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INTRODUCTION: The project undertaken is on “WORKING CAPITAL MANAGEMENT IN NTPC”. It describes about how the company manages its working capital and the various steps that are required in the management of working capital. Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's ability to fund operations, reinvest and meet capital requirements and payments. Understanding a company's cash flow health is essential to making investment decisions. A good way to judge a company's cash flow prospects is to look at its working capital management (WCM). Working capital refers to the cash a business requires for day-to-day operations or, more specifically, for financing the conversion of raw materials into finished goods, which the company sells for payment. Among the most important items of working capital are levels of inventory, accounts receivable, and accounts payable. Analysts look at these items for signs of a company's efficiency and financial strength. The working capital is an important yardstick to measure the company’s operational and financial efficiency. Any company should have a right amount of cash and lines of credit for its business needs at all times. This project describes how the management of working capital takes place at NTPC .
COMPANY PROFILE NTPC Limited is the largest thermal power generating company of India. A public sector company, it was incorporated in the year 1975 to accelerate power development in the country as a wholly owned company of the Government of India. At present, Government of India holds 89.5% of the total equity shares of the company and the balance 10.5% is held by FIIs, Domestic Banks, Public and others. Within a span of 31 years, NTPC has emerged as a truly national power company, with power generating facilities in all the major regions of the country. National Thermal Power Corporation is the largest power generation company in India. The Forbes Global 2000 ranking for 2005 ranks it as the 5th leading company in India and the 486th leading company in the world. It is a public listed (Bombay Stock Exchange) Indian public sector company, with majority shares owned by the Government of India. At present, Government of India holds 89.5% of the total equity shares of the company and the balance 10.5% is held by FIIs, Domestic Banks, Public and others. NTPC ranks amongst the top five companies, in terms of market capitalisation. NTPC's core business is engineering, construction and operation of power generating plants and also providing consultancy to power utilities in India and abroad. As on date the installed capacity of NTPC is 26, 404 MW through its 14
coal based (21,395 MW), 7 gas based (3,955 MW) and 4 Joint Venture Projects (1,054 MW).
From the above graph it’s been clear that NTPC is creating that leading benchmark in all over the country, like above graph is dictating that the intensive and remarkable growth covered by NTPC was started in year 1986-87 from 3000MW with 20000BU and goes to inconsistent growth in year 2006-07 by 30000MW with 200000BU. This shows the effective installed capacity is leading a terrific generation of power.
NTPC’s core business is engineering, construction and operation of power generating plants. It also provides consultancy in the area of power plant constructions and power generation to companies in India and abroad. As on date the installed capacity of NTPC is 27,904 MW through its 15 coal based (22,895 MW), 7 gas based (3,955 MW) and 4 Joint Venture Projects (1,054 MW). NTPC acquired 50% equity of the SAIL Power Supply Corporation Ltd. (SPSCL). This JV company operates the captive power plants of Durgapur (120 MW), Rourkela (120 MW) and Bhilai (74 MW). NTPC also has 28.33% stake in Ratnagiri Gas & Power Private Limited (RGPPL) a joint venture company between NTPC, GAIL, Indian Financial Institutions and Maharashtra SEB Holding Co. Ltd. The present capacity of RGPPL is 850MW.
47817.4 crore NTPC’s share on 31 Mar 2007 in the total installed capacity of the country was 20.18% and it contributed 28.50% of the total power generation of the country during 2006-07. NTPC has set new benchmarks for the power industry both in the area of power plant construction and operations. It is providing power at the cheapest average tariff in the country. With its experience and expertise in the power sector, NTPC is extending consultancy services to various organisations in the power business. NTPC is committed to the environment, generating power at minimal environmental cost and preserving the ecology in the vicinity of the plants. NTPC has undertaken massive afforestation in the vicinity of its plants. Plantations have increased forest area and reduced barren land. The massive afforestation by NTPC in and around its Ramagundam Power station (2600 MW) have contributed reducing the temperature in the areas by about 3°c. NTPC has also taken proactive steps for ash utilisation. In 1991, it set up Ash Utilisation Division to manage efficient use of the ash produced at its coal stations. This quality of ash produced is ideal for use in cement, concrete, cellular concrete, building material.
