which is now attaining great importance in the agricultural scene.FACTAMFOS 20:20:0:13,
with the granular form and non-hydroscopic and free flowing nature, have excellent physical
properties. It is ideal for application on all soils and all crops. FACTAMFOS 20:20:0:13 can also be
used for foliar application.
Fact Mix
FACT prepares on a very large scale all the standard NPK mixtures under the brand name 'FACTMIX'
for different crops for Kerala as stipulated by the Department of Agriculture. In addition, FACT

23
prepares special tailor made fertiliser mixtures of any required grade for plantation crops like coffee,
tea, rubber, etc. FACT mixtures are superior in quality with the presence of ammoniacal nitrogen,
water soluble phosphorus, and other major nutrients like sulphur, calcium, etc.
Gypsum
A by-product of phosphoric acid, is a rich and cost effective source of 16% sulphur and 22% calcium.
FACT is marketing bagged gypsum in brand name FACT Gypsum all 4 southern states as a soil
conditioner with fertilising properties.
Imported Fertilisers
FACT markets imported Urea and Potash from Gulf Countries and Russia for consumption in all 4
southern states as per requirement. Urea with 46% Nitrogen in the granular/prilled form and Potash
with 60% K20 serves the nutritional requirement in the 4 southern states.
Zincated Factamfos
This special product containing 0.3% Zinc in FACTAMFOS has been launched to address the
widespread deficiency of Zinc in most soils of South India.
Zincated Gypsum
This soil amendment and ameliorant contains 2% Zinc in addition to 16% Sulphur and 22% Calcium
for rectifying alkaline soils and improving soil fertility and physical properties.
FACT Organic
FACT is also marketing organic manure produced from city compost, in brand name FACT
ORGANIC.
Caprolactam
It is the raw material for Nylon-6. The product quality of FACT Caprolactam is among the best
available in the world.
Bio-Fertiliser
R&D produces bio-fertiliser such as Rhizobium, Azospirillum, and Phosphobacter (Bacillus
Magatherium) from its 150 TPD plant. The Fertiliser Control Order 1985 has specified the
biofertiliser quality requirement first time in its amended version of June 2006.
By Products-CO2 and Gypsum
Role and Importance of Finance as a function in Fact
Finance is broad term that describes two related activities: the study of how money is managed and
the actual process of acquiring the needed funds. Finance is the elixir that assists in the formation of
new businesses, and allows businesses to take advantage of opportunities to grow, employ local
workers and in turn support other businesses and local, state and federal government through the

24
remittance of income taxes. The strategic use of financial instruments, such as loans and investments,
is key to the success of every business. The Role of the Finance Department can be summarised:
Prepare and create financial accounts

Keep and maintain financial records

Prepare and plan internal financial information

Analyse current financial performance

Pay creditors

Pay employees wages and salaries

Considering all the above points,finance as a function is an integral part in every organisation.In case
of FACT,a PSU which is running on loss for the past 3 years even though they are having significant
production and sales.For them it is crucial to understand what are the pitfalls in their financial
management and how they can tackle it.So finance is an important function in FACT.

25
SITUATION ANALYSIS

26
Problem Identification

The problem to be addressed is the determination of the effectiveness of the Working Capital at FACT
which is needed for maintaining the day to day operations of the company.
Despite reasonable production and marketing performance of the company,the financial results for
the year 2104-15 shows a loss of Rs.39990.79 lakh as against a loss of Rs.26495.63 lakh during the
year 2013-14.

Working capital constraints,High interest and finance charges,low level of operation,decrease in total
revenue and non operation of Caprolactam Plant throughout the year,etc are the main reasons for the
negative working results.So considering the factors my title of the study is Analysis of Working
Capital Management of Fact.Ltd.

SWOT Analysis of FACT

Strengths
1. Strong distribution and Dealer network-Fact is having 7185 dealers for distribution of
fertilizers where Kerala is having 2906 dealers and Karnataka having 1964 dealers followed
by Tamil Nadu,Telungana and Andhra Pradesh.
2. Joint Ventures with Rashtriya Chemicals Ltd(FRBL)-The 50:50 Joint Venture company
of FACT and RCF is stabilising its operations in market.FRBL is receiving for orders for
gypsum panel from neighboring countries like Nepal and Srilanka.
3. Risk Management policy-FACT has formulated risk management policy for identification
of potential area of risk and mitigation of the same.FACT is having adequate risk management
infrastructure in place capable of addressing all potential risks.
4. Premium product in the complex fertilizer segment containing sulphor.
5. Substantial infrastructure facilities.
6. Operational efficiency and high capacity utilization of plants.
7. Tie-ups with key raw material suppliers.
8. R&D Facility
9. Relationship with Co-operative stores and farmers.
Weaknesses
1. Old plants/ infrastructure
2. Over dependence on imports of raw material and logistics.
3. High requirement of Natural Gas
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 4. Dependence on subsidies
5. Huge finance and borrowing costs
6. Low level of operation of fertilizer plants.
7. Liquidity crunch and shortage of working capital.
8. Non-operation of caprolactam plant due to economic reasons.
9. Lack of level playing field in the price of RLNG.
10. Shortage of quality manpower.
Opportunities
1. New JVs and consolidations
2. Fast growing population
3. Scope for expansion and diversification.
4. Availability of land resources for generating additional revenue.
5. Availability of RLNG at Kochi.

