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SESSION 2017-18

A
PROJECT REPORT
ON
“Analysis of Indian cement Industry &
Financial performance of ACC LTD”

For the partial Fulfillment for the Degree of


Master of Business Administration

submitted to submitted by
MRS. NEHA DUBEY KRITIKA JHARIYA
mba iv sem.

PREFACE

1
Preparing a project of this nature is an arduous task and I
was fortunate enough to get support from a large number o
persons. I wish to express my deep sense of gratitude to all those
who generously helped in successful completion of this report by
sharing their invaluable time and knowledge.

It is my proud and previledge to express my deep regards to


Respected HOD Mrs. Neha Dubey, Head of Department of
Business Management , SVNU, SAGAR for allowing me to
undertake this project.

I feel extremely exhilarated to have completed this project


under the able and inspiring guidance of MRS. NEHA DUBEY
She rendered me all possible help me guidance while reviewing
the manuscript in finalising the report.

I also extend my deep regards to my teachers , family


members , friends and all those whose encouragement has infused
courage in me to complete to work successfully.

KRITIKA JHARIYA
MBA IV SEM.

ACKNOWLEDGEMENT

2
Preparing a project of this nature is an arduous task and I was
fortunate enough to get support from a large number o persons. I wish to
express my deep sense of gratitude to all those who generously helped in
successful completion of this report by sharing their invaluable time and
knowledge.

It is my proud and previledge to express my deep regards to Respected

, Head of Department Mrs. Neha Dubey, Department of Business


Management , SVNU, SAGAR for allowing me to undertake this project.

I feel extremely exhilarated to have completed this project under the


able and inspiring guidance of He rendered me all possible help me
guidance while reviewing the manuscript in finalising the report.

I also extend my deep regards to my teachers , family members ,


friends and all those whose encouragement has infused courage in me to
complete to work successfully.

KRITIKA JHARIYA
MBA IV SEM.

DELCLARATION BY THE
CANDIDATE

3
Date :

I declare that the project report titled " “Analysis of


Indian cement Industry & Financial
performance of ACC LTD”" on Market Segmentation is
nay own work conducted under the supervision of MRS NEHA
DUBEY. To the best of my knowledge the report does not contain any
work , which has been submitted for the award of any degree ,
anywhere.

KRITIKA JHARIYA
MBA IV SEM.

4
CERTIFICATE

The project report “Analysis of Indian

cement Industry & Financial performance of

ACC LTD”been prepared by KRITIKA JHARIA MBA IV


SEM. of MRS NEHA DUBEY for the partial fulfillment of

the Degree of MBA

Signature of the Signature of the Signature of the


Supervisor Head of the Department Examiner

TABLE OF CONTENTS

Sr. No. Contents Page No.


1) Preface

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2) Acknowledgement
3) Declaration
4) Executive Summary

5) Introduction To The Study

(A) Objective Of The Study


(B) Place of the study
Research Methodology and Scope Of Study
(C )
Limitation Of The Study
(D )
6) Overview of Indian CEMENT Industry
(A) Industry analysis using Porter’s model
(B) SWOT Analysis
7) Introduction- ACC
(A) Brief History
(B) Plants & Capacity
(C) Vision & Mission
(D) Achievements & Awards
(E) Map of ACC
(F) 5 years performance – physical and highlights
8) Introduction-Working Capital
9) Working Capital Management
Consequences of under and over assessment of
(A) W.C
(B) Types of W.C
( C) Influencing factors

(D) Financing W.C

(E) Inventory Management

(F) Cash Management

(G) Receivables Management


10) Analysis
11) Important Terms and Ratios (graphical
presentation)

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12) Findings & Observed
13) Suggestions
14) Bibliography & Annexure

INTRODUCTION

Working Capital:-
The life blood of business, as is evident, signified funds required for day-to-day
operations of the firm. The management of working capital assumes great
importance because shortage of working capital funds is perhaps the biggest
possible cause of failure of many business units in recent times. There it is of
great importance on the part of management to pay particular attention to the
planning and control for working capital. An attempt has been made to make
critical study of the various dimensions of the working capital management of
ACC.

Decisions relating to working capital and short term financing are referred to as
working capital management. These involve managing the relationship
between a firm's 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
operations and that it has sufficient money flow to satisfy both maturing short-
term debt and upcoming operational expenses.

Objective of the study:-

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The following are the main objective which has been undertaken in the present
study:

1. To determine the amount of working capital requirement and to calculate


various ratios relating to working capital.

2. To analyze the Indian Cement Industry.

3. To evaluate the financial performance of ACC limited using financial tools.

4. To suggest the steps to be taken to increase the efficiency in management


of working capital.

Place of study:-
The project study is carried out at the Finance Department of ACC cements ltd
corporate office Situated at Wadi, Karnataka. The study is undertaken as a part
of the PGPM curriculum from 03 JUNE 2010 to 03 JULY 2009 in the form of
summer internship.

Study design and methodology:-


Two types of data are collected, one is primary data and second one is
secondary data. The primary data were collected from the Department of finance,
ACC Ltd, Wadi. The secondary data were collected from the Annual Report of
ACC & ACC website, etc.

Scope: - The study has got a wide & fast scope. It tries to find out the players in
the industry & focuses on the upcoming trends. It also tries to show the financial
performance of the major player of the industry i.e.; ACC Ltd.

Limitations:-
There may be limitations to this study because the study duration (summer
placement) is very short and it’s not possible to observe every aspect of working
capital management practices. The data collected were mostly secondary in
nature.

Industry Overview:-
The cement industry is one of the vital industries for economic development in a
country. The total utilization of cement in a year is used as an indicator of
economic growth.

Cement is a necessary constituent of infrastructure development and a key raw


material for the construction industry, especially in the government’s
infrastructure development plans in the context of the nation’s socio-
Economic development.

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India is the world's second largest producer of cement with total capacity of 219
million tones (MT) at the end of FY 2009, according to the Cement Manufacture’s
Association.

According to the Cement Manufacturer’s Association, cement dispatches during


2009-10 were 159.43 million tones (MT) increasing by 12 per cent over 142.23 in
2008-09. Cement production during 2009-10 was 160.31 MT an increase of
12.37 per cent over 142.65 MT in 2008-09.

Moreover, the government’s continued thrust on infrastructure will help the key
building material to maintain an annual growth of 9-10 per cent in 2010,
according to India’s largest cement company, ACC.

