New Changed Report

PROJECT REPORT ON

CASH MANAGEMENT SYSTEM AND INLAND DISCOUNTING

ORGANIZATION

BHUSHAN STEEL LIMITED, SAHIBABAD (Formerly Bhushan Steels and Strips Limited)

Submitted to:-

Submitted by:-

Mr General Manager (Finance)

Student of college

BHUSHAN STEEL LIMITED,

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CONTENTS 1. ACKNOWLEDGEMENT………………………….. 2. PREFACE…………………………………............... 3. INTRODUCTION………………………………….. -

Cash Management……………………………

-

Service………………………………………..

4. OBJECTIVE AND SCOPE OF RESEARCH……… 5. METHODOLOGY…………………………………. 6. OVERVIEW OF STEEL SECTOR………………… 7. PROFILE OF THE ORGANIZATION…………….. -

About the Company…………………………..

-

Research and Development…………………..

-

Products from group Companies……………..

-

Company’s Performance at a glance…………

-

Cash Flow Statement…………………………

-

Performance Spotlight………………………..

- Comparitive Analysis of Financial Statement - Ratio analysis

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8. ACTIVITIES ENGAGED IN……………………… 9. BUSINESS GOALS AND STRATEGIES………… 10. S.W.O.T. ANALYSIS……………………………… 11. CASH MANAGEMENT…………………………… -

Importance of Cash for Company……………

- Cash Management at BHUSHAN STEEL LIMITED 12.LETTER OF CREDIT(INLAND DISCOUNTING…. 13.TYPES OF CREDIT & IMPORTANCE 14. ANALYSIS AND FINDINGS……………………… 15. CONCLUSION…………………………………….. 16. RECOMMENDATION……………………………. 17. BIBLIOGRAPHY…………………………………..

ACKNOWLEDGEMENT 3

In pursuit of MBA , internship is a critical component of the entire package. Bhushan Steel limited has given me the opportunity to gain invaluable experience under the guidance of Mr. Pankaj Tiwari, (GM Finance). His continuous support and co-operation along with his invaluable in hand experience about the Cash Management Service provided me with the conceptual understanding and practical approach needed to work efficiently for this project. I am also indebted to him for sharing vital information critical to the accomplishment of the project objectives and providing direction in the pursuance of the project. The constant support rendered not only by him, but by the entire Bhushan Steel Limited family is praiseworthy. Last but not the least; I would like to take the opportunity to thank my trainer Mr. Harish Tiwari ,Mr.Vineet Nandedkar,Ms.Vimla Pandeyfor his intellectual stimulation and moral support through out my project.I hope this report reflecting my learning in the past 8 weeks is as beneficial to the organization as it has been to me. Again, I sincerely thank all of them. Sneha Srivastav

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PREFACE As a part of PGDM Programme, a student has to pursue a project duly approved by the Director of the Institute. I had the privilege of undertaking a project on Cash Management at BHUSHAN STEEL LIMITED. Steel industry had been facing difficulties over the past few years. Lately however, it has witnessed a boom as a result of infrastructure development in the country and increasing demand in the world market. Cash management is very important for a company for its day to day operation. For cash management the very first requirement is the procurement of funds at lowest possible cost. Banks have realized this need of corporate and have come up with CASH MANAGEMENT SERVICES (CMS). This project evaluates the cost benefits of CMS to BHUSHAN STEEL LIMITED as compared to the conventional collection method when sale is on cash basis.

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INTRODUCTION

CASH MANAGEMENT SYSTEM:Cash management system (CMS) is one of the product ranges under the Collection & Production Services (CAPS) offered by banks in the country. CMS envisages elimination of one leg of movement of cheque from drawer to beneficiary’s place and travel bank to speed up the process. The corporate can access the collections effected at meaning (around 170/ corp. banks & 488 locations by ICICI bank) locations across the country covered under the management within 24 to 48 hours at the location of corporate choice. CASH MANAGEMENT SERVICES: Cash management service, as the name suggest is intended at management of cash with corporate entities. It is a service provided by banks to corporate which enables them to have collection from their debtors/receivables with in a period of time earlier than mentioned on the instrument (check/DD). Every organization has receivables to collect from its dealers/ debtors/ customers. Every revenue collected by the organizations gets paid in one form or the other. CMS provides customized solutions to corporate needs in the liquidity management. A CMS facility in any organization will enable that organization to have prompt collection from its debtors who are located at distant places from the corporate office. Had this facility not been there, collection would have meant collection either through outstation cheque or through Demand Draft. In that case DD’s worth corers of rupees would have brought substantial amount of DD charges to the

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company’s P/L a/c or in the other case, the outstation would take days to reach the company’s accounts department & then some more days to get cleared with deduction of some bank charges from the cheque amount. Both of these options shall mean that neither we get our collection quickly nor we get the full amount as banks would charges (deduct) some commission on the amount of cheque. Here CMS comes to our rescue. It is a beautiful facility giving us the desired liquidity in the shortest period of time. This service saves enormous amount places where the transaction volume is high.

The Cash Management System manages the transfer of funds between your cash accounts, cash management investment accounts, asset based revolving line of credit and line of credit accounts, according to the rules you set up for them. For each account, you must establish minimum and maximum balances and determine the relative priority for applying cash to the account, or using cash from the account. The Cash Management System applies these rules automatically throughout the Plan Period, using the other /miscellaneous cash account as a balancing account. The balance in the Other/Miscellaneous cash account will be calculated as containing whatever cash is available after all of the Cash Management System rules have been applied for the other accounts in the Cash Management System. If there is inadequate cash in the system, this will result in Other/Miscellaneous cash having a negative balance. Applying Extra Cash to the Cash Management Accounts - Cash is first applied

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to put enough cash in each of the Cash Management accounts so that their minimum balance requirements are met. This will occur even if it leaves the Other/Misc Cash account with a negative balance. If additional cash exists after the minimum balance requirements are met for all of the Cash Management Accounts, then cash is first applied to 'fill up' the Priority 1 account until it reaches its maximum allowed balance. If additional cash exists, it is next applied to the Priority 2 account, and so on until all Cash Management accounts have been filled to their maximum allowed balance, or the Other/Misc Cash account has run out of cash to apply. If the system runs out of extra cash to apply, the disbursement ends, leaving the Other/Misc Cash account with a zero balance. If all of the Cash Management accounts are filled to their maximum allowed balance, or the Other/Misc Cash account has run out of cash to apply. If the system runs out of extra cash to apply, the disbursement ends, leaving the Other/Misc Cash account with a zero balance. If all of the Cash Management accounts are filled to their maximum limits, then all remaining cash will be left in the Other/Misc. Cash account.

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Using Needed Cash from the Cash Management Accounts - If the other/Misc. Cash account has a positive balance; cash is first used from it until it is reduced to a zero balance. If more cash is required, it is then taken from the Priority 1 account, until it is reduced to the minimum amount, or no more cash is required. Next, cash is used from the Priority 2 account, and so on in similar fashion, until no more cash is needed or until all Cash Management Accounts have been reduced to their minimum amounts and more cash is required, then cash is removed from the Other/Misc. Account even if this results in a negative balance.

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The Cash Management System, located under the Assumptions/ Assumption Tools branch of the Organization Tree, allows us to view and set the cash management priorities for all of the Cash Accounts BBB's and Lines of Credit BBB's that is set up in the model.

ADVANTAGES OF CMS: 1. Saves a huge amount in form of DD commission and clearing charges. 2.

All high value cheque gets cleared and credit is given the same day.

3. We desired the desired liquidity in form of cash very quickly. This means there is a saving of interest on the amount that would have remained blocked under the normal course of clearing and credit by banks. 4. Even if the cheque gets dishonored we can use the amount till the banks get to know it. During this time we can use this money. 5. When credit is given same day, we have our cash position by evening we

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can accordingly plan our investment and expenditures accordingly for coming days. 6. We can have an accurate figure of what were our collections from which place. LIMITATIONS OF CMS: 1. Collection would have meant collection either through outstation cheque or through DD. 2. DD’s worth crores of rupees would have brought substantial amount of DD charges to the company’s P/L account. 3. The outstation cheque would take days to reach to the company’s account s department and some more days to get cleared with deduction of some bank charges from the cheque amount.

HOW DOES CMS WORKS:

Banks offering CMS allow the debtors of a corporate to deposit cheque for payment to the corporate at their place of origin. For example, if BSSL has an account with ICICI bank at Delhi and debtors at Chennai who wants to send this payment to BSSL through bank, CMS would allow him to deposit the cheque at ICICI Chennai in the account of BSSL. ICICI would not charge anything from the depositor and would give the credit of the cheque amount of BSSL in the evening at the same day. ICICI would charge a very nominal amount from BSSL, which is charged according to the cheque amount.

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Now this means that the cheque that would have taken 3 days to reach us through some courier and 3 more days to get cleared and involving some real transit costs, now gets cleared the same day it is deposited and involving nominal charges. At the same time the DD commission and clearing charges would no longer be deducted from the collectable amount. This CMS facility may seem convincing while going through this part of the report, but it is very useful and efficient as would be seen in the later part of the report.

LETTER OF CREDIT

A letter of credit is a document issued mostly by a financial institution which usually provides an irrevocable payment undertaking (it can also be revocable, confirmed, unconfirmed, transferable or others e.g. back to back: revolving but is most commonly irrevocable/confirmed) to a beneficiary against complying documents as stated in the credit. Letter of Credit is abbreviated as an LC or L/C, and often is referred to as a documentary credit, abbreviated as DC or D/C, documentary letter of credit, or simply as credit (as in the UCP 500 and UCP600). Once the beneficiary or a presenting bank acting on its behalf, makes a presentation to the issuing bank or confirming bank, if any, within the expiry date of the LC, comprising documents complying with the terms and conditions of the LC, the applicable UCP and international standard banking practice, the issuing bank or confirming bank, if any, is obliged to honor irrespective of any instructions 12

from the applicant to the contrary. In other words, the obligation to honor (usually payment) is shifted from the applicant to the issuing bank or confirming bank, if any. Non-banks can also issue letters of credit however parties must balance potential risks.

The LC can also be the source of payment for a transaction, meaning that an exporter will get paid by redeeming the letter of credit. Letters of credit are used nowadays primarily in international trade transactions of significant value, for deals between a supplier in one country and a wholesale customer in another. They are also used in the land development process to ensure that approved public facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Since nowadays almost all letters of credit are irrevocable, (i.e. cannot be amended or cancelled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any). However, the applicant is not a party to the letter of credit. In executing a transaction, letters of credit incorporate functions common to giros and Traveler's cheque. Typically, the documents a beneficiary has to present in order to avail himself of the credit are commercial invoice, bill of lading, insurance documents. However, the list and form of documents is open to imagination and negotiation and might contain requirements to present documents issued by a neutral third party evidencing the quality of the goods shipped.

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DIAGRAMATIC REPRESENTATION OF THE WORKING OF LETTER OF CREDIT

OBJECTIVE AND SCOPE OF RESEARCH BSL has saved huge amount of cost after adopting CMS. Had BSL not adopted this system of collection it would have received the amount in not less than 4-5 days. And for the same period it would have to avail the Cash Credit (CC) facilities

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granted to it by various banks. But in order to use the funds available through CC account it had to pay an interest of 9-10% and in some cases up to 12%. Use of CMS has brought down the cost considerably and BSL has been able to save the interest amount because now it receives the fund within 24-48 hrs. For calculating the cost saving for BSL the data set for the month of Ist quarter end (April 07-May 07) is considered for ICICI bank, Corporation Bank, HDFC Bank, UTI Bank and HSBC Bank. The cost incurred by BSL would include the draft charges, Postage charges and interest forgone. While calculating the draft charges it has been assumed that BSL bears the cost of draft sent by customers all the time, this might not hold true in all cases but for its major customers it would have to do so because of the competition in the industry. If BSL received cash in 4 days it had to avail the CC limit and paid interest for the same period that would also add to the cost incurred by BSL. BSL also would have to bear courier charge which is assumed to be Rs 35 per day per location which is equal to what DTDC charges. Interest is calculated @ 11% p.a. Interest Forgone = Total cash in a week * .11/365*(4- days taken in CMS) Where 4 are the days taken by the draft to reach Delhi & gets realized i.e. 2 days in transit & 2 days clearing The Objective was to gather information about the collection charges charged by different banks at different locations for the given period and find out which Bank provides better services at minimum cost. The scope of research is spread over the comparison of the collection charges under the Cash Management System availed by Bhushan Steel Limited through the above stated Banks.

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METHODOLOGY

For the research work, the data used for the project was both primary as well as secondary in nature. For collecting the primary data, the source was the company which provided the necessary data which would be needed for the project .For instance, for company’s profile the company provided its annual report through which we gathered the necessary data and followed and prepared the company’s performance for past few years. Even for calculating charges for the payment received by the company, which is being charged by the different banks for the CMS for different locations, as well as penalty charges in case of any default payment was provided by the company. We gathered the following subject matter from Company: • Bank Reconciliation Statement Sheet. • Statement of Accounts. • Company’s Balance Sheet. • Statement of collection charges. • Statement of Cheque These constituted the primary data for the project material of the research objective.

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The Secondary Data constitutes the Bank Profile and the services provided by them. The Steel Industry overview and the comparatives with the other steel industry constitute the Secondary data. The analysis is done on the basis of the various Statements of the Cash Management Services provided by the bank to Bhushan Steel Limited. The total collection from various locations is calculated for the respective banks. The collection charge is sought from the provided documents. In case of default of payments the penalty charges are taken into consideration. AN OVERVIEW OF STEEL SECTOR

Global Scenario "In 2005 World Crude Steel output at 1129.4 million metric tonne was 5.9% more than the previous year. (Source: IISI) "China remained the world's largest Crude Steel producer in 2005 also (349.4 million metric tonne) followed by Japan (112.47 million metric tons) and USA (93.89 million metric tons). India occupied the 8th position (38.08 million metric tons). (Source: IISI) The International Iron & Steel Institute (IISI) in its forecast for 2006 has confirmed the trend of recent years of an increase in steel use in-line with general economic growth and with the fastest growth occurring in the countries with the highest GDP growth such as India and China. Apparent world-wide Steel Demand is forecast to grow to between 1,040 and 1,053 million tonnes in 2006 from a total of 972 million tonnes in 2004. This is a growth of 4-5% over the two year period.

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However, according to IISI the cost of raw materials and energy would continue to represent a major challenge for the world steel industry. Market Scenario •

After liberalization, there have been no shortages of iron and steel materials in the country.

•

Apparent consumption of finished (carbon) steel increased from 14.84 Million Tonnes in 1991-92 to 43.471 million tonnes (Provisional) in 200607.

•

Steel industry that was facing a recession for some time has staged a turnaround since the beginning of 2002.

•

Efforts are being made to boost demand.

•

China has been an important export destination for Indian steel.

•

The steel industry is buoyant due to strong growth in demand particularly by the demand for steel in China.

Production •

Steel industry was delicensed and decontrolled in 1991 & 1992 respectively.

•

Today, India is the 7th largest crude steel producer of steel in the world.

•

In 2007-08(Apri-May''07), production of Finished (Carbon) Steel was 8.250 million tonnes (Prov).

•

Production of Pig Iron in 2007-08(April-May'07) was 0.803 Million Tonnes (Prov).

•

The share of Main Producers (i.e. SAIL, RINL and TSL) and secondary producers in the total production of Finished (Carbon) steel was 33% and 67% respectively during the period 2007-08 (April, 2007).

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Last 4 year's production of pig iron and finished (carbon) steel is given below: (in million tonnes) Category 200304

200405

200506

2006-07 2007-08 (Provisional) May'07) Estimated) 3.764 3.228 4.695 4.960 0.803 36.957 40.055 44.544 49.391 8.250

(April(Prov.

Pig Iron Finished Carbon Steel (Source: Joint Plant Committee)

Demand - Availability Projection •

Demand – Availability of iron and steel in the country is projected by Ministry of Steel annually.

•

Gaps in Availability are met mostly through imports.

•

Interface with consumers by way of a Steel Consumer Council exists, which is conducted on regular basis.

•

Interface helps in redressing availability problems, complaints related to quality.

Pricing & Distribution •

Price regulation of iron & steel was abolished on 16.1.1992.

•

Distribution controls on iron & steel removed except 5 priority sectors, viz. Defence, Railways, Small Scale Industries Corporations, Exporters of Engineering Goods and North Eastern Region.

•

Allocation to priority sectors is made by Ministry of Steel.

•

Government has no control over prices of iron & steel.

•

Open market prices are generally on rise. Price increases of late have taken place mostly in long products than flat products.

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Imports of Iron & Steel •

Iron & Steel are freely importable as per the extant policy.

•

Last four years import of Finished (Carbon) Steel is given below:-

Year

Qty. (In Tonnes) 1.540 2.109 3.850 4.100

Million

2003-2004 2004-2005 2005-2006 2006-07(Prov. estimated) 2007-08 (Apr-May, 0.400 2007) (Prov. estimated) (Source: JPC)

Exports of Iron & Steel • Iron & Steel are freely exportable. • Advance Licensing Scheme allows duty free import of raw materials for exports. •

Duty Entitlement Pass Book Scheme (DEPB) introduced to facilitate exports. Under this scheme exporters on the basis of notified entitlement rates, are granted due credits which would entitle them to import duty free goods. The DEPB scheme was temporarily suspended from 27th March 2004 to 12 July, 2004 for export of steel items. The Scheme has since been restarted. The DEPB rates have also been substantially reduced.