Threats

1. Uncertainty of government policies

2. Shortage of feedstock/ government approval
3. Large scale imports
4. Delays in subsidy payments
5. Change in Technology-plant as well as chemicals 6. Volatality in the prices of raw materials
and feedstock.
7. Exchange rate variations.
8. Non-availability of sufficient quantity of phosphoric acid and other inputs.
9. Non-availability of natural gas.
10. Shortage of Phosperic acid and other raw-material.
Competitors
Major Players of Public Sector :
The public sector companies in Indian fertilizer market are listed below:
Fertilizer Corporation of India Limited (FCIL)

Hindustan Fertilizer Corporation Limited (HFC)

Pyrites, Phosphates & Chemicals Limited

Rashtriya Chemicals and Fertilizers Limited (RCF)

National Fertilizers Limited (NFL)

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 Projects &Development India Limited (PDIL)

The Fertilizers and Chemicals Travancore Limited (FACT)

Madras Fertilizers Limited (MFL)

FCI Aravali Gypsum & Minerals India Limited, Jodhpur

Private Companies
The Scientific Fertilizer Co Pvt Ltd

Coromandel Fertilizers

Deepak Fertilizers and Petrochemicals Corporation Limited

Devidayal Agro Chemicals

DSCL

Gujarat State Fertilizers &Chemicals Limited

Tata Chemicals Limited

Chambal Fertilizers

Nagarjuna Fertilizers and chemicals limited

Godavari Fertilizers and Chemicals limited.

Zuari Industries limited.

29
PROJECT METHODOLGY

30
Methodology
For preparation of this project the information will be collected from the following sources.

Primary data:
The Primary data will be collected from Personal Interaction with executives and other staff members
in finance department,production department and purchase department.

Secondary data:
The major source of data for this project will be collected through annual reports, profit and loss
account of 4 year period from 2011-2015 & some more information collected from internet and text
sources.
Objectives of the study.

To study the sources and uses of the working capital.

To study the liquidity position through various working capital related ratios.
To study the working capital components such as receivables accounts, Cash management,
Inventory management and its implications.
To comapre the companys performance with respect to its competitiors and industry standards.

To study the various issues related to the working capital management in FACT.

To know the overall operational efficiently and performance FACT.

To forecast the working capital requirements for next few years.

To make suggestions based on the finding of the study.

Alternative ways of tackling objectives.

To analyse the efficiency of working capital management using various ratios and index like
performance index,utilization index etc.
To assess the working capital based on various models such as operating cycle
method,drawing power method,turnover method etc.
To analyse the credit policy,operating cycle and inventory policy and thereby understand the
constraints.

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Problem Solving approach.-

A combination of first and third approach will be used to achieve the objectives.It will be by analyzing
the efficiency using various ratios and also by analyzing the credit policy,operating cycle and
inventory policy to understand the constaints.Along with this statement of changes in working capital
will also be used to achieve the objectives.

Rationale and motivation for selecting this approach.

Understanding the operating cycle is vital to get insights about the issues in working capital
management. Operating cycle gives idea about where an organizations inventory is accumulating,
how much fund is blocked and it also helps in analyzing the efficiency of credit policy of an
organization.Along with this ratios related to working capital helps in analyzing overall efficiency
over the last 4 years.

Steps of Execution.

To study the balance sheet of last 5 years and prepare various ratios relevant to working capital
and financial performance of FACT.
To have personal interaction with Finance team to understand the sources of finance,charges
and requirements.
To have personal interaction with purchase team to understand the inventory requirement.
To have interaction with production team understand the capacity,production,utilisation and
other relevant aspects.

Limitations of the study.

The study duration is limited to less than two months..

Limited interaction with the concerned heads due to their busy schedule.
The findings of the study are based on the information retrieved by the selected unit.