In January 2010, rating agency Fitch predicted that the country will add about 50
million tone cement capacity in 2010, taking the total to around 300 million tones.

Government Initiatives

 Government initiatives in the infrastructure sector, coupled with the


housing sector boom and urban development, continue being the main
drivers of growth for the Indian cement industry.

 Increased infrastructure spending has been a key focus area. In the Union
Budget 2010-11, US$ 37.4 billion has been provided for infrastructure
development.
 The government has also increased budgetary allocation for roads by 13
per cent to US$ 4.3 billion.

Future Trends:-
 The cement industry is expected to grow steadily in 2009-2010 and
increase capacity by another 50 million tons in spite of the recession and
decrease in demand from the housing sector.
 The industry experts project the sector to grow by 9 to 10% for the current
financial year provided India's GDP grows at 7%.
 India ranks second in cement production after China.
 The major Indian cement companies are Associated Cement Company
Ltd (ACC), Grasim Industries Ltd, Ambuja Cements Ltd, J.K Cement Ltd
and Madras Cement Ltd.
 The major players have all made investments to increase the production
capacity in the past few months, heralding a positive outlook for the
industry.
 The housing sector accounts for 50% of the demand for cement and this
trend is expected to continue in the near future.

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PORTER’S FIVE FORCE MODEL:- It is useful for analyzing the industry overall
and determining the level of competition among different existing players .It can
be understood under different topics .Along with the industry we will try to point
out the conditions for ACC too.
i) THREAT OF NEW ENTRANTS:-
ACC has threat from new entrants like TATA; Reliance etc can enter into this
industry.
But there are certain barriers to their entry. These are:-

 Availability of raw material

 Restrictions on entry by government into cement industry

 Cement industry requires a huge investment

 Switching costs are high in cement industry

ii) BARGAINING POWER OF SUPPLIERS:-


Suppliers have very much impact on cement industry because of the following
reasons:-
 Raw materials used in cement are gypsum, fly ash and slag. There are
few suppliers of these materials.

 Quality of finished goods i.e. cement is very important for ACC ltd.

 As already said, there are high switching costs in cement industry.

 There is no substitute to the raw material used in cement.

iii) BARGAINING POWER OF BUYER:- ACC ltd plays the role of buyer. It has
following bargaining powers:
 There are only few buyers of raw material of cement.

 ACC has major stake in cement industry i.e. 11% of the world.

iv) THREAT OF SUBSTITUTES:- It has threat from its competitors like Ambuja
cements, Birla cements, Binani cements ,Grasim etc.

V) RIVALRY AMONG THE COMPETING FIRMS IN INDUSTRY:


In spite of huge stake in cement industry, it is difficult to be on the top because of
the other competing companies i.e. Ambuja, Birla, and Binani etc. The
competitors are using different promotional strategies to attract buyers. So, all
the leading players in the industry have to analyze the situation frequently & they
have to keep changing them too.

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SWOT ANALYSIS
Strengths: -
1. The industry is likely to maintain its growth momentum and continue
growing at about 9 – 10% in the foreseeable future.
2. Government initiative in the infrastructure sector such as the
commencement of the second phase of the National Highway Development
project, freight carriers, rural roads and development of the housing sector
(Bharat Nirman Yojana) are likely to be the main drivers of growth.
3. In the coming few years the demand for the cement will increase which will
be booming news for cement manufactures. As capacity utilization is over
90% now.
4. Huge potential for export.

Weakness: -
1. Cement Industry is highly fragmented & regionalized.
2. Low – value commodity makes transportation over long distances un-
economical.
3. High capital cost and investment cost for each and every project.
4. The complex Excise Duty structure based on the category of buyer and
end use of the cement has caused at lot of confusion in the industry.
5. The recent ban on export of cement clinker would increase the
availability of cement in the domestic market, which in turn would put
pressure on cement prices.
Opportunities: Demand–supply gap
1. Substantially low per capita cement consumption as compared to
developing countries (1/3 rd of world average) Per capita cement
consumption in India is 82 kgs against a global average of 255 kgs and
Asian average of 200 kgs.
2. Despite slightly lower economic growth, the construction and
infrastructure sector is expected to record healthy growth, which augurs
well for cement industry.
3. Additional capacity of 20 million tons per annum will be required to
match the demand.

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Threats: -

1. The recent moves by the Central Government in making the import of


the cement total duty free, is a cause of worry for the Indian cement
industry.

2. Further recent changes in the Central Excise Duty structure by way of


introduction of multiple slabs of Excise Duty is also a cause of worry for
the industry.

3. Almost all the major players in the industry have announced substantial
increase in the capacity and the possibility of over supply situation
cannot be ruled out.

4. Increased railway freight, coal prices and dispatch bottlenecks on


account of truck Loading restrictions imposed by various State
Governments

5. Scarcity of good quality Coal is some other factors which are cause of
concern for the industry.

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Competitor analysis (Overall industry):-

ACC, with an installed capacity of 22.63 MTPA, enjoys an 11% market share in
India, which with its total installed capacity of 207 MTPA, India is the second
largest cement producing country in the world. ACC’s nation-wide presence and
brand image ensures a competitive edge and helps it to withstand regional
fluctuations in prices and also to adapt its distribution to market place needs. Its
key competitors are as follows:-

ACC Ltd is the market leader with the capacity of 22.63 MTPA .The top ten
companies are given below with the details:-
Name ACC Limited
Production 17,902
Installed Capacity 18,640
Net Profit (Quarter ended Sep 30, 2009) 41,550.89 lakhs
Name Gujarat Ambuja Cements Limited
Production 15,094
Installed Capacity 14,860
Net Profit (Quarter ended on Sep 30, 2009) 31,848 lakhs
Name Ultratech
Production 13,707
Installed Capacity 17,000
Net Profit (in 2008-09) 97,700 lakhs
Name Grasim
Production 14,649
Installed Capacity 14,115
Net Profit (in 2008-09) 1,64,800 lakhs
Name India Cements
Production 8,434
Installed Capacity 8,810
Net Profit (in 2008-09) 43,218 lakhs

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Name JK Cement Ltd
Production 6,174
Installed Capacity 6,680
Net Profit (in 2008-09) 14,234.40 lakhs
Name Jaypee Group
Production 6,316
Installed Capacity 6,531
Name Century Cement
Production 6,636
Installed Capacity 6,300
Name Madras Cement
Production 4,550
Installed Capacity 5,457
Net Profit (in 2008-09) 49,081 lakhs
Name Birla Corp.
Production 5,150
Installed Capacity 5,113
Net Profit (in 2008-09) 9,061 lakhs

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Introduction of the Company

ACC (ACC Limited) is India's foremost manufacturer of cement and concrete.