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•

Exports of finished carbon steel and pig iron during the last four years and the current year is as : (Qty. in Million Tonnes) Finished (Carbon) Pig Iron Steel 4.506 0.629 4.835 0.518 4.381 0.393 4.478 0.440 4.750 0.350

2002-2003 2003-2004 2004-2005 2005-2006 20062007(Prov.estimated) 2007-2008(April-May 0.850 07) (Prov.estimated)

0.073

(Source: Joint Plant Committee)

Duties & Levies on Iron & Steel Customs Duty • Peak rate for non-agricultural products reduced from 15 % to 12.5 %. •

Customs Duty on stainless steel and other alloy steel has been reduced from 10 % to 7.5 %.

• Duty on non- alloy steel remains unchanged at 5%. •

Duty for ferro alloys reduced from 10% to 7.5%

• Customs Duty on primary and secondary forms of non-ferrous metals viz. Zinc has been reduced from 10% to 7.5%. • Duty on steel melting scrap has been raised to 5%.

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•

Duty on refractories reduced to 7.5 %. Duty most of the raw material for manufacture of refractories has also been reduced to 7.5%.

•

Duty on ores and concentrates reduced from 5 % to 2 %. In respect of Ministry of Steel this would mean a reduction in duty of 3% on iron ore, manganese ore and chrome ore.

• The Special Countervailing Duty (CVD) of 4 % to be imposed on all imports with a few exceptions viz. ships for breaking, coal and coke etc. Full credit to be allowed to manufacturers of excisable goods. Service tax: • Service tax rate increased from 10% to 12%. Direct Taxes: • No change in rates of personal income tax or corporate income tax. No new taxes are also being imposed.

Levies on Iron & Steel: SDF LEVY- This was a levy started for funding modernization, expansion and development of steel sector. The Fund, inter-alia, supports: 1) Capital expenditure for modernization, rehabilitation, diversification, renewal & replacement of Integrated Steel Plants. 2) Research & Development 3) Rebates to SSI Corporations

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4) Expenditure on ERU of JPC •

SDF levy was abolished on 21.4.94

•

Cabinet decided that corpus could be recycled for loans to Main producers

•

Interest on loans to Main Producers be set aside for promotion of R&D on steel etc.

•

An Empowered Committee has been set up to guide the R&D effort in this sector.

•

EGEAF – Was a levy started for reimbursing the price differential cost of inputs used for engineering exporters. Fund was discontinued on 19.2.96.

Opportunities for growth of Iron and Steel in Private Sector The New Industrial Policy Regime: The New Industrial policy has opened up the iron and steel sector for private investment by (a) removing it from the list of industries reserved for public sector and (b) exempting it from compulsory licensing. Imports of foreign technology as well as foreign direct investment are freely permitted up to certain limits under an automatic route. Ministry of Steel plays the role of facilitator, providing broad directions and assistance to new and existing steel plants, in the liberalized scenario. The Growth Profile (I) Steel The liberalization of industrial policy and other initiatives taken by the Government have given a definite impetus for entry, participation and growth of the private sector in the steel industry. While the existing units are being modernized/expanded, a large number of new/Greenfield steel plants have also

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come up in different parts of the country based on modern, cost effective, state ofthe-art technologies. At present, total (crude) steel making capacity is over 34 million tonnes and India, the 8th largest producer of steel in the world, has to its credit, the capability to produce a variety of grades and that too, of international quality standards. As per the ratings of the prestigious “World Steel Dynamics", Indian HR Products are classified in the Tier II category quality products – a major reason behind their acceptance in the world market. EU, Japan has qualified for the top slot, while countries like South Korea, USA share the same class as India. (II) Pig Iron In pig iron also, the growth has been substantial. Prior to 1991, there was only one unit in the secondary sector. Post liberalization, the AIFIs has sanctioned 21 new projects with a total capacity of approx 3.9 million tonnes. Of these, 16 units have already been commissioned. The production of pig iron has also increased from 1.6 million tonnes in 1991-92 to 5.28 million tonnes in 2002-03. During the year 200304, the production of Pig Iron was 5.221 million tonnes.

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PROFILE OF THE ORGANISATION

BHUSHAN STEEL LIMITED:Bhushan Steel Limited, is an ISO 9002, QS 9000 certified and a company of Rs. 2868 crores ($650 million approx.). As one of the prime movers of the Technological Revolution in the Indian Cold Rolled Steel Industry, BSL has emerged as the country’s largest and the only CR steel plant with an independent line for manufacturing Cold Rolled coils and sheets up to a width of 1700 mm, as well as Galvanized Steel Coils & Sheets up to width of 1350mm. The Company currently has capacity to produce ALMOST ONE MILLION MT/Annum of Cold Rolled Steel at Sahibabad and Khopoli Works. The Company is a “single-point source” for a wide variety of products such as CRCA, Galvanized and Color coated sheets, High tensile steel trapping, hardened and tempered steel strips (HTSS) and Precision tubes.

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Bhushan Steel Ltd. (BSL) is in the process of setting up one of the most advanced Hot Rolling Plants of the world in Orissa. The construction of the first phase is being carried out with speed and is nearing completion. Together with its state-ofthe-art Cold Rolling Plant at Sahibabad and another one at Khopoli, the company is well poised in the industry. The company has recently launched Galume, zinc and aluminium coated sheet, for the first time in India. Thereby, it is all set to revolutionize the industry and demand patterns. BSL is currently exporting to Europe, USA, Canada, Africa, China and the Middle East, in addition to the Asian markets. And, is eagerly looking ahead, steadily defining the future of steel day by day.

Cold

Rolled

Steel:

The Cold Rolling Mill Complex is a towering citadel the first of its kind in the Steel sector of the country having equipments supplied by Global leaders. 26

The state-of-the-art 6 Hi 1700 mm Universal Crown Cold Rolling Mill from Hitachi, Japan ranks as the widest CR mill in India along with additional features of both side auto shape control with automatic spot cooling system for better shape & flatness with the most advanced Level-II adaptive control computerization. It is the first mill of its kind in the whole of Asia.

(6HiUCM Hitachi, Japan) The mill is capable of maintaining extremely close thickness tolerances and can produce ultra-thin CR Steel for inner shield of Picture Tube and Battery application i.e. up to a thickness of 0.10mm in close tolerances.

The company has also installed Electrolytic Cleaning Line (ECL) with technology from Nippon Denro, Japan to remove surface contaminants. The 27

100% Hydrogen based (Hicon) high convection annealing furnaces from world leader Ebner, Austria are yet another exclusive feature of our identity.

(ECL Ebner, Austria) The Skin Pass mill from Calcim, France with tension leveler and Electrostatic Oiling for uniform spray of rust preventive oil provides world standard quality of material suitable to manufacture Automotive Skin panels.

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(Skin Pass Clecim, France) The Roll Grinding machine and the Electrical Discharge Texturizing machine (EDT) for the rolls from the world leaders Waldrich Siegen, Germany ensures uniform Mirror finish material for Automobile Head lamp reflectors and other Electroplated items & Matte surface finish, which in turn

improves

the

paintability,

suitable

for

automobile

skin

panels,respectively. The CR Slitters from Fimi, Italy and Daehyun, Korea with most advanced features like 3 M tension roll and computerized shim-less tooling ensure absolute scratch-free material with a very close tolerance and width as low as 10mm. These machines are the first other kind in the country.

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(CR Slitters FIMI, Italy)

The Cut-to-length lines from Heinrich George, Germany; Fimi, Italy and Daehyun, Korea are milestones of precision engineering. These machines provide a very close tolerance on length as low as +2/-0mm (even less can be achieved). The on-line washing, oiling, electromagnetic sheet stacker and on-line packing system attached to these lines ensure International Quality Standards. These are the first lines of their kind in the country where handling of sheets are completely automated during shearing and packing.

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(CTL Daehyun, Korea) To ensure the right quality input of HR Coils to the mill, the company has the most modern Push-Pull Pickling line with technology back up from Proeco,

Canada.

In addition to the above the company also has one latest 6 Hi 1020mm & one 20 Hi 1250mm wide Sendziemer mill with automatic gauge control and

8 CR Slitters and 14 Cut-to-length lines. The company enjoys uninterrupted power supply from the UPSEB on 220KV, which is the first of its kind in the State of Uttar Pradesh. Further to have captive and better quality of power for the smooth operation of the complex, company has installed 24MW Captive Power Plant imported from MAN B&W, Germany. This ensures consistent supplies of material to our customers even in times of acute power shortage.

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Galvanized steel: The Galvanized sheets & coils manufactured by the company have excellent Zinc adhesion and corrosion resistance achieved by applying a special coating of Zinc & Zinc alloys. This is further enhanced by giving a special chemical treatment on the zinc-coated surface to prevent the formation of white rust. The Company has three Galvanizing lines consisting of most modern continuous annealing furnaces based on the design of Stein Heurty, France.

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(Continuous Galvanizing Line) One of the Galvanizing line has on line 4 Hi skin passing cum tension leveling facility to produce Galvanized skin passed Material with zero spangles for White Goods, Domestic appliances & Automotive applications. The on line coating thickness control equipment from Valmet, Canada and Radiometric, Germany attached to the galvanizing lines ensure uniform zinc coating mass. The Galvanized skin passed sheets & coiled has an excellent surface finish suitable for manufacturing products of aesthetic importance. This product is widely accepted and extensively used for the manufacture of Air Conditioners, Washing Machines, Refrigerators, Dish Washers, Visi Coolers,

Microwave

Ovens,

Computers,

Bus

body,

Automobile

Components, Color coated sheets & coils. The company is the largest supplier to these industries-in fact single source suppliers to many of the customers. Recently, the company has also introduced Galvanneal material, which is most suitable for Appliances and Automobiles industry.

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The Galvanized sheets, coils and corrugated sheets manufactured by the company are globally accepted especially in important international markets of Europe, USA, Canada, South Africa, Kenya, Ethiopia, UAE, Qatar, Oman, Nepal, Myanmar, Taiwan, Vietnam, China, Uganda, Singapore, Tanzania, and Bangladesh.

Research & Development The Company has a latest state of the art R&D Center and has many firsts to its credit including development of High Tensile & IF Steel for passenger car skin

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panel application. Development of panel grade material for Refrigerator. Visi Coolers & Chest Coolers of Coca-Cola & Pepsi, ultra-thin CR Steel for picture tube & battery application etc. A fully equipped Quality Control laboratory has test equipments of unmatched standards- Polyvac 2000 Emission Spectrometer from Hilger, England, fully computerized Universal Testing machine, Micro Hardness tester from Zwick, Germany, Drawability tester from Tinius Olsen, USA, Ionometer from Orion, USA, surface Finish tester from innovation, product quality and product range supported by an extensive network of branch offices, dynamic dealers and distribution network, BHUSHAN is today a familiar name in the country. STRATEGIC ALLIANCE In order to acquire the latest know-how to establish the quality requirements of all customers in Automobile, White Goods Appliances & General Engineering industry, the company has entered in to a technical collaboration with the world's one of the largest steel producer Sumitomo Metal Industries, Japan.

Products from Group Companies Group Companies

Products

Section / Dimension

Grades

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Standard Applications Used

Bhushan Industries Limited, Chandigarh

Bhushan Metallics Limited, Derabassi (Punjabi)

Width: 12-535 mm EDD,DD,D Narrow Thickness: 0.30- High Carbon IS / JIS Width CR 4.00 mm Steel

Automobile, white goods and General Engg. Industry

Width: 20-70 mm Thickness:0.500.80 mm 'Zn' Cable Tape D coating: 210 gm/m* & above on each Side

XLPE Cables

IS

Outside Diameter: M.S ERW IS/BS/ 1/2"-4" (15 mm to Black & GI Pipes ASTM 100 mm N.B.) Outside Diameter: 8.80 - 50.80 mm Thickness: 0.35 3.25 mm Length: Bright 3.0 - 9.0 mtr in Oiled long length. 150 2500 mm in cut length.

Bhushan Metallics Limited, Chandigarh

Precision Tubes

Bhushan Industries Limited, Calcutta.

Width:1250 mm CR/GP/ GC (max.) Thickness : EDD, DD, D IS/ JIS 0.12 - 1.60 mm

&

IS/BS/ JIS/DIN/ ASTM

COLD ROLLED STEEL COILS/SHEETS SPECIFICATIONS

Thickness(mm)

0.10 to 4.00 36

Water, air and gas Application

Automobile, Bycycle, Process, Electrical & General Engg. Industry.

Roofing, Construction &General Engg. Application

Width (mm) Cut-to-Length (mm) + OUTER Coil Weight (MT) DIAMETER(MM) Surface Finish THICKNESS(MM) LENGTH APPLICATIONS Grades

10 to 1700(Max) Up to 4500mm with tolerance of +2/-0 mm. ERW TUBES CEW TUBES (12.70 Further close tolerance available request TO 114.00MM 09.00on TO 110.00) Up to 30 MT ( 7 to 18 Kg/mm width ) Super Bright, Bright, Dull & 0.80 Matte. 0.40. TO6.00 TO 6.00 MTRS. UPTO 12 MTRS. (UPTO R Value12with controlled Rmax on request). Automotive, Boilerper & JIS/BIS/ASTM/EN Automotive, Boiler, Standards Shock Specifications-As Heat Exchangers ,Air Absorbers, Textiles, General Low Carbon CRCA Grades Heater, GEN. EGG., Engg. Propeller Shafts, Super EDD/EDD/DD/D (SPCX, SPCEN, SPCD, SPCC) of nonBicycle IF-Height & Propeller Cylinder boreHigh tubes for Low ageing, Strength steel (IF-HSS), Strength Shaftssteel (HSLA). viz., ST-42, special applications & front Alloy ST-45, ST-52, SAPH-400/410, fork Corrosion tube for two wheeler.Steel viz. Steel for Porcelein Enameling, Resistant Tin
H.R. PICKLED/ SKIN PASSED& OILED Thickness

Up to 3.00mm 3.00mm4.00mm Max.Width for Cut 1500mm 1250mm Size Width for Coil 50mm 50mm -1700mm 1700mm

Above 4.00mm 600mm – 50mm 1700mm

-

GALVANIZED STEEL COILS/ SHEETS PLAIN SKIN

CORRUGATED HLGP 37

FGP

GPC

PASSED Thickness(mm) 0.10 to 0.30 2.50 2.50

to 0.12 to 1.60

PETROL/ FUEL TANK 0.30 to 2.50

Z

COMPANYS’ PERFORMANCE AT A GLANCE Balance Sheet as on 31st March 2007 (In Lacs)

38

FAN BUSES/COACH BLADE ES 0.40 to 0.60 to 1.60 1.20

SOURCES OF FUNDS: Share Holders Funds: Share Capital Reserves & Surplus Deferred Tax Liability (NET) Loan Funds Secured Loans Unsecured Loans TOTAL

As on 31st Mar

As on 31st

2007

2006

4247.17 117203.29 121450.46

4127.17 84839.55 88966.72

12374.12

6631.24

241283.74 82913.96 324197.70

165091.22 38526.59 203617.81

458022.28

299575.77

39

Mar

APPLICATIONS OF FUNDS: Fixed Assets Gross Block Less: Depreciation Net Block Capital Work in Progress

269372.64 97027.00 172345.64 189211.25 361556.89

Investments

179590.57 77582.98 102007359 129522.49 231530.08

2085.39

1916.57

75634.14 53889.61 10013.68 36737.48 176274.91

47478.46 40447.72 8151.64 24114.20 120192.02

Net Current Assets

80115.57 1779.34 81894.91 94380.00

52658.74 1404.16 54062.90 66129.12

TOTAL

458022.28

299575.77

Current Assets, Loans & Advances Inventories Sundry Debtors Cash & Bank Balances Loans & Advances Less:

Current

liabilities

provisions Current Liabilities Provisions

&

PROFIT AND LOSS FOR THE YEAR ENDED 31st Mar 2007 (In lacs) YEAR

YEAR

ENDED 31-Mar-07

ENDED 31-Mar-06

INCOME Sale of Products & Other Income

386816.15

280514.78

EXPENDITURE Manufacturing & Other Expenses

320962.37

239670.11

40

Profit Before Interest, Depreciation and Tax Interest & Financial Charges

65853.78 7725.02

40844.67 8303.07

Amortization Expenses Amortized Depreciation

58128.76 20892.21

32541.60 393.21 16575.77

Profit Before Tax Provision for Tax-Current

37236.55 5910.57

15965.83 32.00

Profit After Current Tax

31325.98

15445.11

Profit After Tax Profit Brought Forward From Previous

31325.98

15445.11

Year

3604.36

3992.52

Profit Available For Appropriation

34930.34

19437.63

APPROPRIATIONS Proposed Dividend Provision for Dividend Tax Transferred To Debenture Redemption

1061.79 180.45

1031.79 144.71

Profit

Before

Depreciation

and

Reserve 8975.00 Release from Debenture Redemption Reserve (3036.45) 5938.55 Transferred to General Reserve 26000.00 Balance Carried Forward to Balance Sheet

(5354.17) (5354.17) 20000

1749.55 34930.34

3604.36 19437.63

40471662

40471662

Weighted Average No. of Equity Shares

41

Basic & Diluted EPS Nominal Value of Share

74.96 10.00

37.90 10.00

CASH FLOW STATEMENT FOR THE YEAR ENDED 31st Mar 07( In lacs) 2006-2007

2005-2006

37236.55

15965.83

(A) CASH FLOW FROM OPERATING ACTIVITIES: Net Profit Before Tax and extraordinary items Adjustments for: Depreciation Transfer from General Reserve Expenses Amortized Provisions Interest and Financial Charges Interest Income Profit on Sale of Investment Loss/(Profit) on Sale of Fixed Assets Provision for Doubtful Debts Bad Debts Written Off Effects of Exchange Rate Change