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KEY RESULTS/KEY LEARNINGS

33
FINANCE
Finance is broad term that describes two related activities: the study of how money is managed and
the actual process of acquiring the needed funds. This field is often separated into three subcategories:
personal finance, corporate finance and public finance.
Corporate Finance deals with the financial activities related to the running a corporation. It is
primarily concerned with maximizing shareholders value through long term and short term financial
planning and the implementation of various strategies.Every discipline has first principles that govern
and guide everything that gets done within it. All of corporate finance is built on three principles- the
investment principle, the financing principle and the dividend principle.
The investment principle determines where business invests their resources, the financing
principlegoverns the mix of fundings used to fund these investments, and the dividend principle
answers the question of how much earnings should be reinvested back into the business and how
much returned to the owners of the business.
IMPORTANCE OF CORPORATE FINANCE
Research and Development: Corporate finance is needed for research and development. Today
a company cannot survive without research and development.
Motivating the employees: Financial incentives (like- bonus, high salaries, etc) and
nonfinancial incentives (like- transport facilities, canteen facilities) must be given to the
employees to keep them motivated and to improve their performance. All this requires finance.
Promoting a Company: It is needed for preparing Project Report, Memorandum of
Association, Articles of Association, Prospectus, etc. it is needed to purchase the land and
buildings, Plant and Machinery, Raw materials, to pay wages, salaries and other expenses.
Smooth Conduct of Business: Finance is needed as Working Capital. It is needed for paying
the day to day expenses, for advertisements, sales promotions, distributions, etc. A company
cannot run smoothly without finance.
Expansions and diversifications: Modern machines and techniques are needed for expansion
and diversification. Finance is needed to purchase these.
Meeting Contingencies: The Company has to meet several contingencies. For e.g. sudden fall
in sales, loss due to natural calamity, loss due to court case, strikes, etc. the company needs finance
to meet these contingencies.
Government Agencies: There are many government agencies such as Income Tax authorities,
Sales Tax authorities, Registrar of Companies, Excise authorities, etc. The company has to pay
taxes and duties to these agencies and for that finance is needed.
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 Dividend and Interests: The Company has to pay dividends to the shareholders and interest to
the debenture holders, banks, etc. It also has to repay the loans. Fianc is needed to pay dividends
and interest.
Replacement of assets: Plant and Machinery are the main assets of the company and are needed
for the production of the goods and provision of services. But, after some days these assets
becomes old and outdated and they are required to be replaced. Finance is needed to replace these
assets.
KEY RESPONSIBILITIES OF FINANCIAL MANAGER
Manage, control and ensure that the companys accounting activities and procedures conform
to the generally accepted accounting principles.
Ensure that all the financial transactions are processed in-line with the approved policies and
procedure.
Oversee the daily operations of the finance department.
Prepare the monthly financial reports with all needed financial and costing analysis comparing
with Budget.
Manage the preparation of the official annual report of actual revenues, transfers and expenses.
Manage the preparation of the financial outlooks and the financial forecasts in coordination with
the CFO.
Ensure that the company is continuously keeping the financial funds to fulfill its financial
obligations by preparing monthly cash flow forecasts. Monitor the actual cash flow against the
forecasts and take necessary measures to remedy the variances.
Direct and coordinate debt financing and debt service payments with external agencies and monitor
terms, conditions and covenants and ensure compliance with the same.
Prepare the financial analysis for the contract negotiations and product investment decisions.
Design, establish and maintain an organizational structure and staffing to effective accomplish
the departments goals and objectives.

Working Capital and its importance

Working Capital is considered as the lifeblood and nerve centre of any business(Khan and Jain) In
the present day modern industrial world the term Working Capital refers to the short term funds
required for financing the entire duration of the operating cycle of a business known as Accounting
Year. It is a trading capital not retained in the business in a particular form for more than a year.

35
 This is used for carrying out the routine or regular business operations consisting of purchase of raw
materials, payment of direct and indirect expenses, carrying out production, investment in stock, etc.
In short it represents the fund by which the day-to-day business is carried on. (Gregfilbeck).
Working Capital refers to that part of the firms capital, which is required for financing short-term
business requirements or Current Assets (CAs) such as Cash,marketable securities, debtors and
inventories. Funds so invested in Current Assets keep revolving fast and are being constantly
converted into Cash and this Cash turns out again in exchange for other Current Assets. Hence, it is
also known as revolving or circulating or short-term capital (Gupta K. Shashi and Sharma R.K.).
Working Capital is the amount of funds necessary to cover the cost of operating enterprise.
Circulating capital means Current Assets of a company that are changed in the ordinary course of
business from one form to another, Eg, from Cash to inventories; inventories to recievables, to cash.
In order to protect a company from financial difficulties, and guard against bankruptcy, it is vital that
a business has sufficient cash flow to pay its employees, service its debts, pay its liabilities without
delay and react promptly and decisively to competition and changes in the market. An effective
working capital management strategy should anticipate all of the above, and help to consolidate a
companys gains thus far, whilst also paving the way for future successes.

Classification of Working Capital.

Source: Gupta K. Shashi and Sharma R. K, Management Accounting Principles and Practice,
Kalyani Publishers, New Delhi, 10th edition (2005), p. 23.6.)
Permanent or Fixed Working Capital

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It is the minimum amount required to ensure effective utilization of fixed facilities and for maintaining
the circulation of Current Assets. There is always a minimum level of Current Assets, which is
continuously required by the firm to carry out its normal business operations such as raw materials,
work-in-progress, finished goods and cash balance. This minimum level of Current Assets, which is
permanently blocked, is called permanent or fixed Working Capital (IM.Pandey).
It is further be classified as regular Working Capital and reserve Working Capital. Regular Working
Capital, as the name implies, refers to the Working Capital required for regular conduct of operations.
Reserve Working Capital is the excess over the requirements for regular Working Capital, which may
be provided for contingencies, such as strikes and rise in prices.

Temporary or Variable Working Capital

It is the amount of Working Capital required to meet the seasonal demands and some special
exigencies.(Kulkarni.P.V. and Satya Prasad B.G.). It can be further classified as seasonal Working
Capital and special Working Capital. The capital needed to meet the seasonal needs of the business
is termed as seasonal or variable working capital . It is that part of the Working Capital which is
required to meet special exigencies, such as special campaign, conducting research and new product
launch, which is known as special Working Capital (Kulparni.P.V.). The requirements of the
temporary Working Capital is shown in figure III. (3) and III (4).

Source: Pandey I. M. Financial Management, (2004), Vikas Publishing House (P) Ltd., New Delhi,
8th edition, p. 808.

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Source: Pandey I. M. Financial Management, (2004), Vikas Publishing House (P) Ltd., New Delhi,
8th edition, p. 808.

Gross Working Capital

The concept of gross working capital refers to the total value of current assets. In other words, gross
working capital is the total amount available for financing of current assets. However, it does not
reveal the true financial position of an enterprise. How? A borrowing will increase current assets and,
thus, will increase gross working capital but, at the same time, it will increase current liabilities
also.As a result, the net working capital will remain the same. This concept is usually supported by
the business community as it raises their assets (current) and is in their advantage to borrow the funds
from external sources such as banks and the financial institutions.