ACC's operations are spread throughout the country with 14 modern cement
factories, 19 Ready mix concrete plants, 19 sales offices, and several zonal
offices. It has a workforce of about 9000 persons and a countrywide distribution
network of over 9,000 dealers. ACC's research and development facility has a
unique track record of innovative research, product development and specialized
consultancy services. Since its inception in 1936, the company has been a
trendsetter and important benchmark for the cement industry in respect of its
production, marketing and personnel management processes. Its commitment to
environment-friendliness, its high ethical standards in business dealings and its
on-going efforts in community welfare programs have won it acclaim as a
responsible corporate citizen. In the 70 years of its existence, ACC has been a
pioneer in the manufacture of cement and concrete and a trendsetter in many
areas of cement and concrete technology including improvements in raw material
utilization, process improvement, energy conservation and development of high
performance concretes.

ACC’s brand name is synonymous with cement and enjoys a high level of equity
in the Indian market. It is the only cement company that figures in the list of
Consumer Super Brands of India.

The company's various businesses are supported by a powerful, in-house


research and technology backup facility - the only one of its kind in the Indian
cement industry. This ensures not just consistency in product quality but also
continuous improvements in products, processes, and application areas.

ACC has rich experience in mining, being the largest user of limestone, and it is
also one of the principal users of coal. As the largest cement producer in India, it
is one of the biggest customers of the Indian Railways, and the foremost user of
the road transport network services for inward and outward movement of
materials and products.

ACC has also extended its services overseas to the Middle East, Africa, and
South America, where it has provided technical and managerial consultancy to a
variety of consumers, and also helps in the operation and maintenance of
cement plants abroad.

ACC is among the first companies in India to include commitment to


environmental protection as one of its corporate objectives, long before pollution
control laws came into existence. The company installed pollution control
equipment and high efficiency sophisticated electrostatic precipitators for cement
kilns, raw mills, coal mills, power plants and coolers as far back as 1966. Every
factory has state-of-the art pollution control equipment and devices.

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History & Profile of ACC Cement Works

ACC was formed in 1936 when ten existing cement companies came together
under one umbrella in a historic merger – the country’s first notable merger at a
time when the term mergers and acquisitions was not even coined. The history of
ACC spans a wide canvas beginning with the lonely struggle of its pioneer F E
Din Shaw and other Indian entrepreneurs like him who founded the Indian
cement industry. Their efforts to face competition for survival in a small but
aggressive market mingled with the stirring of a country’s nationalist pride that
touched all walks of life – including trade, commerce and business.

The first success came in a move towards cooperation in the country’s young
cement industry and culminated in the historic merger of ten companies to form a
cement giant. These companies belonged to four prominent business groups –
Tatas, Khataus, Killick Nixon and F E Din Shaw groups. ACC was formally
established on August 1, 1936. Sadly, F E Din Shaw, the man recognized as the
founder of ACC, died in January 1936. Just months before his dream could be
realized.

The ACC Board comprises of 13 persons. These include executive, non-


executive, and nominee directors. This group is responsible for determining the
objectives and broad policies of the Company - consistent with the primary
objective of enhancing long-term shareholder value.

The Board meets once a month. Two other small groups of directors - comprising
Shareholders'/Investors' Grievance Committee and Audit Committee of the Board
of Directors - also meet once a month on matters pertaining to the finance and
share disciplines. During the last decade, there has been a streamlining of the
senior management structure that is more responsive to the needs of the
Company's prime business. A Managing Committee - comprising, in addition to
the Managing Director and the two executive directors, the presidents
representing multifarious disciplines: finance, production, marketing, research
and consultancy, engineering and human resources – meets once a week.

A Strategic Alliance:
The house of Tata was intimately associated with the heritage and history of
ACC, right from its formation in 1936 up to 2000. The Tata group sold all 14.45%
of its shareholdings in ACC in three stages to subsidiary companies of Gujarat
Ambuja Cements Ltd. (GACL), who are now the largest single shareholder in
ACC.
This enabled ACC to enter into a strategic alliance with GACL; a company
reputed for its brand image and cost leadership in the cement industry.
Holcim – A New Partnership:
A new association was formed between ACC and The Holcim group of
Switzerland in 2005. In January 2005, Holcim announced its plans to enter into
long – term alliances with Ambuja Group by acquiring a majority stake in Ambuja

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Cements India Ltd. (ACIL), which at the time held 13.8% of total equity shares in
ACC. Holcim simultaneously announced its bid to make an open offer to ACC
shareholders, through Holdcem Cement Pvt. Ltd. and ACIL, to acquire a majority
shareholding in ACC. An open offer was made by Holdcem Cement Pvt. Ltd.
along with ACIL, following which the shareholding of ACIL increased to 34.69% of
Equity share capital of ACC. Consequently, ACIL has filed declarations indicating
their shareholding and declaring itself as a promoter of ACC.
Holcim is the world leader in cement as
well as being large supplier of concrete, aggregates and certain construction
related services. Holcim is also a respected name in information technology and
research and development. The group has its headquarters in Switzerland with
worldwide operations spread across more than 70 countries.

