ANALYSIS

NAME OF
Submitted By:
ROLL NO. SECTION

WORKING CAPITAL
NITESH KUMAR 201931029 E
TRISHA PATRE 201931049 E
VASU BISHT 201931052 E

MANAGEMENT
ANKITA SINGH
AJINKYA BHONSLE
201931054
201831003
E
F
URJAA BHATNAGAR 201932104 F

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INTRODUCTION

Hindalco Industries Limited, metals flagship company of the Aditya Birla Group, is the industry leader
in aluminium and copper. With a consolidated turnover of US$18.7 billion, Hindalco is the world’s
largest aluminium rolling company and one of Asia’s biggest producers of primary aluminium. Its
state-of-art copper facility comprises a world-class copper smelter and a fertiliser plant along with a
captive jetty. The copper smelter is among the world’s largest custom smelters at a single location.

In India, the company’s aluminium units across the country encompass the gamut of operations from
bauxite mining, alumina refining, coal mining, captive power plants and aluminium smelting to
downstream rolling, extrusions and foils. Today, Hindalco ranks among the global aluminium majors
as an integrated producer and a footprint in 10 countries outside India.

The Birla Copper unit produces copper cathodes and continuous cast copper rods, along with other by-
products, including gold, silver, and DAP fertilisers. It is India’s largest private producer of gold.

Hindalco has been accorded Star Trading House status in India. Its aluminium is accepted for delivery
under the High-Grade Aluminium Contract on the London Metal Exchange (LME), while its copper
quality is also registered on the LME with Grade a accreditation.

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WORKING CAPITAL MANAGEMENT

Working capital management is a business procedure intended to guarantee that an organization works
productively by checking and utilizing its present resources and liabilities to the best impact. The basic
role of working capital management is to empower the organization to keep up adequate income to
meet its transient working expenses and momentary obligation commitments.

An organization's working capital is comprised of its current assets short its current liabilities.

Current assets incorporate whatever can be effortlessly changed over into money in a year. These are
the company's highly liquid assets. Some current assets include cash, accounts receivable, inventory,
and short-term investments.

 Working Capital Management requires monitoring a company's assets and liabilities to

maintain sufficient cash flow.
 The strategy involves tracking three ratios: the working capital ratio, the collection ratio, and
the inventory ratio.
 Keeping those three ratios at optimal levels ensures efficient working capital management.

Current liabilities are any obligations due within the following 12 months. These include operating
expenses and long-term debt payments.

Ratio Analysis
Working capital management commonly involves monitoring cash flow, current assets, and current
liabilities through ratio analysis of the key elements of operating expenses, including the working
capital ratio, collection ratio, and inventory turnover ratio.

Working capital management helps maintain the smooth operation of the net operating cycle, also
known as the cash conversion cycle (CCC)—the minimum amount of time required to convert net
current assets and liabilities into cash.

Benefits of Working Capital Management

Working capital management can improve a company's earnings and profitability through efficient use
of its resources. Management of working capital includes inventory management as well as
management of accounts receivables and accounts payables. 

The objectives of working capital management, in addition to ensuring that the company has enough
cash to cover its expenses and debt, are minimizing the cost of money spent on working capital, and
maximizing the return on asset investments.

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Types of Working Capital Management Ratios

There are three ratios that are important in working capital management: The working capital ratio or
current ratio; the collection ratio, and the inventory turnover ratio.

The working capital ratio or current ratio is calculated as current assets divided by current liabilities. It
is a key indicator of a company's financial health as it demonstrates its ability to meet its short-term
financial obligations.

Although numbers vary by industry, a working capital ratio below 1.0 generally indicates that a
company is having trouble meeting its short-term obligations. That is, the company's debts due in the
upcoming year would not be covered by its liquid assets. In this case, the company may have to resort
to selling off assets, securing long-term debt, or using other financing options to cover its short-term
debt obligations.

Working capital ratios of 1.2 to 2.0 are considered desirable, but a ratio higher than 2.0 may suggest
that the company is not effectively using its assets to increase revenues. A high ratio may indicate that
the company is not securing financing appropriately or managing its working capital efficiently.

