Working Capital Management

A SUMMER TRAINING PROJECT REPORT

ON

WORKING CAPITAL MANAGEMENT

AT

HINDALCO INDUSTRIES LTD.

Submitted in partial fulfillment of the two years (F/T) PGDM programme 2008-10

BY

AMIT KUMAR SINGH

PG/14/012

Under the guidance of Submitted to

Industrial Guide Academic Guide

Mr. VIMAL RAHEJA

Mr. Shyam Lal Dev Panday

DY.MANAGER (Accounts Dept.) Sr.Lecturer

HINDALCO INDUSTRIES LTD. SCHOOL OF MANAGEMNT SCIENCES

SCHOOL OF MANAGEMENT SCIENCES, VARANASI

DECLARATION

I, hereby state that the Project Report titled” Working Capital

Management of Hindalco Industries Ltd.”Is an original work done

entirely by me and is based on my own observations. The facts presented

here are true to the best of my knowledge

Amit kr. Singh

Place:

Date:

PREFACE

It is a great privilege for me to place this report before the readers. The

report is concerned with “Working Capital Management Of Hindalco

Industries Ltd.”This report is proposed in a very simple and

understandable language. I would also like to state that although every

possible care has been taken to make this report error free but still the

possibility of some errors creeping in inadvertently cannot be ruled out. I

shall feel highly obliged to all the readers if the same are brought to my

notice. Critical evaluation and suggestions for improvement are most

welcome and shall be greatly acknowledged. I sincerely express my

gratefulness to all those who have directly or indirectly helped us in

preparing this report. I firmly believe that this direction from all readers

which will be thankful acknowledged.

ACKNOWLEDGEMENT

This project is an authenticated work on Summer Training Project at

Hindalco Industries Limited, Renukoot, Uttar Pradesh. I would like to

take this opportunity to thank all the people, who extended their immense

help to complete my project. I would like to express our gratitude to Mr.

Vimal Raheja, DY.Manager, Accounts Dept., Hindalco Industries

Limited who spent his valuable time to discuss about the project and his

continuous co- operation helped to get on with the project on a full swing

without much hassles.

TABLE OF CONTENTS

• Introduction---1-12

• Company Profile ---13-22

• Objectives ---23

• Research Methodology ---24

• Working Capital Management---35-60

• Data Analysis and Interpretation--- 61-72

• Conclusions---73-74

• Suggestions and Limitations---75

• Bibliography ---76

• Annexure ---77-78

Global Aluminium Market

Background:

Aluminium is a lightweight, durable and corrosion resistant metal that can be extruded, rolled, formed and painted for use in a wide range of applications. According to the International Aluminium Institute, approximately 66% of global consumption is used in the construction, transportation and packaging sectors while the remaining 34% is used in consumer, capital goods and electricity transmission.

Aluminium is produced from alumina, which is refined from bauxite, a mineral found in various parts of the world. There are several types of bauxite with alumina content ranging from 35% to 60%. Bauxite is refined to produce alumina predominantly through what is known as the Bayer process, although this process varies depending on the type and quality of bauxite. Alumina is then converted into aluminium metal using an electrolytic process.

The global aluminium industry has experienced Global demand for primary aluminium has grown consistently at a compounded annual growth rate of 5.1% between 1999 and 2004. Global primary aluminium consumption was approximately 30.3 million metric tons in 2004 as compared to 27.5 million metric tons in 2003. Driven by strong demand in end-use markets, global demand is expected to rise to 31.7 million metric tons by 2005, before increasing further to 37.8 million metric tons in 2009.

Significant consolidation in recent years, including the recent merger of Pechiney with Alcan. In 2004, the top five producers accounted for approximately 42% of world primary aluminium production, with the largest producer, Alcan, accounting for 12% of global production. The other large producers are Alcoa, Russian Aluminium, Norsk Hydro and BHP Billiton, who together accounted for 30% of global primary aluminium production in 2004.

Increasing Asian Aluminium Consumption:

The following table sets forth the actual and estimated regional consumption of aluminium from 2003 to 2009.

In the above table:

In the 2004, North America, Western Europe and China together accounted for approximately 66% of global primary aluminium consumption. North American demand has been led by the United States, which in 2004 accounted for 21% of global

demand. Asia has shown the largest annual increases in consumption of primary aluminium over the last five years, driven largely by increased demand from China and Japan, which have emerged as the second and third largest aluminium consuming nations, accounting for 20% and 8%, respectively, of global primary aluminium demand in 2004.

Increasing Deficit in Asian market:

According to the International Aluminium Institute, primary aluminium production has grown at a compounded annual growth rate of 4.7% per annum between 1999 to 2004. Historically, industrialized nations accounted for a large share of global production. However, changing dynamics in energy availability and the rising cost of alumina have resulted in a shift in aluminium production to countries with access to greater bauxite supplies and affordable sources of power.

One region which is emerging as an attractive destination for aluminium smelting is Asia. From 1997 to 2004, the proportion of global primary aluminium production carried out in Asia (excluding the Middle East) increased from 13% to 26%, while the proportion of global primary aluminium production carried out in North America and Western Europe in aggregate declined from 43% to 33%. Notwithstanding the rise in aluminium production and capacities in the region, aluminium supplies in Asia have lagged behind demand, resulting in a supply deficit of 4.2 million metric tons during 2004. During this period, China witnessed a marginal surplus and the rest of Asia witnessed a deficit of 4.8 million metric tons. Given expectations of continued strong growth in China and other Asian markets, the demand-supply gap is likely to widen and is estimated to reach a high of 5.5 million metric tons by 2

According to Metal Bulletin Research, the global deficit of alumina in 2004 was 338,000 metric tons, which was approximately 0.6% of global alumina consumption for the same period. However, the overall deficit was larger in Asia primarily due to the demand and supply dynamics in China. While Asia

Accounted for 26% of global metallurgical grade alumina production during the same period, according to Metal Bulletin Research. This indicates a sharp rise in aluminium smelting capacity in Asia without a commensurate increase in alumina refining capacities. More significantly, alumina imports accounted for approximately 45% of total metallurgical grade alumina consumption in China in 2004, with approximately 56% of the total imports being sourced from Australia. Going forward, China will remain the key driver of demand growth in the region with a projected demand of approximately 18.0 million metric tons for metallurgical grade alumina in 2007, growing at a compounded annual growth rate of 10.9%. Furthermore, China will continue to be primary aluminium production in 2004, it accounted for only 16.5% of global dependent on imports to meet its domestic alumina consumption.