A "Center for Power Efficiency and Environment Protection (CENPEEP)" has been established in NTPC with the assistance of United States Agency for International Development. (USAID). Cenpeep is efficiency oriented, eco-friendly and eco-nurturing initiative - a symbol of NTPC's concern towards environmental protection and continued commitment to sustainable power development in India. As a responsible corporate citizen, NTPC is making constant efforts to improve the socio-economic status of the people affected by the projects. Through its Rehabilitation and Resettlement programmes, the company endeavors to improve the overall socio-economic status of Project Affected Persons. NTPC was among the first Public Sector Enterprises to enter into a Memorandum of Understanding (MOU) with the Government in 1987-88. NTPC has been Placed under the 'Excellent category' (the best category) every year since the MOU system became operative. Recognising its excellent performance and vast potential, Government of the India has identified NTPC as one of the jewels of Public Sector ‘Navratnas’- a potential global giant. Inspired by its glorious past and vibrant present, NTPC is well on its way to realise its vision of being “A world class integrated power major, powering India’s growth, with increasing global presence”.
OBJECTIVE OF THE STUDY
The objectives of this project were mainly to study the inventory, cash and receivable at NTPC Ltd., but there are some more and they are – The main purpose of our study is to render a better understanding of the concept “Working Capital Management”. To understand the planning and management of working capital at NTPC Ltd. To measure the financial soundness of the company by analyzing various ratios. To suggest ways for better management and control of working capital at the concern.
DATA SOURCES: The following sources have been sought for the prep of this report:
Primary sources such as business magazines, current annual reports, book on Financial Management by various authors and internet websites the imp amongst them being : www.NTPC.com, www.indiainfoline.com, www.studyfinance.com . Secondary sources like previous years annual reports, reports on working capital for research, analysis and comparison of the data gathered.
While doing this project, the data relating to working capital, cash management, receivables management, inventory management and short term financing was required. This data was gathered through the company’s websites, its corporate intranet, NTPC’s annual reports of the last five years. A detailed study on the actual working processes of the company is also done through direct interaction with the employees and by timely studying the happenings at the company.
INTRODUCTION TO WORKING CAPITAL “Working Capital is the Life-Blood and Controlling Nerve Center of a business” The working capital management precisely refers to management of current assets. A firm’s working capital consists of its investment in current assets, which include shortterm assets such as: Cash and bank balance, Inventories, Receivables (including debtors and bills), Marketable securities. Working capital is commonly defined as the difference between current assets and current liabilities.
Working Capital = Current Assets-Current Liabilities There are two major concepts of working capital: Gross working capital Net working capital Gross working capital: It refers to firm's investment in current assets. Current assets are the assets, which can be converted into cash with in a financial year. The gross working capital points to the need of arranging funds to finance current assets. Net working capital: It refers to the difference between current assets and current liabilities. Net working capital can be positive or negative. A positive net working capital will arise when current assets exceed current liabilities. And vice-versa for negative net working capital. Net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds. Net working capital also covers the question of judicious mix of long-term and short-term funds for financing current assets.
Significance Of Working Capital Management The management of working capital is important for several reasons: For one thing, the current assets of a typical manufacturing firm account for half
of its total assets. For a distribution company, they account for even more. Working capital requires continuous day to day supervision. Working capital has the effect on company's risk, return and share prices, There is an inevitable relationship between sales growth and the level of current assets. The target sales level can be achieved only if supported by adequate working capital Inefficient working capital management may lead to insolvency of the firm if it is not in a position to meet its liabilities and commitments.
Liquidity Vs Profitability: Risk - Return trade off Another important aspect of a working capital policy is to maintain and provide sufficient liquidity to the firm. Like the most corporate financial decisions, the decision on how much working capital be maintained involves a trade off- having a large net working capital may reduce the liquidity risk faced by a firm, but it can have a negative effect on the cash flows. Therefore, the net effect on the value of the firm should be used to determine the optimal amount of working capital. Sound working capital involves two fundamental decisions for the firm. They are the determination of: The optimal level of investments in current assets. The appropriate mix of short-term and long-term financing used to support this investment in current assets, a firm should decide whether or not it should use short-term financing. If short-term financing has to be used, the firm must determine its portion in total financing. Short-term financing may be preferred over long-term financing for two reasons: The cost advantage Flexibility But short-term financing is more risky than long-term financing. Following table will summarize our discussion of short-term versus long-term financing.