In this sense, the working capital is a financial concept. As per this concept: Gross
Working Capital = Total Current Assets

Net Working Capital

The net working capital is an accounting concept which represents the excess of current assets over
current liabilities. Current assets consist of items such as cash, bank balance, stock, debtors, bills
receivables, etc. and current liabilities include items such as bills payables, creditors, etc. Excess of
current assets over current liabilities, thus, indicates the liquid position of an enterprise. The ratio of
2:1 between current assets and current liabilities is considered as optimum or sound. What this ratio
implies is that the firm/ enterprise have sufficient liquidity to meet operating expenses and current
liabilities. It is important to mention that net working capital will not increase with every increase in
38
gross working capital. Importantly, net working capital will increase only when there is increase in
current assets without corresponding increase in current liabilities.

Thus, in the form of a simple formula:

Net Working Capital = Current Assets-Current Liabilities

Competitor Analysis as of year 2014-15

Name Market Cap. Sales Net Profit Total Assets

(Rs. cr.) Turnover

Coromandel Int 6,490.62 11,500.17 361.39 4,264.74

GSFC 3,080.23 5,324.57 400.51 5,166.87

Chambal Fert 2,582.57 8,882.14 236.78 5,976.51

Rashtriya Chem 2,468.80 7,713.45 322.05 4,595.38

GNFC 1,773.34 4,548.30 226.36 6,780.58

FACT 1,514.15 1,991.33 -399.91 96.40

NFL 1,491.36 8,524.91 26.24 11,641.18

Deepak Fert 1,349.98 3,711.77 78.35 2,648.51

Zuari Agro Chem 760.41 5,524.64 12.36 3,185.37

Oswal ChemandFe 630.47 58.75 37.30 2,125.49

Mangalore Chem 532.13 2,578.78 37.54 1,713.75

SPIC 485.68 2,094.16 17.59 341.76

Shree Pushkar 364.30 266.52 18.65 -

Zuari Global 284.99 43.06 26.78 723.63

Madras Fert 217.49 1,701.87 -134.69 213.37

Agri-Tech 4.90 0.08 -0.38 19.67

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Analysis:
FACT stands at 7th position in terms of market capitalization with its other competitiors.But when it
comes to sales turn over and net profits company is lagging behind its other competitors. Company
has gained relatively good market capitalization with their working of over 71 years.
CAPACITY, PRODUCTION AND CAPACITY UTILISATION.
Capacity Utilisation= Actual output/Maximum possible output.

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Analysis
Over the last 5 years FACT is having good production and capacity utilisation consistently except in year
2012-13 where capacity utilisation was declined to 81.44% and 77.11%.The price increase of Benzene
which is the main raw material for Caprolactam production and unremunerative realization has resulted in
shutdown of caprolactam plant from 11.10.2012. As a result of lower production of Caprolactam, there was
under-absorption of fixed cost to the tune of `48 crore. The shutdown of Caprolactam Plant has affected the
production of Ammonium Sulphate also. Due to non-availability of Phosphoric acid, Factamfos production
was lower. Due to severe constraint in working capital and stock built up, Factamfos and Ammonium
Sulphate production was stopped from 9.2.2013 to 31.3.2013. (69th Annual Report 2012-2013)

Net Worth of FACT.

Net Worth=Share Capital+ Reserves & Surplus- Misc. Expenditure to the extent not written off-
Accumulated loss.
Year Share Capital. Reserves & Misc. Expenditure to Accumulated Net Worth.
Surplus the extent not w.off. loss.
(1) 1+2-3-4)
(2) (3) (4)
2014-15 64707 0 - 150441 (85734)
2013-14 64707 0 - 110450 (45743)
2012-13 64707 0 - 83954 (19247)
2011-12 64707 0 - 48558 16149
2011-10 64707 0 - 50538 14169

Working Capital and its impact on Net profits and Net worth.

Analysis
Over the last 3 years FACT is struggling to maintain adequate working capital and because of that it
is affecting their net profits as well as net worth. To meet up the working capital requirements, FACT
had to heavily depend on the borrowing and because of that there is huge finance cost and it affects
their profits and net worth. From the table below this can be understood.

Year Working Capital. Net profits/(Loss) Net Worth

2014-15 (79564) (39991) (85734)

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 2013-14 (41164) (26496) (45743)

2012-13 (12274) (35396) (19247)

2011-12 25133 1980 16149

2011-10 6278 (4933) 14169

Fertilizers and Chemicals Travancore Limited.

Common-Size Profit and Loss Statement.(Vertical Analysis).

Particulars 2014-15 2013-14 2012-13 2011-12 2010-11

Total Income 100 100 100 100 100
Total Expenditure 107.98 105.93 106.57 93.16 94.18
Gross Profit/Loss -8.0 -7.2 -6.8 5.5 -6.4
Exceptional
itemsExpenses/income 1.2 -4.7 -0.02 0 0.3
Finance Cost 9.8 8.8 8.4 6.7 7.9
Depreciation/Impairment loss 1.0 0.9 0.9 0.7 0.8
Profit/Loss before tax -20.02 -17.99 -17.12 0.99 0.89
Tax Expense 0 0 0 0 0
Net Profit After Tax -20.02 -17.99 -17.12 0.99 0.89

Analysis
From the common size P&L statement it is understood that the total expenditure of the last 3 years is
more than the total income FACT earned. More over the finance cost has also increased in the last 3
years.So to meet up the additional expenses company had to borrow and they had to pay huge interest
over the years.The profits in the year 2011-12 is not because of the normal operations of the
company.It was due to the increase in valuation of naphtha and it was included as exceptional item in
2011-12 balance sheet. Even though company earned profits in year 2011-12,there was no tax expense
in that year because it was carried forward and set off for loss.This carry forward process can done
for 8 years.