Pricing:

Aluminium is traded on the LME. While prices are determined by LME price movements, producers also charge a regional premium that generally reflects the cost of obtaining the metal from an alternative sourceThe following table sets forth the movement in the aluminium price from 1995 to 2004.

Alumina, however, is priced on the basis of negotiations, but usually determined with reference to the LME price for aluminium. Negotiated agreements generally take the form of long-term contracts, but fixed prices can be negotiated for shorter periods and a relatively small spot market also exists.

Indian Aluminium Market

Background:

The aluminium industry in India has grown progressively, tracking the country’s economy over the years. According to CRU estimates, domestic primary aluminium production will increase to a high of 943,000 metric tons in calendar 2005, compared to 860,000 metric tons in calendar 2004. CRU estimates production to reach 1,113,000 metric tons by calendar 2006.

According to the Indian Minerals Yearbook 2003, India is home to the sixth largest bauxite deposit in the world with a reserve base of 1,400 million metric tons. Bauxite deposits are spread across the states of Orissa, Andhra Pradesh, Jharkhand, Chhattisgarh, Gujarat and Maharashtra. Indian bauxite is of superior

Quality and is largely located on a single plateau, thus making bulk mining possible and resulting in significant cost advantages.

In the past, Indian producers suffered from high power costs, but with privatization of coal mines by the government of India, new avenues have opened up for securing cost effective power for Indian producers. Backed by abundant, good quality bauxite and coal, as well as lower cost labour, Indian companies have emerged as low cost producers of aluminium. The domestic aluminium industry consists of three primary producers: Hindalco, National Aluminium Company Limited, or NALCO, and Vedanta Resources Plc, which controls Bharat Aluminium Company Limited, or BALCO, and Madras Aluminium Company Limited, or MALCO, all of whom are integrated producers with a presence ranging from bauxite mining to aluminium metal production. In fiscal 2005, Hindalco was the market leader with a 40% market share in India, while NALCO and Vedanta Resources Plc accounted for approximately 23% and 15%, respectively.

importantly, the last two years have witnessed even stronger growth with annual growth rates of 20.6% and 9.5% for in fiscal 2004 and 2005 respectively. The power sector is the largest user segment of aluminium, accounting for 45% of domestic consumption in fiscal 2005. Historically, the power sector has accounted for a significant portion of aggregate domestic demand as high voltage current is usually transmitted through aluminium cables in India. However, as a result of the changing growth dynamics and increasing acceptance of new applications, the proportion of aluminium consumed by other user sectors such as transportation, construction and packaging has increased in recent years. The transportation sector accounted for 21% of domestic demand in fiscal 2005, benefiting from higher volumes and increased per vehicle usage of aluminium. The construction and packaging sectors accounted for 8% and 5%, respectively, of domestic demand in fiscal 2005.

Pricing and Tariff:

Domestic aluminium prices track the global price trends as producers usually price the metal at a marginal discount to the landed cost of imported metal. Though value-added product prices also track metal price movement, they usually witness relatively less volatility and command a premium reflecting the degree of value addition and quality, as indicated by the brand. Aluminium imports are subject to a customs duty of 10% and an additional surcharge on the customs duty at a rate of 2%. This represents a significant reduction from the 25% customs duty charged as recently as fiscal 2001, bringing India more in line with customs duties charged by other countries in Southeast Asia.

Market Outlook:

The domestic aluminium industry is expected to grow in the coming years, supported by growth in the Indian economy and increased domestic demand in end-user markets. CRU estimates that primary aluminium consumption in India will increase to 1,209,000 metric tons by 2009.In addition; the government of India is planning to significantly increase power generation capacity in the next few years. The Ministry of Power plans to double power capacity to 200,000 MW by 2012. As part of this plan, cumulative capacity of the transmission links will be enhanced from 4,800 MW to 30,000 MW by 2012. Coupled with the increased demand resulting from the privatization of electricity transmission

And distribution and a greater emphasis on improving the existing electricity distribution infrastructure in India, especially in rural areas, the power sector is expected to boost domestic aluminium demand.

This growth is also likely to be supported by increased use of aluminium in automobile and two-wheeler manufacturing as well as a potential growth in automotive component exports as major automotive manufacturers begins to look to India as a sourcing base for their operations. The construction sector is also expected to witness continued growth for the foreseeable future. While the

Housing segment has benefited from improved availability of more affordable financing; this sector is likely to get a further boost from the opening up of the real estate sectors to foreign direct investment in India. Backed by increasing acceptance of aluminium as an alternative to wood, demand from this sector is

Poised to grow in the coming years. Moreover, the long term potential for the domestic markets is encouraging with the Indian per capita consumption growing from approximately 627 grams in fiscal 2002 to 830 grams in fiscal 2005, as compared to 4,598 grams in China and 21,286 grams in the United States in calendar 2004.

Global Copper Market

Background:

Copper is a non-magnetic metal with high conductivity, tensile strength and resistance to corrosion. Copper consumption can be divided into three main product groups: copper wire rods, copper products and copper alloy products. According to Brook Hunt, over the last 10 years, the predominant intermediate use of copper has been the production of copper wire rods, which accounted for approximately half of total copper production in 2004. Copper wire rods are used in wire and cable products such as energy cables, building wires and magnet wires. Copper alloy products were the next largest users of copper in 2004, accounting for 17% of total demand, followed by copper tubes at 11%. In addition, copper has several non-electrical applications such as tubes for air conditioners and refrigerators, foils for printed circuit boards and other industrial and consumer applications. In 2004, the construction sector accounted for

number of alloys, including brass (copper and zinc), bronze (copper and tin), nickel silver, phosphor bronze and aluminium bronze. The copper industry can be divided into three broad categories:

• Copper mining which uses mined ore to produce copper concentrates, usually containing 25% to 40%copper;

• Copper custom smelting which smelts and refines copper from the concentrates obtained from copper mines; and

• Integrated copper producers, who undertake mining, smelting, and refining or leaching to produce copper. Integrated copper producers account for a large part of the copper capacity in the world.