20892.21 90.15 7725.02 (28.46) (69.88) (64.41) 127.68 -(1837.57

16575.77 393.21 23.53 8303.07 (0.46) (7.47) (16.47) (193.31) 254.24

)

102.54 25181.03

23856.13

62417.58

39821.96

Operating Profit Before Working Capital Changes 42

Adjustments for: (28155.6 Increase (-)/decrease in Inventories

8) (13618.1

10688.79 (6564.65

Increase (-)/decrease in Other Receivables

3) (8503.28

) (11174.5

Increase (-)/decrease in Loans & Advances Increase (-)/decrease in Trade Payables

) 27237.36

3) 13840.30

Cash Flow From Operating Activities Less: Direct Tax Paid (Net of Refund) Net Cash Flow From Operating Activities(A) (B) CASH FLOW FROM INVESTING

(23039.73) 39377.85 (4068.40) 35309.45

6789.91 46611.87 (1260.79) 45351.08

ACTIVITIES: (132421.7 Purchase of Fixed Assets Sale of Fixed Assets Purchase of Investments Sale of Investments Interest Income on Investment

6) 99.58 (20756.12) 20657.18 2559.33 (129833.3

(96090.85) 27.64 10317.66 10307.57 1185.31

Net Cash Used in Investing Activities (B) (C ) CASH FLOW FROM FINANCING

3)

(94887.53)

ACTIVITIES: Interest & Financial Charges Paid Proceeds From Cash Credit From Banks Proceeds From Other Borrowings Dividend Paid Dividend Tax Paid Effects of Exchange Rate Change Net Cash Flow From Financing Activities

(10692.70) 10009.84 28676.45 (809.44) (104.75) (166.8)

(8929.14) 8565.78 6713.06 (202.36) (25.93) 311.55

(C ) Net

26912.60 608.89

6432.96 183.15

Increase

in

Cash

and

Cash

43

Equivalents(A+B+C) Opening Balances of

Cash and Cash

Equivalents

1130.05

PERFORMANCE SPOTLIGHT PERFORMANCE AT A GLANCE

(Rs. in crores)

44

946.90

Year 2001 2002 2003 2004 2005 2006 2007 Gross Sales 1058 1139 1263 1745 2868 3070 4202 Exports 70 115 300 389 1051 1006 1527 PBDIT 177 183 202 277 410 408 659 Net Profit 46 46 61 96 45

GRAPH FOR TURNOVER VS. NET PROFIT

46

A COMPARATIVE ANALYSIS OF FINANCIAL STATEMENTS

EQUITY

SHARE

DATA BSL

BSL

JINDA

ISPAT

SAIL

TATA

31/3/20 31/3/20

L IRON INDS. STEEL 31/3/20 31/3/20 31/3/20 31/3/20

07

06

07

07

07

07

High

Rs

244

114

298

17

55

466

Low

Rs

62.05

20.25

76

4

9

126

Sales per share

Rs

662.72

389.75

511.2

59.4

59.1

323.1

Earnings per share

Rs

38

22.31

54.8

0.6

6.1

47.3

Cash flow per share Rs

1.50

0.45

65.6

3.8

8.9

70.3

Dividends per share Rs

1.5

1

0

0

0

10

Book

198.90

164.07

240.8

15.8

11.3

118.2

value

per Rs

47

share Shares outstanding m

40.47

40.47

44.32

692.59

(eoy)

4,130.4 368.98 0

Bonus/Rights/Conv

A

A

11

11

A

0.4

0.2

0.6

1

ersions Price / Sales ratio

x

0.77 0.4

Avg P/E ratio

x

5.43

2.73

3.4

16.3

5.3

6.3

Price / Book Value x

1.04

0.37

0.8

0.7

2.8

2.5

42.18

0

0

0

21.1

8,282

7,220

132,07

109,23

0

7

ratio Dividend payout

%

26.53

Avg Mkt Cap

Rs

8343.2

m

3

3,592.5 3

No. of employees

`000

2.166

1.398

1

21

132

41

Total wages/salary

Rs

202.7

144.9

312

716

47,585

13,496

m Avg. sales/employee

Rs

12382.

Th

87

1 20,917. 1,283.2

1,761.5 1,632.1 2,597.0

90

0

0

0

298

33.8

360.7

327.5

6 Avg.

Rs

wages/employee

Th

93.58

103.65

48

Avg. profit/employee

net Rs

704.33

645.89

Th

2,318.1

20.9

190.4

423.7

37,343

215,28

107,02

4

4

0

INCOME DATA Net Sales

Other income

Rs

26821.

21,901

m

3

15,774

Rs

68.1

8.8

122

910

6,027

1,592

22,023

38,253

221,31

108,61

1

6

m Total revenues

Gross profit

Rs

26889.

m

4

Rs

4097.6

m

5

15,783 4,555

5,290

40,822

34,953

2,769.7 5

Depreciation

Rs

1647.2

1068

479

2,197

11,226

6,251

793.9

662.2

827

3,401

8,994

1,408

Rs

1656.5

1039.5

3,371

602

26,629

28,886

m

7

Rs

131

80

944

159

1,161

9,197

1525.5

959.51

2,427

443

25,121

17,462

m Interest

Rs m

Profit before tax

Tax

m Profit after tax

Rs

49

m Gross profit margin %

7 15.28

20.8

14.2

19

32.7

28

26.4

4.4

31.8

11.1

1.2

11.7

16.3

9,035

16,860

82,013

40,830

6,013

7,890

89,326

39,988

13.3

21.8

-3

0.7

1.5

2.1

0.9

1

Inventory Turnover Days

28

42

46

38

Debtors Turnover

Days

53

38

23

20

Net fixed assets

Rs

10470.

9,893

74,030

135,36

78,579

m

06

17.56 Effective tax rate

%

7.91

Net profit margin

%

5.69

7.70

6.08 BALANCE SHEET DATA Current assets

Rs

10682.

m

61

8,455.4 3

Current liabilities

Rs

3970.2

m

2

3,343.5 8

Net working cap to %

25.026

sales Current ratio

32.41 X

2.7

2.5

8,741.4 1

50

1

Share capital

"Free" reserves

Rs

404.71

m

7

Rs

3500

m

404.717 443

6,926

41,304

3,696

5,627

4,454

2,580

33,469

10,672

10,913

46,592

43,603

59,042

72,038

31,450

91,419

222,80

141,35

6

0

1,399.0 6

Net worth

Rs

8050

6,640

Rs

13174.

9306.09 3,727

m

72

Rs

25009.

m

69

m Long term debt

Total assets

1 24,382 9,103.2 0

Interest coverage

X

5.16

4.18

5.1

1.2

4

21.5

Debt to equity ratio

X

1

0.92

0.3

5.4

1.5

0.7

Sales to assets ratio

X

1.07

0.82

0.9

0.5

1.1

0.8

Return on assets

%

6.1

10

0.5

11.3

12.4

22.7

4.1

53.9

40

22.6

5.5

28.8

25.1

5.03 Return on equity

%

19.10

Return on capital

%

22.73

13.60

18.77 Exports to sales

%

39.19

22.29

63.8

21.2

7.8

14

Imports to sales

%

25.37

24.01

0.6

9

11.3

7.5

51

RATIO ANALYSIS A ratio is powerful tool for analyzing the financial data. Often numbers by themselves do not convey anything until they are related. It needs a contextual and relative reference. Several ratios, calculated from the accounting data, can be grouped into various classes according to the financial activity or function to be evaluated. Financial ratios are a valuable and easy way to interpret the numbers found in statements. It can help to answer critical questions such as whether the business is carrying excess debt or inventory, whether customers are paying according to terms, whether the operating expenses are too high and whether the company assets are being used properly to generate income. When computing financial relationships, a good indication of the company's financial strengths and weaknesses becomes clear. Examining these ratios over time provides some insight as to how effectively the business is being operated. Many industries compile average industry ratios each year. Average industry ratios offer the small business owner a means of comparing his or her company with others within the same industry. In this manner, they provide yet another measurement of an individual company's strengths or weaknesses. Robert Morris & Associates is a good source of comparative financial ratios. Following are the most critical ratios for most businesses, though there are others that may be computed. The following are the important categories of ratios: Liquidity ratios Leverage ratios Activity/Operating ratios Profitability ratios

LIQUIDITY RATIOS Liquidity ratios measure the firm’s ability to meet current obligations. They establish a relationship between cash and other current assets to current obligations and current liabilities to provide a quick measure of liquidity. A firm should ensure 52

that it does not suffer from lack of liquidity and also that it does not have excess liquidity. Lack of sufficient liquidity can result in poor creditworthiness, loss of creditor’s confidence and insolvency. Contrastingly, very high liquidity is also bad because it reflects idle and non-earning assets. Therefore, it is necessary to strike a proper balance between high liquidity and lack of liquidity. The ratios, which indicate the extent of liquidity or lack of it, are: CURRENT RATIO A liquidity ratio that measures a company's ability to pay short-term obligations. Calculated as:

Also known as "liquidity ratio", "cash asset ratio" and "cash ratio". The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations An acceptable current ratio varies by industry. Generally speaking, the more liquid the current assets, the smaller the current ratio can be without cause for concern. For most industrial companies, 1.5 is an acceptable current ratio. As the number approaches or falls below 1 (which means the company has a negative working capital), you will need to take a close look at the business and make sure there are no liquidity issues. Companies that have ratios around or below 1 should only be those, which have inventories that can immediately be converted into cash. If this is not the case and a company's number is low, you should be seriously concerned. If you're analyzing a balance sheet and find a company has a current ratio of 3 or 4, you may want to be concerned. A number this high means that management has so

much cash on hand; they may be doing a poor job of investing it. This is one of the reasons it is important to read the annual report of a company. Most of the

53

time, the executives will discuss their plans in these reports. If you notice a large pile of cash building up and the debt has not increased at the same rate (meaning the money is not borrowed), you may want to try to find out what is going on. Although not ideal, too much cash on hand is the kind of problem a smart investor prays for. QUICK RATIO An indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company. The quick ratio is calculated as:

Also known as the "acid-test ratio" or the "quick assets ratio". The quick ratio is more conservative than the current ratio, a more well-known liquidity measure, because it excludes inventory from current assets. Inventory is excluded because some companies have difficulty turning their inventory into cash. In the event that short-term obligations need to be paid off immediately, there are situations in which the current ratio would overestimate a company's short-term financial strength If the ratio is 1 or higher, it says that the company has enough cash and liquid assets to cover its short-term debt obligations. NET WORKING CAPITAL RATIO Net Working Capital = Working Capital/ Total Assets Ratio This liquidity ratio, which records net liquid assets relative to total capitalization, is the most valuable indicator of a looming business disaster. Consistent operating losses will cause current assets to shrink relative to total assets. Note: A negative ratio, resulting from negative net working capital, presages serious problems. A measure of both a company's efficiency and its short-term financial health. The working capital ratio is calculated as: 54

Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory). Also known as "net working capital". If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company's sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller. Working capital also gives investors an idea of the company's underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. Comparing the working capital from one period to another can see this; slow collection may signal an underlying problem in the company's operations. CASH RATIO This ratio establishes the relationship between cash (also includes marketable securities) and current liabilities. It means that higher the ratio, the larger is the liquidity position of the company and it can be easily used when any amount is due. These ratio measures the most efficient current asset i.e. cash which can be easily used for the payment purpose. It is the most liquid ratio in comparison to other liquidity ratios. Cash ratio =

marketable securities + cash ________________________ Current liabilities SOLVENCY RATIOS

55

Long-term creditors like debenture holders, financial institutions etc. are more concerned with the firm’s long-term financial strength. In fact, a firm should have both a strong short-term and a strong long-term financial position. The long-term financial position can be assessed through financial leverage and capital structure ratios. They measure financial strength and reflect the firm’s ability of using debt to shareholder’s advantage. DEBT-EQUITY RATIO Debt to equity is also called debt to net worth. It quantifies the relationship between the capital invested by owners and investors and the funds provided by creditors. The higher the ratio, the greater the risk to a current or future creditor. A lower ratio means your client's company is more financially stable and is probably in a better position to borrow now and in the future. However, an extremely low ratio may indicate that your client is too conservative and is not letting the business realize its potential. The formula is: Total Liabilities (or Debt) _____________________ Net Worth (or Total Equity) INTEREST COVERAGE RATIO A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period:

56

The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses. DEBT RATIO A ratio that indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load.

A debt ratio of greater than 1 indicates that a company has more debt than assets, meanwhile, a debt ratio of less than 1 indicates that a company has more assets than debt. Used in conjunction with other measures of financial health, the debt ratio can help investors determine a company's level of risk. ACTIVITY OPERATING RATIOS These ratios are employed to evaluate the efficiency with which firms manage and utilize their assets. These ratios are also called turnover ratios because they indicate the speed with which assets are being converted or turned over into sales; thus, these ratios usually reflect a relationship between sales and assets. A proper balance between sales and assets reflects that assets are managed well. These are : ASSET TURNOVER RATIO The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales in dollars by assets in dollars. Asset turnover is a financial ratio that measures the efficiency of a company's use of its assets in generating sales revenue or sales income to the company.

57

"Sales" is the value of "Net Sales" or "Sales" from the company's income statement "Average Total Assets" is the value of "Total assets" from the company's balance sheet in the beginning and the end of the fiscal period divided by 2. Formula:Asset Turnover Ratio =

net sales -----------------------------Average Total Asset

Or Asset Turnover Ratio =

net sales -------------------------------Total capital Employed

Asset turnover measures a firm's efficiency at using its assets or total capital employed in generating sales or revenue - the higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover. STOCK TURNOVER RATIO A ratio showing how many times a company's inventory is sold and replaced over a period. Generally, calculated as: = sales/ Inventory However, it may also be calculated as: = cost of goods sold/ Average Inventory Although the first calculation is more frequently used, COGS (cost of goods sold) may be substituted because sales are recorded at market value, while inventories are usually recorded at cost. Also, average inventory may be used instead of the ending levell to minimize seasonal factors. This ratio should be compared against industry averages. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales 58

or ineffective buying. High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall. INVENTORY COLLECTION PERIOD Formula to calculate number of day’s inventory: Number of Days Inventory = 365 days / inventory turnover ratio. Number of day’s inventory ratio definition and explanation: The number of day’s inventory is also known as average inventory period and inventory holding period. A high number of days inventory indicates that their is a lack of demand for the product being sold. A low days inventory ratio (inventory holding period) may indicate that the company is not keeping enough stock on hand to meet demands. DEBTORS TURNOVER RATIO Debtor’s turnover ratio indicates the relation between net credit sales and average accounts receivables of the year. This ratio is also known as Debtors’ Velocity. Net Credit Sales Debtors Turnover Ratio = Average Accounts Receivables Where Average Accounts Receivables = [Opening Debtors and B/R + Closing Debtors and B/R]/2 Credit Sales = Total Sales – Cash Sales Objective and Significance: This ratio indicates the efficiency of the concern to collect the amount due from debtors. It determines the efficiency with which the trade debtors are managed. Higher the ratio, better it is as it proves that the debts are being collected very quickly. DEBTORS COLLECTION PERIOD 59

It Indicates the average time taken to collect trade debts. In other words, a reducing period of time is an indicator of increasing efficiency. Debtors Collection Period = (Average Debtors / Credit Sales) * 360 (= No. of days) Credit Sales are all sales made on credit (i.e. excluding cash sales) You can change the multiplier to 12 (for months) or 52 (for weeks) if appropriate. In the calculation of Debtors turnover Ratio of Bhushan steel Ltd., I have taken only 360 days. FIXED ASSET TURNOVER RATIO Fixed asset turnover is the ratio of sales (on the Profit and loss account) to the value of fixed assets (on the balance sheet). It indicates how well the business is using its fixed assets to generate sales. = sales/average fixed assets Generally speaking, the higher the ratio, the better, because a high ratio indicates the business has less money tied up in fixed assets for each dollar of sales revenue. A declining ratio may indicate that the business is over-invested in plant, equipment, or other fixed assets CURRENT ASSET TURNOVER RATIO It establishes the relationship between current assets and sales. sales = __________________ Net current Assets It shows how the current assets are efficiently used in converting itself into sales. Generally speaking, the higher the ratio, the better, because a high ratio indicates the less money has been invested on the current assets for each dollar of sales revenue. A declining ratio indicates that the business is over-invested in current assets. PROFITABILITY RATIOS:

60

Profit is the difference between revenues & expenses over a period of time (usually one year). The financial manager should continuously evaluate the company in terms of profits because profit maximization is the ultimate goal of all profit-seeking companies. The Profitability Ratios are calculated to measure the relationships between profit and its constituents such as sales and investments. Generally, two types of profitability ratios are calculated: Profitability in relation to sales Profitability in relation to investment Profitability in relation to investment RETURN ON ASSETS An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment”. Note: Some investors add interest expense back into net income when performing this calculation because they'd like to use operating returns before cost of borrowing. RETURN ON ASSETS =

EBIT AND DEPRECIATION _____________________________ Average total assets (FA+CA+Investment) ROA tells you what earnings were generated from invested capital (assets). ROA for public companies can vary substantially and will be highly dependent on the industry. This is why when using ROA as a comparative measure, it is best to compare it against a company's previous ROA numbers or the ROA of a similar company. The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. For example, if one company has a net income of $1 million and total assets of $5 million, its ROA is 20%; however, if another company earns the same amount but has total assets of $10 million, it has an ROA of 10%. Based on this example, the first company is better at converting its investment into profit. When you really think about 61

it, management's most important job is to make wise choices in allocating its resources. Anybody can make a profit by throwing a ton of money at a problem, but very few managers excel at making large profits with little investment. RETURN ON EQUITY Return on equity is a measure that most investors are greatly concerned about as it is a measure of what return the company is able to generate on the shareholder’s money. While there is no doubt as to its relevance, the return can in itself be broken down into three components to further analyze how these returns were earned and what mainly helped in generating the same. It is calculated as follows: Return on Equity = Net income/Average Shareholders fund Net income/Average stockholder’s fund The return on equity ratio measures the company’s profitability by showing profit margins generated by the company. It is indicative in a limited sense of its pricing ability and cost control when compared with its own performance and with the performance of other companies. Any decision affecting the product prices, per unit costs, volume or efficiency has an impact on the profit margin or turnover ratios. Similarly, any decision affecting the amount and ratio of debt or equity used will affect the financial structure and the overall cost of capital of a company. Therefore, these financial concepts are very important to evaluate as every business is competing for limited capital resources. Additionally, people should not be swayed by high Return on Equity without breaking it down to these components and then comparing it to other companies in similar industries as companies can inflate the ROE by simply tweaking one of the components of this ratio. Thus, to truly understand the profitability and productivity of a company and its resources it is vital to divide the ratio and compare it to the ratios of other companies belonging to similar industries. Also, understanding the inter-relationships among the various ratios such as turnover ratios, leverage, and profitability ratios helps companies in utilizing their money in areas where the risk adjusted return is the maximum.