The Collection Ratio

The collection ratio is a measure of how efficiently a company manages its accounts receivables. The
collection ratio is calculated as the product of the number of days in an accounting period multiplied
by the average amount of outstanding accounts receivables divided by the total amount of net credit
sales during the accounting period.

The collection ratio calculation provides the average number of days it takes a company to receive
payment after a sales transaction on credit. If a company's billing department is effective at collections
attempts and customers pay their bills on time, the collection ratio will be lower. The lower a
company's collection ratio, the more efficient its cash flow.

The Inventory Turnover Ratio

The final element of working capital management is inventory management. To operate with
maximum efficiency and maintain a comfortably high level of working capital, a company must keep
sufficient inventory on hand to meet customers' needs while avoiding unnecessary inventory that ties
up working capital.

Companies typically measure how efficiently that balance is maintained by monitoring the inventory
turnover ratio. The inventory turnover ratio, calculated as revenues divided by inventory cost, reveals
how rapidly a company's inventory is being sold and replenished. A relatively low ratio compared to
industry peers indicates inventory levels are excessively high, while a relatively high ratio may indicate
inadequate inventory levels.

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INVENTORY MANAGEMENT
Inventory is the term for the goods available for sale and raw materials used to produce goods
available for sale. Inventory represents one of the most important assets of a business because the
turnover of inventory represents one of the primary sources of revenue generation and subsequent
earnings for the company's shareholders. Inventory is the array of finished goods or goods used in
production held by a company. Inventory is classified as a current asset on a company's balance sheet,
and it serves as a buffer between manufacturing and order fulfilment. When an inventory item is sold,
its carrying cost transfers to the cost of goods sold (COGS) category on the income statement.

The inventory is broadly classified in the following:

1. Raw material
2. Work-in-progress
3. Consumable inventory
4. Finished goods

Usually the finished goods are maintained at zero level. The parts are manufactured to fulfil current
demand. Raw materials are kept in stock to meet the unpredicted demand of products and the
consumable goods are kept for more time period as compared to the raw materials. The duration
depend upon the demand, availability, price and other market factors.

Inventories are stated at the lower of cost and net realizable value. The cost of finished goods and work
in progress includes raw materials, direct labour, other direct costs and related production overheads.
Costs of inventories include the transfer from equity any gains/losses on qualifying cash flow hedges
for foreign currency purchases of raw materials.

The Inventories are measured at Fair Value only in those cases where the Inventories are designated
into a fair value hedge relationship.

Cost is determined using the weighted average cost basis. However, the same cost basis is applied to
all inventories of a particular class. Inventories of stores and spare parts are valued at weighted average
cost basis after providing for cost of obsolescence and other anticipated losses, wherever considered
necessary.

Materials and other supplies held for use in the production of inventories (finished goods, work- in-
progress) are not written down below the cost if the finished products in which they will be used are
expected to sell at or above cost.

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Annual Report on Inventory of Hindalco Industries (In Crores)

As on 31.03.2019 As on 31.03.2018
In In In
Particulars In hand transit Total hand transit Total
Raw 1,479.4
Materials 1310.15 3011 4,321.15 6 2636.78 4116.24
Finished
Goods 517.8 201.38 719.18 487.26 4.62 491.88
Work-in- 5,136.2
progress 5,262.02 77.78 5339.8 1 49.29 5185.5
Stores and
spares 519.76 26.11 545.87 520.37 33.14 553.51
Coal and fuel 362.26 106.2 468.46 259.46 131.79 391.25
11,394.4 7,882,7 10,738.3
Total 7,971.99 3422.47 6 6 2,855.62 8

Analysis:

 From the above data, we can clearly see that, for year 2019, raw materials purchased by the
company, finished goods and work-in-progress amounts to Rs.10,380.13 whereas for year 2018
these amounts to Rs.9793.62 Crore . Thus, we can say that the company has produced less
products in this as compared to previous year and production goes down. These were
recognized as expense during the year and included in ‘cost of raw material consumed’ and
‘change in value of inventories of work-in-progress and finished goods’ in statement of Profit
and Loss.