Copper Consumption:

Global consumption of refined copper has grown consistently at a compounded annual growth rate of 3.8% between 1994 and 2004. The consumption of 16.8 million metric tons in 2004 reflects an increase of 8.8% over 2003. The key growth drivers are the continuing demand from the construction and power sectors. Global demand for refined copper is expected to reach 17.0 million metric tons in 2005, and to increase gradually to an estimated 19.6 million metric tons by 2009. Western Europe, China, North America and the rest of Asia (including Japan and the Middle East) together accounted for nearly 88% of global refined copper consumption. Europe and North America accounted for over 50% of refined copper consumption during the 1980s, but robust growth in Asia, led by China and Japan, has resulted in a significant change in global consumption patterns during the last decade.

With a compounded annual growth rate of 6.6% between 1994 and 2004, Asia has been amongst the fastest growing copper market in the world. Driven by continuing growth in China and other regional markets, Asia is likely to witness continued strong growth over the next five years with regional consumption of refined copper estimated to reach 10.1 million metric tons by 2009. The following table sets forth the regional consumption pattern of refined copper from 2003 to 2009 (estimated):

Copper Supply:

Global mine production is the principal source of copper, with scrap recycling accounting for only 11% to 13% of aggregate supplies. The five largest copper mining countries are Chile, USA, Peru, Australia and Indonesia, which together accounted for 64% of global copper mine production in 2004. Nearly one third of global mine production is sold in the custom smelting market, with the rest being used for integrated production. Integrated copper production is concentrated in countries such as Chile, Peru, Canada and Australia, which together account for 25% of global smelter copper production and 29% of global refined copper production. The major custom smelting locations include China, Japan, South Korea, India, and Western Europe, which together accounted for 42% of global smelter production in 2004 and thus are major importers of copper concentrate.

Refined copper production has grown at a compounded annual growth rate of 3.5% between 1995 and 2004. Global production currently stands at 15.9 million metric tons, reflecting a growth of 4.5% in 2004. Traditionally, the Americas and Western Europe accounted for a majority of copper production, though their share has been on the decline in recent years. Asian markets have witnessed strong growth in capacities during this period. In 2004, China and the rest of Asia (including Japan and the

deficit of 2.3 million metric tons in 2004. Of this, the supply deficit in China was 1.4 million metric tons.

The following table sets forth the actual and estimated regional demand - supply balance from 2003 to 2009:

Pricing:

Copper is traded on the LME. Although prices are determined by LME price movements, producers normally charge a regional premium that is market driven. The following table sets forth the movement in copper prices from 1995 to 2004.

For custom smelters, TcRc has a significant impact on profitability as prices for copper concentrate and prices of finished products are LME price net of TcRc or plus a premium, respectively. A significant proportion of concentrates are sold under frame contracts and TcRc is negotiated annually. The TcRc rates are influenced by the

demand-supply situation in the concentrate market, prevailing and forecasted LME prices and mining and freight costs.

Indian Copper Market

Background:

The Indian copper industry primarily consists of custom smelters as there are limited quality copper deposits in the country. The available deposits are owned by the government-owned Hindustan Copper Limited, which was the only producer in India until 1995. However, the industry has transformed significantly since then with the entry of Birla Copper, now owned by Hindalco Industries Limited, and Sterlite Industries, part of Vedanta Resources Plc., who together accounted for 89% of domestic production in calendar 2004. Reflecting this transformation, over the last 8 years, industry capacity has also grown approximately 8 times from a modest 72,000 metric tons in 1997 to 566,000 metric tons in 2004.

Consumption Pattern:

Domestic refined copper consumption has grown at a compounded annual growth rate of only 7.2% between 1999 and 2004. Overall growth has been hampered due to a sharp decline in domestic demand from the jelly filled telecom cables, or JFTC, sector, the largest user of copper in India. The deeper penetration of the cellular industry as well as a decrease in optic fiber prices led to a slowdown in JFTC demand from government-owned purchasers, which in turn impacted copper consumption adversely. Supported by strong growth in other user segments such as winding wires, power cables and other user applications, industry demand has rebounded strongly during the last few years. CRU has estimated the aggregate refined copper consumption at 325,000 metric tons in 2004, a growth of 5.9% from 307,000 metric tons reported in 2003.

Pricing and Tariff:

Domestic copper prices track the global prices as the metal is priced on the basis of the landed costs of imported metal. Copper imports are subject to a customs duty of 10% and an additional surcharge of 2% of the customs duty. The customs duty has been reduced from 15% to 10% in 2005. Domestic producers are also able to charge a

Market Outlook

The Indian market outlook is expected to remain positive with strong growth in key user segments such as power, construction and engineering. According to CRU, domestic consumption of refined copper is expected to increase from 325,000 metric tons in 2004 to an estimated 378,000 metric tons by 2009, reflecting a compounded annual growth rate of 3.1% between 2004 and 2009. This growth is significantly lower than the historical averages, largely on account of negative growth in the telecom cable segment which continues to suffer from increasing penetration of the cellular telecommunication and low prices of optic fibers in the international markets. Indian producers, however, benefit from attractive opportunities in the regional markets, which had reported an aggregate supply deficit of 2.8 million metric tons in 2004. According to CRU, the Asian deficit is likely to widen further over the next few years, which offers promising prospects for exports.

Hindalco-Overview

‘Hindalco’ was set up in collaboration with Kaiser Aluminium & Chemicals Corporation USA, in a record time of 18 month. The plant started its commercial production in the year 1962 with a capacity of 20,000 TPA. It has since grown to become the largest integrated aluminium producer in India.

The company has grown manifold and is managed by board of directors, with shri Kumar Mangalam Birla as the chairman of the board of directors.