RETURN ON INVESTMENT 62

A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.

Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken Keep in mind that the calculation for return on investment can be modified to suit the situation -it all depends on what you include as returns and costs. The term in the broadest sense just attempts to measure the profitability of an investment and, as such, there is no one "right" calculation. For example, a marketer may compare two different products by dividing the revenue that each product has generated by its respective expenses. A financial analyst, however, may compare the same two products using an entirely different ROI calculation, perhaps by dividing the net income of an investment by the total value of all resources that have been employed to make and sell the product. This flexibility has a downside, as ROI calculations can be easily manipulated to suit the user's purposes, and the result can be expressed in many different ways. When using this metric, make sure you understand what inputs are being used Roce = profit before tax / capital employed * 100 ROCE compares earnings with capital invested in the company. It is similar to Return on Assets (ROA), but takes into account sources of financing. Operating Income In the numerator we have Pretax operating profit or operating income. In the absence of non-operating income, operating income agrees with EBIT; otherwise, it can be derived from EBIT by subtracting non-operating income. Capital Employed In the denominator we have net assets or capital employed instead of total assets (which is the case of Return on Assets). Capital Employed has many definitions. In general it is the capital investment necessary for a business to function. It is commonly represented as total assets less current liabilities or fixed assets plus working capital. 63

ROCE uses the reported (period end) capital numbers; if one instead uses the average of the opening and closing capital for the period, one obtains Return on Average Capital Employed (ROACE). ROCE is used to prove the value the business gains from its assets and liabilities, a business which owns lots of land but has little profit will have a smaller ROCE to a business which owns little land but makes the same profit. It basically can be used to show how much a business is gaining for its assets, or how much it is losing for its liabilities.

Drawbacks of ROCE The main drawback of ROCE is that it measures return against the book value of assets in the business. As these are depreciated the ROCE will increase even though cash flow has remained the same. Thus, older businesses with depreciated assets will tend to have higher ROCE than newer, possibly better businesses. In addition, while cash flow is affected by inflation, the book value of assets is not. Consequently revenues increase with inflation while capital employed generally does not (as the book value of assets is not affected by inflation).

DIVIDEND PER SHARE The part of the earnings not paid to investors is left for investment to provide for future earnings growth. Investors seeking high current income and limited capital growth prefer companies with high Dividend payout ratio. However investors seeking capital growth may prefer lower payout ratio because capital gains are taxed at a lower rate. High growth firms in early life generally have low or zero payout ratios. As they mature, they tend to return more of the earnings back to investors. Dividend per share = Earnings paid to shareholders (equity dividends) ___________________________________________ Number of equity shares Dividends over the entire year (not including any special dividends) must be added together for a proper calculation of DPS, including interim dividends. Special dividends are dividends which are only expected to be issued once. The total number of ordinary shares outstanding is sometimes calculated using the weighted average over the reporting period.

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DIVIDEND PAYOUT RATIO The percentage of earnings paid to shareholders in dividends. Calculated as:

The payout ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio. A reduction in dividends paid is looked poorly upon by investors, and the stock price usually depreciates as investors seek other dividend paying stocks. A stable dividend payout ratio indicates a solid dividend policy by the company's board of directors. The part of the earnings not paid to investors is left for investment to provide for future earnings growth. Investors seeking high current income and limited capital growth prefer companies with high Dividend payout ratio. However investors seeking capital growth may prefer lower payout ratio because capital gains are taxed at a lower rate. High growth firms in early life generally have low or zero payout ratios. As they mature, they tend to return more of the earnings back to investors.

EARNING YIELD RATIO The earnings per share for the most recent 12-month period divided by the current market price per share. The earnings yield (which is the inverse of the P/E ratio) shows the percentage of each dollar invested in the stock that was earned by the company. The earnings yield is used by many investment managers to determine optimal asset allocations. Earnings yield is the quotient of earnings per share divided by the share price. It is the reciprocal of the P/E ratio—the E/P or the EPS. 65

The earnings yield is quoted as a percentage, allowing an easy comparison to going bond rates. The earnings yield can be used to compare the earnings of a stock, sector or the whole market against bond yields. Generally, the earnings yields of equities are higher than the yield of risk-free treasury bonds reflecting the additional risk involved in equity investments. The average P/E ratio for U.S. stocks from 1900 to 2005 is 14, which equates to an earnings yield of over 7%. The earnings yield is also the cost to a publicly traded company of raising expansion capital through the issuance of stock Money managers often compare the earnings yield of a broad market index (such as the S&P 500) to prevailing interest rates, such as the current 10-year Treasury yield. If the earnings yield is less than the rate of the 10-year Treasury yield, stocks as a whole may be considered overvalued. If the earnings yield is higher, stocks may consider undervalued relative to bonds. Classical theory suggests that investors in equities should demand an extra risk premium of several percentage points above prevailing risk-free rates (such as Tbills) in their earnings yield to compensate them for the higher risk of owning stocks over bonds and other asset classes.

DIVIDEND YIELD RATIO The part of the earnings not paid to investors is left for investment to provide for future earnings growth. Investors seeking high current income and limited capital growth prefer companies with high Dividend payout ratio. However investors seeking capital growth may prefer lower payout ratio because capital gains are taxed at a lower rate. High growth firms in early life generally have low or zero payout ratios. As they mature, they tend to return more of the earnings back to investors. DIVIDEND YIELD RATIO = DPS _______________________ MARKET VALUE PER SHARE The part of the earnings not paid to investors is left for investment to provide for future earnings growth. Investors seeking high current income and limited capital growth prefer companies with high Dividend payout ratio. However investors seeking capital growth may prefer lower payout ratio because capital gains are taxed at a lower rate. High growth firms in early life generally have low or zero

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payout ratios. As they mature, they tend to return more of the earnings back to investors.

EARNING PER SHARE:The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability. Calculated as:

In the EPS calculation, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period. Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number. Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component of the price-to-earnings valuation ratio. An important aspect of EPS that's often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment) that company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures. When you analyze a company, you have to do it on two levels, the “whole company” and the “per share”. If you decide ABC, Inc. is worth $5 billion as a whole, you should be able to break it down by simply dividing the $5 billion price tag by the number of shares outstanding. Unfortunately, it isn’t always that simple. When you analyze a company, you have to do it on two levels, the “whole company” and the “per share”. If you decide ABC, Inc. is worth $5 billion as a whole, you should be able to break it down by simply dividing the $5 billion price tag by the number of shares outstanding. Unfortunately, it isn’t always that simple. When you analyze a company, you have to do it on two levels, the “whole company” and the “per share”. If you decide ABC, Inc. is worth $5 billion as a 67

whole, you should be able to break it down by simply dividing the $5 billion price tag by the number of shares outstanding. Unfortunately, it isn’t always that simple. Diluted Earnings Per Share (diluted EPS) is a company's earnings per share (EPS) calculated using fully diluted shares outstanding (i.e. including the impact of stock option grants and convertible bonds). Diluted EPS indicates a "worst case" scenario, one in which everyone who could have received stock without purchasing it directly for the full market value did so. To find diluted EPS, basic EPS is calculated for each of the categories on the income statement first. Then each of the dilutive securities are ranked based on their effects, from most dilutive to least dilutive and antidilutive. Then the basic EPS number is diluted one by one by applying each one, skipping any instruments that have an antidilutive effect. PRICE – EARNING RATIO The PE (price-earnings) ratio is among the basic tools used to measure how cheap or expensive a stock is. The P/E looks at the relationship between the stock price and the company’s earnings. The P/E is the most popular stock analysis ratio, although it is not the only one you should consider. It is a valuation ratio of a company's current share price compared to its per-share earnings. Also sometimes known as "price multiple" or "earnings multiple". The P/E is calculated by taking the share price and dividing it by the company’s EPS (Earnings Per Share that we saw above) Market Value per share = ----------------------------------Earnings per Share (EPS) In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio is usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospect.

Importance of PRICE EARNING RATIO

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This ratio is used by traders to get a basic assessment of what the market will pay for the earnings of a company. The higher the price earnings ratio is, the more money the market is willing to pay for earnings from a company. Some investors stay away from stocks that have a high price earnings ratio, and this may be because they think the stock is overpriced. But a high price earnings ratio may also mean that there are high hopes for the company on the market. A low price earnings ratio may mean that there is no confidence in the company on the market, but that does not make this stock a loser. Some stocks, called sleepers, are good stocks that get overlooked by the market. These sleeper stocks are also known as value stocks, and many traders have made a killing by recognizing these stocks when the market does not. There is no right or good price earnings ratio. One investor may see a value stock while another investor disagrees and sees junk stock. The right price earnings ratio is determined by the individual investor. The price earnings ratio is one of the most frequently used stock analysis tools. The price earnings ratio can mean different things to different traders, depending on their trading strategies. One trader may see a stock with a low price earnings ratio and think of the stock as a loss, and another trader may see the same stock and same low price earnings ratio as a sleeper or value stock that is worth investing in. Calculating the price earnings ratio is an important financial tool used by market traders to help them predict the market. It must also be noted that average P/E ratios tend to vary from industry to industry. Typically, P/E ratios of companies in very stable, mature industries which have more moderate growth potential have lower P/E ratios than companies in relatively young, quick growing industries with more robust future potential. Thus, when an investor is comparing P/E ratios from two companies as potential investments, it is important to compare companies from the same industry with similar characteristics. Otherwise, if an investor simply purchased stocks with the lowest P/E ratios, they would likely end up with a portfolio full of utilities stocks and similar companies, which would leave them poorly diversified and exposed to more risk than if they had diversified into other industries with higher-than-average P/E ratios. However, this doesn't mean that stocks with high P/E ratios cannot turn out to be good investments. Suppose the same company mentioned earlier with a 40-P/E ratio (stock at Rs. 40, earned Rs. 1/share last year) was widely expected to earn Rs. 4/share in the coming year. This would mean (if the stock price didn't change) the 69

company would have a P/E ratio of only 10 in one year's time (40/4), making it appear very inexpensive. The important thing to remember when looking at P/E ratios as part of your stock analysis is to consider what premium you are paying for a company's earnings today, and determine if the expected growth warrants the premium. Also compare it to its industry peers to see its relative valuation to determine whether the premium is the worth the cost of the investment. Can a stock have a negative price-to-earnings (P/E) ratio? Yes, a stock can have a negative price-to-earnings ratio (P/E), but it is very unlikely that you will ever see it reported. Although negative P/E ratios are mathematically possible, they generally aren't accepted in the financial community and are considered to be invalid or just not applicable. We'll explain why this is. The price-earnings ratio is arguably the most popular fundamental factor used by investors who try to determine the attractiveness of an asset's current value and, more importantly, whether the current price level makes for a good buying opportunity. Generally speaking, a low P/E value suggests that an investor needs to pay a low amount for each Rs of earnings made by the company. This could be used by investors as a sign that the given asset is undervalued and a potentially good investment at current levels. Conversely, a relatively high P/E value is used to suggest that investors will need to pay a high amount for the company's earnings, which can then be used to suggest that the asset is relatively expensive and that it may be a good idea to wait for a better entry. Mathematically, there are only two ways for a ratio of this form to have a negative value: 1. The numerator falls below zero 2. The denominator falls below zero. In the case of the P/E ratio, it is impossible for the numerator to fall below zero because this represents the price of the asset. However, the denominator, which is equal to the earnings of the company, can become negative. EPS values below zero mean that the company is losing money and is the reason why it is possible to have a negative P/E ratio. BOOK VALUE TO MARKET VALUE RATIO

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A ratio used to find the value of a company by comparing the book value of a firm to its market value. Book value is calculated by looking at the firm's historical cost, or accounting value. Market value is determined in the stock market through its capitalization. The book-to-market (or book-to-price) ratio categorizes firms into value or growth groups. Book value is the value of the firm from an accounting perspective. Market value is a firm’s stock price multiplied by shares outstanding. It signifies the market’s valuation of a company’s equity. Value firms have higher book-tomarket ratios than growth firms. Value firms (high book-to-market ratio) reliably have higher returns than growth firms (low book-to-market ratio). Formula:

The book-to-market ratio attempts to identify undervalued or overvalued securities by taking the book value and dividing it by market value. In basic terms, if the ratio is above 1 then the stock is undervalued; if it is less than 1, the stock is overvalued. PROFITABILITY BASED ON SALES:GROSS PROFIT RATIO The gross profit ratio indicates how much of each sales dollar is available to meet expenses and profits after merely paying for the goods that were sold. This interactive tutorial explains the gross profit ratio by walking you through the steps, including where Sales and Cost of Goods Sold are on the Income Statement. It lets you use your own numbers -- great for checking homework answers! Gross profit divided by net sales. High ratios are favorable in that they indicate the business is earning a good return on the sale of its merchandise, although that may also invite competition. NET PROFIT RATIO The ratio of an organization's net profit to its total net sales. Comparing the net profit ratios of companies in the same sector shows which are the most efficient.

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NET PROFIT MARGIN The profit margin tells you how much profit a company makes for every $1 it generates in revenue. Profit margins vary by industry, but all else being equal, the higher a company’s profit margin compared to its competitors, the better. Several financial books, sites, and resources tell an investor to take the after-tax net profit divided by sales. While this is standard and generally accepted, some analysts prefer to add minority interest back into the equation, to give an idea of how much money the company made before paying out to minority “owners”. Either way is acceptable, although you must be consistent in your calculations. All companies must be compared on the same basis. Net income after taxes --------------------------------------------------Revenue Or Net income + minority interest + tax-adjusted interest --------------------------------------------------Revenue In some cases, lower profit margins represent a pricing strategy. Some businesses, especially retailers, may be known for their low-cost, high-volume approach. In other cases, a low net profit margin may represent a price war which is lowering profits, as was the case in the computer industry in 2000. OPERATING EXPENSES RATIO

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The operating expense ratio also known as the OER is the ratio between the total operating expenses and the effective gross income for an income producing property. Operating expenses are costs associated with the operation and maintenance of income producing properties. They include such items as property taxes, property management fees, insurance, wages, utilities, repairs and maintenance, supplies, advertising, attorney fees, accounting fees, trash removal, pest control, etc. The following are not operating expenses; loan payments, personal property and capital improvements. The effective gross income for a property is the actual yearly income from all sources. It is equal to the yearly gross rents possible plus other income such as laundry receipts, vending machines, parking fees, etc. less the yearly vacancy amount. The operating expense ratio shows the percentage of a property's income that is being used to pay maintenance and operational expenses The operating expense ratio is calculated like this.

OPERATING EXPENSES RATIO = OPERATING EXPENSES ______________________________ NET SALES The operating expense ratio is an indicator of how efficiently a property is being managed. The lower the operating expense ratio, the greater the profit for the investor or investors. As the owner or manager of an income producing property, you should be assessing what steps you can take to reduce vacancies, reduce operating expense items and increase income. Which operating expenses are out of line and why? You can learn a lot about an income property by examining the individual operating expense items. Many factors can impact the operating expense ratio for income properties. Poor management will result in higher than normal vacancies. The cause might be ineffective advertising, poor maintenance, etc. Older income properties will have larger maintenance and utility expenses than newer income properties since newer income properties are usually insulated better and require less maintenance. An income property with rents below market value will have a higher operating expense ratio than one that is managed effectively. Office buildings will generally have higher OER's then apartment buildings because they require more intensive management and maintenance.

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OPERATING MARGIN In business, operating margin is the ratio of operating income (operating profit in the UK) divided by net sales, usually presented in percent. OPERATING MARGIN

=

INCOME FROM OPERATIONS _____________________________________ NET REVENUES

Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. Also known as "operating profit margin" or "net profit margin. Operating margin gives analysts an idea of how much a company makes (before interest and taxes) on each dollar of sales. When looking at operating margin to determine the quality of a company, it is best to look at the change in operating margin over time and to compare the company's yearly or quarterly figures to those of its competitors. If a company's margin is increasing, it is earning more per dollar For example, if a company has an operating margin of 12%, this means that it makes $0.12 (before interest and taxes) for every dollar of sales. Often, nonrecurring cash flows, such as cash paid out in a lawsuit settlement, are excluded from the operating margin calculation because they don't represent a company's true operating performance.