Plants & Their Capacity:

S. State Capacity (MTPA)


Units
No.
Bargarh Cement Works
Bargarh 0.96
1
Chaibasa Cement Works
Chaibasa 0.87
2
Chanda Cement Works
Chanda 1.00
3
Damodar Cement Works
Damodhar 0.53
4
Gagal Cement Works 4.40
Gagal
5 (Gagal I and II)
Jamul Cement Works
Jamul 1.58
6
Kymore Cement Works
Kymore 2.20
7
Lakheri Cement Works
Lakheri 1.50
8
Madukkarai Cement Works
Madukkarai 0.96
9
Sindri Cement Works
Sindri 0.91
10
Wadi Cement Works
Wadi 2.59
11
Wadi Cement Works
New Wadi Plant 2.60
12
Tikaria Cement Grinding and
Tikaria Packing Plant 2.31
13

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Vision:
“To be one of the most respected companies in India; recognized for challenging
conventions and delivering on our promises”

Mission of ACC

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Maintain our leadership of the Indian cement industry through the
Leadership continuous modernization and expansion of our manufacturing
facilities and activities, and through the establishment of a wide and
efficient marketing network.
Achieve a fair and reasonable return on capital by promoting
Profitability productivity throughout the company.
Ensure a steady growth of business by strengthening our position
Growth in the cement sector.
Maintain the high quality of our products and services and ensure
Quality
their supply at fair prices.
Promote and maintain fair industrial relations and an environment
Equity for the effective involvement, welfare and development of staff at all
levels.
Promote research and development efforts in the areas of product
Pioneering development and energy, and fuel conservation, and to innovate
and optimize productivity.
Fulfill our obligations to society, specifically in the areas of
Responsibility integrated rural development and in safeguarding the environment
and natural ecological balance.

Few Achievement of ACC Limited:

YEAR Achievements

1936 The Associated Cement Companies Limited incorporated on August 1

1947 India's first entirely indigenous cement plant installed at Chaibasa.

ACC Sindri uses waste material - calcium carbonate sludge -from fertilizer factory at
1955
Sindri to make cement
1956 Bulk Cement Depot established at Okhla, Delhi
Blast furnace slag, (a waste by-product from steel) from TISCO used at ACC
1961
Chaibasa to manufacture Portland Slag Cement.

1961 Manufacture of Hydrophobic (waterproof) cement at ACC Khalari.

Manufacture of Portland Pozzolana Cement using naturally available materials. An


1965
Eco-friendly cements using an eco-friendly process.

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ACC inducts use of pollution control equipment and high efficiency sophisticated
1966 electrostatic precipitators for its cement plants and captive power plants decades
before it becomes mandatory to do so.

Introduction of the energy efficient pre-calcinations technology for the first time in
1978
India.

1982 Commissioning of the first 1 MTPA plant in the country at Wadi, Karnataka.

ACC develops a new binder, working at sub-zero temperature, which is successfully


1987
used in the Indian expedition to Antarctica.
Incorporation of Bulk Cement Corporation of India, a JV with the Government of
1992
India.

1993 Commercial manufacture of ready-mixed concrete at Mumbai.


Commissioning of the new Wadi plant of 2.6 MTPA capacity in Karnataka, the
2001 largest in India, and among the largest sized kilns in the World.

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Awards & Accolades

 IMC Ramkrishna Bajaj National Quality Award - – Gagal wins Commendation


Certificate and New Wadi Plant wins Special Award for Performance Excellence in the
Manufacturing Sector, 2007.

 National Award for outstanding performance in promoting rural and agricultural


development – by ASSOCHAM
 Sword of Honour - by British Safety Council, United Kingdom for excellence in safety
performance.
 Indira Priyadarshini Vrikshamitra Award --- by The Ministry of Environment and
Forests for "extraordinary work" carried out in the area of afforestation.
 FICCI Award --- for innovative measures for control of pollution, waste management &
conservation of mineral resources in mines and plant.
 Subh Karan Sarawagi Environment Award - by The Federation of Indian Mineral
Industries for environment protection measures.
 Drona Trophy - By Indian Bureau Of Mines for extra ordinary efforts in protection of
Environment and mineral conservation in the large mechanized mines sector.
 Indo German Greentech Environment Excellence Award
 Golden Peacock Environment Management Special Award - for outstanding efforts
in Environment Management in the large manufacturing sector.
 Indira Gandhi Memorial National Award - for excellent performance in prevention of
pollution and ecological development
 Excellence in Management of Health, Safety and Environment : Certificate of Merit
by Indian Chemical Manufacturers Association
 Vishwakarma Rashtriya Puraskar trophy for outstanding performance in safety and
mine working
 Good Corporate Citizen Award - by PHD Chamber of Commerce and Industry
 Jamnalal Bajaj Uchit Vyavahar Puraskar - Certificate of Merit by Council for Fair
Business Practices
 Greentech Safety Gold and Silver Awards - for outstanding performance in Safety
management systems by Greentech Foundation
 FIMI National Award - for valuable contribution in Mining activities from the Federation
of Indian Mineral Industry under the Ministry of Coal.
 Rajya Sthariya Paryavaran Puraskar - for outstanding work in Environmental
Protection and Environment Performance by the Madhya Pradesh Pollution. Control
Board.
 National Award for Fly Ash Utilization - by Ministry of Power, Ministry of Environment
& Forests and Dept of Science & Technology, Govt of India - for manufacture of Portland
Pozzolana Cement.
 Good Corporate Citizen Award - by Bombay Chamber of Commerce and Industry for
working towards an environmentally sustainable industry while pursuing the objective of
creation of a better society.

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 National Award for Excellence in Water Management - by the Confederation of
Indian Industry (CII)

ACC was the first recipient of ASSOCHAM’s first ever National Award for
outstanding performance in promoting rural and agricultural development
activities in 1976.

Decades later, PHD Chamber of Commerce and Industry selected ACC as


winner of its Good Corporate Citizen Award for the year 2002.

Over the years, there have been many awards and felicitations for achievements
in Rural and community development, Safety, Health, Tree plantation, A
forestation, Clean Mining, Environment Awareness and Protection.

WORKING CAPITAL MANAGEMENT

Working Capital Management refers to management of current assets and


current liabilities. The major thrust of course is on the management of current
assets .This is understandable because current liabilities arise in the context of
current assets. Working Capital Management is a significant fact of financial
management. Its importance stems from two reasons:-

 Investment in current assets represents a substantial portion of


total investment.

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 Investment in current assets and the level of current liabilities have to be
geared quickly to change in sales. To be sure, fixed asset investment and
long term financing are responsive to variation in sales. However, this
relationship is not as close and direct as it is in the case of working capital
components.

The importance of working capital management is effected in the fact that


financial manages spend a great deal of time in managing current assets and
current liabilities. Arranging short term financing, negotiating favorable credit
terms, controlling the movement of cash, administering the accounts receivable,
and monitoring the inventories consume a great deal of time of financial
managers.

The problem of working capital management is one of the “best” utilization of a


scarce resource.

Thus the job of efficient working capital management is a formidable one, since it
depends upon several variables such as character of the business, the lengths of
the merchandising cycle, rapidity of turnover, scale of operations, volume and
terms of purchase & sales and seasonal and other variations.