Hindalco Industries Limited, the metals flagship company of the Aditya Birla Group, is an industry leader in aluminium and copper. A metals powerhouse with a consolidated turnover in excess of US$ 14 billion, Hindalco is the world's largest aluminium rolling company and one of the biggest producers of primary aluminium in Asia. Its Copper smelter is the world's largest custom smelter at a single location. Company's principal products comprise of Aluminium Ingots, Aluminium Billets, Aluminium Wire Rods, Sheet Products, Extrusions, Aluminium Foils and Aluminium Alloy Wheels. The Company's by products include Gallium Metal, Vanadium Sludge and Aluminium Dross Established in 1958, Hindalco commissioned its aluminium facility at Renukoot in Eastern U.P. in 1962. Later acquisitions and mergers, with Indal, Birla Copper and the Nifty and Mt.Gordon copper mines in Australia, strengthened the company's position in value-added alumina, aluminium and copper products, with vertical integration through access to captive copper concentrates. In 2007, the acquisition of Novelis Inc. a world leader in aluminium rolling and can recycling marked a significant milestone in the history of the aluminium industry in India. With Novelis under its fold Hindalco ranks among the global top five aluminium majors, as an integrated producer with low cost alumina and aluminium facilities combined with high-end rolling capabilities and a global footprint in 12 countries outside India. Its combined turnover of US$ 14 billion, places it in the Fortune 500 league.

Hindalco, at Renukoot, houses a fully integrated plant, comprising of 3 main plants i.e. the Alumina, Smelter & Fabrication Plants. Each plant employs varying Technology. With integrated facilities, output from various plants is used by next, along with

Alumina Plant: It was commissioned with an initial capacity of 40,000 MTPA, which has now increased, to 700000 MTPA. The plant has been expanded in phases using new technology from time to time for energy efficiency and capacity enhancement. It employs the basic Bayer’s process and the major raw materials for the plant are Bauxite, Steam, Caustic Soda and Furnace oil.

Aluminium Smelter: It has 11 Pot lines with 2067 Pots installed with annual production capacity of 3,45,000 MT. The Smelter employs the Hall Heroult Electrolysis Process for the extraction of Aluminium from Alumina. Basic raw materials for the smelter are Alumina, Power, Anodes and Aluminium Fluoride. Fabrication Plant: The Fabrication Plant at Renukoot comprises of 4 Main Sections Remelt Shop, Cast House, Rolling Mills, Extrusion & Conform which produce Wire Rod, Sheets, Coils and Extruded Products.

Hindalco, an ISO 14001, ISO 9001:2000 and OHSAS 18001 Company. Recently these three systems have integrated as IMS (Integrated Management System).

Today Hindalco occupies a place of pride in the global aluminium scenario with its most efficient working in all areas of operations. The company has kept pace all along with latest development in aluminium technology and has occupied its manufacturing facilities. Hindalco has bagged 14 prestigious International & National Awards for Business Excellence, Quality, Energy Conservation and its efforts for preserving the Environment in FY 05-06.

Hindalco Today

Aluminium has turned out to be the wonder metal of the industrialized World. No other single metal can do so many job’s so well, and so Economically also. Aluminium growth rate is the highest amongst the major basic metals today. Hindalco ranks as the largest aluminium producer in India and contributes about 40 % share in total production of the country. The company’s fully integrated aluminium operations consists of the Mining of bauxite, conversion of bauxite in to alumina, production of primary aluminium from alumina by electrolysis and production of Properzi redraw roads, rolled products, extructions and value added products like foil wheel at silvasa. Hindalco integrated operations and operational efficiency has enabled the company to be one of world’s lowest cost producers of aluminium. The company’s cost efficiency has helped it to record an outstanding performance in the face of adverse

market conditions. Hindalco also owns a large captive thermal power plant at renusager that Meets the power requirment of the company very efectively, has a current Generation units . Hindalco currently has primary aluminium capicity of 3, 50,000 MTPA.

Some recent milestones:

In May 2007, Novelis became a Hindalco subsidiary with the completion of the acquisition process. The transaction makes Hindalco the world's largest aluminium rolling company and one of the biggest producers of primary aluminium in Asia, as well as being India's leading copper producer.

In May 2006, the company signed an MoU with the Government of Madhya Pradesh for setting up a greenfield aluminium smelter and a captive power plant. The company also entered into a joint venture with Essar Power (M.P.) Ltd. to develop and operate coal mines at Mahan, Madhya Pradesh. The joint venture will supply coal to the proposed aluminium smelter and power complex in Madhya Pradesh

In May 2006, the company's copper mining subsidiary Aditya Birla Minerals Limited (formerly Birla Mineral Resources Pty Ltd.) came out with an equity offering and subsequent listing on the Australian Stock Exchange (ASX)

In March 2006, the company acquired an aluminium rolling mill and wire rods facility, from Asset Reconstruction Company (India) Limited (ARCIL), belonging to Pennar Aluminium Company Limited

In January 2006, the company concluded 4:1 rights issue of its shares on partly paid basis. It was the largest ever rights issue in the history of corporate India and first one to issue partly paid instruments

In September 2005, the company split its shares in ratio of 10:1 in order to enhance liquidity and to encourage participation from retail investors

In April 2005, the company entered into MOUs with the Orissa and Jharkhand governments for setting up a greenfield alumina facility and aluminium facility respectively, in the states

Hindalco Business

Hindalco in India enjoys a leadership position in aluminium and copper. The company's aluminium units across the country encompass the entire gamut of operations from bauxite mining, alumina refining, aluminium smelting to downstream rolling, extrusions, foils and alloy wheels, along with captive power plants and coal mines. The Birla Copper unit produces copper cathodes, continuous cast copper rods along with other by-products, including gold, silver and DAP fertilizers.

Hindalco is the world's largest aluminium rolling company and one of the biggest producers of primary aluminium in Asia. In India, Hindalco enjoys a leadership position in speciality alumina, primary aluminium and downstream products.

Hindalco's major products include standard and speciality grade aluminas and hydrates, aluminium ingots, billets, wire rods, flat rolled products, extrusions, foil and alloy wheels

indalco's Birla Copper unit at Dahej in Gujarat is the world's largest single location custom copper smelter with 500,000 tpa capacity. The plant is backed by captive power plants, oxygen plants, as also by product facilities for fertilisers and precious metals. A captive jetty with cargo handling capacity of over four million tpa, facilitates easy input of copper concentrate and other imported raw materials.