Common-Size Balance Sheet.(Vertical Analysis)

Particulars 2014-15 2013-14 2012-13 2011-12 2010-11

Equity and Liabilities
Shareolder's Funds
Share Capital. 39.6737 34.3817 38.0741 33.9479 36.4898
Reserves & Surplus -92.199 -58.65 -49.357 -25.436 -28.454

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 Non-Current Liabilities
Long-term borrowings 9.90141 10.0828 12.8291 12.6034 12.4193
Long-term provisions 13.0112 10.3771 11.0238 9.30658 9.53031
Current liabilities
Short term borrowings 48.5334 44.0022 41.6958 23.0096 36.778
Trade payables 44.3525 28.1389 18.9315 28.0876 17.8651
Other current liabilities 33.9134 28.666 23.4598 15.9732 13.1546
Short-term Provisions 2.81303 3.00103 3.34275 2.50725 2.21735
Total 100 100 100 100 100

Assets
Non-current assets
Fixed Assets
Tangible Assets 17.278 14.5939 14.113 14.266 17.3993
Intangible Assets 0 0.07439 0.20653 0.29485 0.41561
Capital work in progress 1.52424 1.26619 3.12621 1.31685 0.49682
Non-current investments 0.22502 1.13495 1.25684 0.95642 7.8047
Long term loans and
advances 0.14253 0.18683 0.36587 0.11126 0.04286
Other non-current assets 0.00026 0.8068 0.72433 0.29118 0.28478
Current Assets
Inventories 33.8036 32.9901 39.6852 39.7436 34.6108
Trade Receivables 0.626 0.60945 0.48603 0.59022 2.73277
Cash and Bank balances 5.41944 4.11101 1.90409 3.6814 3.11455
Short-term loans &
advances 9.08901 7.67951 9.06325 9.67226 9.99329
Other current assets 31.8919 36.5458 29.0685 29.0755 23.1045
Total 100 100 100 100 100

Analysis
The working capital constraints of FACT is mainly because of their huge borrowings and it can be
understood from the 3 items i.e. short term borrowings, trade payables and other current liabilities.
From the above table it is understood that all the 3 items had significant increase and it is causing
working capital constraints. At the same time receivable are not showing significant increase or
growth. It has increased only by a small amount.

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 TIME SERIES RATIO ANALYSIS OF FACT FOR LAST 5 YEARS

LIQUIDITY RATIOS

Particulars 2014-15 2013-14 2012-13 2011-12 2010-11

Current Ratio 1.05:1 0.78:1 0.91:1 1.18:1 1.05:1
Quick Ratio 0.61:1 0.69:1 0.46:1 0.41:1 0.32:1
Interval Measure 116 days 128 days 101 days 124 days 119.85
Cash Ratio 4.45% 5.29% 2.18% 3.96% 4.18%
Net Working -0.11 -0.43 -0.57 -0.74 -0.84
Capital Ratio

Analysis:
The liquidity position of the company is not satisfactory as quick ratio and net working capital ratio
indicates. Quick assets are nearly half to current liabilities which means that the company is not in a
position to get immediate cash.And net working capital is negative in the last five years clearly
indicates company is struggle to meet their day to day operational needs.

LEVERAGE RATIOS

Debt Ratio 0.88 0.84 1.20 1.6 3.7

Debt-Equity Ratio -1.35 -2.65 -5.78 5.30 7.34

Analysis
As an investor if you analyze the capital structure of FACT, debt is more than the equity. This means
for additional borrowings they have to give additional expenses and charges.
ACTIVITY RATIOS

Asset Turnover Ratio (%) 121.32 117.39 136.26 150.88 138.76

Inventory Turnover Ratio (X) 3.59 3.56 3.43 3.79 4.01

PROFITABILITY RATIOS

PBDIT Margin (%) -8.05 -5.96 -6.62 6.92 5.88

PBIT Margin (%) -9.07 -8.00 -8.59 5.44 4.15

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PBT Margin (%) -20.20 -11.99 -15.28 0.68 -2.00

Net Profit Margin (%) -20.20 -11.99 -15.28 0.68 -2.00

Return on Networth / Equity (%) 0.00 0.00 0.00 12.20 0.00

Return on Capital Employed (%) 82.80 369.64 -165.68 3.55 -9.27

Return on Assets (%) -24.51 -14.07 -20.82 1.03 -2.78

Analysis
Company is running on loss for the past 5 years and more.So its obvious that the profitability position
of FACT will not be satisfactory.

PER SHARE RATIOS

Basic EPS (Rs.) -6.18 -4.09 -5.47 0.31 -0.76

Diluted EPS (Rs.) -6.18 -4.09 -5.47 0.31 -0.76

Cash EPS (Rs.) -5.87 -3.40 -4.77 0.96 -0.10

Book Value -13.24 -7.06 -2.96 2.51 2.20

[ExclRevalReserve]/Share (Rs.)

Book Value -13.24 -7.06 -2.96 2.51 2.20

[InclRevalReserve]/Share (Rs.)