CONSEQUENCES OF UNDER ASSESSMENT OF WORKING CAPITAL

o Growth may be stunted. It may become difficult for the enterprise to


undertake profitable projects due to non-availability of working capital.

o Implementation of operating plans may become difficult and consequently


the profit goals may not be achieved.

o Cash crisis may emerge due to paucity of working funds.

o Optimum capacity utilization of fixed assets may not be achieved due to


non availability of the working capital.

o The business may fail to honor its commitment in time, thereby adversely
affecting its credibility. This situation may lead to business closure.

o The business may be compelled to buy raw materials on credit and sell
finished goods on cash. In the process it may end up with increasing cost
of purchases and reducing selling prices by offering discounts. Both these
situations would affect profitability adversely.

o Non-availability of stocks due to non-availability of funds may result in


production stoppage.

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CONSEQUENCES OF OVER ASSESSMENT OF WORKING CAPITAL

o Excess of working capital may result in unnecessary accumulation of


inventories.

o It may lead to offer too liberal credit terms to buyers and very poor
recovery system and cash management.

o It may make management complacent leading to its inefficiency.

o Over-investment in working capital makes capital less productive and may


reduce return on investment. Working capital is very essential for success
of a business and, therefore, needs efficient management and control.
Each of the components of the working capital needs proper management
to optimize profit.

Financing Working Capital

Working capital or current assets are those assets, which unlike fixed assets
change their forms rapidly. Due to this nature, they need to be financed through
short-term funds. Short-term funds are also called current liabilities. The following
are the major sources of raising short-term funds:

I. Supplier’s Credit
At times, business gets raw material on credit from the suppliers. The cost of raw
material is paid after some time, i.e. upon completion of the credit period. Thus,
without having an outflow of cash the business is in a position to use raw material
and continue the activities. The credit given by the suppliers of raw materials is
for a short period and is considered current liabilities. These funds should be
used for creating current assets like stock of raw material, work in process,
finished goods, etc.

ii. Bank Loan for Working Capital


This is a major source for raising short-term funds. Banks extend loans to
businesses to help them create necessary current assets so as to achieve the
Required business level. The loans are available for creating the following
current Assets:
 Stock of Raw Materials
 Stock of Work in Process
 Stock of Finished Goods
 Debtors
Banks give short-term loans against these assets, keeping some security margin.

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The advances given by banks against current assets are short-term in nature and
banks have the right to ask for immediate repayment if they consider doing so.
Thus bank loans for creation of current assets are also current liabilities.

iii. Promoter’s Fund


It is advisable to finance a portion of current assets from the promoter’s funds.
They are long-term funds and, therefore do not require immediate repayment.
These funds increase the liquidity of the business.

Management of Inventory

Inventories constitute the most significant part of current assets of a large


majority of companies in India. On an average, inventories are approximately 60
% of current assets in public limited companies in India.

Because of the large size of inventories maintained by firms maintained by firms,


a considerable amount of funds is required to be committed to them. It is,
therefore very necessary to manage inventories efficiently and effectively in order
to avoid unnecessary investments. A firm neglecting a firm the management of
inventories will be jeopardizing its long run profitability and may fail ultimately.

The purpose of inventory management is to ensure availability of materials in


sufficient quantity as and when required and also to minimize investment in
inventories at considerable degrees, without any adverse effect on production
and sales, by using simple inventory planning and control techniques.

Need to hold inventories:-

 Transaction motive emphasizes the need to maintain inventories


to facilitate smooth production and sales operation.
 Precautionary motive necessities holding of inventories to guard against
the risk of unpredictable changes in demand and supply forces and other
factors.
 Speculative motive influences the decision to increases or reduce
inventory levels to take advantage of price fluctuations and also for saving
in re-ordering costs and quantity discounts etc.

Objective of Inventory Management:-

The main objectives of inventory management are operational and financial. The
operational mean that means that the materials and spares should be available
in sufficient quantity so that work is not disrupted for want of inventory. The
financial objective means that investments in inventories should not remain ideal
and minimum working capital should be locked in it. The following are the
objectives of inventory management:-

25
 To ensure continuous supply of materials, spares and finished goods.
 To avoid both over-stocking of inventory.
 To maintain investments in inventories at the optimum level as required by
the operational and sale activities.
 To keep material cost under control so that they contribute in reducing cost
of production and overall purchases.
 To eliminate duplication in ordering or replenishing stocks. This is possible
with the help of centralizing purchases.
 To minimize losses through deterioration, pilferage, wastages and
damages.
 To design proper organization for inventory control so that management.
Clear cut account ability should be fixed at various levels of the
organization.
 To ensure perpetual inventory control so that materials shown in stock
ledgers should be actually lying in the stores.
 To ensure right quality of goods at reasonable prices.
 To facilitate furnishing of data for short-term and long term planning and
control of inventory

Management of cash

Cash is the important current asset for the operation of the business. Cash is the
basic input needed to keep the business running in the continuous basis, it is
also the ultimate output expected to be realized by selling or product
manufactured by the firm.

The firm should keep sufficient cash neither more nor less. Cash shortage will
disrupt the firm’s manufacturing operations while excessive cash will simply
remain ideal without contributing anything towards the firm’s profitability. Thus a
major function of the financial manager is to maintain a sound cash position.

Cash is the money, which a firm can disburse immediately without any restriction.
The term cash includes coins, currency and cheques held by the firm and
balances in its bank account. Sometimes near cash items such as marketing
securities or bank term deposits are also included in cash. Generally when a firm
has excess cash, it invests it is marketable securities. This kind of investment
contributes some profit to the firm.

Management of Receivables

A sound managerial control requires proper management of liquid assets and


inventory. These assets are a part of working capital of the business. An efficient
use of financial resources is necessary to avoid financial distress. Receivables
result from credit sales.

26
A concern is required to allow credit sales in order to expand its sales volume. It
is not always possible to sell goods on cash basis only. Sometimes other concern
in that line might have established a practice of selling goods on credit basis.
Under these circumstances, it is not possible to avoid credit sales without
adversely affecting sales.

The increase in sales is also essential to increases profitability. After a certain


level of sales the increase in sales will not proportionately increase production
costs. The increase in sales will bring in more profits. Thus, receivables
constitute a significant portion of current assets of a firm. But for investment in
receivables, a firm has to insure certain costs. Further, there is a risk of bad
debts also. It is therefore, very necessary to have a proper control and
management of receivables.