The two copper mines in Australia were acquired in 2003. Birla Nifty mine consists of an open-pit mine, heap leach pads and a solvent extraction and electro winning (SXEW) processing plant, which produces copper cathode. Birla Nifty's copper cathode capacity is 25,000 tpa. A copper sulphide deposit is located at the lower levels of the Nifty open pit mine and an underground mine and concentrator have been developed to mine and process ore from this deposit. The Nifty sulphide operation commenced ore production from stoping in December 2005 and concentrate production in March 2006. With the start-up of the Nifty sulphide operation and its progressive ramp up during FY2007, Aditya Birla Minerals (ABML) is entering a period of rapid growth.

Hindalco Vision:

“To strengthen our position as a premium aluminium company, sustaining domestic leadership and global competitiveness through innovation, quality and value added growth.”

Hindalco Mission:

“To pursue the creation of value for our customers, shareholders, employees and society at large.”

Hindalco Values:

Integrity Honesty in every action

Commitment On the foundation of integrity, doing whatever it takes to deliver, as promised.

Passion Missionary zeal arising out of an emotional engagement with work

Seamlessness Thinking and working together across functional silos, hierarchy levels, businesses

and geographies.

Speed Responding to stakeholders with a sense of urgency

Hindalco Strategy:

Efficiency focus

To be one of the lowest cost producers globally

Effectiveness focus

Growth focus

To pursue value adding growth opportunities in aluminium

THE MARKET LEADER

Hindalco is a leading domestic player in two metals business segments — aluminium and copper. The aluminium division's product range includes alumna chemicals, primary aluminium ingots, billets, and wire rods, product extrusions, foils and alloy Wheels.The Company has a significant market share in all the segments in which it operates. It enjoys a domestic market share of 42 per cent in primary aluminum, 63 per cent in rolled products, 20 per cent in extrusions, 44 per cent in foils and 31 per cent in wheels.

As a step towards expanding the market for value-added products and services, Hindalco has launched several brands in recent years, which include Aura for alloy wheels, Fresh Rapp for kitchen foil and Ever last for roofing sheets. Our exclusive showroom, The Aluminium Gallery, seeks to promote Hindalco products to its customers. It is a platform for the company to showcase quality products to a quality audience in an appropriate ambience. The exhibits include products like windows, doors, furniture, ladder, roofing sheets and ceiling and cladding panels.

Hindalco products are well received not only in the domestic market, but also in the international market. The company's metal is accepted for delivery under the high-grade aluminium contract on the London Metal Exchange (LME). The company exports about 17 per cent of its total sales volume of Aluminum.The Company’s alumna chemical business is a leader in manufacturing and marketing of specialty alumna and alumna hydrate products in the country. It has a market share of 90 per cent in the country. These specialty products find wide usage in diversified industries including water treatment chemicals, refractory, ceramics, cryolite, glass, fillers and plastics, conveyor belts and cables, among others. The company also exports these alumna chemicals to over 30 countries covering North America, Western Europe and the Asian region

Birla Copper, Hindalco's copper division at Dahej in Gujarat enjoys a leadership position in India, having built over 40 per cent of the domestic market share within three years of its commissioning. It has also made successful forays into the export markets of the Middle East, Southeast Asia, China, Korea and Taiwan.

The copper plant produces world-class copper cathodes, continuous cast copper rods and precious metals. Sulphuric acid, phosphoric acid, DI-ammonium phosphate, other phosphate fertilizers and phosphor-gypsum are also produced at this plant.

SWOT ANALYSIS OF HINDALCO INDUSTRIES LIMITED

STRENGTHS:

 Strong brand recognition  Internet sales

 Growing international presence

 Superior research and development department  Strong financial returns

 Strong sense of culture in the working environment  Successful experience being competitive

 Effective Leadership  Cost leadership

 Prestigious Client Base  Customer Loyalty  Diversified Business

 Product innovation capabilities  Technological excel.

 Good corporate image

WEAKNESSES:

• Complexity of operation • Lengthy processing chain

OPPORTUNITIES:

• Growth of core sector industries • Rapid integration with global economy • Booming construction business in Asia • Growing e-commerce’s business. • Increasing urbanization

THREATS:

• Entry of global players • Take over possibilities • Political threats

COMPETITORS

1. Domestic:

Textiles Copper Auminum Cement Telecommunication

Reliance _{Vedant group Ambuja Bharti airtel}

Raymond Essar Unitech Reliance

Mayur Sail Vodafone

Tata Nalco BSNL 2. International: • ALCOA Inc. • ALCAN Inc. • Russian Aluminium • NORSK HYDRO

OBJECTIVES

1. To know about the current assets and current liabilities position of Hindalco Industries Ltd.

2. To determine the ratios relating to the working capital.

3. To find out the Gross Working Capital position of Hindalco Industries Ltd.

METHODOLOGY OF THE PROJECT

The methodology followed in this project involved the following Phases:

• Collection of Data • Type of the project • Analysis of Data

• Conclusion & Recommendation

Collection of Data:

Data required for the project e.g. Balance Sheet, statement of Profit & Loss Account etc. were collected from the annual reports of Hindalco period of 2005-06, 2006-07, 2007-08. Besides for Explanation of several issues, different articles, Internet data’s, books etc were consulted. The data collected are Secondary Data.

Type of the project:

The project is descriptive and analytical in nature. Analysis:

For the comparative analysis ratios were used along with graphs, charts, and necessary diagrams. The current year i.e., 2008-09 has not been taken into calculation because, at that time of preparation of this report annual closing accounting of the Company was going on.

Interpretation & Recommendation:

After completion of the entire analysis, interpretation & recommendation were made on the basis of figures and diagrams. Statistical tools like Tables, Charts, Bar graphs used for representation of data.

Working Capital Management

“More business fails for lack of cash than for want of profit”. Efficient management of working capital is one of the pre-conditions for the success of an enterprise. Efficient management of working capital means management of various components of working capital in such a way that an adequate amount of working capital is maintained for smooth running of a firm and for fulfilment of twin objectives of liquidity and profitability. While inadequate amount of working capital impairs the firm’s liquidity. Holding of excess working capital results in the reduction of the profitability. But the 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, production cycle, credit policy, availability of raw material, etc.