 We can also see that, for year 2019, the coal and fuel reserve, spare parts left with the company
amounts to Rs.1014.33 Crore whereas for year 2018 these amounts to Rs. 944.76 Crore. Thus,
we can say that there is a huge stock of coal, fuel and spare parts as compared to previous
which is a result of low production level by the company.

Measurement of bulk inventory quantities (such as coal, bauxite, etc.) lying at yards and work
in progress of precious metals at smelter and refinery is material, complex and involves significant
judgement and estimate resulting from measuring the surface area, dip measurement of materials in
tanks/silos, etc.

The Company performs physical counts of above inventory on a periodic basis using internal / external
experts to perform volumetric surveys and assessments, basis which the estimate of quantity for these
inventories is determined. The variations noted between book records and physical quantities of above
inventories are evaluated and appropriately accounted in the books of accounts.

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Inventory Turnover Ratio

Inventory turnover is a ratio showing how many times a company has sold and replaced inventory
during a given period. A company can then divide the days in the period by the inventory turnover
formula to calculate the days it takes to sell the inventory on hand. Calculating inventory turnover can
help businesses make better decisions on pricing, manufacturing, marketing and purchasing new
inventory.

Inventory Turnover = Sales / Average Inventory

Where, Average inventory = (Opening inventory + closing inventory) / 2

 Financial year 2017-18

Sales = Rs.39912.79 (in crores)
Opening inventory = Rs.9268.03 (In crores)
Closing inventory = Rs.10738.38 (in crores)
So, Average inventory = Rs10003.205 (in crores)
Therefore, Inventory Turnover ratio = 3.99

 Financial year 2018-19

Sales = Rs.44487 (in crores)
Opening inventory = Rs.10738.38 (in crores)
Closing inventory = Rs.11394.46 (in crores)
So, Average inventory = Rs.11066.42 (in crore)
Therefore, Inventory Turnover Ratio = 4.02

From the above data, we can clearly see that the Inventory Turnover Ratio is almost same for both the
financial year, 2017-18 &2018-19. Hence, we can conclude that the company is able to convert their
inventory in cash with the same rate for both year. It defines the stability of profitability of the
company.

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RECEIVABLES AND CASH MANAGEMENT

A firm ought to build up receivables approaches after cautiously thinking about the two advantages
and expenses of various arrangements. These approaches identify with.

Credit Standards -
The association's credit measures are commonly dictated by the five ―C's. Character, Capacity,
Capital, Collateral and Conditions. Data about the five C's can be gathered both from inward just as
outside sources. Inner sources incorporate the company's past involvement in the client enhanced by its
own well created data framework. Outside assets incorporate client's references, exchange affiliations
and FICO assessment associations such.

Credit Terms -
It alludes to the terms under which a firm sells merchandise using a credit card to its clients. As
expressed before, the two segments of the credit terms are (a) Credit Period what's more, (b) Cash
Discount. The way to deal with be received by the firm in regard of each of these parts is examined:

 Credit period - Extending the credit time frame invigorates deals however expands the
expense on record of more tying up of assets in receivables. Additionally, shortening the credit
period lessens the benefit by virtue of decreased deals, yet in addition diminishes the expense
of composing up of assets in receivables. Deciding the ideal credit time frame, hence, includes
finding the period where the minimal benefits on expanded deals are actually counterbalance by
the expense of conveying the higher measure of records receivable.

 Money rebate - The impact of permitting money markdown can likewise be dissected on the
same example as that of the credit time frame. Alluring money markdown terms diminish the
normal assortment period bringing about decreased interest in records of sales. In this manner,
there is a sparing in capital expenses. Then again, money rebate itself is a misfortune to the
firm. Ideal markdown is set up at where the expense and advantage are precisely
counterbalancing.
Collection Strategies
A stringent assortment methodology is costly for the firm on account of high cash based expenses and
loss of generosity of the firm among its clients. Notwithstanding, it limits the misfortune by virtue of
awful obligations just as expands investment funds in terms of lower capital expenses by virtue of
decrease in the size of receivables. A parity has in this way to be stuck between the expenses and
advantages of various assortment techniques or then again arrangements.