Needs to hold cash:

Receivables management is the process of making decisions relating to


investment in trade debtors. Certain investments in receivables are necessary to
increase the sales and the profits of a firm. But at the same time investment in
this asset involves cost consideration also. Further, there is always a risk of bad
debts too.

Thus, the objective of receivable management is to take


a sound decision as regards investments in debtors. In the words of Bolton, S.E.,
the need of receivables management is “to promote sales and profits until
that point is reached where the return of investment in further funding of
receivables is less than the cost of funds raised to finance that additional
credit.”
Working Capital Cycle

Cash flows in a cycle into, around and out of a business. It is the business's life
blood and every manager's primary task is to help keep it flowing and to use the
cash flow to generate profits. If a business is operating profitably, then it should,
in theory, generate cash surpluses. If it doesn't generate surpluses, the business
will eventually run out of cash and expire. The faster a business expands the
more cash it will need for working capital and investment. The cheapest and best
sources of cash exist as working capital right within business. Good management
of working capital will generate cash will help improve profits and reduce risks.
Bear in mind that the cost of providing credit to customers and holding stocks can
represent a substantial proportion of a firm's total profits.

There are two elements in the business cycle


that absorb cash - Inventory (stocks and work-in-progress) and Receivables
(debtors owing our money). The main sources of cash are Payables (our
creditors) and Equity and Loans.

27
Each component of working capital (namely inventory, receivables and payables)
has two dimensions ........TIME ......... and MONEY. When it comes to managing
working capital - TIME IS MONEY. If we can get money to move faster around
the cycle (e.g. collect monies due from debtors more quickly) or reduce the
amount of money tied up (e.g. reduce inventory levels relative to sales), the
business will generate more cash or it will need to borrow less money to fund
working capital. As a consequence, we could reduce the cost of bank interest or
we'll have additional free money available to support additional sales growth or
investment. Similarly, if we can negotiate improved terms with suppliers e.g. get
longer credit or an increased credit limit; we effectively create free finance to help
fund future sales.

If we....... Then......
Collect receivables (debtors) We release cash
faster from the cycle

Collect receivables (debtors) Our receivables soak


slower up cash

Get better credit (in terms of We increase our cash


duration or amount) from resources
suppliers

Shift inventory (stocks) faster We free up cash

Move inventory (stocks) slower We consume more


cash

It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant,
vehicles etc. If we do pay cash, remember that this is now longer available for
working capital. Therefore, if cash is tight, we should consider other ways of
financing capital investment - loans, equity, leasing etc. Similarly, if we pay

28
dividends or increase drawings, these are cash outflows and, like water flowing downs a
plug hole, they remove liquidity from the business.

More businesses fail for lack of cash than for want of


profit.

Sources of Additional Working Capital:-

 Existing cash reserves


 Profits (when we secure it as cash!)
 Payables (credit from suppliers)
 New equity or loans from shareholders
 Bank overdrafts or lines of credit
 Long-term loans

If we have insufficient working capital and we try to increase sales, we can easily
over-stretch the financial resources of the business. This is called overtrading.
Early warning signs include:

 Pressure on existing cash


 Exceptional cash generating activities e.g. offering high discounts for early
cash payment
 Bank overdraft exceeds authorized limit
 Seeking greater overdrafts or lines of credit
 Part-paying suppliers or other creditors
 Paying bills in cash to secure additional supplies
 Management pre-occupation with surviving rather than managing
Frequent short-term emergency requests to the bank (to help pay wages,
pending receipt of a cheque).

Handling Receivables (Debtors)

Cash flow can be significantly enhanced if the amounts owing to a business are collected
faster. Every business needs to know.... who owes them money.... how much is owed....
how long it is owing.... for what it is owed.

Late payments erode profits and can lead to bad


debts.

If we don't manage debtors, they will begin to manage our business as we


will gradually lose control due to reduced cash flow and, of course, we could
experience an increased incidence of bad debt.

29
The following measures will help manage our debtors:

1. Have the right mental attitude to the control of credit and make sure that it
gets the priority it deserves.
2. Establish clear credit practices as a matter of company policy.
3. Make sure that these practices are clearly understood by staff, suppliers
and customers.
4. Be professional when accepting new accounts, and especially larger ones.
5. Check out each customer thoroughly before we offer credit. Use credit
agencies, bank references, industry sources etc.
6. Establish credit limits for each customer... and stick to them.
7. Continuously review these limits when we suspect tough times are coming
or if operating in a volatile sector.
8. Keep very close to our larger customers.
9. Invoice promptly and clearly.
10. Consider charging penalties on overdue accounts.
11. Consider accepting credit /debit cards as a payment option.
12. Monitor our debtor balances and ageing schedules, and don't let any
debts get too large or too old.

Recognize that the longer someone owes we, the greater the chance we will
never get paid. If the average age of our debtors is getting longer, or is already
very long, we may need to look for the following possible defects:

 weak credit judgment


 poor collection procedures
 lax enforcement of credit terms
 slow issue of invoices or statements
 errors in invoices or statements
 Customer dissatisfaction.

Debtors due over 90 days (unless within agreed credit terms) should generally demand
immediate attention.

Profits only come from paid sales.

The act of collecting money is one which most people dislike for many reasons
and therefore put on the long finger because they convince themselves there is
something more urgent or important that demands their attention now. There is

30
nothing more important than getting paid for our product or service. A
customer who does not pay is not a customer.

Managing Payables (Creditors)

Creditors are a vital part of effective cash management and should be managed
carefully to enhance the cash position.

Purchasing initiates cash outflows and an over-zealous purchasing function can


create liquidity problems. Consider the following:

 Who authorizes purchasing in our company - is it tightly managed or


spread among a number of (junior) people?
 Are purchase quantities geared to demand forecasts?
 Do we use order quantities which take account of stock-holding and
purchasing costs?
 Do we know the cost to the company of carrying stock?
 Do we have alternative sources of supply? If not, get quotes from major
suppliers and shop around for the best discounts, credit terms, and reduce
dependence on a single supplier.

 How many of our suppliers have a returns policy?