Thus efficient management of working capital is an important indicator of sound health of an organisation which requires reduction of unnecessary blocking of capital in order to bring down the cost of financing.

Meaning of Working Capital:

Working capital is the amount of capital that a business has available to meet the day-to-day cash requirements of its operations, or more specially, for financing the conversion of raw material into finished goods, which the company sells for payment. Funds are also needed for short-term purposes for the purpose of raw materials, payment of wages and other day-to-day expenses, etc. These funds are known as working capital.In simple words, working capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such as cash, marketable securities, debtors and inventories. Working capital is a valuation metric that is calculated as current assets minus current liabilities. Working capital is also known as operating capital.

Current Assets

This is any cash or assets that can be quickly turned into cash. Current assets are assets, which can be converted into cash within an accounting year.

• Short tern loans and advances • Inventories of stocks.

• Raw material. • Work in progress. • Stores and spares. • Finished goods. • Prepaid expenses. • Accrual incomes.etc

Current Liabilities

Current liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year.

Constituents of current Liabilities: • Bills payable

• Sundry creditors or account payable • Short term borrowings

• Dividend payable • Bank overdraft • Provisions

• Outstanding expenses • Unaccrued income

Determinants of working capital:

Working capital requirements of a concern depends on a number of factors, each of which should be considered carefully for determining the proper amount of working capital. It may be however be added that these factors affect differently to the different units and these keeps varying from time to time. In general, the determinants of working capital which re common to all organization’s can be summarized as under: Nature of business:

Need for working capital is highly depends on what type of business, the firm in. there are trading firms, which needs to invest a lot in stocks, ills receivables, liquid cash etc. public utilities like railways, electricity, ete., need much less inventories and cash. Manufacturing concerns stands in between these two extends. Working capital requirement for manufacturing concerns depends on various factors like the products, technologies, marketing policies.

Production policies:

Production policies of the organization effects working capital requirements very highly. Seasonal industries, which produces only in specific season requires more working capital. Some industries which produces round the year but sale mainly done in some special seasons are also need to keep more working capital.

Size of business:

Size of business is another factor to determines the need for working capital Length of operating cycle:

Operating cycle of the firm also influence the working capital. Longer the orating cycle, the higher will be the working capital requirement of the organization.

Credit policy:

Companies; follows liberal credit policy needs to keep more working capital with them. Efficiency of debt collecting machinery is also relevant in this matter. Credit availability form suppliers also effects the company’s working capital requirements. A company doesn’t enjoy a liberal credit from its suppliers will have to keep more working capital

Business fluctuation:

Cyclical changes in the economy also influencing the working capital. During boom period, the tendency of management is to pile up inventories of raw materials and finished goods to avail the advantage of rising prove. This creates demand for more capital. Similarly during depression when the prices and demand for manufactured goods. Constantly reduce the industrial and trading activities show a downward termed. Hence the demand for working capital is low.

Current asset policies:

The quantum of working capital of a company is significantly determined by its current assets policies. A company with conservative assets policy may operate with relatively high level of working capital than its sales volume. A company pursuing an aggressive amount assets policy operates with a relatively lower level of working capital.

seasons. Working capital requirements of such industries will be higher during certain season of such industries period.

Other factors:

Effective co ordination between production and distribution can reduce the need for working capital. Transportation and communication means. If developed helps to reduce the working capital requirement.

EXCESS

OR

ADEQUATE

WORKING

CAPITAL

Every business concern should have adequate working capital to run its business operations. It should not have either redundant / excess working capital or inadequate/ shortage of working capital. Both excess as well as shortage of working capital situations are bad for any business. However, out of the two, inadequacy or shortage of working capital is more dangerous from the point of view of the firm. Disadvantages of Redundant or Excess Working Capital:

1.Idle funds, non-profitable for business, poor ROI.

2. Unnecessary purchasing & accumulation of inventories over required level. 3. Excessive debtors and defective credit policy, higher incidence of B/D. 4.Overall inefficiency in the organization.

5. When there is excessive working capital, Credit worthiness suffers.

6. Due to low rate of return on investments, the market value of shares may fall. Disadvantages or Dangers of Inadequate or Short Working Capital: 1Can not pay off its short-term liabilities in time.

2. Economies of scale are not possible.

3. Difficult for the firm to exploit favorable market situations. 4. Day-to-day liquidity worsens.

5. Improper utilization the fixed assets and ROA/ROI falls sharply.

Need for working capital

The basic objective of financial management is to maximize shareholder’s wealth. For this it is necessary to generate sufficient profits. The extent to it, which the profit can be earned, largely depends on the magnitude of sales. However sales do not convert into cash instantly. There is invariable the time gap between the sales of goods and receipts of cash. There is, therefore, a need for working capital in the form of Current Assets to deal with the problem arising. Out of the lack of immediate realization of

cash again goods sold. Therefore, sufficient working capital is necessary to sustain sales activity.

Working capital is needed for the following purpose:

1. For the purchase of raw material, components and spares.

2. To incur day to day expenses and overhead costs such as fuel, power and office expenses, etc.

3. To meet selling costs as packing, advertisement etc. 4. To provide credit facilities to the customers.

5. To maintain the inventories of raw material, work in progress, stores and spare and finished goods.

6. To pay wages and salaries.

Meaning of working capital management

Working Capital Management is concerned with the problems that arise in attempting to manage the Current Assets, Current Liabilities and the inter-relationship that exists between them.

Working Capital Management means the deployment of current assets and current liabilities efficiently so as to maximize short-term liquidity. Working capital management entails short term decisions - generally, relating to the next one year periods - which are "reversible"

Steps involved in working capital management

I. Forecasting the Amount of Working Capital II. Determining the Sources of Working

Objectives of Working Capital Management

I. Deciding Optimum Level of Investment in various WC Assets II. Decide Optimal Mix of Short Term and Long Term Capital III. Decide Appropriate means of Short Term Financing

Forecasting /Estimation of Working Capital Management

Requirement

Factors to be considered:

• The length of the sales cycle during which finished goods are to be kept waiting for sales.

• The average period of credit allowed to customers.

• The amount of cash required to pay day to day expenses of the business. • The amount of cash required for advance payments if any.