GROSS MARGIN RATIO (Gross Margin Ratio) Formula to calculate gross margin ratio: Gross Profit Margin Ratio = gross profit / sales. Gross margin ratio definition and explanation: Gross profit margin ratio is also called gross margin ratio To calculate gross profit subtract cost of sales (variable costs) from sales. (i.e. gross profit = sales - cost of sales) A low gross profit margin ratio (or gross margin ratio) indicates that low amount of earnings, required to pay fixed costs and profits, and are generated from revenues. A low gross profit margin ratio (or gross margin ratio) indicates that the business is unable to control its production costs. The gross profit margin ratio (or gross margin ratio) provides clues to the company's pricing, cost structure and production efficiency. 74

The gross profit margin ratio (or gross margin ratio) is a good ratio to benchmark against competitors On Analyzing the Balance Sheet Data we find that the company has raised loans through both secure and insecure means. Application of loans is also reflected in the Balance Sheet. The company has gone in for the modernization of its plant and hence for importing sophisticated machinery the funds are raised. Also the company is going ahead with a backward integration project in Orissa for which the requirement of funds is huge. There is a huge rise in the inventory level of the company but that could be mainly because there has been a shortage of HR coils in the market and thus the prices are going up so such high level of inventory is justified also the demand for CR sheets and coils have also gone up so in order to fulfill the demand the company needs to pump up its production. The ratio analysis is done and the performance is compared with the major players in the industry. However, one must keep in mind that Bhushan Steel and Strips Ltd has its presence only in the secondary sector and has to depend upon other companies for raw material supply

( basically Hot rolled(HR) coils). The

company has been constantly declaring dividend which indicates growth of the company. In fact the dividend payout ratio is the highest in the industry. In fact the average sale per employee is very high as compared to the major player Sail, Tisco and Ispat. However it’s still behind Jisco in this respect. Net profit per employee is also high as compared to all major players but Jisco is still leading the industry in this respect as well. It would be unfair to compare the Income data as BSL has its presence only in the secondary sector as already mentioned above. Current ratio is the best as compared to the industry standards. The inventory turnover and the debtors turnover ratio are very high as compared to the industry standards that

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could be because of the fact that the company has started its operation in Khopoli late in the financial year and the sales of Khopoli are only for the 3 months so in order to have a better view for the turnover ratios the Khopoli figures should be annualized. The same could not be done as the separate figures were unavailable. Interest coverage ratio is also good as compared to the other companies in the industry and has even improved this year. This is a good indicator for investors especially when the company is in the expansion mode as it insures the company’s sound financial health and ability to pay back the interest on the loans taken from the market. Debt to equity ratio is 0.92 in previous year but has improved this year. ROA is less as compared to the industry that my be because there is still expansion going on as can be seen from the balance sheet the figure of Capital work in progress is high and so all the assets employed are not generating revenue at the moment hence such a level is acceptable. ROE on the other hand has been good as compared to the industry standards which suggest that the company has been able to generate wealth for its shareholders. The company has been able to boost up its exports and thus is earning foreign exchange as well. Over all the company holds good prospects for all its stakeholders as is evident from its income statements. Activities Engaged In Sahibabad Plant Bhushan Steel Ltd. has recently successfully implemented SAP system at its Sahibabad works along with its sales outlets with the help of Siemens Information Systems ltd. (SISL) in first phase.

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Finished Product List of Sahibabad Plant 1. Cold Rolled Coil 2. Cold Rolled Sheet 3. Galvanized Plane Coil 4. Galvanized Plane Sheet 5. Galvanized Corrugated Sheet

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Current Capacities (tonnes per annum) Products Sahibabad Cold Rolling

1. Widest (up to 1700 mm) 350,000 2. Wider (up to 1200 mm) 100,000 3. Narrow (up to 550 mm) 25,000 Total Cold Rolling 475,000 Galvanized Sheets 225,000 Hardened & Tempered Strips Color Coated Sheets Drawn/Precision Tubes 15,000 High Tensile Steel Strapping -

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Dhenkanal Plant The most brilliant milestone in BSL's journey of excellence is the setting up of a state-of-the-art Hot Rolling Steel & Power Plant in Orissa. This Integrated tool and Power Plant will, no doubt, put BSL firmly on the fast track of progress.

Products Range 1. DRI a. Sponge Iron Fines b. Sponge Iron Lumps c. Char 2. SMS a. Billets MS b. Billets HSf

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c. Billets CS 3 HR Coils 2. Oxyge 3. Power Generation 4. Pig Iron Khopoli Plant The Khopoli plant, commissioned in 2004 has been playing a remarkable role not only in the growth of exports, but in the production of a much wider variety of value added steel like Color Coated Sheets, High Tensile Steel Strapping, Hardened and Tempered Strips and Precision Tubes. In addition to these, the Khopoli plant has recently launched Galume value added steel (Aluminium & Zinc Coated Sheet) for the first time in the country. Operating with the most advanced technology, expressed through a large fleet of latest equipment, machinery and systems, the Khopoli plant has given a tremendous boost of 425000 MT per annum to BSL's total production capacity Including 240000 MT of galvanized steel, which are further forward integrated into Color Coated Sheet, Galume and other value added products.

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Product

Khopoli

Cold Widest Wider

Rolling (up

to

(up

1700 to

mm)

1200

Narrow (up to 550 mm) Total Cold Rolling

300,000 mm) 125,000 425,000

Galvanized Sheets Hardened & Tempered Strips Color Coated Sheets Drawn/Precision Tubes High Tensile Steel Strapping Alloy Steel/Wire Rods

240,000 10,000 80,000 45,000 20,000

Service Centre Captive Power

24 MW

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BUSINESS GOALS AND STRATEGIES VISION The vision of evolving into a totally integrated steel producer, committed to achieving the highest standards of quality through cutting-edge technology, is being realized at Bhushan Steel Ltd. If you can anchor your organization with a single-mindedness of purpose, for providing-the best service, technology and quality to customers and stakeholders, then you can deliver higher value for money within schedule and budget, and continue to thrive even in the face of rapid change and other challenges besotting the Indian economy and especially the steel industry. This is, precisely, what BSL has been doing since its inception: Acquiring the latest technology sourced from the global leaders and maintaining global quality standards; continually upgrading the steel plants and efficiently implementing projects within schedule and budget always meeting financial obligations on time and yes, these are the hallmarks of BSL's Saga of Excellence. BSL's vision of total integration is a lot closer to realization today. Through seamless backward integration, BSL is consolidating its position on the entire steel

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value chain - from iron ore to specialized, value-added steel, the company is surging ahead.

Strategies: Integrated Quality, Environment, Occupational Health & Safety Management System Policy. Bhushan Steel Ltd. commits to produce cold rolled and galvanized steel sheets of world class quality in a safe, healthy and clean environment by involving employees with continual improvements in system implementation, technological advancement, operational integration, prevention of pollution & hazards maintaining.

Legal compliance and satisfying needs & expectations of Customers. •

For Environmental Management System we have ISO 14001:2001 Certification

•

For Quality System we have ISO/TS 16949:2002 Certification

•

For Safety Management System we have OHSAS 18001:1999 Certification

GOAL Bhushan Steel Ltd. (BSL) is in the process of setting up one of the most advanced Hot Rolling Plants of the world in Orissa. The construction of the first phase is

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being carried out with speed and is nearing completion. Together with its state-ofthe-art Cold Rolling Plant at Sahibabad and another one at Khopoli, the company is well poised in the industry. The company has recently launched Galume, zinc and aluminum coated sheet, for the first time in India. Thereby, it is all set to revolutionize

the

industry

and

demand

patterns.

Be it is specialized steel for the automotive and white goods industry, or steel for highly discerning international clients, BSL's advanced manufacturing facilities and stringent quality standards have earned appreciation and acceptance in international markets.

S.W.O.T ANALYSIS OF BSL

STRENGTHS: •

BSL has earned recognition in the form of ISO 9002 and QS 9000 certification. It has also achieved the rare distinction of being appointed Global Resource Centre for Ford, General Motors and Honda. Its steel plant was the first Cold Rolling plant recommended for QS 9000-1998 edition conducted by DET NORSKE VERITAS, Netherlands. Presently, to further its commitment to quality BSL is upgrading its quality system by obtaining TS 16949-2002 Certification from DET NORSKE VERITAS, Netherlands. This makes the products of the company acceptable internationally.

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•

Bhushan Steel Ltd. Is one of the major companies in Secondary sector in India. The original equipment manufactures share in the total sale is more than 60% and the major customers are automobile majors like Maruti, Ford, General Motors, Bajaj Auto, Hyundai, Fiat (Polio), Hindustan Motors, TELCO, Honda SIEL car, Mahindra and Mahindra, Ashok Leyland and the leading white goods manufactures like LG, BPL, Godrej, Electrolux, Whirlpool, Videocon, Samsung. Apart from them BHEL is also one of the major customers of BSL. Thus the customer base is not only huge but is diversified as well.

•

The exports this year have risen by almost 170% suggesting that the company is making its presence felt in the international market as well. Thus a downtrend in the domestic market would not affect the company adversely if its exports rise with such a pace.

•

The company has diversified its product range in line with the global demand e.g. it has added a product Color coated sheets have been recognized in the European Countries and almost all of the production is being exported. The company has successfully penetrated into Spain, Portugal, Philippines, South Korea, Australia, New Zealand, Mexico, and Chili etc.

•

BSL is heading towards a backward integration in order to become selfreliant and to have control on raw material in terms of pricing and availability of right quality. This would make the company a major player in the industry and increase its profitability substantially as it would no longer 85

be subject to the vagaries if HR availability and price hikes ( The company is currently into Cold rolling and HR coil is the basic raw material that the company either imports or purchase from the domestic market)

•

The Fitch Rating India Pvt, Ltd has reassigned short term rating of F1+ for Rs 100 Crs Commercial Paper Program of the company. This makes the short-term borrowings easy for the company from the market at much cheaper rates bringing down the weighted average cost of capital.

WEAKNESS: •

The major raw material for the company is HR coil, which it has to procure from either domestic or international market, and thus is subject to price fluctuations. It thus becomes difficult to make cost estimates. The company has also realized the same and is in a process of backward integration.

•

The purchases made by the company are in cash whereas the sales are in cash and credit both this makes the working capital requirement of the company very high.

•

The competitors of BSL are major players; though its products are competitive still the company has not been able to capture the market convincingly despite the stringent quality control.

•

The company has a conservative approach towards hedging exchange rate risks, which at times lead to loss of revenue.

86

OPPORTUNITIES: •

The company has exposed itself to Automobile and white goods segment there is still scope for the company to increase its customer base.

•

The percentage of exports to Gross sales has been somewhere around 36.33% the company can further strengthen its exports so as to hedge itself against the low sale in the lean period in the domestic economy.

•

The liberalization of industrial policy and other initiatives taken by the Government have given a definite impetus for entry, participation and growth of the private sector in the steel industry. While the existing units are being modernized/expanded, a large number of new/Greenfield steel plants have also come up in different parts of the country based on modern, cost effective, state of-the-art technologies.

At present, total (crude) steel making capacity is over 34 million tonnes and India, the 8th largest producer of steel in the world, has to its credit, the capability to produce a variety of grades and that too, of international quality standards. As per the ratings of the prestigious “World Steel Dynamics", Indian HR Products are classified in the Tier II category quality products – a major reason behind their acceptance in the world market. EU, Japan has qualified for the top slot, while countries like South Korea, USA share the same class as India. 87

THREATS: •

The threats to the company are the rising input costs in the industry the raw materials as coking coal, non ferrous materials, scrap steel, Iron ore have seen an increasing trend and are further expected to rise.

•

China is world’s largest steel producer. A slowdown in the Chinese economy would have an adverse effect on the global steel industry.

•

All the major steel companies in India have gone for a capacity expansion plan which makes would place a serious threat to small players like BSL.

•

High debt has also reduced the profit margins though the company has gone for a debt restructuring when the global steel prices were soaring but if the prices do not stabilize at that level the operating margins would go down affecting the overall growth of the company.

IMPORTANCE OF CASH MANAGEMENT FOR A COMPANY

Cash is ready money in the bank or in the business. It is not inventory, it is not accounts receivable (what you are owed), and it is not property. These might be converted to cash at some point in time, but it takes cash on hand or in the bank to pay suppliers, to pay the rent, and to meet the payroll.

88

A Cash Flow Statement is typically divided into three components so that you can see and understand the sources and uses of cash. These components include internal and external sources: Operating Cash Flow:Operating cash flow, often referred to as working capital, is the cash flow generated from internal operations. It is the cash generated from sales of the product or service of your business. It is the real lifeblood of your business, and because it is generated internally, it is under a manager’s control. Investing Cash Flow:Investing cash flow is generated internally from non-operating activities. This component would include investments in plant and equipment or other fixed assets, nonrecurring gains or losses, or other sources and uses of cash outside of normal operations. Financing Cash Flow:Financing cash flow is the cash to and from external sources, such as lenders,Realization investors of and shareholders. A new loan, the repayment loan, the SalesofinaCash Payment

issuance of stock and the payment of dividend are some of the activities that would be included in this section of the cash flow statement.

Payment by Draft or Cheque Locking time 3-7 days

89

CASH FLOW UNDER CMS:

90

Realization on day 1 or day 2

Sales in Cash

Collection by banker locking period 12days

CASH MANAGEMENT AT BSL

91

Bhushan Steels Ltd. has been efficiently and effectively using modern cash management techniques to maintain cash inflow for its day to day operations. The most important of these have been the cash management services (CMS) rendered to it by the ICICI and Corporation banks. The company has a huge customer base and is into business with customers from all over India so it becomes very important for the company to mobilize funds to carry out its day to operations. Before adopting CMS the company had a locking period of 6-7 days as it used to realize payment through TPO (Transfer Pay Order). For TPO money collected by banks over a week from Customers of BSL was transferred every Saturday to the central pool in Delhi. Such a lock in period is not acceptable to any company specially manufacturing firms as it has a huge requirement of working capital in addition to that the company sells goods at credit for a period of 30-60 or 90 days, In this industry there is always a mismatch of funds as the raw material needed is usually available only on cash payment because of demand and supply mismatch. Also, the cost incurred by BSL was on a very high side. Cost involved an interest loss of 6 days along with the service charges of the banker. BSL is availing CC facilities at 11% p.a. so if there is a huge locking period it had to pay an interest for using the funds. The other system of collection adopted was payment through drafts. The customers paid through Drafts the problem with this system of accepting payments has been that the company had to bear the draft and postage charges to remain competitive in the industry. The bankers acted as agents of BSL and accepted drafts. The drafts collected over the day were sent through courier to the Head Office. This not only was expensive but the company was losing the interest amount for time taken in transit and realization of draft amount. Steel industry these days is facing a pressure of rising input cost thus in order to maintain the profit margins it becomes all the more important for the company to

92

cut costs and manage their funds effectively and efficiently. CMS thus offers an effective solution to manage funds. BSL is availing CMS provided by ICICI, Corporation banks, HSBC, HDFC and UTI. The banks collect the cheque of customers through their various branches spread over different location all over the country and transfer the funds in the central pool at Delhi. BSL then disburses the cash thus collected. The company has entered into a contract with the banks for the same and banks charges it for the same. ICICI BANK

ICICI Bank is India's second-largest bank with total assets of about Rs.3, 446.58 billion at March 31, 2007 and profit after tax of Rs. 31.10 billion for the year ended March 31, 2007. ICICI Bank has a network of about 560 branches and extension counters. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset management. ICICI Bank set up its international banking group in fiscal 2002 to cater to the cross border needs of clients and leverage on its domestic banking strengths to offer products internationally. ICICI Bank currently has subsidiaries in the United Kingdom and Canada, branches in Singapore and Bahrain and representative offices in the United States, China, United Arab Emirates, Bangladesh and South Africa.

93

ICICI Bank's equity shares are listed in India on the Stock Exchange, Mumbai and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE).

Cash management products cover both collections and payments. Collection Products Local Cheque Collections •

One of the largest network spanning over 488 locations

•

Courier pick-up can be provided

•

Process

flow

can

be

structured

to

suit

the

company’s

requirements

Upcountry Cheque Collections •

Coverage of over 3919 locations with tie-ups with correspondent banks

•

Capability to process cheques drawn on any location in India.

•

Assured credit given with funds pooled at any ICICI Bank location. Instrument level tracking of instruments to ensure faster realization

Cash Collections

94

•

Cash Collection from dealers and business associates on behalf of companies

•

Cash pick-up facility in 28 locations

•

Customized MIS for cash collection

Payment Anywhere Banking •

Cheques issued payable at par at various ICICI Bank locations

•

Single account to be operated at any ICICI Bank branch for this facility

•

Ideal for small value, large volume payments

Fund Transfers •

Online transfer of funds between accounts maintained with any branch of ICICI Bank

Issue of Bulk Demand Drafts/ Pay orders •

Capability to issue Bulk Demand Drafts/Pay Orders on various ICICI Bank and correspondent bank locations

•

Capability to accept online requests from the customers

•

Capability to print beneficiary advice and dispatch

•

Remote printing facility

•

Simple process with a low turnaround time and delivery

Cheque Writing 95

•

Cheques can be issued on behalf of companies

•

Capability of processing large volumes of cheques in a short turnaround time

•

Capability of printing facsimile signatures

•

Capability to print beneficiary advice and dispatch

•

Ideal for bulk payments such as pension payments, gratuity payments.