 Are we in a position to pass on cost increases quickly through price
increases to our customers?
 If a supplier of goods or services lets we down can we charge back the
cost of the delay?
 Can we arrange (with confidence!) to have delivery of supplies staggered
or on a just-in-time basis?

There is an old adage in business that if we can buy well then we can sell
well. Management of our creditors and suppliers is just as important as the
management of our debtors. It is important to look after our creditors - slow
payment by we may create ill-feeling and can signal that our company is
inefficient (or in trouble!).

Remember, a good supplier is someone who will work with us to enhance


the future viability and profitability of our company.

ANALYSIS of financial statement of ACC Limited:-


Common size statement Analysis (vertical Analysis):-
A financial statement that has variables expressed in percentages rather than in
dollar amounts. For example, items on an income statement are shown as a
percentage of revenue or sales, and balance sheet entries are displayed as a
percentage of total assets. Common-size statements are used primarily for

31
comparative purposes so that firms of various sizes can be equated. Also called
one hundred percent statement.
Advantages:-
 The statement reveals the sources of funds & the distribution or
application of the total funds in the asset of a business enterprise.
 Comparison of the common size statement over a number of years will
clearly indicate the changing proportion of the various components of
assets, liabilities, cost, net sales & profits.
 It will assist corporate evaluation & ranking.
Limitations:-
 It doesn’t show variations in the different account items from period to
period.
 Less useful due to lack of established standard proportion of an asset to
the total asset & so on.

Common size statement analysis of ACC cements Ltd. from 2005-2009


2005 (%) 2006(%) 2007(%) 2008(%) 2009(%)

SOURCES OF Rs. Rs. Rs. Rs. Rs.(Crore)


FUNDS: (Crore) (Crore) (Crore) (Crore)
Shareholders’ 46.96 71.76 83.84 85.77 86.78
Funds:-
Loan Funds: 44.36 20.91 9.47 8.39 8.18

Deferred Tax 8.68 7.32 6.69 5.84 5.04


Liabilities (Net)
TOTAL FUNDS 100 100 100 100 100
APP. OF FUNDS:---
Fixed Assets: - 84.16 79.48 80.03 88.29 91.08
Investments:- 9.60 11.50 17.06 11.82 21.28
Net Current Assets( 5.62 9.00 2.92 (0.11) (12.37)
Curr Assests-
current liabilities &
provision)
MISC EXP. 0.61 0.02 0.00 0.00 0.00
(to the extent not
written off or
adjusted)
TOTAL ASSETS 100 100 100 100 100
(Net)

Interpretation:-

(a) There is a significant increase in shareholder’s fund & decrease in


loan funds continuously over a period of time.

32
(b) There is also a significant increase in the amount invested by the
company for the purpose of future growth.
(c) There is a significant decrease in current asset over a period of
time.

Trend Analysis (Horizontal):- Trend percentage analysis moves in one direction


either progression or regression ( upward or downward).This method involves the
calculation of percentage relationship that each statements bear to the same
item in the base year .Mostly the earliest period is taken as the base year.

Advantages:-
 It indicates the increase in an accounted item along with the magnitude of
changes in percentages which is more effective then absolute data.
 It facilitates an efficient comparative study of the financial performance of
a firm over a period of time.

Limitations:-
 Any one trend by itself is not very analytical & informative.
 During the inflationary periods the data becomes incomparable ,unless the
absolute rupee data is adjusted.
 There is always the danger of selecting the base year which may not be
representative, normal & typical.
 The calculated percentages having no logical relationship with one
another.

Precautions to be taken:-
 Consistency in the principles & practices followed by the organization
throughout the calculated period.
 The base year should be normal.
 Trend percentages should be calculated only for the items which are
having logical relationship with each other.
 Figures of the current year should be adjusted according to the changes in
price levels.

2006* 2007 2008 2009

SOURCES OF FUNDS: Rs. Rs. Rs. Rs.(Crore)


(Crore (Crore) (Crore)
)

Shareholders’ Funds:- 100 132.06 156.79 191.42

Loan Funds 100 51.21 52.62 61.9

33
Deferred Tax Liabilities 100 103.4 104.7 108.9

TOTAL FUNDS 100 113.1 131.2 158.3

APP. OF FUNDS:-

Fixed Assets 100 113.9 145.7 181.4

Investments 503.5 167.8 134.9 293.1

Curr Assets,Loans & Adv: 100 114.7 143.6 119.4


---

(Less):-Current Liabilities 100 134.8 181.1 206.4


&Prov.
MISC EXP.
(to the extent not written 100 0.00 0.00 0.00
off or adjusted)

TOTAL ASSETS (Net) 100 113.1 131.2 158.3

*Base year:-2006 Value (100)

Working Capital calculation:-

Statement showing change in working capital for ACC Ltd:-


( Rs.in Crore)
Particulars Dec’09 Dec’08 Increase ( + ) Decrease (- )
Current Assets
Inventories 778.98 793.27 (14.29)
Sund. Debtors 203.70 310.17 (106.47)
Cash & Bank Bal 746.38 984.24 (237.86)
Loan & Advances 554.42 651.28 (96.86)
Other CA 10.99 20.67 (9.68)
Total ( A ) 2294.47 2759.63

Current Liabilities
C.L. 2060.34 1801.79 258.55
Provisions 1091.88 963.93 127.95
Total ( B ) 3152.22 2765.72
(851.66)

34
( A-B ) (857.75) (6.09) (465.16) (465.16)
Changes in (851.66)
working capital
Total (857.75) (857.75) (465.16) (465.16)

Similarly the calculation of WC for the year 2005 to 2009 as given below:-
(Rs.in Crore)
2005 2006 2007 2008 2009
(A)Current assets 1,421 1,921 2,203 2,760 2,294
(B)Current 1,335 1,672 2,221 2,766 3,152
Liabilities
Working capital 86 249 (18) (6) (858)

Interpretation:-While looking into the changes, we will look into the various
components of working capital & analyze the changes in that.

INVENTORY ANALYSIS

35
By analyzing the 5 years data we can see that the value of inventories is
increasing over a no of year. It indicates that the company is growing rapidly in
cement sector. A company uses inventory when they have demand in market.
From other point of view we can say that the liquidity of firm is blocked in
inventories but it is important to keep stocks due to uncertainty of availability of
raw material in time.
SUNDRY DEBTORS ANALYSIS

Debtors will arise only when credit sales are made. The above graph depicts that
there is continuous rise in the debtors of ACC Ltd in the successive years other
than 2009.. It represents an extension of credit to customers. The reason for
increasing credit is competition and company liberal credit policy.