Maintaining a policy of short term financing for short term or temporary assets needs (Box 1) and long- term financing for long term or permanent assets needs (Box 3) would comprise a set of moderate risk –profitability strategies. But what one gains by following alternative strategies (like by box 2 or box 4) needs to weighed against what you give up. CLASSIFICATION OF WORKING CAPITAL
KINDS OF WORKING CAPITAL ON THE BASIS OF CONCEPT GROSS WORKING CAPITAL
ON THE BASIS OF TIME
NET WORKING CAPITAL
REGULAR WORKING CAPITAL
PERMANENT /FIXED WORKING CAPITAL RESERVE WORKING CAPITAL
TEMPORARY/ VARIABLE WORKING CAPITAL SEASONAL WORKING CAPITAL
SPECIAL WORKING CAPITAL
Types of Working Capital Needs Another important aspect of working capital management is to analyze the total working capital needs of the firm in order to find out the permanent and temporary
working capital. Working capital is required because of existence of operating cycle. The lengthier the operating cycle, greater would be the need for working capital. The operating cycle is a continuous process and therefore, the working capital is needed constantly and regularly. However, the magnitude and quantum of working capital required will not be same all the times, rather it will fluctuate.
The need for current assets tends to shift over time. Some of these changes reflect permanent changes in the firm as is the case when the inventory and receivables increases as the firm grows and the sales become higher and higher. Other changes are seasonal, as is the case with increased inventory required for a particular festival season. Still others are random reflecting the uncertainty associated with growth in sales due to firm's specific or general economic factors. The working capital needs can be bifurcated as: Permanent working capital Temporary working capital Permanent working capital: There is always a minimum level of working capital, which is continuously required by a firm in order to maintain its activities. Every firm must have a minimum of cash, stock and other current assets, this minimum level of current assets, which must be maintained by any firm all the times, is known as permanent working capital for that firm. This amount of working capital is
constantly and regularly required in the same way as fixed assets are required. So, it may also be called fixed working capital.
Temporary working capital: Any amount over and above the permanent level of working capital is temporary, fluctuating or variable working capital. The position of the required working capital is needed to meet fluctuations in demand consequent upon changes in production and sales as a result of seasonal changes.
The permanent level is constant while the temporary working capital is fluctuating increasing and decreasing in accordance with seasonal demands as shown in the figure. In the case of an expanding firm, the permanent working capital line may not be horizontal. This is because the demand for permanent current assets might be increasing (or decreasing) to support a rising level of activity. In that case line would be rising.
FINANCING OF WORKING CAPITAL There are two types of working capital requirements as discussed above. They are: Permanent or Fixed Working Capital requirements Temporary or Variable Working Capital requirements Therefore, to finance either of these two working capital requirements, we have long-term as well as short-term sources. FACTORS DETERMINING WORKING CAPITAL REQUIREMENTS There are many factors that determine working capital needs of an enterprise. Some of these factors are explained below: Nature or Character of Business. The working capital requirement of a firm is closely related to the nature of its business. A service firm, like an electricity undertaking or a transport corporation, which has a short operating cycle and which sells predominantly on cash basis, has a modest working capital requirement. Oh the other hand, a manufacturing concern like a machine tools unit, which has a long operating cycle and which sells largely on credit, has a very substantial working capital requirement.
NTPC carry on activities related to Sugar systems. Though they are primarily an assembling firm they also have manufacturing facilities in Chennai and Pondicherry. This requires them to keep a very sizeable amount in working capital. Size of Business/Scale of Operations. NTPC is the leader in its segment in both consumer as well as commercial market share. They have increased their share in the consumer segment notably in the last four years. This they have achieved through retail expansion. The scale of operations and the size it holds in the Indian IT market makes it a must for them to hold their inventory and current asset at a huge level. The rate of growth of sales indicates a need for increase in the working capital requirements of the firm. As the firm is projected to increase Rate of Growth of Business.their sales by 80% from what it was in 2016, it is required to guard them against the increasing requirements of the net current asset by way of efficient working capital management. The sales and projected sales level determine the investment in inventories and receivables.