Location

Days

Rate

Ahmadabad

1

0.3

Amritsar

2

0.2

Aurangabad

2

0.2

Bangalore

1

0.15

Baroda

2

0.3

Calcutta

1

0.15

Chandigarh

1

0.15

Chennai

1

0.15

Dindigul

2

0.3

Gwalior

2

0.3

Hubli

2

0.3

Hyderabad

1

0.15

Indore

2

0.3

Jaipur

1

0.15

Jallandhar

2

0.3

Kanpur

1

.05

Ludhiana

2

0.2

96

Mumbai

1

0.15

Nagpur

2

0.3

Nasik

2

0.3

Pune 1 **Rates above are Rupees per thousand

97

0.2

HDFC Cash Management is the stewardship or proper use of an entity’s cash resources. It serves as the means to keep an organization functioning by making the best use of cash or liquid resources of the organization. At the same time the organizations have the responsibility to use timely, reliable and comprehensive financial information systems. Cash Management Services (CMS) is one of our thrust areas. Today, it has a large number of satisfied CMS customers, many of whom are in the top segment of the Indian Corporate and Public Sectors. This has been a result of a robust, end to end cash management product which offers innovative and reliable solutions by combining an efficient collections and disbursements product, backed by state of the art systems to ensure customized delivery. The Bank has constructed a wide range of CMS products covering collections and disbursements of operating flows, as well as specialized cash flow streams such as rights/public issue collections, dividends, interest/principal repayments, excise and sales tax payments etc. We operate out of a large and expanding network of over 175 outlets across the country. This is the largest network of online, electronically linked branches in the country. This provides us with a clear competitive advantage, which naturally translates into a lower cost and faster credit to corporate. In addition to our

98

network, we have an extensive correspondent banking arrangement, which allows us to offer you Cash Management Services a/c over 1100 locations covered for collections and over 650 locations for Payments.

Cash Management helps the organization in: Eliminating idle cash balances. Monitoring exposure and reducing risks. Ensuring timely deposit of collections. Properly timing the disbursements.

99

100

Headquartered in London .HSBC Holdings plc is one of the largest banking and financial services organization in the world. The HSBC Group’s international network comprises over 9500 offices in 79 countries and territories in Europe, the Asia-Pacific region, the America, the Middle East and Africa. The Group has over 110 million customers worldwide, the more than 223000 employees. With listing on the London, Hong Kong, New York and Paris stock exchange, around 200000 shareholders in some 100 Countries and territories hold shares in HSBC Holdings plc. The shares are also traded on the new York stock exchange in the form of American Depository receipts. Through a global network linked by advanced technology, including a rapidly growing e-commerce capability, HSBC provides a comprehensive range of financial services; personal , commercial ,corporate, investment and private banking; trade services ; cash management; treasury and capital markets services; insurance; consumers and business finance; pension and investment fund management; trustee services; and securities and custodial services. The name of HSBC is derived from the initials of Hong Kong and Shanghai banking Corporation, the founding member of the modern group. The Group’s Hexagon symbol was introduced as part of the new corporate identity of the Hong Kong and Shanghai Banking Corporation in 1983.

CASH MANAGEMENT EXPERTISE

101

HSBC has extensive experience in cash and treasury management across all geographies. HSBC’s approach to cash management is customer focused and consultative as opposed to concentrating in selling products. HSBC is technologically advanced, utilizing automation and straight-through processing wherever possible. HSBC places high emphasis on implementation and ongoing support via highly skilled executives and client services staff. In summary, HSBC focuses on the relationship, not the transaction or sale. HSBC offers a full array of receivables solution to meet BSL’s requirement .HSBC’s solution is based on nature of BSL’s business and the geographic distribution of payer location. HSBC’s collection solution will speed up BSL’s overall collection cycle and thus reduce internal processing work, while at the same time deliver the receivables report to support working capital management. Apart from a considerable cost advantage, key benefits of HSBC’s integrated Receivables Solution will be as follow. Improved availability of funds- acceleration of receivables for BSL’s by reduction in collection cycle. Reduced administrative burden- automation of receivables reconciliation would result in cost effectiveness and free-up time for other operational issues. Improved management of information- availability of various collection reports for flexible and efficient information management for BSL.

INTEGRATED RECIEVABLE MANAGEMENT HSBC is present 22cities with 43 branches across India and we cover over 2000 collection locations through our arrangements with associate banks. Under its cash management offering, HSBC provide you the convenience of daily Cheque pick102

up from your offices. We can pick up Cheques at more than 230 locations across the country and provide you credit if collection proceeds in your account held with HSBC. Collection product overview:Cheque Mate: This comprises of local Cheques deposited at locations where HSBC has branches across the country. A courier arrangement can be made available at each of the centers to facilitate daily pickup of Cheques from your offices. Lock box: This comprises of local Cheques deposited at over 200 locations where the Cheques are cleared through our correspondence banks. A courier arrangement can be made available at each of these centers to facilitate daily pickup Cheques from BSL’s offices. Quick Encash : this comprises of outstation Cheques payable at over 2000 location across India where the Cheque are deposited with HSBC at centers other than where they are drawn. The credits for these will be provided into BSL’s account maintained with HSBC as per arrangement. Quick collect; this comprises of Cheques, which are not covered by any of the arrangements specified above. The credits for these will be provided into BSL’s account maintained with HSBC on realization basis.

AXIS BANK

103

In today's competitive market place, effectively managing cash flow can make the difference between success and failure. UTI Bank offers a wide range of collection and payment services to meet your complex cash management needs. Payments received from your buyers and made to your suppliers are efficiently processed to optimize your cash flow position and to ensure the effective management of your business' operating funds. The flow of receivables and payables can also be seen through our web solution Above all our quick adaptation of the latest technology differentiates us from the other competing banks. Our Power Pay products are designed to take maximum benefit of the Anywhere Banking through our large network of branches with centralised database. UTI Bank not only provides a clearing platform to process your payments but also has taken a step ahead by enabling you to outsource your Cheque writing and other time-consuming and routine manual payment processes. The Centralised Payment system, connecting our entire branch network, is capable to process any type of payment - physical instrument (with or without facsimile signature) as well as electronic payment, bulk DD payment to vendors, salary payment or dividend/ interest payments of large corporate houses. •

At Par Payment We issue At Par payable cheque book to our Current Account customers. Par facility enables you to maintain only one Account and issue cheques that would be payable at any UTI Bank location as a local cheque. Further each cheque, if needed, can be validated against an issue file before clearing the instrument to avoid fraudulent payment.

•

Dividend/Interest Payment We undertake Bulk dividend and interest payment of corporate houses through an At Par facility. A central account maintained by you. Our Bank needs to be funded and we would ensure that the dividend/interest warrant presented at any UTI Bank 104

location is cleared under respective local clearing. A validation process ensures that each warrant matches with the issue file before it is cleared and thereby avoids fraudulent payment. •

Power Remote-Remote DD Printing To cater to your need for issuing bulk demand draft (DD) at various locations, we offer our remote printing services wherein you fund a central account and we would print the DD at different UTI Bank locations and arrange for the dispatch of the same. Validation against the issue file keeps a check on fraudulent payment.

•

Power Cheque-Customer Cheque Printing Payment by Cheque still remains a popular payment method but involves timeconsuming and laborious manual processes. Payments outsourcing to our Bank would enable you to get the Cheques and the cover note printed as per the payment file with the facsimile signatures of the authorized signatories of your company. Power Pay The Cheques can be printed centrally various remote locations as per your requirement.

•

Electronic Clearing Service (ECS Credit) ECS Credit is an electronic clearing system that facilitates paperless transaction through an offline system. UTI Bank facilitates ECS Credit at 46 locations. We accept the electronic file and then arrange it to be uploaded at the RBI site for clearing. The funds get debited from a centralized account and a detailed MIS about the transactions is provided to the customer.

•

Electronic Fund Transfer EFT is an expeditious system of funds transfer across around 13000 branches of designated EFT bank at various locations. The bank offers this facility at all designated EFT Centers that are activated by the clearinghouses. Further, the bank has recently launched the EFT under Internet Banking known as "Power Transfer" which facilitates execution of fund transfer from anywhere through Internet.

105

•

NEFT To establish an Electronic Funds Transfer System to facilitate an efficient, secure, economical, reliable and expeditious system of funds transfer and clearing in the banking sector throughout India. The customer willing to avail the NEFT facility offered by us shall submit an "NEFT Application Form" authorising the sending bank to debit the sender's account and transfer funds to the beneficiary specified in the NEFT Application Form. The Beneficiary's account will be credited on the same day by crediting the specified account of the beneficiary or otherwise placing funds at the disposal of the beneficiary. Collection Solutions - Power Collect Our Power Collect products are designed and developed to meet all of your Collection needs Cheques, Cash and Electronic Transfer. Whether you do business locally or throughout India, we can provide you with innovative, integrated cash management solutions customised to your specific needs. UTI Bank's Cash Management Services is based on an extremely robust technology capable to cater to collection or payment requirements of:

• • • • •

Large Corporate Small and Medium Segment Banks NBFCs Mutual Funds

Corporation Bank:

Established in the year 1906, The Bank has a unique history of 98 years of successful Banking and has stood the test of time by growing steadily, offering vast, varied and versatile services. Today, its good customer service, pre-eminent track record in House Keeping, adherence to Prudential Accounting norms, consistent profitability and adoption of modern technology for betterment of 106

customer service have earned the Bank a place of pride in the Banking Community The Bank is a Public Sector Unit with 57.17% of Share Capital held by the Government of India. The Bank came out with its Initial Public Offer (IPO) in October 1997 and 37.87% of Share Capital is presently held by the Public and Financial Institutions. The Bank’s Net Worth stood at Rs.2, 755 crore as on 31.12.2003. Corporation Bank is the first Public Sector Bank to publish the results under US GAAP. The Bank has been publishing the results under the US GAAP since 199899. The net profit of the Bank and its subsidiaries under US GAAP for the year 2002-03 stood at Rs. 382.12 crore against consolidated net profit of Rs. 415.99 crore

registered

under

Indian

GAAP

method

As on 31.03.04, the Bank has a highly dedicated team of 10,176 fulltime employees who have made the encouraging performance of the Bank possible by extending exemplary services to its customers. The Bank has better productivity levels than many of its peers in the Public Sector.

Products Offered By Corporation Banks: Collection and Payment Services (CAPS) The PRODUCT RANGE under the umbrella of CAPS, provide one point solution to corporate cash management requirements in the area of receivables and payables management of the corporates. The essence of CAPS is Speed, Accuracy, and Efficiency . Features of CAPS, evolved in response to corporates' needs - aim at providing significant TANGIBLE BENEFITS

to

corporates.

Collection And Payment Services are offered and managed by specialised exclusive Special Business Units in the form of CAPS BRANCHES, Payment Processing Centre and FCS HUB using the state of the art TECHNOLOGY. 107

Fast Collection Service Fast Collection Service (FCS) is the premier product of the Bank under CAPS range of products. FCS envisages elimination of one leg of movement of cheques from drawer to beneficiary’s place and travel back to speed up the process. The corporates can access the collections effected at 212 LOCATIONS (OPERATING CENTRES) across the country covered under the arrangement within 24 to 48 hours at a location of corporate’s choice. Corp Clear Services [ CCS ] CCS ensures quick collection of outstation cheques. The product enables assured credit on pre-determined day of corporate’s choice, in respect of upcountry cheques deposited with specialised CAPS branches irrespective of the day of realisation. The need-based product range under this segment includes

Corp Clear Services - CCS 8th Day* Corp Express Services - CES 4th Day* Corp Instant Services - CIS Next Day (* for cheques drawn on locations where CorpBank has branches)

Corp Collect Service [ CCT ] Corporates apprehensive of cheque realisations may use our Corp Collect Service that operates on “Realise and Pay” basis. The Service is extended for both within and outside network locations. All the benefits of other corp clear services do come along with Corp Collect Service. Corp comfort services

108

Waiting unduly and without certainty as to realisation of outstation cheque would hamper the business cycles. With an assured credit on 8th day in respect of outstation cheques falling outside network, Corp Comfort Service proves an effective blend of Corp Clear Service and Corp Instant Service. Corp Remit Services CorpRemit Service meets the corporates’ wholesale payment requirements such as statutory payments, payments to vendors/suppliers, banking requirements, inter branch transfers etc., Corporates need just to hand over the payout instructions file along with funding cheque to CAPS branch. Further Servicing will be taken over by the CAPS outfit. One of the salient features of CorpRemit is that corporates get confirmation on payout effected. Corp Pay Services CorpPay Service facilitates corporates’ to make retail payments very effectively. Some of the payouts that can be very effectively and conveniently handled includes disbursal of incentives, equity and debt servicing to the satisfaction of investors, salary and wages payouts etc. All that corporates need to do is to furnish the payout details in magnetic media/mail and the funding therefore. Rest is only client satisfaction. Value added service such as dispatch of payout instrument to beneficiary is also made available. All these are available at a very competitive price exclusively for corporates. Payment Processing Centre Continuing the initiatives in re-engineering the Cash Management Process, Payment Processing Centre was set up to replicate the success achieved in collections in payments too. At PPC, capabilities are built to print exceptionally large number of Demand Drafts with advice. Value added service such as dispatch of payout instruments to beneficiaries is being undertaken. 109

CorpNet - an Internet banking facility Symbolizing the commitment to deliver value added services to clients using CAPS with continuous improvements year after year; the Bank has made the use of the state of the art technology. CorpNet an Internet banking facility is now available to all corporates using CAPS for their cash management needs. CorpNet optimizes the efficiency of corporates cash

management.

CorpNet provides for a host of advantages to corporates using CAPS. Convenience, information on line, data modulation, cash inflow forecast, outstanding position of instruments sent for collection are some of these distinct advantages coming without any extra cost. A very high level of security features are incorporated to afford greater degree of client comfort using this technology driven value addition. What the corporates need to do is to simply register with any of the CAPS branches. CAPS Dial - a telebanking facility CAPS Dial, yet another delivery channel, provides information round the clock over telephone. Fax on demand option provides required reports at client’s desk. The Interactive Voice Response system provides for required information pertaining to collections, returns including fate of the instrument. Corporation Bank offers the services to BSL under FAST COLLECTION SYSTEM. BSSL avails CMS from Corporation bank in the following locations. The table below shows the rates charged by the Corporation bank and the days taken to transfer the funds to the central pool.

Location Agra Aligarh Allahabad Bangalore Bareilly

Days 2 2 2 2 2

Rate 0.08 0.08 0.08 0.08 0.08 110

Belgaum Bhopal Coimbatore Dehradun Dindigul Ernakulam Gorakhput

1 2 2 2 2 2 2

0.08 0.05 0.08 0.08 0.08 0.08 0.08

Guwahati Hubli Jammu Jamshedpur Jodhpur Kanpur Lucknow Madurai Muzf. Nagar Pondicherry Rewari Rohtak Saharanpur Salem Tiruchirapally Tirupati Tumkur Varanasi

2 2 2 2 2 2 1 2 2 2 2 2 2 2 2 2 1 2

0.08 0.08 0.08 0.08 0.08 0.05 0.04 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.04 0.08

Corporation Bank charges @ 18 paisa per thousand and 5 paisa per thousand. In addition to it the interest is charged @13.5% on the cheques that are returned.

RELEVANCE OF LETTER OF CREDIT IN CASH MANAGEMENT 111

The Cash Management Services are availed by BSL so that the payment under cash sales can be realized early at low cost. However, a company’s sale includes both cash and credit sales. What does a company do to realize the payment early in case of credit sales? The answer is it gets the bill of exchange discounted and realizes the payment much before the expiry of the credit period which is anywhere between 30-180 days. The procedure is simple. The buyer (party) of goods opens an LC with his bank and sends it to the seller (beneficiary). The beneficiary presents the documents as mentioned in the LC to the beneficiary’s bank which in turn credits the payment to the beneficiary’s account after discounting. The party pays to its banker the amount written in the Bills of exchange at the expiry date of LC and Party’s bank in turn makes the payment to the beneficiary’s bank. BSL makes uses of Inland letter of credit in case of credit sales in India and Foreign Letter of credit in case of exports. Another advantage of LC is that it ensures the credit worthiness of the party (buyer of goods) because the transactions are through banks hence the chances of default are negligible. Thus it becomes an important method to realize funds. However, the procedures involved in the realizing payments through this mode is rather complex. All the terms mentioned in the LC are to be strictly adhered to. The next part of the project is about the LCs and the procedures involved in there negotiations.

Introduction of Letter of Credit

112

The Letter of Credit is one of the most convenient methods of settling payment in trade. It provides financial security to the seller of goods up to a certain extent Letters of credit became necessary when trade between countries made it impossible to simply do business by handshake. A letter of credit is basically a document issued by a bank guaranteeing a client's ability to pay for goods or services. A bank or finance company issues a letter of credit on behalf of an importer or buyer, authorizing the exporter or seller to obtain payment within a specified timeframe once the terms and conditions outlined in the letter of credit are met. The letter of credit acts like an insurance contract for both the buyer and seller and practically eliminates the credit risk for both parties, while at the same time reducing payment delays. A letter of credit provides the exporter or seller with the greatest degree of safety when extending credit. It is useful when the importer or buyer is not well known and when exchange restrictions exist or are possible.

Definition of Letter of Credit A documentary letter of credit may be defined as an arrangement by means of which a bank at the request of customer (applicant), undertakes to pay to a third party (beneficiary) a predetermined amount by a given date according to agreed stipulations and against presentation of stipulated documents.

It may be defined as an arrangement where payment is made against documents. Under documentary credits all the parties concerned deal with 113

documents not with goods, services and performances to which the document may relate. The Uniform Custom and Practice for Documentary Credits (UCPDC) guidelines which governs the operations of letter of credit defines documentary credit as “any arrangement, however named named or described, whereby a bank (the “issuing bank”) acting at the request and on the instructions of a customer (“the applicant”) or on its own behalf i.

Is to make a payment to or to the order of a third party. OR

ii.

Authorizes another bank to effect such payment, or to accept such bill of exchange. OR

iii.