• The average period of credit to be allowed by suppliers. • Time – lag in the payment of wages and other overheads

Nature of Working Capital Management

Composition & Level of CA Composition &Level of CL Profitability, Risk& Liquidity Working Capital Management

Working Capital Cycle

The working capital requirement of a firm depends, to a great extent upon the operating cycle of the firm. The operating cycle may be defined as the time duration starting from the procurement of goods or raw material and ending with the sales of realization. The length and nature of the operating cycle may differ from one firm to another depending upon the size and nature of the firm. In a trading concern, there is a series of activities starting from procurement of goods (saleable goods) and ending with the realization of sales revenue (at the time of sale itself in the case of cash sales and at the time of debtors realization in case of credit sales).similarly in case of manufacturing concern, this series starts from the procurement of raw materials and ending with the sales realization of finished goods. In both the cases, however, there is a time gap between the happening of the first event and the happening of the last event. This time gap is called the operating cycle.

Thus, the operating cycle of a firm consists of the time required for the completion of the chronological sequences of some or all of the following:

1. Procurement of raw material and services.

2. Conversion of raw material into work-in-progress. 3. Conversion of work-in-progress into finished goods. 4. sale of finished good(cash or credit)

5. Conversion of receivable into cash.

The working capital cycle (Operating cycle)

Operating cycle period

The length or time duration of the operating cycle of any firm can be defined as the sum of its inventory conversion period and the receivable conversion period.

1. Inventory conversion period:

It is the time required for the conversion of raw material into finished goods sales. In a manufacturing firm the inventory conversion period is consisting of raw material conversion period (RMCP), work-in-progress conversion period (WPCP) and finished goods conversion period (FGCP).

Raw material conversion period refers to the period for which the raw material is generally kept in stores before it is issued to the production department.

The work-in-progress conversion period (WPCP) refers to the period for which the raw material remains in the production process before it is taken out as finished units.

W I P

Sales

Finished

Foods

Accounts

Receivabl

e

Cash

Raw-Material

The finished goods conversion period refers to the period for which finished units remains in stores before being sold a customer.

2. Receivable conversion period (RCP):

It is the time required to convert the credit sales into cash realization. It refers to the period between the occurrence of credit sales and collection from debtors.

The total of Inventory conversion period (ICP) and Receivable conversion period (RCP) is also known as total operating cycle period (TOCP).the firm might be getting some credit facilities from supplier of raw material, wages earners etc.This period for which the payment to these parties are deferred or delayed is known as deferred period (DP).the net operating cycle (NOC) of the firm is arrived at by deducting the DP from TOCP.

NOC=TOCP-DP =ICP+RCP-DP

For calculating total operating cycle period (TOCP) and net operating cycle (NOC), the following formula is being used:

RMCP = Average Raw material stock ×365 Total Raw material consumption WPCP=Average Work-in-progress ×365 Total cost of production

FGCP= Average Finished Goods ×365 Total Cost of goods sold RCP=Average Receivable ×365 Total Credit sales

DP=Average Creditors ×365

*The average value in the numerator is the average of opening balance and closing balance of the respective item. However, if only the closing balance is available, then even the closing balance may be taken as the ‘average’.

*The figure ‘365’represents number of days in a year. However, there is no hard and fast rule and sometimes even 360 days are considered.

*The ‘Total’ figure in the denominator refers to the value of the item in a particular year.

Time and Money concept in Working Capital Cycle

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 money 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 can reduce the cost of bank interest or will 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 future sales.

If we

Then

Collect receivables (debtors) faster We release cash from cycle Collect receivables(debtors) faster Our receivables soak up cash Get better credit(in terms of duration or

amount from suppliers)

We increase our cash resources

Shift inventory(stocks)faster We free up cash

Move inventory(stocks) slower We consume more cash

TYPES OF WORKING CAPITAL

On the basis of concept

1. Gross working capital: the gross working capital refers to the firm’s investment in all the assets taken together. The total of investment in all the individual current assets is the gross working capital.

For example: if a firm has a cash balance of Rs. 50,000 ,debtors of Rs.70,000 and inventory of raw material and finished goods has been assessed at Rs.1,00,000,then the gross working capital of the firm is Rs.2,20,000(i.e.,Rs 50,000+Rs.70,000+Rs.1,00,000).

2. Net working capital: the term net working capital may be defined as the excess of total current assets over total current liabilities. Current liabilities refer to those liabilities which are payable within a period of 1 year.

The net working capital may either be positive or negative. If the total current assets are more than total current liabilities, then the difference is known as positive net working capital, otherwise the difference is known as negative net working capital. The net working capital measures the firm’s liquidity. The greater the margin, the

WORKING CAPITAL

BASIS OF

CONCEPT

BASIS OF TIME

Gross

Working

Capital

Permanent /

Fixed WC

Temporary /

Variable WC

Net

Working

Capital

A financial manager must consider both (gross and net working capital) because they provide different interpretation. The gross working capital denotes the total working capital or the total investment in current assets. This will help avoiding 1.the unnecessarily stoppage of work or chance of liquidation due to insufficient working capital, and 2.effects on profitability (over flowing working capital implies cost).The gross working capital also gives an idea of total funds required for maintaining current assets.

On the other hand, net working capital refers to the amount of funds that must be invested by firm, more or less, regularly in current assets. The net working capital also denotes the net liquidity being maintained by the firm.

On the basis of time

1. Permanent /fixed working capital: Permanent working capital may be defined as the minimum level of current assets, which is required by a firm to carry on its business operations. Every firm has to maintain a minimum level of raw materials, work-in-progress, finished goods and cash balances.

For example-extra inventory of finished goods will have to be maintained to support the peak periods of sale. Permanent working capital is permanently needed for the business and therefore, it should be financed out of long term funds.

2. Fluctuating /variable working capital: It is the extra working capital needed to support the changing production and sales activities of the firm. The amount of temporary working capital keeps on fluctuating on time to time on the basis of business activity.

Both kind of working capital – permanent and fluctuating (temporary) are necessary to facilitate production and sales through the operating cycle. The amount over and above permanent working capital is temporarily variable or fluctuating.

Permanent and temporary working capital of a stable

firm

Amt. Of W C Temporary Permanent W C Time

In the above figure, it is shown that permanent working capital is stable over time, while temporary working capital is fluctuating –some times increasing and sometimes decreasing.