NTPC
2018
2017
2016
2015
2014
PROJECTED Gross
Sales/Income
3400
2833
2381
1967.37
1522.03
from Operations
Price Level Changes. Changes in the price level also affect the working capital requirements. It was the reduced margins in the price of the raw materials that had prompted them to go for bulk purchases thus making on additions to their net current assets. They might have gone for this large-scale procurement for availing discounts and anticipating a rise in prices, which would have meant that more funds are required to maintain the same current assets.
COMPANY PROFILE NTPC Limited is the largest thermal power generating company of India. A public sector company, it was incorporated in the year 1975 to accelerate power development in the country as a wholly owned company of the Government of India. At present, Government of India holds 89.5% of the total equity shares of the company and the balance 10.5% is held by FIIs, Domestic Banks, Public and others. Within a span of 31 years, NTPC has emerged as a truly national power company, with power generating facilities in all the major regions of the country. National Thermal Power Corporation is the largest power generation company in India. The Forbes Global 2000 ranking for 2005 ranks it as the 5th leading company in India and the 486th leading company in the world. It is a public listed (Bombay Stock Exchange) Indian public sector company, with majority shares owned by the Government of India. At present, Government of India holds 89.5% of the total equity shares of the company and the balance 10.5% is held by FIIs, Domestic Banks, Public and others. NTPC ranks amongst the top five companies, in terms of market capitalisation. NTPC's core business is engineering, construction and operation of power generating plants and also providing consultancy to power utilities in India and abroad. As on date the installed capacity of NTPC is 26, 404 MW through its 14
coal based (21,395 MW), 7 gas based (3,955 MW) and 4 Joint Venture Projects (1,054 MW).
From the above graph it’s been clear that NTPC is creating that leading benchmark in all over the country, like above graph is dictating that the intensive and remarkable growth covered by NTPC was started in year 1986-87 from 3000MW with 20000BU and goes to inconsistent growth in year 2006-07 by 30000MW with 200000BU. This shows the effective installed capacity is leading a terrific generation of power.
NTPC’s core business is engineering, construction and operation of power generating plants. It also provides consultancy in the area of power plant constructions and power generation to companies in India and abroad. As on date the installed capacity of NTPC is 27,904 MW through its 15 coal based (22,895 MW), 7 gas based (3,955 MW) and 4 Joint Venture Projects (1,054 MW). NTPC acquired 50% equity of the SAIL Power Supply Corporation Ltd. (SPSCL). This JV company operates the captive power plants of Durgapur (120 MW), Rourkela (120 MW) and Bhilai (74 MW). NTPC also has 28.33% stake in Ratnagiri Gas & Power Private Limited (RGPPL) a joint venture company between NTPC, GAIL, Indian Financial Institutions and Maharashtra SEB Holding Co. Ltd. The present capacity of RGPPL is 850MW.
47817.4 crore NTPC’s share on 31 Mar 2007 in the total installed capacity of the country was 20.18% and it contributed 28.50% of the total power generation of the country during 2006-07. NTPC has set new benchmarks for the power industry both in the area of power plant construction and operations. It is providing power at the cheapest average tariff in the country. With its experience and expertise in the power sector, NTPC is extending consultancy services to various organisations in the power business. NTPC is committed to the environment, generating power at minimal environmental cost and preserving the ecology in the vicinity of the plants. NTPC has undertaken massive afforestation in the vicinity of its plants. Plantations have increased forest area and reduced barren land. The massive afforestation by NTPC in and around its Ramagundam Power station (2600 MW) have contributed reducing the temperature in the areas by about 3°c. NTPC has also taken proactive steps for ash utilisation. In 1991, it set up Ash Utilisation Division to manage efficient use of the ash produced at its coal stations. This quality of ash produced is ideal for use in cement, concrete, cellular concrete, building material.