Revenue from Operations/Share 30.58 34.14 35.79 44.45 38.03

(Rs.)

PBDIT/Share (Rs.) -2.46 -2.04 -2.37 3.08 2.24

PBIT/Share (Rs.) -2.77 -2.73 -3.08 2.42 1.58

PBT/Share (Rs.) -6.18 -4.09 -5.47 0.31 -0.76

Net Profit/Share (Rs.) -6.18 -4.09 -5.47 0.31 -0.76

Analysis
From the point of view of investor also, company is not doing well. Company was not able to provide
dividends for their shareholders over the years. More over the price of their share is also declining.

45
 VALUATION RATIOS

Enterprise Value (Cr.) 2,682.94 2,270.24 2,295.19 2,537.36 3,363.41

EV/Net Operating Revenue (X) 1.36 1.03 0.99 0.88 1.37

EV/EBITDA (X) -16.84 -17.24 -14.96 12.74 23.21

MarketCap/Net Operating Revenue (X) 0.92 0.60 0.60 0.68 1.03

Retention Ratios (%) 100.00 100.00 100.00 100.00 100.00

Price/BV (X) -2.12 -2.91 -7.31 12.03 17.87

Price/Net Operating Revenue 0.92 0.60 0.60 0.68 1.03

Earnings Yield -0.22 -0.20 -0.25 0.01 -0.02

INDUSTRY RATIOS OF LAST 5 YEARS

Industry : Fertilizers - Nitrogenous / Phosphatic

Year 2010 2011 2012 2013 2014 2015
LEVERAGE RATIOS
Debt-Equity Ratio 1.06 1.8 1.08 1.41 1.69 1.33
Long Term Debt-Equity Ratio 0.6 1.5 1.08 1.41 1.69 1.33
LIQUIDITY RATIOS
Current Ratio 1.12 1.49 2.16 2.54 2.88 2.77
TURNOVER RATIOS
Fixed Assets 1.42 1.56 2.19 1.77 1.62 1.19
Inventory 8.45 9.39 10.58 8.44 7.88 5.7
Debtors 7.78 9.1 6.07 3.31 2.87 2.12
Interest Cover Ratio 4.48 6.27 4.18 2.46 2.45 4.56
PROFITABILITY RATIOS
PBIDTM (%) 11.36 12.61 10.41 8.95 8.37 9.41
PBITM (%) 8.56 10.22 8.46 6.8 6.51 7.42

46
 PBDTM (%) 9.45 10.98 8.39 6.19 5.71 7.79
CPM (%) 7.18 8.52 6.21 4.88 4.64 5.81
APATM (%) 4.37 6.13 4.25 2.73 2.78 3.82
ROCE (%) 13.06 14.36 15.32 8.41 7.17 6.23
RONW (%) 13.95 19.4 16.07 8.15 8.22 7.49

Working capital Management

Working capital management is concerned with the problems arise in attempting to manage the
current assets, the current liabilities and the inter relationship that exist between them.
The goal of working capital management is to manage the firms current assets and current
liabilities in such a way that satisfactory level of working capital is mentioned. The current assets
should be large enough to cover its current liabilities in order to ensure a reasonable margin of
safety.

Importance

The need for working capital gross or current assets cannot be over emphasized. As already
observed, the objective of financial decision making is to maximise the shareholders wealth.
To achieve this, it is necessary to generate sufficient profits can be earned will naturally
depend upon the magnitude of the sales among other things but sales cannot convert into
cash. The amount required to be invested in the current assets is always higher than the funds
available from current liabilities. This is the precise reason why the needs for working capital
arise.

Determinants of working capital

The amount of working capital depends upon the following factors:

1. Nature of business
2. Length of production cycle
3. Size and growth of business
4. Business/trade cycle
5. Terms of purchase and sales
6. Profitability
7. Operational efficiency
8. Seasonal variation

47
 9. Working capital cycle
10. Rate of stock turnover
11. Credit policy
12. Earning capacity and dividend policy
13. Price level changes

Working Capital Turnover ratio = Working Capital./ Sales

Year Working Capital. Sales Working Capital

Ratio
2014-15 (79564) 136743
-1.71865
2013-14 (41164) 143993
-3.49803
2012-13 (12274) 152776
-12.4471
2011-12 25133 174535
6.944455
2010-11 6278 139348

22.19624
Working Capital Turn over Ratio
25
20
15
10
5
0
-5 2010-11 2011-12 2012-13 2013-14 2014-15

-10
-15

Column1 Column2 Series 3

Analysis

Working capital is decling over the years for FACT,But the working capital turnover ratio shows
that it has deteriorated even more and it is getting into negative levels.

48
Cash Management

Cash the most liquid asset, is of vital important of the daily operations of business firms. While the
proportion of corporate assets in the form of cash is very small, often between 1 & 3% its efficient
management is crucial to the solvency of business in a very important sense. Cash is the focal point
of fund flows in business. In view of its importance, it is generally referred to as the life blood of
a business enterprise

Purpose

1. Transaction Motive

2. Precautionary Motive

3. Speculative Motive

4. Compensative Motive

Relevance

Cash management is one of the critical areas of working capital management and greater
significance because it is most liquid asset used to specify the firms obligations but it is sterile an
asset , as it does not yield anything. Therefore, financial manager maintain its liquidity position
without jeopardizing the profitability.