Cash & Bank Bal, Loans & adv ANALYSIS:-

 Significant increase in Cash & bank balance, which shows the financial
strengths of the company. Though there is a slight fall in the FY 2009 .
Cash is basic input or component of working capital. Cash is needed to
keep the business running on a continuous basis. So the organization
should have sufficient cash to meet various requirements.
 After analyzing the table, we can say that the pattern of loans & advance
is not static in nature. It shows upwards & downwards movement as the
requirements influence it.

CURRENT LIABILITIES & PROVISIONS ANALYSIS:-

36
 After analyzing the bar-chart, we can say that the amount of current
liabilities is increasing significantly over years .An increase current
liabilities indicates that company is using its credit facilities to the
maximum extent for operating purpose.

 From the above table we can see that provision shows an increasing trend
and the huge amount is being kept in these provisions. This is kept to pay
the taxes, interest & other facilities or benefits to the employee. It is just
kept for meeting future short-term liabilities.

RATIO ANALYSIS
(A) Overview:-
Financial ratios are measures of the relative health, or sometimes the relative
sickness of a business. A physician, when evaluating a person’s health, will
measure the heart rate, blood-pressure and temperature; whereas, a financial
analyst will take readings on a company’s growth, cost control, turnover,
profitability and risk. Like the physician, the financial analyst will then compare
these readings with generally accepted guidelines. Ratio analysis is an effective
tool to assist the analyst in answering some basic questions, such as:-
1. How well is the company doing?
2. What are its strengths and weaknesses?
3. What are the relative risks to the company?
Although an analysis of financial ratios will help identify a company’s strengths
and weaknesses, it has its limitations and will not necessarily provide the
solutions or cures for the problems it identifies.

B. APPLICATION OF RATIO ANALYSIS:-


Integral tool in trend analysis
 Compares the company’s own ratios to itself over time
 Identifies the company’s strengths and weaknesses

37
 Assists in establishing appropriate capitalization rates (helps to identify
risk factors particular to the subject company)
WORKING CAPITAL RATIOS AND ITS INTERPRETATION :-
Dec’05 Dec’06 Dec’07 Dec’08 Dec’09
Liquidity Ratio

Current Ratio 0.58 0.77 0.86 0.89 0.67

Quick Ratio 0.42 0.61 0.55 0.61 0.42

Solvency Ratio
Debt-equity ratio. 0.50 0.25 0.07 0.10 0.09

 Interpretation: - As we know that ideal current ratio for any firm is 2:1.The
current ratio of company is less than the ideal ratio. This depicts that
company’s liquidity position is not sound. Its current assets are less than
its current liabilities.
 Generally a QR of 1:1 is considered to represent satisfactory current
financial position. The trend of quick ratio is uneven & the ratio is around
0.5:1 over a period of time. A quick ratio is an indication that the firm is
liquid and has the less confidence to meet its current liabilities in time.
This shows company has liquidity problem.
 Debt-equity ratio shows relationship between borrowed funds and owners’
capital is a popular measure of the long term financial solvency of the firm.
For ACC it was the highest around 0.5:1 in 2005.After that it shows
fluctuation.

Activity/mgmt efficiency Ratio:-


Dec,05 Dec’06 Dec’07 Dec’08 Dec’09
Inventory Turnover 5.37 9.33 24.85 27.51 25.22
Ratio
Debtor Turnover 16.34 27.75 27.40 24.12 31.22
Ratio

38
Investment 12.29 22.40 24.85 27.51 25.22
Turnover Ratio

Work cap turn. (27.93) (6.96) (18.25) (17.02) (54.17)

 It shows increasing trend which is favorable for the company. As it


indicates how rapidly the inventory is turning into receivable through
sales. A high ratio is good from the view point of liquidity. A low ratio would
signify that inventory does not sell fast.
 A high ratio is indicative of shorter time lag between credit sales and cash
collection. The higher the value of debtors’ turnover the more efficient is
the management of debtors or more liquid the debtors are. A low ratio
shows that debts are not being collected rapidly. As the graph reveals that
the debts are collected in time & the process is improving consistently.
This shows that company is utilizing its debtor’s efficiently as compare to
previous year.
 This ratio indicates high net working capital requires for sales. This
company having negative working capital because, they have more
current liabilities over current assets. It shows that the short term loans are
not sufficient and more money are invested in the purchase of fixed
assets. Thus this ratio is helpful to forecast the working capital
requirement on the basis of sale.

Profitability & Investment turnover Ratio:-


Profitability Dec,05 Dec’06 Dec’07 Dec’08 Dec’09
Ratio

Gross Profit 17.32 28.97 23.72 20.59 27.68


Ratio

Net Profit Ratio 16.85 21.16 20.44 16.29 19.69

39
Investment
Valuation Ratio
Face value 10.00 10.00 10.00 10.00 10.00
Dividend per 8.00 15.00 20.00 20.00 23.00
Share

 As it shows the dividend per share ratio is increasing over years. It


means that the investors have faith in the company.
 G/P margin ratio shows the profit relative to sales. A high ratio of gross
profits to sales is a sign of good management as it implies that the cost
of production of the firm is relatively low. For ACC it is uneven but it was
good in FY’06 & FY’09.
 The net profit margin is indicative of management ability to operate the
business with sufficient success not only to recover from revenues, but
also to leave a reasonable margin to the owners. A high net profit margin
would ensure adequate return to the owners as well as enable a firm to
face adverse economic conditions. It is significant & satisfactory for the
company.

40
Suggestion:-
 It is suggested that the company has to increase its current assets to
meet its short-term obligations.

 Company has to improve debtors’ collection period continuously so


that effective receivable management will possible.

 Reserves should be utilized for the growth of the company.

 While forecasting cash flow, the management should take into account
the impact of unforeseen events, market cycles and actions by
competitors. The effect of unforeseen demands of working capital
should be factored in.
 Collaborating with the customers & suppliers instead of being focused
only on own operations will also yield good results. If feasible, helping
them to plan their inventory requirements efficiently to match their
production with their consumption will help reduce inventory levels.

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Bibliography

www.google.com

INVESTOPEDIA.com

www.Moneycontrol.com

www.cmaindia.org

www.acclimited.com

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