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Trade Receivables Summary 2019 –

*Source – Hindalco Annual Report 2019

Analysis:

Of the exchange receivables balance as at 31/03/2019, ' 345.54 Crore (as at 31/03/2018, 185.10 Crore)
is expected from a solitary client being the Company's biggest client. There are no different clients
who speak to more than 10% of the absolute parity of exchange receivables.

Trade Receivables

*Source – Hindalco Annual Report 2019

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Analysis

No exchange or other receivable are expected from chiefs or other officers of the Company either
severally or together with any other individual. Further no exchange or other receivable are expected
from firms or privately owned businesses individually in which any chief is an accomplice, or
executive or part.

Loss recompenses incorporates extra arrangement of ' 5.26 crore (31/03/2018: ' 4.18 crore) made by
virtue of anticipated credit misfortune on Trade Receivables.

Trade Receivables Ratio

The records receivable turnover ratio is a bookkeeping measure used to evaluate an organization's
viability in gathering its receivables or cash owed by customers. The proportion shows how well an
organization utilizes and deals with the credit it stretches out to clients and how rapidly that transient
obligation is gathered or is paid. Records receivable turnover is a productivity proportion or movement
proportion that estimates how often a business can transform its records receivable into money during
a period.

Efficiency Ratio Yr-2019 Yr-2018 YOY% Change

Receivable Days 29.94 28.73 4.22

A high positive ratio is attractive, as it demonstrates that the organization's assortment of records
receivable is productive. A high records receivable turnover additionally shows that the organization
appreciates an excellent client base that can pay their obligations rapidly.

Under receivables management of a company, accounts receivables turnover ratio is measured to

quantify a company's effectiveness in collecting its receivables or money owed by clients. The ratio
shows how well a company uses and manages the credit it extends to customers and how quickly that
short-term debt is collected or is paid. The receivables turnover ratio is also called the accounts
receivable turnover ratio.

A high receivables turnover ratio can indicate that a company’s collection of accounts receivable is
efficient and that the company has a high proportion of quality customers that pay their debts quickly.

A low receivables turnover ratio might be due to a company having a poor collection process, bad
credit policies, or customers that are not financially viable or creditworthy.

A company’s receivables turnover ratio should be monitored and tracked to determine if a trend or
pattern is developing over time. A high receivables turnover ratio can indicate that a company’s
collection of accounts receivable is efficient and that the company has a high proportion of quality

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customers that pay their debts quickly. A high receivables turnover ratio might also indicate that a
company operates on a cash basis.

A high ratio can also suggest that a company is conservative when it comes to extending credit to
its customers. Conservative credit policy can be beneficial since it could help the company avoid
extending credit to customers who may not be able to pay on time.
On the other hand, if a company’s credit policy is too conservative, it might drive away potential
customers to the competition who will extend them credit. If a company is losing clients or
suffering slow growth, they might be better off loosening their credit policy to improve sales, even
though it might lead to a lower accounts receivable turnover ratio.

Hindalco’s Receivables Turnover Ratio

When we look at the Debtor’s Turnover Ratio, the consolidated debtor turnover days as on March
31, 2019 stood at 30 days versus at the end of March 31, 2018. This shows how consistent the
company is in managing its credit with the customers and this also reflects strong financial position of
the customers who are in the business with the company.

When we look at the Inventory Turnover Ratio, the consolidated inventory turnover days as on
March 31, 2019 stood at 67 days versus 68 days at the end of March 31, 2018. Here it is clear that
company has managed its inventory levels at best a company could.

Calculating Account Receivable Turnover Ratio (Aluminum + Copper)

Net Credit Sales = 2,218 crore.

Average Account Receivables = 1,623.576 crore (estimated)
Account Receivable Turnover ratio = .732

This is a high Account Receivables Turnover Ratio which indicated that the customers/clients pay their
dues timely.