Permanent and temporary working capital of a Raising

Firm

: In the case of an expanding firm the permanent W C line may not be horizontal. This is because the demand for permanent Current Assets might be increasing or decreasing to support a rising level of activities. In that case line should be raising one as follows:

Amt.

Of Temporary W C

W C

Permanent W C

Sources of working capital

The company can choose to finance its current assets by 1. Long term sources

2. Short term sources 3. A combination of them.

Long term sources of permanent working capital include equity and preference shares, retained earning, debentures and other long term debts from public deposits and financial institution. The long term working capital needs should meet through long term means of financing. Financing through long term means provides stability, reduces risk or payment. And increases liquidity of the business concern. Various types of long term sources of working capital are summarized as follow:

1. Issue of shares:

It is the primary and most important sources of regular or permanent working capital. Issuing equity shares as it does not create and burden on the income of the concern. Nor the concern is obliged to refund capital should preferably raise permanent working capital.

2. Retained earnings:

Retain earning accumulated profits are a permanent sources of regular working capital. It is regular and cheapest. It creates not charge on future profits of the enterprises. 3. Issue of debentures:

It crates a fixed charge on future earnings of the company. Company is obliged to pay interest. Management should make wise choice in procuring funds by issue of debentures.

4. Long term debt:

Company can raise fund from accepting public deposits, debts from financial institutution like banks, corporations etc. the cost is higher than the other financial tools.

5. Other sources: sale of idle fixed assets, securities received from employees and customers are examples of other sources of finance.

_{Short term sources of temporary working capital}

Temporary working capital is required to meet the day to day business expenditures. The variable working capital would finance from short term sources of funds. And only the period needed. It has the benefits of, low cost and establishes closer relationships with banker.

Some sources of temporary working capital are given below: 1. Commercial bank:

A commercial bank constitutes significant sources for short term or temporary working capital. This will be in the form of short term loans, cash credit, and overdraft and though discounting the bills of exchanges.

2. Public deposits:

3. Various credits:

Trade credit, business credit papers and customer credit are other sources of short term working capital. Credit from suppliers, advances from customers, bills of exchanges, etc helps to raise temporary working capital

4. Reserves and other funds:

Various funds of the company like depreciation fund. Provision for tax and other provisions kept with the company can be used as temporary working capital.The company should meet its working capital needs through both long term and short term funds. It will be appropriate to meet at least 2/3 of the permanent working capital equipments form long term sources, whereas the variables working capital should be financed from short term sources. The working capital financing mix should be designed in such a way that the overall cost of working capital is the lowest, and the funds are available on time and for the period they are really required.

SOURCES OF ADDITIONAL WORKING CAPITAL

Sources of additional working capital include the following- 1. Existing cash reserves

2. Profits (when you secure it as cash) 3. Payables (credit from suppliers) 4. New equity or loans from shareholder 5. Bank overdrafts line of credit

6. Long term loans

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

1. Pressure on existing cash

2. Exceptional cash generating activities. offering high discounts for clear cash payment

3. Bank overdraft exceeds authorized limit 4. Seeking greater overdrafts or lines of credit 5. Part paying suppliers or there creditor.

Trade - Off between Profitability and Risk

In evaluating the firm’s working capital position an important consideration is the trade-off between profitability and risk. In other words, the level of NWC has a bearing on profitability and risk. The term profitability used in this context is measured by profit after expenses. The term risk is defined as the profitability that a firm will become technically insolvent so that it will not be able to meet its obligation when they become due for payment.It is assured that greater amount of NWC, the less risk prone the firm is, or greater the NWC, the more liquid is the firm, and therefore the less likely it is to become technically insolvent. Conversely lower level of NWC and liquidity are associated with increasing level of risk.A firm must have adequate WC. It should neither be excessive nor inadequate. Excessive WC means the firms has idle funds, which are in no profit for the firm. This situation decreases both risk and profitability of the firm. Inadequate WC means the firm doesn’t have sufficient funds for running its operation which ultimately results in production interruption, and lowering down the profitability. Lower level of WC increases the risk but has the potentiality of increasing the profitability also.

The above principle is based on the following assumption: 1. There is direct relationship between profitability and risk. 2. Current assets are less profitable than fixed assets

3. Short term funds are less expensive than long term funds.

Effect of level of CA on Profitability-Risk Trade Off

The effect of level of CA’s on profitability risk trade-off can be shown using the ratio of CA to TA. This ratio indicates the percentages of TA’s that are in form of CAs.An increase in the ratio will lead to decline in profitability because CAs is less profitable than FAs. It would also increase risk of technical insolvency because increase in CA assuming no change in CL will increase NWC. Conversely a decrease in ratio will result in increase in profitability as well as risk.

Effect of level of CL on risk profitability trade-off:

The effect of CL can be demonstrated by using the ratio of CL to TAs. This portion of short term financing which is less expensive as compared to long term financing. These will therefore, be a decline in cost and corresponding rise in profitability. The increased ratio will also increase risk because assuming no change in CA, this would decrease in NWC. The consequence of decrease in the ratio is exactly opposite to the result of an increase. Thus it will lead to decrease in profitability and risk

Different Aspects of Working Capital Management

• Management of Inventory

• Management of Receivables/Debtors • Management of Cash

• Management of Payables/Creditors

MANAGEMENT OF INVENTORY

Inventories constitute the most significant part of current assets of a large majority of companies. On an average, inventories are approximately 60% of current assets. Because of large size, it requires a considerable amount of fund.

The inventory means and includes the goods and services being sold by the firm and the raw material or other components being used in the manufacturing of such goods and services.

Nature of Inventory:

The common type of inventories for most of the business firms may be classified as raw-material, work-in-progress, finished goods.

• Raw material: it is basic inputs that are converted into finished products through the manufacturing process. Raw materials inventories are those units which have been purchased and stored for future productions.

• Work–in–process: Work-in-process is semi-manufactured products. They represent products that need more work before they become finished products for sale.

• Finished goods: These are completely manufactured products which are ready for sale.

Stocks of raw materials and work-in-process facilitate production, while stock of finished goods is required for smooth marketing