A "Center for Power Efficiency and Environment Protection (CENPEEP)" has been established in NTPC with the assistance of United States Agency for International Development. (USAID). Cenpeep is efficiency oriented, eco-friendly and eco-nurturing initiative - a symbol of NTPC's concern towards environmental protection and continued commitment to sustainable power development in India. As a responsible corporate citizen, NTPC is making constant efforts to improve the socio-economic status of the people affected by the projects. Through its Rehabilitation and Resettlement programmes, the company endeavors to improve the overall socio-economic status of Project Affected Persons. NTPC was among the first Public Sector Enterprises to enter into a Memorandum of Understanding (MOU) with the Government in 1987-88. NTPC has been Placed under the 'Excellent category' (the best category) every year since the MOU system became operative. Recognising its excellent performance and vast potential, Government of the India has identified NTPC as one of the jewels of Public Sector ‘Navratnas’- a potential global giant. Inspired by its glorious past and vibrant present, NTPC is well on its way to realise its vision of being “A world class integrated power major, powering India’s growth, with increasing global presence”.
OBJECTIVE OF THE STUDY
The objectives of this project were mainly to study the inventory, cash and receivable at NTPC Ltd., but there are some more and they are – The main purpose of our study is to render a better understanding of the concept “Working Capital Management”. To understand the planning and management of working capital at NTPC Ltd. To measure the financial soundness of the company by analyzing various ratios. To suggest ways for better management and control of working capital at the concern.
DATA SOURCES: The following sources have been sought for the prep of this report:
Primary sources such as business magazines, current annual reports, book on Financial Management by various authors and internet websites the imp amongst them being : www.NTPC.com, www.indiainfoline.com, www.studyfinance.com . Secondary sources like previous years annual reports, reports on working capital for research, analysis and comparison of the data gathered.
While doing this project, the data relating to working capital, cash management, receivables management, inventory management and short term financing was required. This data was gathered through the company’s websites, its corporate intranet, NTPC’s annual reports of the last five years. A detailed study on the actual working processes of the company is also done through direct interaction with the employees and by timely studying the happenings at the company.
INTRODUCTION TO WORKING CAPITAL “Working Capital is the Life-Blood and Controlling Nerve Center of a business” The working capital management precisely refers to management of current assets. A firm’s working capital consists of its investment in current assets, which include shortterm assets such as: Cash and bank balance, Inventories, Receivables (including debtors and bills), Marketable securities. Working capital is commonly defined as the difference between current assets and current liabilities.
Working Capital = Current Assets-Current Liabilities There are two major concepts of working capital: Gross working capital Net working capital Gross working capital: It refers to firm's investment in current assets. Current assets are the assets, which can be converted into cash with in a financial year. The gross working capital points to the need of arranging funds to finance current assets. Net working capital: It refers to the difference between current assets and current liabilities. Net working capital can be positive or negative. A positive net working capital will arise when current assets exceed current liabilities. And vice-versa for negative net working capital. Net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds. Net working capital also covers the question of judicious mix of long-term and short-term funds for financing current assets.
Significance Of Working Capital Management The management of working capital is important for several reasons: For one thing, the current assets of a typical manufacturing firm account for half
of its total assets. For a distribution company, they account for even more. Working capital requires continuous day to day supervision. Working capital has the effect on company's risk, return and share prices, There is an inevitable relationship between sales growth and the level of current assets. The target sales level can be achieved only if supported by adequate working capital Inefficient working capital management may lead to insolvency of the firm if it is not in a position to meet its liabilities and commitments.
Liquidity Vs Profitability: Risk - Return trade off Another important aspect of a working capital policy is to maintain and provide sufficient liquidity to the firm. Like the most corporate financial decisions, the decision on how much working capital be maintained involves a trade off- having a large net working capital may reduce the liquidity risk faced by a firm, but it can have a negative effect on the cash flows. Therefore, the net effect on the value of the firm should be used to determine the optimal amount of working capital. Sound working capital involves two fundamental decisions for the firm. They are the determination of: The optimal level of investments in current assets. The appropriate mix of short-term and long-term financing used to support this investment in current assets, a firm should decide whether or not it should use short-term financing. If short-term financing has to be used, the firm must determine its portion in total financing. Short-term financing may be preferred over long-term financing for two reasons: The cost advantage Flexibility But short-term financing is more risky than long-term financing. Following table will summarize our discussion of short-term versus long-term financing.