Authorize another bank to negotiate against stipulated documents, provided that the terms and conditions of the credit are compiled with.

Parties to Letter of Credit

114

From the definition given above it can be deducted that the principal parties to a letter of credit are:  The applicant  The issuing bank  The beneficiary  The advising bank  Confirming bank  Nominated bank  Reimbursement bank

The applicant: The applicant of an LC is normally the buyer of the goods who is to make payment to the seller. It is at his request and instructions that the issuing bank opens the LC. The issuing bank: The issuing bank is the bank which opens the LC in favor of the beneficiary. By opening the LC the issuing bank undertakes the responsibility to make payment to the seller on compliance of required terms and conditions. The beneficiary: The beneficiary is the seller of the goods who is to receive payment from the buyer. The LC is opened in his favor to enable him to receive payment on submission of the stipulated documents. 115

The advising bank: The advising bank advises the credit to the beneficiary. Advising of credit is done only after verifying the authenticity of the credit. Confirming bank: The advising bank or any other bank so authorized by the issuing bank may assume the role of a confirming bank and adds its confirmation to the LC opened by an issuing bank. The bank which has been asked to confirm an LC is under no obligation to confirm it. Nominated bank: Nominated bank is the bank that is nominated and authorized by the issuing bank to:

-

Pay if the LC is a payment LC

-

Incur a deferred payment undertaking

-

Accept drafts, if the credit stipulates so

-

Negotiate.

Reimbursement bank: Reimbursement bank is the bank which is authorized to honor the reimbursement claim in settlement of negotiation/acceptance/payment lodged with it by the paying, negotiating or accepting bank. It is normally the bank with which the issuing bank has an account from which payment is made.

116

RIGHTS AND RESPONSBILITIES OF PARTIES OF LC The right and responsibilities of every party associated with an LC have been defined in the UCPDC 500. It is necessary that every party dealing with the LC keep himself informed about these responsibilities. A brief summary of these rights is as under: • All parties dealing with an LC are dealing with documents and not with goods/services, or performances to which the documents may relate. •

Exporters/beneficiary of LC has a right to receive payment against submission of prescribed documents under the LC. It is exporter’s duty to ship the goods as per the LC and submit the documents within the stipulated time for negotiation.

• Negotiating bank: once documents under LC is submitted the negotiating bank has to ascertain that they appear on their face to be an accordance with the terms and conditions of the credit and if found agreeable, should effect payment as per the LC terms and dispatch documents to the opening bank as instructed. •

Opening bank: once the documents under the LC are received from the negotiating bank, it should scrutinize them within 7 days from the date of receipt. If it finds any discrepancy in the documents, it must convey the same to the negotiating bank through the fastest mean available.

117

• Advising bank: once LC opening instructions are received from the opening bank, the advising bank should, if it so desire to act as advising bank, verify the veracity of the LC and advice the beneficiary about the LC and its terms. • Confirming bank: at the request of the issuing bank the advising bank chooses to add its conformity to the LC. It is taken upon itself, the responsibility of paying the beneficiary against presentation of stipulated documents. • Applicant of the LC: the importer is responsible for making payment under the LC, against release of stipulate documents to the opening bank.

TYPES OF CREDIT BASED ON THE SCOPE FOR CANCELATION: •

Irrevocable letter of credit: cancellation or any amendment to such an LC cannot be made without the prior acceptance of all the parties to the said LC.

•

Confirmed letter of credit: here, in addition to the issuing bank another bank will add its confirmation to the LC. In other words, a confirmed letter of credit will have the guarantee of not only the issuing bank but also of the confirming bank.

BASED ON MODE OF PAYMENT: •

Payment credit: under this credit, payment will be made to the beneficiary on submission of the required documents provided they are in compliance with the LC terms. Payment credits do not usually call for drawing of bills.

118

•

Deferred payment credit: this type of credit is a usance credit, where payment is made on the due date specified in the credit. Under this credit the maturity dates at which payment has to be made and how such maturity should be determined should be clearly indicated.

•

Acceptance credit: this credit is a usance credit, where it is mandatory for the beneficiary to draw a draft on the drawee /specified bank for a specified tenor. the drawee bank will accept such drafts & make payment on the respective due dates on presentation of the relevant bill of exchange

•

Negotiation credit: this credit may be a sight credit or a usance credit. Under a sight credit payment is made immediately, while under a usance credit payment is made after a specified tenor.

BASED ON TENOR: •

Sight credit: where payment is made on sight (either on demand or presentation), such credit is called a sight credit. Drawing of drafts is not compulsory under sight credit. If drawing a draft is not required payment can be made against submission of stipulated documents.

•

Usance credit: also referred to as term credit, this credit requires drafts to be drawn on the drawee / specified bank indicating the tenor. Such draft will be accepted by the drawee and paid for at the end of the usance period.

BASED ON AVAILIBILITY STYLE:

119

•

Revolving credit: a LC whereby the credit available to the beneficiary gets reinstated by the original amount, once a drawing is made called revolving credit.

•

Installment credit: it stipulates that shipment may be made in installment at specified periods of time. It differs from simple credit which permits partial shipment.

•

Deferred credit: this credit mostly used in those trades where a position of goods is paid for by the buyer after verification of goods or after assessing the value of the goods taking into account of quantity, shortage etc.

•

Transit credit: in a transit credit the service of a bank stipulated in a third country will be used.

•

Reimbursement credit: when a credit is denominated in a currency of a third country, such credit is termed as reimbursement credit.

•

Anticipatory credit: payment under LC is usually made at the post shipment stage (i.e. on submission of documents). However, under this credit payment is made to the exporter at the pre-shipment stage in anticipation of export of goods and submission of bills at later stage.

Documents Required: •

Invoice: a commercial invoice is prima facie evidence of the contract of sale and purchase. It is the document made by the exporter on the importer indicating details like description of the goods consigned, consigner’s name, 120

name of the steamer, number and date of bill of lading, country of origin, term of payment, amount of freight etc.

•

Bill of lading: a bill of lading is the document issued by the shipping company or its agent, acknowledging the receipts for good for carriage which are delivered to the consignee or his assignee in the same condition as they were received.

•

Insurance documents: in international trade, when goods are in transit they are exposed to marine perils. Insurance is affected to protect the insured against risk of loss or damage to goods due to marine perils.

•

Other documents: An addition to the above mention documents, a L/C may call for additional documents like bill of change, health certificate, preshipment inspection certificate, packing list, shipping companies profile, beneficiary’s declaration/undertaking etc.

•

Certificate of origin: many countries require a certificate from the supplier of goods stating the origin of the goods and certified by the Chamber of Commerce or any other recognized authority in the exporter’s country.

121

Sample Procedure for Administration of Irrevocable Documentary Letters of Credit:Step 1 The Sales and Credit Departments agree that an irrevocable letter of credit is necessary prior to communicating financial terms to the customer. Sales and Credit must also agree whether to require an irrevocable confirmed or unconfirmed letter of credit.

Step 2 The Credit Department will communicate the letter of credit terms to the customer, forward a letter of credit checklist to the customer and try to select the issuing bank.

Selecting

the

issuing

bank

is

not

always

possible.

The Credit Department will also request that the customer forward a copy of the letter of credit on receipt. The customer generally receives its copy before our advising bank. Getting an early copy allows all parties at (your company) to begin the review process.

Step 3 The customer arranges with its bank for the issuance of the letter of credit. Step 4

The issuing bank sends copies of the letter of credit to the customer and to seller’s advising bank. Both, the customer and seller’s advising bank will send a copy to the Credit Department.

Step 5 122

Once the Credit Department receives a copy of the letter of credit, it will send copies to Customer Service Representatives, Sales, and Traffic within one business day of receipt. Traffic personnel will forward the letter of credit to the forwarder. In addition, the Credit Department will log the letter of credit in the Letter of Credit Database.

Step 6 Credit, Sales, and Traffic will review the letter of credit looking for necessary amendments within one day of receipt. Reviewing parties will forward all amendments to the Credit Department via Fax or E-mail. A Fax or E-mail is still necessary should Sales or Traffic require no amendments.

Step 7

If amendments are necessary, the Credit Department will forward all required changes to the customer. Should the necessary amendments lie outside Credit's realm of expertise; it will seek the needed assistance from other areas within the Company. If the customer agrees, it will forward requests to its issuing bank, which in turn will forward an amended letter of credit to seller’s advising bank. Seller’s advising bank will fax a copy of the amended letter of credit to Credit, who in turn will send it to Sales and Traffic. Credit, Sales, and Traffic will review the amended letter of credit to ensure no additional changes are necessary. When making amendments and reviewing an amended letter of credit, it is important to keep the letter of credit's expiration date in mind. Credit should approximate the number of days taken up by the amendment process and amend the expiration date by the same number of days.

123

Step 8 If no changes are necessary, all the affected parties approve the amended letter of credit by notifying the Credit Department of the approval via Fax or E-mail within one day of receiving the amended letter of credit. If changes are necessary, go back to Step 6. Once the Credit Department receives the approval notifications from all parties, it will immediately advise all parties affected that the letter of credit has been approved. Step 9

Sales send a copy of the amended letter of credit to the plant with instructions to ship the product to the customer. Sales will do this on the same day it receives the notification from the Credit Department confirming that the amended letter of credit is acceptable.

Step 10 The Freight forwarder and Traffic Department ship the material and send all the documentation required in the letter of credit along with a draft for payment to seller’s advising bank via overnight express courier.

Step 11 Our advising bank reviews all documentation to ensure that it complies with the letter of credit's requirements. If there are any correctable discrepancies, the advising bank will correct them. It is important to note that your advising bank may charge you for each discrepancy found and corrected. If there are noncorrectable discrepancies, our advising bank will try to get the customer to waive them. However, getting the customer to waive non-correctable discrepancies is no guarantee that the issuing bank will agree to the changes. This is especially true if

124

the financial condition of the customer deteriorates. The advising bank's review process should take three days or less.

Step 12 Seller’s advising bank forwards all the documents to the location specified in the letter of credit, which is usually the address of the issuing bank.

Step 13 The issuing bank honors the letter of credit and forwards the funds to seller’s advising bank. Should the issuing bank not honor the letter of credit, it must tell seller’s advising bank why.

Step 14 Seller’s advising bank will credit his account minus applicable fees. All advising fees are absorbed by the division making the sale. The advising bank will contact the Credit Department stating whether or not payment has been received. Should the issuing bank refuse to honor the letter of credit, Seller Company is still responsible for associated fees. The issue of who will pay for the associated fees should be resolved prior to accepting the letter of credit. The Buyer and the Seller should all be in accord. Although the seller typically pays for advising fees, all fees are negotiable

Some special terms of Letter of credit

Latest Negotiation Date :

125

The latest negotiation date is the last day of the period of time allowed by the letter of credit (L/C) for the presentation of documents and/or draft(s) to the bank. The latest negotiation date is not necessarily the L/C expiry date. For example in the letter of credit the latest negotiation date can be May 25, 2006 or 15 days after the date of shipment, whichever comes first. In case the L/C does not stipulate the latest negotiation, it is within 21 days after the date of issuance of the transport documents, but on or before the L/C expiry date. Expiry Date and Place : The expiry date and place is the last day of validity of the credit and the place allowed by the letter of credit (L/C) for the presentation of documents and/or draft(s) for payment, acceptance or negotiation. In the sample

letter of credit

the expiry

date is May 25, 2006 and the place for presentation of document is Export-City, which is the beneficiary's city. In case the validity of an L/C is stated in a period of time, for example "this credit is valid for three months" or "this credit is available for two months" or "this credit is good for one month", but does not specify the date from which the time is to run, its validity starts from the issuance date of L/C by the issuing bank. The bank normally discourages stating the L/C validity in a period of time.

In case the expiry date and/or the latest negotiation date falls on a day on which the bank is closed for reasons not including the acts of God, strikes, riots, civil commotions, lockouts, insurrections, wars or any other causes beyond the bank's control, the expiry date and/or the latest negotiation date is extended to the

126

succeeding first day on which the bank is opened. Such extension, however, does not extend the latest date of shipment.

Draft(s) Drawn On The draft(s) drawn on answers the question "Which bank or who is the drawee (the payer) of the draft?" L\C should specify on which bank it could be drawn. Mostly it is any bank. The draft is most often drawn on the confirming bank or the issuing bank. In some cases, the draft is drawn on the applicant.

Draft(s) Drawn At The draft(s) drawn at answers the question "The draft is drawn at what terms?" It can be a sight draft (i.e., payment on demand or on presentation) or a term draft (i.e., payment at a fixed or determinable future time). Draft(s) Drawn Under The draft(s) drawn under answers the question "The draft is drawn under which credit and the credit is of which bank?"

Latest Shipment The latest shipment---latest date of shipment or last date for shipment---is the last day of the period of time allowed by the letter of credit (L/C) for shipment, dispatch or taking in charge.

127

Payment of Letter Of Credit

The Uniform Rules for Collections, ICC Publication No. 322, describes the conditions governing collections (including those for the presentation, payment and acceptance terms), is issued by the International Chamber of Commerce (ICC) in Paris, France. In the documents against payment (D/P) ---documents on payment (DOP or D/P) --- The conditions under which the documents attached to a Bill of Exchange (BOE) will be given to the buyer, provided that he accepts the BOE. Only then can the goods be released to the buyer. In the documents against acceptance (D/A) ---documents on acceptance (DOA or D/A) --- The conditions under which the documents attached to a Bill of Exchange (BOE) will be given to the buyer, provided that he pays the BOE immediately. Only then can the goods be released to the buyer.

AMENDMENT OF LETTER OF CREDITS Many times, it becomes necessary for the contracting parties to make certain amendments to the terms and conditions originally stipulated. In such cases, Applicant approaches his Bank, which opened the credit requesting it to convey the desired amendments to the Beneficiary. Accordingly, Opening Bank sends a message advising the Bank through whom they had advised the Letter of Credit originally conveying the desired amendments.

128

While advising the amendments normally the Issuing Bank serializes the amendment numbers. Before advising the amendment, Bank has to ensure that no previous amendment is missing. Normally, whenever an amendment is effected, there is a likelihood of inconsistencies creeping into the Letter of Credits because of not amending the connected clause of Letter of Credit. The Advising Bank must go through the provisions of Letter of Credit and the amendments to ensure that on account of such amendments no inconsistency arises in the Letter of Credit. If the amendment is not clear, preliminary information can be given to the Beneficiary and necessary clarifications sought for from the Issuing Bank (Article 8 & 12). In an Irrevocable Letter of Credit, no amendment to the terms and conditions originally conveyed can be made unless all parties to the credit agree thereto. In case, Opening Bank requires information of acceptance of amendments by the beneficiary, while communicating the amendment, the beneficiary is to be requested to convey his acceptances to the Opening Bank. Amendments are to be advised in the manner as done while advising the Letter of Credit. All charges connected to amendment as per rules in force either from the Beneficiary or from the Opening Bank (Article 18).

Cancellation of Letter of Credit

1. If the issuing bank requisites that their irrevocable letter credit be cancelled before expiry date and that the original letter of credit be returned to them. Bank immediately should write to the beneficiary to that effect inquiring whether they are agreeable and if so to return the credit. 129

2. Bank should follow up to get the original letter of credits for cancellation at their end for onward transmission if need arises. If beneficiary is not agreeable for cancellation the advising bank should inform the opener accordingly. 3. If transferable credit is to be cancelled at the request of the opener, then the advising bank should inform all the concerned parties, and if agreeable should get back all the advised letter of credit before communicating the acceptance to the opener. Unless all the parties agree for cancellation. UCPDC Provisions Uniform Customs and Practice for Documentary Credits (UCPDC) is a set of standard rules governing letters of credit clarified by International Chamber of Commerce (ICC). The current set of rules has been published by ICC in its brochure no.500 and w.e.f. 01-01-1994. UCPDC is a document of world wide importance which is universally recognized by over 165 countries.

India also accepted to adhere the rule of UCPDC. Hence all banks in

India have to issue and operate the credits subject to the rules of UCPDC-500 and have to incorporate the clause in their credit that the same are subject to the provisions of UCPDC-500 rules. UCPDC-500 has only 7 chapters containing in all 49 articles and deals in all aspect of letter of credit, viz opening handling of documents there under and its operation.

Advantages to the Buyer •

The buyer is assured that his/her bank will refuse payment to the seller unless

130

•

the seller’s documents comply with the terms and conditions of the Letter of Credit

•

If the seller is willing to grant extended terms to the buyer, the buyer may arrange for a Letter of Credit which is payable at a future date (i.e. 60 or 90 days after presentation of complying documents).

•

Through the use of Banker’s Acceptances, a buyer who has purchased goods under a Letter of Credit may finance the goods until they are marketed.

•

By the documents called for, the Buyer can seek to minimize the risks in not receiving the goods ordered. The Buyer may also impose conditions on the manner and dates in which the goods are to be shipped.

Risk to the Buyer •

In Letters of Credit, banks deal only with documents, not with goods.

•

The merchandise may not be as it is represented in the documents.

Advantages to the Seller •

The seller may rely on a bank’s credit worthiness rather than the buyers. The seller is more confident when he has a bank’s commitment to pay upon presentation of complying documents.

131

•

The seller can reduce the risk that payment for the goods might be delayed or otherwise jeopardized by political or foreign exchange problems in the buyer’s country.

•

The seller may be able to obtain financing for the purchase or manufacture of goods that will be shipped under the Letter of Credit.

•

Under Banker’s Acceptance financing the seller may receive funds shortly after shipment despite having granted credit terms to the buyer, or the seller may receive funds prior to export. The decision is typically based on the seller’s cash flow position.

