Literature Review

Working Capital Management of Selected Cement Companies in India,

April 2013, R Swaminathan, N Rajesh and K Mohamed Jasim.
They conducted a study of major cement companies across India and their
mechanisms for Working Capital Management. Data related to profit and
loss account, balance sheet and other key ratios were collected from the
published annual reports of select cement companies. The study indicated
that interest coverage ratio, creditor to working capital and cash to total
fund significantly impact working capital turnover ratio, to the extent of
99.4%. Inventory turnover ratio has significantly impacted gross profit
ratio. Inventory to working capital ratio and inventory turnover ratio have
significantly contributed to total asset turnover ratio and explain upto
99.6% of its variance.
The study points out that the overall position of the working capital of
select cement companies is satisfactory, but there is a need for
improvement in certain factors. The major portion of the current assets is
in the form of Inventory. Investment in current assets should consider
liquidity profitability and solvency. The companies should also try to
maintain adequate quantum of liquidity all the times by keeping
considerable proportion of various components of the working capital in
relation to the overall current assets. It is very important to trade-off
between liquidity and profitability by properly arranging the needed funds
at right time, period and source.
Determinants of Working Capital in Cement Sector, Dr. S. Vijayalakshmi,
Nikhel Bansal, Pacific Business Review International, July 2013
This study, conducted on ACC limited, was performed on 12 years worth
of data collected from the CMIE database. The study found that exogenous
factors such as prices of raw materials, growth in sales and business
environment did not significantly impact working capital requirement in
the cement industry. Analysis showed that among all endogenous factors,
debt-equity ratio played a significant role in determining the working
capital requirement of a firm. Surprisingly, other endogenous factors such
as size of the firm and operational efficiency had no bearing on working
capital requirements.

Working capital management efficiency: A study on the Indian

cement industry, Dr. Santanu Kr. Ghosh, Santi Gopal Maji
The study investigated the efficiency of working capital management in
Indian cement companies during 1992-93 to 2001-2002, with data
captured from the Capitaline database. They employed three index
values, representing
1) Average performance of current assets,

2) Degree of utilisation of the total current assets in relation to sales, and

3) Efficiency in managing the working capital
The study observed that the Indian cement industrys performance was
below par during the period. The industry average for efficiency index was
greater than one in 6 years out of 10 years study period. The high degree
of inconsistency between firms in improving working capital indicates that
firms can gain a competitive advantage by employing stricter policies.
Associated Cement and Dalmia Cement had proved the most successful at
bringing about change in this regard.

Conceptual Framework
Working capital of a firm refers to the firm's capital which is used to
finance short term or current assets like cash, inventory, receivables,
debtors etc. It is the amount of money which is required to cover the cost
of operating the enterprise.
Current assets are considered to be one of the important components of
the total assets of the firm. A firm may be able to reduce its investment in
fixed assets by leasing or renting, but, the same cannot be done with
current assets. Keeping high levels of current assets gives a firm a better
liquidity position. With high level of current assets, a firm is able to meet
its obligations on time and the operations of the firm are smooth.
But, high levels of current asset come at a cost, namely, profitability. The
amount blocked in the current assets has an opportunity cost. As the
amount of current assets increase, the cost associated with it also
increases and the profitability of the firm decreases.
Proper estimation of working capital actually required, is a difficult task for
the management because the amount of working capital varies across
firms over the periods depending upon the nature of business, scale of
operation, production cycle, credit policy, availability of raw materials.
Modern financial management aims at reducing the amount of working
capital, reducing the cost of financing and preventing unwanted blocking
of cash. For instance, due to time lag between sale of goods and their
actual realisation in cash, adequate amount of working capital is always
required to be made available for maintaining the desired level of sales.
Working capital management is essential to bring down the cost of
financing by reducing the needless blocking of capital.
The factors that influence the working capital requirement of a firm can be
broadly classified into two categories depending on their relationship with
the firm.
These categories are:

1. Endogenous factors: factors which are internal to the firm and can be
controlled to some extent.
These factors include:
a. Size of the firm.
b. Debt equity ratio.
c. Operating cash flow.
d. Operating efficiency.
e. Performance of the firm.
2. Exogenous factors: these are the factors which are external to the firm
and cannot be controlled.
These factors include:
a. Business environment.
b. Prices of raw materials.
c. Growth in sales of the firm.

Methodology
Objectives of the Study
1. To study the origin and development of cement companies in India.
2. To analyze the Working Capital Management of select cement
companies in India.
3. To compare the Working Capital Management of Select Cement
companies India.
4. To consolidate findings and offer suggestions for improvement of
Working Capital
Management of Select Cement companies in India.
Independent variable: Shulman and Cox (1985) proposed that working
capital requirement represents the spontaneous uses and sources of funds
over a firm's operating cycle, which are computed as follows: WCR
(Working Capital requirement) = Accounts receivables + Inventory
Accounts payable other payables.
The present study is based on secondary data. Data related to profit and
loss account, balance sheet and other key ratios were collected from the
published annual reports of select cement companies. Finally the data has
been correlated and the working capital management analysis is
evaluated.