Cash Management ratios

The two commonly used cash management ratios are as follows

Cash Turnover Ratio

Cash Ratio

Cash Turnover Ratio

Statement of Cash Turnover Ratio over the past five years

Year Cash/Bank Sales Cash Turnover Ratio

2014-15 8839 136743 15.47
2013-14 7737 143993 18.61

49
2012-13 3236 152776 47.21
2011-12 7017 174535 24.87
2010-11 5523 139348 25.23

CASH TURNOVER RATIO

50
47.21
45

40

35

30

25 24.87 25.23

20
18.61
15 15.47

10

0
2014-15 2013-14 2012-13 2011-12 2010-11

Source: Annual Reports of the company

Interpretation

Cash turnover ratio has been decreasing over the last two years.
There is significant decrease in the cash turnover with the previous year which comes to 15.47

Cash Ratio
= /
Year Cash/Bank Current Liability Cash Ratio
2014-15 163098 0.054
8839
2013-14 188202 0.041
7737
2012-13 169950 0.019
3236
2011-12 190607 0.037
7017
2010-11 177329 0.031
5523

50
 CASH RATIO
0.06
0.054
0.05

0.04 0.041
0.037
0.03 0.031

0.02 0.019

0.01

0
2014-15 2013-14 2012-13 2011-12 2010-11
CASH RATIO

Source: Annual Reports of the company

Interpretation

From the above chart, it is clear that the cash ratio (cash availability) is increasing every year.

In the year 2014-15, the cash ratio is 0.054, which is greater in comparison with year 2013-14.

Receivables Management
Debtors Turnover Ratio

It is an accounting measure used to quantify a firms effectiveness in extending credit as well

as collecting debts.

Receivable turnover ratio indicates how many times, on average, account receivables are
collected during a year. It is an important indicator of a company's financial and operational
performance and can be used to determine if a company is having difficulties collecting sales
made on credit.

Debtors Turnover Ratio For FACT is Zero/Nil as their fertilisers are not sold on credit.Its given
on subsidized rates but not on credit.The Receivables in the balance sheet of FACT is related to
its services and engineering division FEDO.

51
OPERATING CYCLE AND CASH CONVERSION CYCLE OF FACT.

Particulars 2015-14 2014-13 2013-12

Cost of sales per day 382.03 417.78082 390.31
Average Inventory 27566.5 31044 33722.5
Days Inventory Outsatanding 72.16 74.31 86.40
Days Inventory(In Months) 2.41 2.48 2.88

Particulars 2015-14 2014-13 2013-12

Cost of sales per day 382.03 417.78082 390.31
Average Accounts Payable 36169 26479 16087
Days Payable Outstanding 94.68 63.38 41.22
Days Payable Outstanding(In Months) 3.16 2.11 1.37

Year Year Year

2014-15 2013-14 2013-12
Particulars (In months) (In Months) (In Months)
Days Inventory 2.41 2.48 2.88
Subsidy Days 30 30 30
Operating Cycle 32.41 32.48 32.88
Operating Cycle(In Years) 2.7 2.71 2.74

Year Year Year

2014-15 2013-14 2013-12
Particulars (In months) (In Months) (In Months)
Days Inventory 2.41 2.48 2.88
Subsidy Days 30 30 30
Days Payable Outstanding 3.16 2.11 1.37
Cash Conversion Cycle 29.2 30.4 31.5
Cash Conversion Cycle(In years) 2.44 2.53 2.63

Analysis
From the operating cycle and cash conversion cycle of FACT,it is clear that it is taking a long time
for FACT to get their cash on sales.The delay is because of the delay in time taken by Govt. to give
the subsidy amount back.First 80% will be given in 3 months by Govt.But for the remaining 20% it

52
 will take 2 to 3 years.And this amount will constitute to around 300 crores per year.So to meet up this
300 crores FACT has to borrow from outside sources.
Inventory Management

STOCK/INVENTORY MANAGEMENT
Inventories are the stock of the product a company is manufacturing for sale and the component that make
up the product. The term inventory comprises three components. They are-
i. Raw Materials (also consumable stores and spares) - Raw Material are those basic inputs which are
used to manufacture the finished products.

ii. Work-in-process (also known as stock-in-process, or goods-in-process) - It is the intermediary stage

that comes after the stage of raw materials, but just before the stage of finished goods.

iii. Finished goods It comprises the end-product, that is, the goods at their final stage of production,
ready for sale in the market.

Importance of inventory management

Inventories are necessary because it takes time to complete an operation and to move product from one
stage to another. The importance of inventory management to the firm depends upon the extent of the
inventory investments. For an average firm approximately 25-30% of total assets are in the form of
inventory. However, this percentage varies widely from firm to firm on account of their nature and
production procedure.
The twin goals of inventory management are-
i. To ensure that the inventories needed to sustain operations are available, but

ii. To hold the costs of ordering and carrying inventories to the lowest possible level

Costs of high inventory levels

Keeping inventory level high is expensive due to:
i. Purchase costs

ii. Holding costs (storage, stores administration, risk of theft/damage/obsolescence).

Carrying inventory involves a major working capital investment and therefore levels need to be very
tightly controlled. The cost is not just that of purchasing the goods, but also storing, insuring, and
managing them once they are in inventory

53
 INVENTORY
80000
70000
60000
50000
40000
30000
20000
10000
0
2014-15 2013-14 2012-13 2011-12
Inventory

As you can see that inventory levels has decreased in year 2014-15 significantly. Over the last 4 years
inventory has decreased significantly.