Maintaining a policy of short term financing for short term or temporary assets needs (Box 1) and long- term financing for long term or permanent assets needs (Box 3) would comprise a set of moderate risk –profitability strategies. But what one gains by following alternative strategies (like by box 2 or box 4) needs to weighed against what you give up. CLASSIFICATION OF WORKING CAPITAL
KINDS OF WORKING CAPITAL ON THE BASIS OF CONCEPT GROSS WORKING CAPITAL
ON THE BASIS OF TIME
NET WORKING CAPITAL
REGULAR WORKING CAPITAL
PERMANENT /FIXED WORKING CAPITAL RESERVE WORKING CAPITAL
TEMPORARY/ VARIABLE WORKING CAPITAL SEASONAL WORKING CAPITAL
SPECIAL WORKING CAPITAL
Types of Working Capital Needs Another important aspect of working capital management is to analyze the total working capital needs of the firm in order to find out the permanent and temporary
working capital. Working capital is required because of existence of operating cycle. The lengthier the operating cycle, greater would be the need for working capital. The operating cycle is a continuous process and therefore, the working capital is needed constantly and regularly. However, the magnitude and quantum of working capital required will not be same all the times, rather it will fluctuate.
The need for current assets tends to shift over time. Some of these changes reflect permanent changes in the firm as is the case when the inventory and receivables increases as the firm grows and the sales become higher and higher. Other changes are seasonal, as is the case with increased inventory required for a particular festival season. Still others are random reflecting the uncertainty associated with growth in sales due to firm's specific or general economic factors. The working capital needs can be bifurcated as: Permanent working capital Temporary working capital Permanent working capital: There is always a minimum level of working capital, which is continuously required by a firm in order to maintain its activities. Every firm must have a minimum of cash, stock and other current assets, this minimum level of current assets, which must be maintained by any firm all the times, is known as permanent working capital for that firm. This amount of working capital is
constantly and regularly required in the same way as fixed assets are required. So, it may also be called fixed working capital.
Temporary working capital: Any amount over and above the permanent level of working capital is temporary, fluctuating or variable working capital. The position of the required working capital is needed to meet fluctuations in demand consequent upon changes in production and sales as a result of seasonal changes.
The permanent level is constant while the temporary working capital is fluctuating increasing and decreasing in accordance with seasonal demands as shown in the figure. In the case of an expanding firm, the permanent working capital line may not be horizontal. This is because the demand for permanent current assets might be increasing (or decreasing) to support a rising level of activity. In that case line would be rising.
FINANCING OF WORKING CAPITAL There are two types of working capital requirements as discussed above. They are: Permanent or Fixed Working Capital requirements Temporary or Variable Working Capital requirements Therefore, to finance either of these two working capital requirements, we have long-term as well as short-term sources. FACTORS DETERMINING WORKING CAPITAL REQUIREMENTS There are many factors that determine working capital needs of an enterprise. Some of these factors are explained below: Nature or Character of Business. The working capital requirement of a firm is closely related to the nature of its business. A service firm, like an electricity undertaking or a transport corporation, which has a short operating cycle and which sells predominantly on cash basis, has a modest working capital requirement. Oh the other hand, a manufacturing concern like a machine tools unit, which has a long operating cycle and which sells largely on credit, has a very substantial working capital requirement.
NTPC carry on activities related to Sugar systems. Though they are primarily an assembling firm they also have manufacturing facilities in Chennai and Pondicherry. This requires them to keep a very sizeable amount in working capital. Size of Business/Scale of Operations. NTPC is the leader in its segment in both consumer as well as commercial market share. They have increased their share in the consumer segment notably in the last four years. This they have achieved through retail expansion. The scale of operations and the size it holds in the Indian IT market makes it a must for them to hold their inventory and current asset at a huge level. The rate of growth of sales indicates a need for increase in the working capital requirements of the firm. As the firm is projected to increase Rate of Growth of Business.their sales by 80% from what it was in 2016, it is required to guard them against the increasing requirements of the net current asset by way of efficient working capital management. The sales and projected sales level determine the investment in inventories and receivables.
NTPC
2018
2017
2016
2015
2014
PROJECTED Gross
Sales/Income
3400
2833
2381
1967.37
1522.03
from Operations
Price Level Changes. Changes in the price level also affect the working capital requirements. It was the reduced margins in the price of the raw materials that had prompted them to go for bulk purchases thus making on additions to their net current assets. They might have gone for this large-scale procurement for availing discounts and anticipating a rise in prices, which would have meant that more funds are required to maintain the same current assets.
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