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WORKING CAPITAL FINANCING POLICIES

Working capital arrangements, through their impact on the company's normal future returns and the
hazard related with these profits, at last affect investor riches. Successful working capital arrangements
are urgent to an association's for some time run development and endurance. In the event that, for
instance, an organization comes up short on the working capital expected to extend creation and deals,
it might lose incomes and benefits. Working capital is utilized by firms to look after liquidity, that is,
the capacity to meet their money unbelievably due. Otherwise, it may incur the costs associated with a
deteriorating credit rating, liquidation of assets, and bankruptcy.

There are basically two different policies of working capital management:

1. Current assets financing policies

2. Current assets investment policies

Current Assets Financing Policies

Current assets financing policy is to decide what portion of current assets should be financed by long
term sources and by short term sources.

1. Aggressive Policy
Aggressive policy is a high-risk policy, which yields higher returns. The companies who follow this
type of policy minimise their current assets or the amount of debt owed.
No payments of debtors are collected in time and are eventually invested in business. Creditors’
payments are delayed to the maximum. This sometimes led to selling out company to clear debts.

Fig 1: Aggressive Policy

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2. Conservative Policy
Businesses who want low-risk want such a policy. In this policy, credit limits are pre-set to a
specific amount. Also, such policies refrain doing business on credit with any debtor who
defaults.

Fig 2: Conservative Policy

3. Hedging/Matching Policy
This one is a hybrid between a working capital management policy and a working capital
financing policy. Businesses generally follow this policy when they want their working capital
to be less; thereby utilizing or investing the money elsewhere.

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Fig 3: Matching Policy

Current assets investment policies

Current assets investment policy is the proportion of investment in current assets and fixed assets. The
three types are:
 Conservative approach- This approach is relatively high level of investment in current assets
in order to support a given level of sales.
 Aggressive Approach- As per this approach, relatively low level of investment in current
assets is made to attain a given level of sales.
 Moderate Approach- In this approach, there is neither very high nor very low investment in
current assets made to attain a given level of sales.

Hindalco’s Working Capital Management Policy

Ratios 2019 2018

Current Ratio 1.05 1.03
ROE 10.8% 9.81%

The company’s current ratio is 1.05. Ideally, this ratio should be 2 but anything 1.5 is considered
healthy. In this case, Hindalco has a decent current ratio which means the higher the ratio, the more
liquid the company. The risk is lower which means it is less profitable is. ROE is 10.8% which should
be ideally between 15%-20%. As the current ratio is low and ROE is also low, Hindalco seems to be
following a Moderate working capital management policy. The risk and return is higher than the
conservative approach but lower than the aggressive policy.

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FINANCIAL STATEMENTS

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Inventories

a) Above inventories include goods in transit of ` 3,682.06 crore (31/03/2018: ` 3,057.55 crore).
b) For Inventories hypothecated against secure short-term borrowings, refer Note 31.
c) Fair value hedges are mainly used to hedge the exposure to change in fair value of commodity
price risks. The fair
d) Value adjustment remains part of the carrying value of inventory and taken to profit and loss
when the inventory is sold.
e) The Group write downs inventories (net of reversal) to net realizable value amounted to `
155.35 crore (31/03/2018:
f) ` 24.56 crore). These were recognized as expense and included in ‘Cost of Material Consumed’
and ‘Changes in
g) Inventories of Finished Goods, Work-in-Progress and Stock-in-Trade’ in the Consolidated
Statement of Profit t and Loss.
h) Inventories of the Company includes bulk material of coal and bauxite lying at yards and
precious metals of gold and
i) Silver lying at smelter and refinery aggregating to ` 1,730 Crore (31/03/2018: ` 1,870 Crore).

Trade Receivables

a) No trade or other receivable are due from directors or other officers of the Company either
severally or jointly with any
b) Other person. Further no trade or other receivable are due from firms or private companies
respectively in which any
c) Director is a partner, or director or member.
d) Loss allowances includes additional provision of ` 5.26 crore (31/03/2018: ` 4.18 crore) made
on account of expected
e) Credit loss on Trade Receivables.