Risk to the Seller •

The seller’s documents must comply strictly with the terms and conditions of the Letter of Credit to entitle the seller to payment.

•

The seller is exposed to the commercial risk that the bank providing its undertaking is willing and able to perform.

•

The seller assumes any political and foreign exchange risk affecting the issuing bank’s obligation.

132

ANALYSIS AND FINDINGS: HDFC-28 HDFC-28-CMS BANK COLLECTION CHARGES FOR THE M/O APRIL-2008 COLL. LOCATION

COLLECTION RATE CHGS. 0.00

TOTAL

AGRA

1116726.00

55.84

55.84

21.78

21.78

14.96

14.96

45.31

45.31

005 0.00

ALIGARH

435526.00

005 0.00

PHAGWARA

299278.00

005 0.00

BANGLORE

1132710.00

004 0.00

LUDHIANA

44147509.00

INDORE

3907211.00

005 0.00005

2207.38 2207.38 195 .36

195.36

83.09

83.09

36.59

36.59

42.57

42.57

0.00 LUCKNOW

1661721.00

005 0.00

MADRAS

1829425.00

002 0.00

KANPUR

1064183.00

004 0.00

MEERUT

2197046.00

005

10 9.85

1 09.85

0.00 HALDWANI MANDI

801092.00 2647023.00

005

133

40.05 0.00 132.35

40.05 132.35

GOBINDGARH

005 0.00

ROORKEE

1231844.00

005

61.59

61.59

25.00

25.00

482.38

482.38

82.83 3636.93

82.83 3636.93

0.00 VARANSI

500000.00

005 0.00

JAIPUR

12059585.00

004 0.00

PANAPAT TOTAL

1656609.00 76687488.00

005

HDFC-28-CMS BANK – CH.RETURNS FOR THE M/O APRIL-2008 LOCATION DELHI DELHI DELHI DELHI LUDHIANA DELHI INDORE DELHI DELHI DELHI LUDHIANA DELHI DELHI DELHI DELHI DELHI DELHI LUDHIANA DELHI DELHI DELHI DELHI DELHI

AMOUNT 70965.00 74121.19 5249.00 46373.00 127008.00 800000.00 505995.00 350000.00 236420.00 500000.00 265761.00 200000.00 50000.00 250000.00 550913.00 457706.00 350000.00 38289.00 400000.00 479584.00 589224.00 20000.00 362752.00

PER.CH 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 134

INTEREST 0.00 21.32 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

TOTAL 100.00 121.32 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

DELHI DELHI DELHI DELHI DELHI DELHI COURIER(DELHI) COURIER(SBD) COURIER(SBD) COURIER(GURGAON) COURIER(MADRAS) COURIER(KANPUR) TOTAL

481672.00 150000.00 186049.00 300000.00 474144.00 442210.00 0.00 0.00 0.00 0.00 0.00 0.00 8764435.1 9

PARTICULARS Collection+Ret.Chargs SERVICE-TAX 12.36%

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

100.00 100.00 100.00 100.00 143.54 135.55 400.00 400.00 400.00 1200.00 400.00 400.00

6179.09

21.32

6200.41

AMOUNT 9837.34 TOTAL

CHARGED BANK

100.00 100.00 100.00 100.00 143.54 135.55 400.00 400.00 400.00 1200.00 400.00 400.00

1215.90 11053.23

BY 11053.30

HDFC-23 HDFC-23-CMS BANK COLLECTION CHARGES FOR THE M/O MAY-2008 LOCATION LUDHIANA ALIGARH ALLAHABAD

COLLECTION RATE 0.0000 32880735.00 5 0.0000 19097493.00 5 630966.00 0.0000

135

COLL.CHGS. TOTAL 1644.04

1644.04

954.87 31.55

954.87 31.55

BELGAUM

212010.00

MADRAS

17472980.00

CHANDIGARH

1175267.00

HALDWANI

15922961.00

SRINAGAR

15108290.00

TRIUPATHI

7900614.00

PUNE MUZAFAR NAGAR

23178328.00

JAIPUR

16331886.00

KANPUR

59843066.00

GUWAHATI TOTAL

48774975.00 259160175.00

5 0.0000 5 0.0000 2 0.0000 4 0.0000 5 0.0000 5 0.0000 5 0.0000 4 0.0000 5 0.0000 4 0.0000 4 0.0000 4

630604.00

10.60

10.60

349.46

349.46

47.01

47.01

796.15

796.15

755.41

755.41

395.03

395.03

927.13

927.13

31.53

31.53

653.28

653.28

2393.72

2393.72

1951.00 10940.78

1951.00 10940.78

HDFC-23-CMS BANK -CH.RETURNS FOR THE M/O MAY-2008 PER.C LOCATION GUWAHATI HALDWANI MADRAS HALDWANI GUWAHATI GUWAHATI

AMOUNT 1000000.0 0 6183.00 629254.00 45174 400000 400000

H

INTEREST TOTAL

100.00 100.00 100.00 100.00 100.00 100.00

0.00 0.00 0.00 0.00 0.00 0.00

136

100.00 100.00 100.00 100.00 100.00 100.00

GUWAHATI GUWAHATI KANPUR HALDWANI HALDWANI GUWAHATI JAIPUR LUDHIANA LUDHIANA LUDHIANA

100000 106966.23 611164 67801 40000 2500000 727992 247173 287005 197765.00 7366477.2 3

TOTAL

PARTICULARS COLLECTIONCHARGES SERVICE-TAX 12.36% TOTAL CHARGED BANK

100.00 100.00 100.00 100.00 100.00 100.00 100.00 25.00 25.00 25.00

57.53 61.54 0.00 0.00 0.00 0.00 0.00 61.79 71.25 49.44

157.53 161.54 100.00 100.00 100.00 100.00 100.00 86.79 96.25 74.44

1375.00

301.56

1676.56

AMOUNT 12617.34 1559.50 14176.84

BY 14177.46

ICICI-CMS BANK SERVICE CHARGES FOR THE M/O MAY-2008 LOCATION AHMEDABAD NAGPUR MUMBAI

COLLECTION 2976522.89 4538620.00 15429925.40

RATE 0.0000411 0.0003 0.00004 137

TOTAL 1500.00 1500.00 1500.00

JALLANDHAR LUDHIANA TOTAL

157665.00 2945197.00 26047930.29

PARTICULARS Collection-Charges SERVICE TAX 12.36% TOTAL

0.0003 0.0002

1500.00 1500.00 7500.00

AMOUNT 7500.00 927.00 8427.00

HSBC-23-CMS BANK SERVICE CHARGES FOR THE M/O APRIL-2008 LOCATION

COLLECTION RATE 0.0000 BANGALORE 58362398.92 2 0.0000 HYDERABAD 8820059.25 2 0.0000 INDORE 16467361.45 4 0.0000 MUMBAI 16544468 1 TOTAL 100194287.62 HSBC-23-CH.RETURNS APRIL-2008 LOCATION AMOUNT INDORE 500000.00 INDORE 416827.00 TOTAL 916827.00 COLLECTIONCHARGES S.TAX 12.36%

COLL.CHGS. 1167.25 176.40 658.69 165.44 2167.79

CHRGS

M/O

CHARGE 100.00 100.00 200.00

TOTAL 100.00 100.00 200.00

2367.7 9 292.60 TOTAL 2660.3

138

9 2660.4 8

DEBITED BY BANK

HSBC-23-CMS BANK SERVICE CHARGES FOR THE M/O MAY-2008 LOCATION

COLLECTION RATE 0.0000 BANGALORE 53650087.03 2 0.0000 HYDERABAD 5386036.00 2 0.0000 INDORE 22167964.00 4 0.0000 MUMBAI 48271198.00 1 TOTAL 129475285.03

COLL.CHGS.

TOTAL

2550.15

CHARGED BY BANK

2550.17

12167734.00

139

1073.00 107.72 886.72 482.71 2550.15

CORP-CMS BANK SERVICE CHARGES FOR THE M/O APRIL-2008 LOCATION ALLAHABAD SAHARANPUR ROHTAK LUCKNOW GORAKHPUR AGRA BHOPAL JODHPUR KANPUR TIRUCHIRAP DEHRADUN JAMMU REWARI TOTAL

COLLECTION 799094.00 4182373.00 832254.00 5218092.90 37576078.41 7598339.00 449904.00 112253.00 1321586.00 5000000.00 2418623.00 7242179.00 2827137.00 75577913.31

RATE 0.00008 0.00008 0.00008 0.00008 0.00008 0.00008 0.00003 0.00008 0.00003 0.00008 0.00008 0.00008 0.00008

TOTAL 63.93 334.59 66.58 417.45 3006.09 607.87 13.50 8.98 39.65 400.00 193.49 579.37 226.17 5957.66

CORP-CMS CH.RTURNS CHARGES FOR THE M/O APRIL-2008 LOCATION JODHPUR GORAKHPUR GORAKHPUR GORAKHPUR GORAKHPUR GORAKHPUR TOTAL

AMOUNT 112253.00 79349.00 381124.25 550161.00 591139.00 229057.00

RET.CHGS 100.00 100.00 100.00 100.00 100.00 100.00 600.00

140

INTEREST 0.00 32.61 156.63 226.09 242.93 188.27 846.53

TOTAL 100.00 132.61 256.63 326.09 342.93 288.27 1446.53

PARTICULARS CollectionCharges SERVICE-TAX 12.36% INTEREST TOTAL

AMOUNT 6557.66 810.53 846.53 8214.72

CORP-CMS BANK SERVICE CHARGES FOR THE M/O MAY-2008 LOCATION COLLECTION RATE ALLAHABAD 3,197,572.00 0.00008 SAHARANPUR 2,707,873.00 0.00008 ROHTAK 1,491,609.00 0.00008 LUCKNOW 7,422,077.00 0.00008 GORAKHPUR 42,341,734.50 0.00008 AGRA 6,865,833.95 0.00008 KANPUR 5,512,395.00 0.00003 TIRUCHIRAP 5,000,000.00 0.00008 DEHRADUN 3,215,656.60 0.00008 JAMMU 3,544,052.00 0.00008 REWARI 1,790,950.00 0.00008 TOTAL 83089753.05

PARTICULARS CollectionCharges SERVICE-TAX 12.36% TOTAL

TOTAL 255.81 216.63 119.33 593.77 3387.34 549.27 165.37 400.00 257.25 283.52 143.28 6371.56

AMOUNT 6371.56 787.52 7159.09

UTI-CMS BANK SERVICE CHARGES FOR THE M/O April-2008

141

LOCATION COIMBATORE HYDERABAD RUDDRAPUR KOCHI/ERNAK. VARANASI TOTAL

COLLECTION 4352706.98 693661.99 1349564.43 1994495.00 28771059.35 37161487.75

Collection+Ret.Chargs SERVICE-TAX 12.36% TOTAL CHARGED BY BANK

RATE 0.00004 0.00003 0.00004 0.00004 0.00004

COLL.CHGS. 174.11 20.81 53.98 79.78 1150.84 1479.52

COURIER 0.00 0.00 0.00 0.00 400.00 400.00

TOTAL 174.11 20.81 53.98 79.78 1550.84 1879.52

1879.52 232.31 2111.83 2111.86

UTI-CMS BANK SERVICE CHARGES FOR THE M/O MAY-2008 LOCATION COIMBATORE RUDDRAPUR VARANASI TOTAL

COLLECTION 4197182.09 248364.00 35555173.18 40000719.27

Collection+Ret.Chargs SERVICE-TAX 12.36% TOTAL CHARGED BY BANK

RATE 0.00004 0.00004 0.00004

COLL.CHGS. 167.89 9.93 1422.21 1600.03

COURIER 0.00 0.00 400.00 400.00

TOTAL 167.89 9.93 1822.21 2000.03

2000.03 247.20 2247.23 2247.24

SHORT COMINGS IN THE PRESENT SYSTEM The above calculations show that the total saving has been to the tune of Rs. 4800000(approx) each year since BSL has started using CMS. However BSL have been facing certain problem with the existing banks. Both the banks are charging at a much higher rate according to the prevailing rates in the market. It is because 142

when BSL entered into the contract with the banks in June 1999 these were the cheapest rates but there have been no major revision of the contract. hence BSL ended paying higher rates. So we invited quotations from some other banks and I did analysis as to which bank should they opt for so that the cost can be further reduced. In the same context rates were invited AXIS, IDBI and HDFC Bank. BSL intendeds to take back its business from ICICI and corporation bank, because in spite of repeated reminders there has been no positive response from the above banks. Also the contracts have certain clause that is no more acceptable to BSL. They are as follows: • ICICI charges minimum of Rs.1500 per month in respective of collection. • Both of the bank charge an interest @15.5% and13.5% p.a per instrument returned for the period of which the bank has remained out of fund which is quite high. • The bank however pays at much lesser rate in the case of delayed credit. In order to select bank, service charge charged paid by BSL over the year 07-08 was compared with the service charges BSL had to pay, if it had entered into a contract with UTI, IDBI or HDFC. Service Charges are calculated by multiplying the rates quoted by the banks with the total collection of the month. In calculating the total charges payable to each these banks the service tax and instruments returned charges neglected because instrument returned cases are very few and rates below 13.5% would be acceptable to BSL. Also in the collection charges are less than the service tax would automatically come down.

COMPARING HDFC, ICICI, UTI, CORPORATION AND HSBC BANKS:

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• ICICI is providing to be an expensive option as compared to any of the above bank. • HDFC is the most suitable bank it is not charging any amount for collection. However, the location Chandigarh, Jaipur, Kanpur, Nagpur, is the location on which HDFC is crediting the amount in two days which would not suit BSL. •

In the location such as Coimbatore, Rudrapur Aurangabad UTI is charging a flat rates, BSL should look for other option, since BSL is getting huge amount.

• Corporation Bank has also flat rate for all the locations of BSL. • HSBC provides a inexpensive service but in few places such as Mumbai, Bangalore, Hyderabad and Indore.

CONCLUSION Cash Management Services has saved huge amount of cost which BSL had to pay to procure funds from its customers. The savings have been nearly to the tune of Rs 4800000. CMS has not only saved cost but have also ensured fast realization of 144

cash. Earlier it used to take BSL at least 4-5 days to realize the payments made by its customers whereas now it takes 24-48 hrs. The cost to BSL under conventional method of collection (through drafts) is estimated by taking the cash inflow through sale in cash only and current rates in the market is used for the calculation e.g. BBSL has been availing the CC facility from Punjab national bank and paying an interest @ 11% p.a. Also, the return charges are ignored while doing all the calculations because there are very few cases of return each month and most of the time the banks adjust the amount the very same days so no interest is levied upon it. In such cases BSL has to pay Rs 100 flat as return charges. It would be in best interest of BSL to change the banks from which it is availing CMS as the cost can be further reduced. The above study leads us to the conclusion that HDFC and UTI are best suited for BSL. The conclusion has not been made only on the grounds of financial charges, while finalizing the banks the return interest rate, MIS report by banks have also been taken into consideration. Any rate below 13.5% should be acceptable to BSL. The MIS reports of all the banks are at par. Also, the banks have ruled out the possibility of delayed credit as they have sophisticated software’s to insure timely credit. Still BSL should insist on writing a clause in the agreement stating that in case of delayed credit BSL is entitled to claim an interest equivalent to the interest charged by the bank in case of instrument return. Thus fresh negotiations with banks could save up to 70% of the cost. Where as, Letter of Credit has been an important source of funds for BSL and huge amount of transactions are carried out by way of Letter of credit in both domestic and international market. It not only hedges the company against the default risk but also ensures that the cash is realized much earlier than the due date of payment. However, In many cases I have noticed that the party does not default but delays the payment to the bank which in turn charges interest to BSL for the 145

period for which it has remained out of funds. This increases the cost of financing. Provisions should be made while entering into agreement with the party so as to avoid such costs. Also, at times it has been observed that the party makes payment to its banker on the due date only and hence the transfer of funds are delayed, again BSL ends up paying an interest for the same. This does not make much of a difference if the credit period is anywhere between 60-180 days. But in case the credit period is less than 60 say 30-45 the cost of financing becomes high. Thus, while entering into agreement with the party such costs must also be taken into consideration. BSL has been managing the funds very well by employing latest management techniques and have also ensured timely realization of funds.

RECOMMENDATION

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• I would like to recommend BSL to negotiate with HDFC for location

such

as

Ludhiana,

Aligarh,

Allahabad,

Mandi-

Gobindgarh, Kanpur, Pune, Guhawati as from these location BSL is receiving a huge amount, so if negotiated at lower rates, then the saving would increase at higher rates.

• As regard business with UTI but not a large, furthermore BSL should negotiate with UTI for the rates which suit the dealing.

• As regard business with Corporation Bank, Corporation Bank is having very high rate as compared to HDFC and UTI.

• ICICI Bank is another option delayed payment

147

but it charges high in case of

BIBLIOGRAPHY I M Pandey “ Financial Management” Vikas Publishers Agrawal J. D, “Education Finance: Facts & Fancies”, Finance India Vol II No.3, Sept 1998, pp 321-338 Brigham F. Eugene, “Fundamentals of Financial Management,” Dryden Press Brigham F. Eugene, Ehrhadt c. Michael, “Financial Theory and Practice”; Thomson South Western Bryant James W, “Financial Modeling in Corporate Management”, WileyInterscience Clark, John J., el, al, “Financial Management: A Capital Market Approach”, Allyn Publications Khan and Jain, “Financial Management”, Tata Mc Graw Hill Publications Kuchhal S.C, “Financial Management: An Analytical & Conceptual Approach, “Chaitanya Allagabad, 1980 Kulkarni, PV, Financial Management,” Himalaya, Bombay, 1983. I.m pandey.Financial Managemaent.

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