Findings

Compa
ny

Current

ACC
Ambuja
Birla
Corp
Dalmia
J.K.
JK
Lakshm
i
Orient
Prism
Ramco
Shree
Ultratec
h

Quick

Debtors
turnove
r

Invento
ry
turnove
r

Working
Capital
turnove
r Ratio

Net
Working Profit
Capital
Margin
-9.43 1244.38
11.24
9.21 1083.08
14.32

0.81
1.27

0.53
1.04

29.06
43.43

9.35
11.23

0.99
3.36
0.89

0.80
3.59
0.73

40.31
3.25
9.81

5.85
14.75
10.74

138.08
-0.67
-30.38

0.68
0.53
0.83
0.46
0.90

0.62
0.83
0.76
0.42
0.77

38.94
20.18
24.64
12.14
19.26

20.08
20.38
5.16
5.37
7.27

-3.58
-9.32
-10.50
-3.71
-67.31

0.76

0.52

17.65

8.56

21.85
-341.14
-92.04

12.64
17.58
6.34

-573.89
-154.41
-472.79
-992.14
-87.47
-6.74 3007.79

7.81
8.85
1.63
9.26
20.75
12.43

Study 1
Null Hypothesis: The independent variables Quick Ratio, Current Ratio,
Debtors Turnover Ratio and Inventory Turnover Ratio do not significantly
contribute to Working Capital Turnover Ratio.
Alternate Hypothesis: The independent variables Quick Ratio, Current
Ratio, Debtors Turnover Ratio and Inventory Turnover Ratio significantly
contribute to Working Capital Turnover Ratio.
Regression Model and Analysis of Variance for Y- Working Capital
Turnover Ratio
df
Regression

Residual

Total

Variable
Intercept

10

SS
10940.541
04
14019.439
11
24959.980
14

MS
2735.135
259
2336.573
184

F
1.170575
473

Coefficien Standard
ts
Error
t Stat
R2
28.02282 55.421546
0.505630
414
92
494

Significan
ce F
0.4102084
12

0.438323

Current Ratio
Quick Ratio
Debtors
Turnover Ratio
Inventory
Turnover Ratio

105.1530
217
121.1333
943
3.074065
377
4.710651
39

135.06988
67
129.52645
74
1.4897753
59
3.8805118
1

0.778508
254
0.935201
941
2.063442
221
1.213925
281

Analysis of the data reveals that the R-squared values are low, indicating
that there isnt a significant correlation between working capital turnover
ratio and the independent variables chosen for study. Variations in the
independent variables under study explain upto 43.83% of the variations
in overall working capital turnover. However, even within this framework,
current ratio and quick ratio seem to have the most significant impact on
working capital turnover ratio.
Study 2
Null Hypothesis: The independent variables Quick Ratio, Current Ratio,
Debtors Turnover Ratio and Inventory Turnover Ratio do not significantly
contribute to Net Profit Margin as a percentage of sales.
Alternate Hypothesis: The independent variables Quick Ratio, Current
Ratio, Debtors Turnover Ratio and Inventory Turnover Ratio significantly
contribute to Net Profit Margin as a percentage of sales.

df
Regression

Residual

Total

Variable
Intercept
Current
Quick
Debtors

10

SS
74.849105
58
206.30315
26
281.15225
82

MS
18.71227
639
34.38385
877

F
0.544216
882

Coefficien Standard
ts
Error
t Stat
R2
6.385793 6.7230486 0.949835 0.2662
438
92
964
23
10.29192 16.384988 0.628131
439
8
305
6.560508 15.712529 0.417533
063
31
545
0.004694 0.1807209 0.025974

Significan
ce F
0.710630
557

turnover
Inventory
turnover

126
0.023898
78

08
0.4707351
44

448
0.050769
059

Analysis of the data reveals that the R-squared values are low, indicating
that there isnt a significant correlation between net profit margin and the
independent variables chosen for study. Variations in the independent
variables under study explain upto 26.63% of the variations in the overall
net profit margin of the firms. However, even within this framework,
current ratio and quick ratio seem to have the most significant impact on
net profit margin.

Conclusion
Working capital management is a highly important decision for overall
business planning. Our study finds that overall working capital
management at the companies under review is satisfactory, but could do
with improvement in certain factors. Firms in the cement sector must look
to invest in current assets, particularly taking into consideration liquidity
profitability and solvency. There should be an equitable distribution of
different components of current assets in the company portfolio to ensure
efficient working capital management and to maintain sufficient liquidity
at all times. Lowering cost of capital and arranging for the right funds at
the right time will ensure that companies in the cement sector excel at
working capital management.