2014-15 2013-14 2012-13 2011-12 2010-11

Inventory Turnover Ratio (X) 3.59 3.56 3.43 3.79 4.01

Inventory Turnover
4.1
4
3.9
3.8
3.7
3.6
3.5
3.4
3.3
3.2
3.1
2014-15 2013-14 2012-13 2011-12 2011-10

54
Interpretation

Inventory Turnover Ratio has increased over the years,which is a positive sign for the company.
Company is able to convert their inventory into sales.

Inventory Conversion Period

Particulars 2014-15 2013-14 2012-13 2011-12 2010-11

Inventory Conversion
101.671309 102.52809 106.413994 96.306069 91.0224439
Period

Inventory Conversion Period

110

105

100

95

90

85

80
2014-15 2013-14 2012-13 2011-12 2010-11

Interpretation

From the above data its clear that the inventory conversion period of FACT is also decreasing which is a
good sign for the company.

Sources and Working Capital Requirements of FACT.

Cash Credit SBT SBI BOB SBH CANARA DENA BOI

Amount(In 238 120 126.60 60 48.00 41.40 36.00

Crores)

55
Total estimated Working Capital Requirements of FACT is 1070 crores per year.
In 1070 crores 670 crores is Fund Based and 400 crores is Non-Fund Base Sales
and borrowings are the sources of working capital for FACT.
The fund based 670 crores is provided by a consortium of 7 banks given in the above table. The cash
credit limit of each bank is also mentioned above. And the interest rate for each bank varies from
13%-14%.

56
LEARNINGS

57
Learnings
As a person this is my first organization experience. So this is my best learning.
Understanding the culture and work style of an organization.
Fresh experience of interaction with professionals and other experts. This helps in building my
knowledge as a person and student.

Application of theoretical knowledge (Porters Diamond, five forces etc.) for an industry.
Understanding the competitors and how they affect the working of an organization.
Understood the importance and support of each department towards the organization success.
Basics of inventory valuation and other parameters.
How a PSU which is running on loss is able to source their working capital.
Cost incurred in sourcing WC and its impact on overall profitability of the firm.
Significance of WC in profitability of an organization.
WC impact on Net Worth.
Interview with experts helps in gaining deeper insights into the various aspects of finance.
Importance of forecasting the needs related to finance in an organization and the benefits derive
out of it.

58
RECOMMENDATIONS

59
 Proper forecasting should be done by the company to analyze what will be the working capital
needs in coming years and what are the alternative sources of finance.
Company has been granted 1000 crores by Central Govt. for the expansion of their ammonium
plant in Cochin division. Proper allocation and utilization of this amount will helps in
increasing their revenue from operation.
Methods like estimating working capital as percentage of net sales, operating cycle etc. can
be employed to estimate the working capital.
Top management should take measures of budgetary control to cut down unnecessary costs.
Inventory control and management techniques like EOQ can be adopted.
Company can get into Joint venture with other companies like what they have with Rashtriya
chemicals to produce and derive benefits out of it.
Company can use the available land resources for generating additional revenue.
Company can use their substantial infrastructure facilities to earn revenue.
Company can use their extensive marketing network in Southern India to market their
products.
There is always scope for expansion and diversification for FACT.

60
CONCLUSION

61
 It has been an excellent opportunity for me to carry out the study on Working Capital

Management at FACT Ltd, Udyogamandal. It helped me to a great extent to have an insight

into the practical realities of the subject.
A firm should always invest in current assets for smooth & uninterrupted production & sales.

As per my findings, FACT is struggling to manage their working capital efficiently due to
various constraints like finance and interest charges, Non operation of plants etc.
Despite reasonable production and marketing FACT is in struggle to meet their working
capital needs.

Companys liquidity position is also not satisfactory.

But with new plans and grants from government, FACT can expect a turnaround in coming
years.

Due to economic reasons,the caprolactam palnt remained shutdown through out the financial
year 2014-15.How ever in-house modification has been carried out in the plants to maintain
production of Ammonium Sulphate at 100% capacity through direct neutralization.

Fertilizers of company is not sold on credit.But still the company has huge working capital
constraints because of the delay in receiving the subsidy payments.

The procedure for getting subsidy is also cumbersome as:

1. Company has to upload all their audited and sanctioned details related to sale in the
website of Ministry of Chemicals and Fertilizers.
2. On verification of this 80% of sales amount will be given to company in a period of 3
to 4 months.
3. The dealers to whom sale was made have to send a message in a number provided by
Ministry on receivable of products from FACT.
4. Remaining 20% will be given after further verification and takes 2 to 3 years.
So the main reasons for working capital constraints of FACT is due to the continuous losses
incurred, delay in subsidy receivables and due to huge borrowings.

62
REFERNCES
www.fact.co.in Annual reports of the
company www.moneycontrol.com
www.capitaline.com
Financial Management 10th edition M Pandey.
www.investopedia.com www.investopedia.com

63
ANNEXURES

CHECK LIST

1. Why tax expense is 0 in years where profits are made?

2. What are the working capital requirements of FACT and its sources?
3. What was the reasons for FACT to become profitable in the year 2011-12 after a huge loss
4933 crores in year 2010-11?
4. What are the interest rates for the cash credit of FACT?
5. Why working capital was negative even though there was no credit sales?
6. What does reserves and surplus negative means in the balance sheet?
7. What is the procedure for getting subsidy?
8. What is the time lag of receiving subsidy?
9. What are the reasons for shut down of plant in FACT?

64