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Cash and Cash Equivalents

(a) Includes ` 0.04 crore (31/03/2018: ` 9.4 crore) remittance in transit.

(b) There is no repatriation restriction with regard to cash and cash equivalents as the end of
reporting period and prior periods.

Current Borrowings

(a) Working Capital Loan for Aluminium Business, granted under the Consortium Lending
Arrangement, are secured by a first pari-passu charge on entire stocks of raw materials, work-
in-process, finished goods, consumable stores and spares and also book debts pertaining to the
Company’s Aluminium business, both present and future. Working Capital Loan of State Bank
of India for the Copper business is secured by a first pari passu charge stocks of raw materials,
work-in-process, finished goods and consumable stores and spares and also book debts and
other moveable assets of Copper business, both present and future.

(b) Cash Credit facilities for Utkal Alumina International Limited (Utkal) with banks are availed
under the consortium lending arrangement and are secured by (a) first pari-passu charge by
hypothecation of investments classified as “held for trading”, entire stocks of raw materials,
semi-finished and finished goods, consumable stores and spares, investments classified as
“available for sale”, stock-in trade and book debts pertaining to the company’s business, both
present and future and (b) second charge on Utkal’s fixed assets. The borrowings carry floating

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interest rate at MCLR (ranging from 3 months to one year) + Spread (ranging from 25 bps to 55
bps).

Ratio Analysis

(i) Debtor Turnover (days)

Consolidated Debtors Turnover Days as on March 31, 2019 stood at 30 days versus 29 days at the end
of March 31, 2018. This shows consistency in managing its credit with the customers and this also
reflects strong financial position of most of its customers. Debtor Turnover (days) is calculated as
Average Debtors/Total Consolidated Sales multiplied by 365.

(ii) Inventory Turnover (days)

Consolidated Inventory Turnover Days as on March 31, 2019 was at 67 days versus 68 days at the end
of March 31,
2018. This shows how well the Company managed its inventory levels during the year. Inventory
(days) is calculated as Average Inventory/Cost of Goods Sold (Cost of Sales + Depreciation)
multiplied by 365.

(iii) Interest Coverage Ratio:

Consolidated Net Interest Coverage Ratio as on March 31, 2019 stood at 4.40 times versus 3.84 times
at the end of March 31, 2018. This improved over the previous year because of better earnings
(EBITDA) and lower interest cost due to prepayments and re-pricing of the long-term loans in India.
This shows the Company’s ability and strength to meet its interest obligations.

(iv) Current Ratio

Consolidated Current/Liquidity Ratio as on March 31, 2019 stood at 1.60 times versus 1.53 times at
the end of March 31, 2018. This reflects a strong liquidity or solvency of the Company.

(v) Debt to Equity Ratio

Consolidated debt to equity ratio as on March 31, 2019 stood at 0.91 times versus 0.95 times as on
March 31, 2018. This reflects the Company’s strong balance sheet to meet its current short-term
obligations.

(vi) Return on Net worth (RONW)

Consolidated Return on Net Worth for FY 2018-19 stood at 9.56% versus 8.24% in FY 2017-18 (after
adjusting for tax effected exceptional items in FY 2017-18). This shows the Company’s strength in
generating higher profits in FY 2018-19 on the shareholders' equity.

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CONCLUSION
Hindalco Industries Limited is a leading Aluminum producing industry under the flag ship of Aditya
Birla Group. As the working capital is essential for the smooth running of a business it is important to
study whether the Hindalco Industries Ltd. has achieved adequate amount of working capital or not.
Maintaining adequate working capital ensures the improvement of profitability. The finance manager
always tries to maintain an adequate working capital at every time so as to carry on operations
successfully and maximize the return on investment. Better working capital will reduce interest cost.
The study has helped to have a clear understanding of the working capital management and also
arrived at the following conclusions:
• Firm has a good working capital management policy.
• Firm is able to meet its both short term and long-term obligations.
• Firm is able to continuously decrease its receivables period
• The firm's turnover ratio is up to the mark
• The firm is continuously indulged in expansion policy and is making optimum utilization of funds.

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